Warren Buffett’s latest letter: Multibillion-dollar ‘mistake’, bond investors’ bleak future, other key takeaways
Warren Buffett’s annual letters to Berkshire Hathaway’s shareholders are arguably read better than business books by those involved in the investment world. The holy grail for investors, Buffett’s letters over the past many decades have been offering insights into how the Oracle of Omaha and his team pick and evaluate businesses and strategises investments along with Berkshire’s work culture, future prospects, and more. Buffett has been identifying valuable companies and buying a portion of them such as Coca-Cola, American Express, Apple, General Motors, and more. The latest letter released by Buffett on Saturday offered similar engaging insights apart from offering an account of how Berkshire fared in the past year.
Published ahead of the company’s annual general meeting (AGM), the latest letter revealed Buffett’s ‘mistake’ that led to $11 billion loss, his unwavering belief in the American dream, caution to bond investors against a ‘bleak future’, buying back more Berkshire stock this year, the new venue for the AGM and much more. Below are the key takeaways from the 15-page treasure trove for investors, entrepreneurs, and analysts:
The $11-billion mistake
Warren Buffett said he made a mistake in buying Precision Castparts Corp, which makes equipment for the aerospace and energy sectors, in 2016. The company had to write down nearly $11 billion, which was mostly tied to that purchase, as the pandemic hit the aviation sector badly.
“The final component in our GAAP figure – that ugly $11 billion write-down – is almost entirely the quantification of a mistake I made in 2016. That year, Berkshire purchased Precision Castparts (“PCC”), and I paid too much for the company. No one misled me in any way – I was simply too optimistic about PCC’s normalized profit potential. Last year, my miscalculation was laid bare by adverse developments throughout the aerospace industry, PCC’s most important source of customers,” Buffett said.
Bond – Not the place to be
Buffett in his annual letter also noted that the ultra-low interest rates globally have weakened the appeal of the bond market. “Bonds are not the place to be these days. Can you believe that the income recently available from a 10-year U.S. Treasury bond – the yield was 0.93% at yearend – had fallen 94% from the 15.8% yield available in September 1981? In certain large and important countries, such as Germany and Japan, investors earn a negative return on trillions of dollars of sovereign debt,” he said while cautioning fixed-income investors worldwide – whether pension funds, insurance companies or retirees – against facing a bleak future.
‘No one unleashes human potential like the US’
The billionaire investing icon Warren Buffett also tried to encourage investors to believe in the great American dream “despite some severe interruption”. He wrote that in its brief 232 years of existence, there has been no incubator for unleashing human potential like America. Despite some severe interruptions, the country’s economic progress has been breathtaking…Our unwavering conclusion: Never bet against America, he asserted.
Record share buyback
Even as the Covid pandemic triggered turbulence in the markets during 2020, Warren Buffett’s Berkshire Hathaway made a record repurchase of company stock worth $24.7 billion including the buyback of around $9 billion of its shares during the fourth quarter. “Last year we demonstrated our enthusiasm for Berkshire’s spread of properties by repurchasing the equivalent of 80,998 “A” shares, spending $24.7 billion in the process. That action increased your ownership in all of Berkshire’s businesses by 5.2% without requiring you to so much as touch your wallet.”
However, in no way does Berkshire thinks that its shares should be repurchased at simply any price, he said. “I emphasize that point because American CEOs have an embarrassing record of devoting more company funds to repurchases when prices have risen than when they have tanked. Our approach is exactly the reverse.”
Warren Buffett noted that he will be buying back more Berkshire stock this year. “Berkshire has repurchased more shares since yearend and is likely to further reduce its share count in the future. The math of repurchases grinds away slowly, but can be powerful over time. The process offers a simple way for investors to own an ever-expanding portion of exceptional businesses.”
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Going to Hollywood
This year’s AGM on May 1 will be held in Los Angeles, where the company’s Vice Chairman Charlie Munger is based, instead of Omaha. Munger was not able to attend last year’s AGM amid the Covid pandemic. Buffett along with Munger will be answering questions during the AGM. “I missed him last year and, more important, you clearly missed him,” said Buffett. The formal meeting will begin at 5:00 PM EDT (3:30 AM IST) and should finish by 5:30 PM, he added, while between 1:30-5:00, Buffett and Munger will answer questions. The company’s two vice-chairman, Ajit Jain and Greg Abel, will also be present to field questions.
Warren Buffett highlighted the company’s 15 common stock investments including American Express, Apple, Bank of America, Coca-Cola, General Motors, Moody’s, Verizon, and more that were its largest in market value by the end of 2020.
Most of Berkshire’s value resided in four businesses out of which three were controlled by the company and “one in which we have only 5.4% interest. All four are jewels,” wrote Buffett. The largest in value was the property/casualty insurance operation, which for 53 years has been the core of Berkshire. “Overall, the insurance fleet operates with far more capital than is deployed by any of its competitors worldwide. That financial strength, coupled with the huge flow of cash Berkshire annually receives from its non-insurance businesses, allows our insurance companies to safely follow an equity-heavy investment strategy not feasible for the overwhelming majority of insurers.”
The second and third most valuable assets of Berkshire were the latter’s 100 per cent ownership of Burlington Northern Santa Fe Railway (BNSF) Railway – America’s largest railroad measured by freight volume, and 5.4 per cent ownership of Apple. The fourth jewel for Berkshire was its 91 per cent ownership of energy company Berkshire Hathaway Energy (BHE). “What we have here is a very unusual utility business, whose annual earnings have grown from $122 million to $3.4 billion during our 21 years of ownership,” Buffet said.
Berkshire earned $42.5 billion in 2020 according to generally accepted accounting principles (GAAP). The four components of that figure included $21.9 billion of operating earnings, $4.9 billion of realized capital gains, $26.7 billion gain from an increase in the amount of net unrealized capital gains that existed in the stocks the company held apart from the $11 billion loss largely related to the Precision Castparts Corp purchase.
“Our focus at Berkshire is both to increase this segment of our income and to acquire large and favorably-situated businesses. Last year, however, we met neither goal: Berkshire made no sizable acquisitions and operating earnings fell 9%. We did, though, increase Berkshire’s per-share intrinsic value by both retaining earnings and repurchasing about 5% of our shares,” said Buffett.