Berkshire Hathaway’s annual report included Warren Buffett’s much anticipated letter to shareholders.

Here are highlights from the letter:

• Retained earnings. Buffett dedicated the first several pages of the letter to defending his position on reinvestment of earnings: “At Berkshire, Charlie and I have long focused on using retained earnings advantageously. Sometimes this job has been easy—at other times, more than difficult, particularly when we began working with huge and ever-growing sums of money.”
• When investing retained earnings, Buffett explains that he and partner Charlie Munger first focus on businesses they already own, and then seek to purchase new businesses that meet the following three criteria:
  • They must earn good returns on the net tangible capital required in their operations.
  • They must be run by able and honest managers.
  • They must be available at a sensible price.
• Buffett humbly recounts his record of business acquisitions, comparing them to marriages: “I would say that our marital record remains largely acceptable, with all parties happy with the decisions they made long ago. Some of our tie-ups have been positively idyllic. A meaningful number, however, have caused me all too quickly to wonder what I was thinking when I proposed.”
• Property/Casualty insurance operations have been “the engine propelling Berkshire’s growth since 1967,” Buffett writes. Although he notes that lower rates have led to a drop in float value for the industry, he adds that “Berkshire’s situation is more favorable than that of insurers in general.”
• On rates and equities: Buffett notes the uncertainty on what’s to come, but adds, “What we can say is that if something close to current rates should prevail over the coming decades and if corporate tax rates also  remain near the low level businesses now enjoy, it is almost certain that equities will over time perform far better than long-term, fixed-rate debt instruments.” He qualified his prediction, however, by noting that “Anything can happen to stock prices tomorrow.”
• Succession: Buffett dedicated a section of the letter to “The Road Ahead,” writing that “Berkshire Hathaway shareholders need not worry: Your company is 100% prepared for our departure.”