Buffett says U.S. economy is “alive and well”

This past weekend, billionaire Warren Buffett released his annual letter to shareholders for 2015. And that letter reveals Berkshire Hathaway’s investment performance continues to outpace that of the S&P 500.

Berkshire’s compounded annual gains from 1965 to 2015 (based on per-share market value) amount to 20.8% overall, versus the S&P 500’s pre-tax gains of 9.7% (dividends included).

The letter says, “Berkshire’s gain in net worth during 2015 was $15.4 billion, which increased the per-share book value of both our Class A and Class B stock by 6.4%. Over the last 51 years (that is, since present management took over), per-share book value has grown from $19 to $155,501, a rate of 19.2% compounded annually.”

In 2015 alone, however, Berkshire’s per-share market value fell 12.5% and per-share book value rose by 6.4%. The S&P 500 gained 1.4% over the same period.

View on the U.S. economy

When it comes to the U.S. economy, Buffett is optimistic. He says the economy is in better shape than current presidential candidates claim and notes, “American GDP per capita is now about $56,000. In real terms, as I mentioned last year, that is a staggering six times the amount in 1930, the year I was born. [It’s] a leap far beyond the wildest dreams of my parents or their contemporaries.”

Today, he adds, “U.S. citizens […] work far more efficiently and thereby produce far more. This all-powerful trend is certain to continue: America’s economic magic remains alive and well.”

Berkshire is backing up that claim by investing in American infrastructure. Buffett’s letter says, “We invested $16 billion in property, plant and equipment last year, a full 86% of it deployed in the United States.”

Buffett notes the secret to success is continuing to improve productivity and eliminate inefficiencies. That may mean layoffs and other cost-cutting measures, but he says what the country needs is to make sure it has a solid safety net to help people who lose jobs, rather than prohibit efforts to improve productivity.

Read: There are signs the U.S. is in recession again

So, even though the U.S. economy appears weaker than he thought it would as recently as last fall, that doesn’t change his long-term view of the country’s prospects. In fact, he says the collapse in oil prices will be good overall for the American economy because more money will be spent by consumers.

However, he recognizes the negative effects of falling crude prices hit the oil industry immediately in terms of lost jobs and reduced company values.

Read: This year, Fed will be more defensive

On the topic of interest rates, Buffett says he can’t predict how having negative rates in Europe for a prolonged period will affect the global economy because it has never happened before. During a CNBC interview, he joked that Berkshire would be better off stashing cash in a giant mattress instead of European banks — if only he could find a trustworthy person to guard the cash.

But, Buffett says he understands why regulators cut interest rates to help Europe recover, but there’s no way to know how that will affect business.

2015 results

In reflecting on 2015, Buffett says his greatest achievement was improving customer service at BNSF Railway. “To attain that result, we invested about $5.8 billion during the year in capital expenditures, a sum far and away the record for any American railroad and nearly three times our annual depreciation charge.”

Read: Consider telco and rail companies

Turned out, “It was money well-spent. BNSF moves about 17% of America’s intercity freight (measured by revenue ton-miles), whether transported by rail, truck, air, water or pipeline. In that respect, we are a strong number one among the seven large American railroads, two of which are Canadian-based, [and we] carry 45% more ton-miles of freight than our closest competitor.”

Buffett notes one prominent risk to his railway, however: along with other railroads, BNSF “is certain to lose significant coal volume over the next decade.”

BNSF is the largest of what Buffett refers to as Berkshire’s “Powerhouse Five,” a group that includes Berkshire Hathaway Energy, Marmon, Lubrizol and IMC. Combined, these companies earned $13.1 billion in 2015, an increase of $650 million over 2014.

And, says Buffett, “Next year, I will be discussing the ‘Powerhouse Six.’ The newcomer will be Precision Castparts Corp., a business we purchased [in January] for more than $32 billion of cash.” PCC is a supplier of aerospace components.

Further, Buffett says Berkshire’s growing insurance operation again operated at an underwriting profit in 2015, which “makes 13 years in a row. During those years, our float—money that doesn’t belong to us, but that we can invest for Berkshire’s benefit—grew from $41 billion to $88 billion.” He also notes Berkshire is including insurance underwriting income in its business earnings for the first time.

A peek at Berkshire’s future plans

Part of the letter is dedicated to explaining how Berkshire’s executives are working toward competing in a changing world. In particular, Buffett notes shareholders will be asked to vote on a proposal requiring the company to prepare a report on the threat climate chance poses for its insurance companies. Buffett says it’s reasonable to worry about climate change, but that it shouldn’t hurt insurance companies since policy prices are set annually based on each year’s risks.

As well, Buffett defends Berkshire’s association with cost-cutting and the lending practices at its mobile home unit, Clayton Homes. Edward Jones analyst Jim Shanahan says the fact that Buffett devoted space in his shareholder letter to such topics suggests he’s still hearing criticism of 3G Capital and Clayton Homes.

Buffett says Berkshire has always craved efficiency, just like 3G. Berkshire just tends to buy companies that already are lean, while 3G looks for investments that need costs reduced. For example, the two firms teamed up to buy Kraft Foods and Heinz and promptly announced layoffs at both firms.

He also stated that Berkshire would only make friendly acquisitions.

Read: U.S. companies benefit when budgeting like Kraft Heinz

Investors were set to look for clues about who might eventually replace 85-year-old Warren Buffett as chairman and CEO. But, Buffett says he hopes to spend his 100th birthday in 2030 celebrating that one of Berkshire’s key insurance companies, Geico, will have overtaken State Farm to become the number one auto insurer.

Read: Why Warren Buffett like P&C

Buffett has long said that Berkshire has a plan to replace him when the need arises, but doesn’t mention it in the letter. He does, however, note that their annual meeting will be webcast for the first time, in part so investors can “make sure [Charlie Munger and Buffett] hadn’t drifted off into la-la land.”

Berkshire Hathaway’s top 15 publicly traded investments

1. American Express Company

2. AT&T

3. Charter Communications

4. The Coca-Cola Company

5. DaVita HealthCare Partners

6. Deere & Company

7. The Goldman Sachs Group

8. International Business Machines

9. Moody’s Corporation

10. Phillips 66

11. The Procter & Gamble Company

12. Sanofi

13. U.S. Bancorp

14. Walmart Stores

15. Wells Fargo & Company

In 2015, Berkshire increased its ownership in what it calls its “Big Four” investments. “We purchased additional shares of IBM (increasing our ownership to 8.4% versus 7.8% at year-end 2014) and Wells Fargo (going to 9.8% from 9.4%). At the other two companies, Coca-Cola and American Express, stock repurchases raised our percentage ownership. Our equity in Coca-Cola grew from 9.2% to 9.3%, and our interest in American Express increased from 14.8% to 15.6% […] These four invest[ments] possess excellent businesses and are run by managers who are both talented and shareholder-oriented. Their returns on tangible equity range from excellent to staggering.”