5 timely reminders in Buffett's latest letter

Lewis Jackson, data journalist at Morningstar Australia, sums it up nicely.
By Morningstar |  06-03-22 | 
 

Warren Buffett recently published his 57th letter to Berkshire Hathaway shareholders. Buffett uses the annual letter to update shareholders on the company’s performance, and is read by legions of investors across the globe.

#1. There’s value in keeping cash on the books.

“Both of us [Buffett and Munger] like to sleep soundly, and we want our creditors, insurance claimants and you to do so as well.”

He pledged to keep $30 billion in the coffers at Berkshire to ensure the company would always be “financially impregnable” and never need to depend on the kindness of strangers.

Buffett is no stranger to picking up a distressed bargain. During the depths of the Global Financial Crisis in 2008, he threw Goldman Sachs a $5 billion lifeline in exchange for equity. The bank redeemed the shares in 2011, netting Buffett $3.7 billion in profit.

#2. Where to deploy cash can be a problem.

“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 long-term holding”.

Buffett defended Berkshire Hathaway’s $144 billion in unspent cash, saying low-interest rates had pushed up prices for everything from stocks to oil wells and limited worthwhile spending opportunities.

Looking across publicly traded markets, Buffet and long-term partner Charlie Munger saw “little that excites”. Investing in the company’s portfolio of businesses was preferable to acquisitions currently, Buffett said, while acknowledging the firm’s cash file was too large to be spent just internally. Berkshire has spent billions buying back its own stock. In addition to the $51.7 billion spent in 2020 and 2021, the conglomerate made another $1.2 billion in share repurchases through February 23, 2022.

#3. Jump in when the valuation is right.

“BNSF, our third giant, continues to be the number one artery of American commerce, which makes it an indispensable asset for America as well as for Berkshire.”

One of the “four giants” that power Berkshire Hathaway is its wholly-owned stake in BNSF, one of America's largest freight railroads.

BNSF’s share price shed 10% in the days following its third-quarter report on October 22, 2009. Buffett decided to takeover BNSF after markets ditched the company’s stock in the aftermath of disappointing earnings. A little under two weeks later, Buffett lobbed a $26 bid. Last year alone, the railroad posted a record $6 billion in profit.

#4. Never compromise on quality; it always wins.

“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.”

Berkshire Hathaway’s collection of banks, insurance companies, utilities and industrials benefited from the recovery in value stocks over the course of 2021.

In addition to its wholly- or nearly-wholly-owned stakes in insurers, railroads and utilities, the firm also holds parts of Apple, American Express, Mitsubishi, Chevron and a $7.6 billion stake in Chinese electric automaker BYD that it bought for $232 million in 2008.

Stronger economic growth and the prospect of higher interest rates helped value stocks stage a recovery last year. Value investors look for stocks trading at prices they believe to be below fundamentals. The Morningstar US Large Broad Value returned 33% last year compared to a loss of 3% in 2020. It’s growth equivalent notched 36%.

#5. Be alert.

Buffett warned investors to be on the watch when companies use “deceptive ‘adjustments’” to report earnings, saying "bull markets breed bloviated bull.”

Performance

Berkshire Hathaway reported net income had more than doubled to $89.9 billion in 2021, driven by strong results at its utilities and railroad holdings.

After lagging the S&P 500 index in 2020, Buffett’s conglomerate edged out the benchmark last year as its dozens of banking, insurance, energy and industrial subsidiaries rode the resurgence in value stocks amid the post-covid economic recovery.

Berkshire shares finished the year up 29.6%, compared to a 26.9% for the index.

15 Largest Portfolio holdings (as on Dec 31, 2021)

  • American Express: 19.9%
  • Moody's Corporation: 13.3%
  • Bank of America: 12.8%
  • U.S. Bancorp: 9.7%
  • The Coca-Cola Company: 9.2%
  • The Bank of New York Mellon: 8.3%
  • BYD Co: 7.7%
  • Mitsui & Co: 5.7%
  • Apple: 5.6%
  • ITOCHU Corporation: 5.6%
  • Mitsubishi: 5.5%
  • Verizon Communications: 3.8%
  • General Motors: 3.6%
  • Charter Communications: 2.2%
  • Chevron Corporation: 2.0%

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