Berkshire Hathaway Annual Shareholder Letter
I’m delighted to say that the (very) unofficial start of spring was this weekend. Warren Buffett’s annual shareholder letter was released, and that starts the countdown to the annual shareholder meeting in early May. Since 1965, many of Buffett’s quips, quirks, advice and insights have come from these letters. While a lot of the writing is specific to the various Berkshire businesses, there is almost always applicability to our businesses and investing in general. Here are some highlights:
- Berkshire stock lagged the S&P 500 by more than 20% last year, the most since 2009. This is despite (my calculation) their stock holdings returning almost 50% on a weighted basis!
- Buffett commented again on GAAP earnings requirements. Since 2018, Berkshire has been required to report unrealized gains and losses on its stock investments in earnings, which fluctuate year-to-year with the market. This is akin to clients looking at short-term performance instead of focusing on long-term goals.
- Buffett dove into retained earnings (Berkshire doesn’t pay a dividend) and their importance to the overall firm and the various businesses.
- Overall, non-insurance businesses grew 3% in net income in 2019.
- Buffett also listed another underwriting profit in the insurance business, a quick touting of Ajit Jain’s (the likely successor to lead insurance operations) acquisition of GUARD insurance group and its success. Total insurance “float” (money from premiums that’s available to invest) has climbed to $129 billion.
- On a somewhat comical note, Buffett mentioned a Lubrizol plant in Ohio that caught fire and said it wasn’t a big deal because they had insurance. Well, turns out they were insured by . . . Berkshire!
- Buffett wrote on 20 years of Berkshire Hathaway Energy (BHE), led by Greg Abel (another likely manager who will play a key role in succession) and the success they have had. He also mentioned that by 2021 Iowa’s BHE customers will be completely wind power self-sufficient. This is important to mention but also likely deliberate, bringing attention to Berkshire’s green energy efforts.
- Apple remains Berkshire’s largest holding at nearly $74 billion, or nearly 30% of reported stock investments.
- Buffett comforted investors with a reminder that a succession plan is fully formed, and he and Charlie Munger are very optimistic about the future of Berkshire after they are gone. He also said it will take 12-15 years for his Berkshire shares to be sold into the market.
- Buffett wrote on the makeup of his board of directors and boards in general. He mentioned the explosion in director pay and the lack of ownership in the firms that directors serve on (bought with their own money rather than granted). He also mentioned the rarity of women on boards, but interestingly did not mention that Berkshire has three women directors; two have served for more than a decade.
- Berkshire will continue to buy back its own stock when the price trades below its perceived intrinsic value. Around $5 billion was repurchased last year, with nearly half in the fourth quarter.
- The company paid $3.6 billion in taxes, which amounted to 1.5% of the total federal income tax paid by corporations. That was another comment I thought was likely driven by narratives in today’s business and political environment.
- Finally, the biggest “bombshell,” if there was such a thing, was that Greg Abel and Ajit Jain will be taking questions at the annual shareholder meeting in addition to Buffett and Munger. He doesn’t go as far as to say they will be on stage with them, but they will have more exposure.
- Overall, the letter was a bit shorter and not as comical as those in years past. But, in my view, he addressed many of the questions that Buffett-watchers and others frequently have, more so than he has in the past. This year’s meeting should be another great one. And, not to be morbid, but time is short — if you’ve never made it to a meeting, you should definitely make it a priority (or at least go for the shopping!).
Investing Like Buffett at Orion!
This is always a nice time of year to remind people of Buffett’s investment approach and how that has influenced many of CLS’s strategies and offerings. In this year’s letter, Buffett laid out his three criteria:
First, they must earn good returns on the net tangible capital required in their operation. Second, they must be run by able and honest managers. Finally, they must be available at a sensible price.
These ideas can be quantified, except for the manager criterion (maybe?), which is what many investors seek to do. Specifically, our Quality-Value stock portfolios at Orion invest along these lines — finding attractively valued companies in a quality universe. In fact, several large holdings in the QV TSP overlap with Berkshire’s portfolio, including Apple, JP Morgan, Costco and Berkshire shares themselves. And in the larger, direct-index universe of stocks, nearly 60% of Berkshire’s holdings are present.
The Quality-Value Select portfolio is available in a number of ways — as a model portfolio on the OPS platform, as a customized, tax-managed, direct-index strategy, and as part of CLS’s high-net-worth offering. There, we blend the TSP with ETFs and individual municipal bonds, wrapping it all in an extensive and flexible, tax-managed offering. If you have questions on any of this, please reach out.