I highlight my key takeaways from Warren Buffett’s 2020 Berkshire Hathaway Letter that came out in February 2021!
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Buffett discusses his thoughts on Berkshire Hathaway’s earnings last year, which were $42.5B in 2020, and a significant amount of which was in the form of unrealized gains. Berkshire’s operating earnings actually went down by 9%, but this is the most important metric to Buffett and he believes best reflects the company’s business value.
He wrote the only reason Berkshire’s intrinsic value increased is because of the Berkshire’s share repurchases or buybacks of its own stock last year. In addition, Berkshire did not get to do the things it normally likes to in making big acquisitions or increasing their operating earnings.
I like how Buffett wrote that they have a collection of businesses as in marketable securities in non-controlled companies that they’re invested in. He also refers to them as investees. Their earnings are not reflected in Berkshire’s earnings according to the Generally Accepted Accounting Principles (GAAP), and this is a huge amount of business value that Berkshire shareholders will continue to benefit from.
Always humble, Buffett admits his mistakes and wrote he made a misjudgement in the calculation of the proper price to pay for Precision Cast Parts, and this is part of what led to an $11B write down last year.
Buffett talks about some of the negative behavior of other conglomerates and how many of them pump up their share prices to act as currency to acquire “so-so” businesses. Even though Berkshire Hathaway is also a conglomerate, his holding company is striving to be better than other conglomerates by seeking to own whole or part of diverse businesses with good economic characteristics with good managements with character and capabilities, and have a durable competitive advantage and that can be bought at a fair price.
He’s trying to deploy capital from cash flows from non-insurance business earnings and the insurance premium float they collect. He’s got over $138B of float to deploy that Buffett’s just sitting on and waiting for the right opportunity to invest.
The 4 main jewels that constitute most of Berkshire’s business value include: 3 controlled subsidiaries: the property and casualty insurance businesses like GEICO, Burlington Northern Santa Fe (BNSF), Berkshire Hathaway Energy (BHE), and the non-controlled company of Apple in which they have a 5.4% stake.
Buffett is super confident about their insurance operations because they operate with more capital (from non-insurance earnings and insurance float) than any other insurance operation in the world. Moreover, they can afford to be heavy in securities while competitors have to depend on bonds because of regulatory and credit rating reasons. Buffett thinks that bonds are not the place to be and which have a bleak future.
An important lesson about share buybacks or repurchases: it should not just be bought at any price! When it makes sense to do so, Buffett indicated that stock repurchases can greatly enhance the intrinsic value of a business. He illustrates this powerful effect with Apple buying back its stock, which has helped grow Berkshire’s position in this company that has a market cap of over $2T.
Buffett talks about how even though the coasts get the most attention, we shouldn’t overlook the miracles in middle America when someone had an idea, ambition, and a little capital to achieve the American dream. While See’s Candies came from Los Angeles and GEICO came from Washington DC, there’s also the marvelous wonders in Omaha: Nebraska Furniture Mart and National Indemnity and in Tennessee: Clayton Homes and Pilot Travel Centers.
Buffett recites “Every retailer knows that a satisfied customer is a store’s best salespeople.” The successful entrepreneurs have led to a spread of prosperity and there’s no other incubator that can unleash human potential like America can. Despite severe interruptions, whereby he’s referring to the coronavirus pandemic, America’s economic progress has been breathtaking to him.
“Never Bet Against America.” -Buffett
He used to run the Buffett Partnership Limited before he converted it into a corporation when he said he stumbled into business management. While their form is corporate, their attitude is partner. Buffett hopes existing shareholders will continue to stick around for the long term, because, after all, who likes turnover in friends, neighbors, and marriage?
The last takeaway that Buffett recently learned is Berkshire has the most amount of domestic fixed assets of $154B, making up the most of America’s business infrastructure, coming mostly from BNSF and BHE. The railroad industry looks like it’s finally maturing. Often you get the best business results when you have minimal amounts of capital to expend every year, says Buffett. However, despite having the most property, plant, and equipment (PPE), he thinks these Berkshire businesses will continue to deliver appropriate returns over time.
Buffett hopes existing shareholders will continue to stick around for the long term, because, after all, who likes turnover in friends, neighbors, and marriages?
The last takeaway that Buffett recently learned is Berkshire has the most amount of domestic fixed assets of $154B, making up the most of America’s business infrastructure, coming mostly from BNSF and BHE. The railroad industry looks like it’s finally maturing. Often you get the best business results when you have minimal amounts of capital to expend every year, says Buffett. However, despite having the most property, plant, and equipment (PPE), he thinks these Berkshire businesses will continue to deliver appropriate returns over time.
All of us are on the journey toward financial freedom, and I look forward to making more investor friends.
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