Warren Buffett, the beloved ‘Oracle of Omaha’, is back yet again with his much-read annual letter for Berkshire Hathaway shareholders. In the letter, the ace investor stayed true to the tradition, which he has been following since 1977, and listed down the performance of Berkshire’s business and the performance of the company’s investments in the year 2021, with a tint of business lessons and some humour.
Berkshire Hathaway chief executive Warren Buffett and his co-founder Charlie Munger have often said that they choose investments not on the basis of value vs growth stock debate, but they see both value and growth as part of the same equation. Buffett reiterated the same view in the letter, and said “we own stocks based upon our expectations about their long-term business performance and not because we view them as vehicles for timely market moves. That point is crucial: Charlie and I are not stock-pickers; we are business-pickers,” he said.
The letter comes as a curtain-raiser before Berkshire’s upcoming annual meeting in Omaha called the “Woodstock for Capitalists” in April. In the letter, Buffett listed the top four investment giants that account for a big chunk of Berkshire’s value i.e. i) Berkshire Hathaway’s insurance operations, ii) Apple Inc, iii) BNSF (Burlington Northern Santa Fe) Railways and iv) Berkshire Hathaway Energy.
These are the investments which have brought ‘economic moat’ or economic advantage to Berkshire in comparison to its competitors in the same space. He also mentioned how and why Berkshire has chosen the strategy of buying back its own shares. And finally he has given a lesson for his shareholders and his followers on how to clear their mind. Here are key takeaways from his 12-page annual letter to his shareholders which was released last week:
- Apple all the way
In the annual letter, Berkshire Hathaway’s Buffett praised Tim Cook-led Apple Inc and lauded it – as Berkshire’s second biggest investment or one of its top four giants – that has brought value to the company. Over the last year, Buffett said the company increased its holding of Apple stock from to 5.55% from 5.39% a year earlier, and this was done not by spending anything but through Apple’s repurchase program, announced last year. Buffett said this may sound like small potatoes but “consider that each 0.1% of Apple’s 2021 earnings amounted to $100 million.”
“It’s important to understand that only dividends from Apple are counted in the GAAP earnings Berkshire reports – and last year, Apple paid us $785 million of those. Yet our “share” of Apple’s earnings amounted to a staggering $5.6 billion. Much of what the company retained was used to repurchase Apple shares, an act we applaud,” Buffett said.
He also applauded Apple’s chief executive Tim Cook and said Cook regards users of Apple products as his first love, but all of his other constituencies (including Berkshire) benefit from his managerial touch.
- Share Buyback as a Berkshire strategy
Buffett said he prefers to keep 100% of his net worth in equities. But the problem is there are not enough businesses that are marketable. That is the reason why Berkshire currently has $144 billion worth of its assets in cash and cash equivalents of which $120 billion is being held in US Treasury bills.
“Berkshire’s current 80%-or-so position in businesses is a consequence of my failure to find entire companies or small portions thereof (that is, marketable stocks) which meet our criteria for longterm holding,” he said. “Charlie and I have endured similar cash-heavy positions from time to time in the past. These periods are never pleasant; they are also never permanent. And, fortunately, we have had a mildly attractive alternative during 2020 and 2021 for deploying capital,” he added.
The 91-year old investor said the mildly attractive alternative option has been share repurchases. The company said it believes the first choice it has is by contributing its capital to grow businesses it already owns – by investing more in it. It also believes in buying non-controlling part-interests in publicly-listed companies. The third choice, Buffett said, is repurchasing Berkshire shares.
“Our final path to value creation is to repurchase Berkshire shares. Through that simple act, we increase your share of the many controlled and non-controlled businesses Berkshire owns. When the price/value equation is right, this path is the easiest and most certain way for us to increase your wealth,” he said in the letter.
- Berkshire’s infrastructure bets, and dominance
In the 12-page annual letter, Buffett reiterated his belief in the American businesses and American economy at large – quite a number of times – especially in the infrastructure industry. Buffet said Berkshire owns and operates more U.S.-based “infrastructure” assets – classified on its balance sheet as property, plant and equipment – than are owned and operated by any other American corporation. Berkshire will always be building, he said.
He even lauded one of his companies, that in his words, has become “number one artery of American commerce.” The company is BNSF Railway, which Berkshire acquired in 2009. BNSF also comes under Buffett’s list of top four giants. BNSF is an “indispensable asset for America as well as for Berkshire,” Buffett added.
“BHE has become a utility powerhouse (no groaning, please) and a leading force in wind, solar and transmission throughout much of the United States,” he said. And unlike other companies, BHE is not green-washing its plans. “BHE has been faithfully detailing its plans and performance in renewables and transmissions every year since 2007,” he added.
- Buffett’s toughest audience: 11-year olds
And like other annual letters – Buffett laid down life lessons and some humour for the readers of his annual letter. The 91-year old investment giant gave an account on whom he considers his toughest audience. Buffett said his grandson’s fifth-grade class has been his toughest audience. It’s difficult to grab the attention of 11-year olds, he said, but once you crack the code, teaching children will help you clear your own mind.
“Along the way, my toughest audience was my grandson’s fifth-grade class. The 11-year-olds were squirming in their seats and giving me blank stares until I mentioned Coca-Cola and its famous secret formula. Instantly, every hand went up, and I learned that “secrets” are catnip to kids,” Buffet said.
“Teaching, like writing, has helped me develop and clarify my own thoughts. Charlie calls this phenomenon the orangutan effect: If you sit down with an orangutan and carefully explain to it one of your cherished ideas, you may leave behind a puzzled primate, but will yourself exit thinking more clearly,” he added.