The One Where Buffett Pens Down “The Year Gone By”6 min read
“All that’s required is the passage of time, an inner calm, ample diversification, and a minimization of transactions and fees,” Billionaire Investor Warren Buffett said in his annual letter to investors.
Well-known billionaire investor Warren Buffett who has turned 90, has been unusually quiet since last year’s annual meeting of Berkshire Hathaway in May amid issues that Americans faced in 2020.
His annual letters to investors are often seen as a chance for investors to help them understand his thinking on broad topics and market trends, in addition to details on how his company is faring.
The much-awaited Warren Buffett’s annual letter to Berkshire Hathaway shareholders finally arrived, giving a glimpse into the year gone by, its struggles, achievements, and missed opportunities.
Buffett reiterated his trust in America to create miracles day in and day out, despite reeling under a mismanaged pandemic. He said in “its brief 232 years of existence, there has been no incubator for unleashing human potential like America.” He recounted the power of repurchases in creating wealth and also outlined why high Capex businesses will eventually pay rewards, though that may take some time.
Buffett is well-known for his quotes, let’s look at his quotes from the past investor letters:
“I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.”
“Over the years, I’ve often been asked for investment advice, and in the process of answering, I’ve learned a good deal about human behavior. My regular recommendation has been a low-cost S&P 500 index fund.”
“We constantly seek to buy new businesses that meet three criteria. First, they must earn good returns on the net tangible capital required in their operation,” he writes. “Second, they must be run by able and honest managers. Finally, they must be available at a sensible price”
“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
Buybacks Over Acquisitions
Berkshire Hathaway bought back nearly $24.7 billion of its own stock as Buffett reportedly struggled to find better ways to invest his enormous pile of cash.
The conglomerate continued to buy its own stock since the end of last year and is likely to keep at it, Buffett said in his annual letter to shareholders.
“That action increased your ownership in all of Berkshire’s businesses by 5.2% without requiring you to so much as touch your wallet,” Buffett said in the letter, which pointed out that the company “made no sizable acquisitions” in 2020.
Berkshire did make a small amount of progress in pairing the cash pile, which fell 5% in the fourth quarter to $138.3 billion. Buffett has reportedly struggled to keep pace with the flow in recent years as Berkshire threw off cash faster than it could find higher-returning assets to snap up, leading to a surge in share repurchases.
Apple – Prized Possession
Berkshire’s $120 billion investment in Apple Inc. stock has become so valuable that Buffett places it in the same category as the railroad business that he spent around a decade in building.
He began building a stake in the iPhone maker in 2016 and spent just $31.1 billion acquiring it all. The surge in value since then places it among the company’s top three assets, alongside his insurers and BNSF, the U.S. railroad purchase completed in 2010, according to the annual letter.
Buffett has always balked at technology investments, saying he doesn’t understand the companies well enough. But the rise of deputies, including Combs and Weschler, has brought Berkshire deeper into the sector.
In addition to Apple, the conglomerate has built up stakes in Amazon.com Inc., cloud-computing company Snowflake Inc., and Version Communications Inc.
Buffett Admits “Billion Dollar Mistake”
Buffett admitted that he made a mistake when he bought Precision Castparts Corp. five years ago for $37.2 billion.
“I paid too much for the company,” the billionaire investor said Saturday in his annual letter. “No one misled me in any way — I was simply too optimistic about PCC’s normalized profit potential.”
Berkshire took an almost $11 billion writedown last year that was largely tied to Precision Castparts, the maker of equipment for aerospace and energy industries based in Portland, Oregon.
The pandemic was the main culprit. Precision Castparts struggled for it’s growth in 2020 as demand for flights fell, prompting airlines to park their jets and slash their schedules. Less flying means lower demand for replacement parts and new aircraft. Precision also slashed its workforce by around 40% last year, according to Berkshire’s annual report.
Sincere Thanks to Railroad, Manufacturers
Despite the pandemic’s effects continuing to hit Berkshire’s collection of businesses, the conglomerate posted a near 14% gain in operating earnings in the fourth quarter compared to the same period a year earlier.
That was helped by a record quarter for railroad BNSF since its 2010 purchase and one of the best quarters for the manufacturing operations since mid-2019.
Buffett said most of Berkshire’s value resides in four businesses–three controlled and one in which it has only a 5.4% interest–and termed them as jewels. These four businesses are its collection of insurance companies (GEICO, National Indemnity, etc.), BNSF (America’s largest railroad), Apple (a most valuable company in its portfolio), and Berkshire Hathaway Energy ( in which it holds 91% stake).
Bye-bye Omaha, Hello Los Angeles
Berkshire’s annual meeting has for years drawn throngs of Buffett fans to Omaha, Nebraska, where the company is based. This year, the annual show is moving to the West Coast of the US.
While the meeting will be a virtual one because of the pandemic, it will be filmed in Los Angeles, the company said.
That would bring the event closer to the home of Warren Buffett’s longtime business partner, Charlie Munger. Buffett and Munger will be joined by two key people, Greg Abel and Ajit Jain, who will also field questions.
Warren Buffett’s steered clear of commenting on politics and pandemic. In the 15-page annual letter to shareholders made mention of the pandemic that ravaged the globe in 2020 exactly once on page nine: One of his furniture companies had to close for a time because of the virus, the billionaire noted.
Despite the contested presidential election and riots at the US Capitol, Buffett did not touch the topic about the Presidential race or inequality even after protests and unrest broke out in cities across the nation last year. He also avoided delving into the competitive deal-making pressures faced by his conglomerate, Berkshire Hathaway Inc., a topic that he routinely dissected in his past year’s letters.
Click here to view Warren Buffett’s full letter. Let us know your thoughts in the comments.
