Annual Warren Buffett Letter to Shareholders - Key Takeaways

In what has become an annual tradition, the Berkshire Hathaway letter to shareholders from the Chairman, Warren Buffett, was published yesterday in conjunction with the Company's annual report for 2019.

The letter is always an interesting read, since he often talks not only about the past, but also the future and where he sees investing opportunities.  It gives small investors a glimpse into the "Wizard of Omaha's" portfolio and where he is allocating capital.  The Company has investments in a dizzying array of US companies, many in basic industries such as transportation, banking, energy, insurance, services and now even tech (Apple!).  Many people mimic his holdings or simply buy the stock outright (the "B" shares currently trade at about $230 and so are somewhat more accessible to average investors than the "A" shares which trade over $343,000 per share).

This year, with the Company's stock lagging the major benchmark indices, you would think he would have some explaining to do.  Also, some investors are frustrated by the lack of dividends paid by the company, the relatively limited amount of stock buybacks and the lack of major new acquisitions.  The result is a large pile of cash:  $125B in cash and short term investments.

Instead, he makes a pretty convincing case for "retained earnings" and how the compounding effects that can be achieved in allocating capital in a disciplined way to growing profitable, strong businesses provides the best long-term growth.  Indeed, this growth is far better than paying out large dividends or buying back shares indiscriminately.  The Company's ten largest public company holdings (which include Apple, Bank of America, Coca Cola and American Express) paid out dividends of $3.8B to Berkshire Hathaway.  What's more interesting is that Berkshire Hathaway's share of those same companies' retained earnings (reinvested in their respective businesses) was $8.3B or 2.2x the amount paid out in dividends.

He also talked a lot (as he has in past years) about the superior attributes of the insurance business and the ability to capitalize on the collection and accumulation of premiums in advance of incurring losses ("float") to leverage investment returns, while carefully managing the risks inherent in the insurance business.  The utility business is also notable in that like the rest of the Company, the earnings are plowed back into the business rather than paid out as dividends (which is very common in the utility industry).   What's more notable and impressive is the big commitment to alternative energy in this reinvestment program, which should excite many investors.

While there can be no guarantee that earnings retained in the business and reinvested will result in a superior return and the annual results can swing wildly from year to year, he strongly believes in this approach to building wealth and maximizing long term returns.  He has talked about the "American Tailwind" in last year's letter and how the US economy continues to generate strong innovation and long-term business growth relative to other parts of the world.

Warren Buffett holds 99% of his net worth in Berkshire Hathaway stock.  This is pretty incredible in a day and age where corporate leaders are actively selling off their shares in an effort to "diversify" their holdings - especially those "internet unicorns."  As it relates to his faith in the Company and it's management team even after he is gone, here's a direct quote from the letter that I found very interesting and should make anyone comfortable in holding Berkshire stock long term:

"Today, my will specifically directs its executors – as well as the trustees who will succeed them in administering my estate after the will is closed – not to sell any Berkshire shares. My will also absolves both the executors and the trustees from liability for maintaining what obviously will be an extreme concentration of assets. 

The will goes on to instruct the executors – and, in time, the trustees – to each year convert a portion of my A shares into B shares and then distribute the Bs to various foundations. Those foundations will be required to deploy their grants promptly. In all, I estimate that it will take 12 to 15 years for the entirety of the Berkshire shares I hold at my death to move into the market. 

Absent my will’s directive that all my Berkshire shares should be held until their scheduled distribution dates, the “safe” course for both my executors and trustees would be to sell the Berkshire shares under their temporary control and reinvest the proceeds in U.S. Treasury bonds with maturities matching the scheduled dates for distributions. That strategy would leave the fiduciaries immune from both public criticism and the possibility of personal liability for failure to act in accordance with the “prudent man” standard.  

I myself feel comfortable that Berkshire shares will provide a safe and rewarding investment during the disposal period. There is always a chance – unlikely, but not negligible – that events will prove me wrong. I believe, however, that there is a high probability that my directive will deliver substantially greater resources to society than would result from a conventional course of action. 

Key to my “Berkshire-only” instructions is my faith in the future judgment and fidelity of Berkshire directors. They will regularly be tested by Wall Streeters bearing fees. At many companies, these super-salesmen might win. I do not, however, expect that to happen at Berkshire."

What I find fascinating is that he is not interested in any sort of diversification or "flight to safety," since he sees the continued growth potential of the business Berkshire Hathaway has built well into the future and which will provide even greater resources to the charitable organizations that will ultimately benefit from these shares.  He is even willing to indemnify the trustees of his estate of all liability for holding only Berkshire Hathaway.  That's a strong statement.

I hope you find this post useful as you chart your personal financial course and Build a Financial Fortress in 2020.
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