Berkshire Hathaway’s letter to shareholders is something I look forward to each year. Unfortunately, it was quite a disappointment for me this year as I expected much more than ‘Never bet against America.’ The optimism surrounding the much-vaunted American Dream is partly rooted in how capitalism in America gave birth to successful everyday entrepreneurs — think the Claytons, Haslams, and Blumkins who prospered building homes, operating truck stops, and selling furniture to fill out homes.
As much as I appreciate his hopes for America, I wanted to hear more of Buffett’s thoughts on the pandemic, how it had impacted businesses, and perhaps the effect of stimulus on the economy. It would’ve made this article it a whole lot more interesting, but nonetheless there are still nuggets of wisdom from the Oracle of Omaha:
1. Focus on earnings that count. Since the implementation of the new GAAP rule to include capital gains and losses in the net income, Buffett has reiterated annually in his letter to focus on operating earnings to gauge the performance of the business. With a portfolio worth US$281 billion, periods of bull and bear markets could mask the underperformance and resilience of Berkshire Hathaway.
In 2020, US$21.9 billion out of US$42.5 billion in Berkshire’s GAAP earnings consisted of operating income, which has declined by 9% in the absence of growth and acquisitions. The rest consists of US$4.9 billion in capital gains, US$26.7 billion of net unrealized capital gains, and an US$11 billion asset write down.
2. Berkshire repurchased 80,998 Class A shares at US$24.7 billion. Without forking out a dime, shareholders’ ownership of the conglomerate has grown by 5.2%. Buffett has mentioned in the past about doing buybacks whenever he sees value in Berkshire stock, and he bought big in 2020.
3. Buffett overpaid for Precision Castparts. Berkshire wrote down US$11 billion of the asset that they acquired for US$32 billion in 2016. COVID-19 has impacted the airline industry, causing them to slash plane orders which curbed the demand for Precision Castparts’ products. Nobody can anticipate this in their financial projections, but as the leader of the pack, Buffett must take responsibility for his actions.
4. Berkshire will not make reckless acquisitions in the name of growth. When there are no great businesses up for sale, conglomerates often settle for mediocre businesses without any durable competitive advantages. They inflate their balance sheets to offset the hefty premiums to control the business, and this is not something Buffett wants for Berkshire. He would rather own a non-controlling interest in a wonderful business rather than have a full ownership of a struggling enterprise.
5. ‘Invisible’ earnings are going to add significant value to shareholders. Although retained earnings from Berkshire’s US$281 billion worth portfolio of companies are not reflected in the books, they are the invisible building blocks used to expand operations, pay down debt, and repurchase shares, which will materialize in the form capital appreciation in decades from now.
6. Buffett is not a big fan of bonds. Fixed income investors, pension funds, and insurance companies reliant on the bond market for returns will fare poorly in the coming years as the 10-year U.S. Treasury yield fell to 0.93% at the end of last year. Due to Berkshire’s financial strength and cash flow from its non-insurance businesses, Buffett is free to deploy US$138 billion worth of float from their insurance business into the equity market.
7. Berkshire Hathaway Energy to become the leader in clean energy. In 2006, the utility business spent US$18 billion to rework and expand their electrical grid to transmit clean energy, solar and wind energy, from remote areas to population centers where their customers reside. This capital-intensive project is expected to be completed in 2030, putting them ahead of their competitors.
8. Never bet against America. Don’t lose faith in America’s economy and businesses, which will continue to thrive despite the pandemic. Buffett continues to believe in the American Dream: ‘In its brief 232 years of existence, however, there has been no incubator for unleashing human potential like America.’
This year the Berkshire Hathaway annual meeting will be held in Los Angeles. Warren Buffett decided to move the meeting from Omaha to reunite with his BFF, Charlie Munger, who resides in California. Berkshire’s vice-chairmen, Ajit Jain and Greg Abel, will be joining them on stage to answer shareholders’ questions from around the world.
As usual, Berkshire’s annual meeting will once again be available via live webcast on Yahoo. To view the event, go to https://finance.yahoo.com/brklivestream at 1:00 p.m. Eastern Standard Time (GMT-4) on Saturday, 1 May 2021. If you’d like to read Buffett’s full 2020 annual letter to Berkshire Hathaway shareholders, you can click here. Enjoy the read!
