Berkshire Hathaway: 2020 Annual Shareholder Letter
This month all eyes were on Warren Buffett’s legendary annual shareholder letter. Below we’ve provided a brief summary and a few excerpts from the letter. This year, Buffett largely focused on Berkshire Hathaway, refraining from commentary on many of the topical subjects we saw throughout 2020.
Even our Heroes Make Mistakes
Buffett being a true gentleman, threw no one under the bus after admitting he paid too much for Precision Castparts back in 2016. Buffett stated he was not misled in any way, just miscalculated what he thought normalized earnings are for the company, thus paying too much for those earnings. Berkshire took an $11 billion write down on the investment in 2020 after paying a hair over $32 billion for the acquisition.
Buffett while discussing the non-insurance and float side of their business (sitting at $138 billion), stated that bonds are generating paltry returns and purchasing junk bonds to earn higher income is not the answer to inadequate interest rates.
Buffett then goes on to discuss what makes Berkshire a gem, highlighting 4 parts of the business that comprise most of Berkshire’s value:
- Berkshire’s wholly owned Property/Casualty business run by Ajit Jain. This business operates with substantial cash, allowing it to invest that extra cash in stocks as opposed to most insurers who invest in low yielding, yet safe bonds.
- BNSF (Burlington Northern Santa Fe) – Berkshire owns 100% of BNSF, America’s largest railroad measured by freight volume
- Apple – Berkshire owns roughly 5.4% of Apple’s stock
- Berkshire Hathaway Energy (BHE) – BHE, run by heir apparent Greg Abel, is as Buffett states, “a very unusual utility business, whose annual earnings have grown from $122 million to $3.4 billion during our 21 years of ownership”.
Berkshire finally starts repurchasing its shares
Buffett purchased 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…In no way do we think that Berkshire shares should be repurchased at simply any price. 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.”
Berkshire’s investment in Apple vividly illustrates the power of repurchases.
“We began buying Apple stock late in 2016 and by early July 2018, owned slightly more than one billion Apple shares (split-adjusted). Saying that, I’m referencing the investment held in Berkshire’s general account and am excluding a very small and separately-managed holding of Apple shares that was subsequently sold. When we finished our purchases in mid-2018, Berkshire’s general account owned 5.2% of Apple.
Our cost for that stake was $36 billion. Since then, we have both enjoyed regular dividends, averaging about $775 million annually, and have also – in 2020 – pocketed an additional $11 billion by selling a small portion of our position. Despite that sale – voila! – Berkshire now owns 5.4% of Apple. That increase was costless to us, coming about because Apple has continuously repurchased its shares, thereby substantially shrinking the number it now has outstanding.
But that’s far from all of the good news. Because we also repurchased Berkshire shares during the 2 1⁄2 years, you now indirectly own a full 10% more of Apple’s assets and future earnings than you did in July 2018. This agreeable dynamic continues. Berkshire has repurchased more shares since yearend and is likely to further reduce its share count in the future. Apple has publicly stated an intention to repurchase its shares as well. As these reductions occur, Berkshire shareholders will not only own a greater interest in our insurance group and in BNSF and BHE, but will also find their indirect ownership of Apple increasing as well. 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. And as a sultry Mae West assured us: ‘Too much of a good thing can be . . . wonderful.’”
Buffett continues to bet on America
In a theme Buffett has continued for several years now, Buffett maintains that investors should never bet against America…the ingenuity, hard work, and ability to achieve the American dream still exists. In a reminiscent way, Buffett tells success stories of See’s Candy, Omaha Furniture Mart, Pilot Travel Centers and Clayton Homes.
Still lacking clarity…
Berkshire and Buffett still have not officially addressed the elephant in the room, Warren’s 90 year age and lineage for the person(s) to wear the Berkshire crown. Given Greg Abel’s addition to last year’s annual event, it seems as though Abel will run Berkshire’s vast non-insurance operations, while Ajit Jain runs the insurance side of the business. This year, Jain turns a young 70 years old in Berkshire terms, but investors still have no official word on the future of Berkshire’s leadership in a post Warren and Charlie world.