While the market is volatile and uncertainty is ahead, I went back to read Buffet’s 2019 annual shareholder letter, issued in February 2020.
[More letter could be found here]
Some ket takeaways:
- Berkshire’s earnings has 3 components (operating earnings, realized capital gains, unrealized capital gains) and indeed becomes more volatile under the new accounting rule
- The 3 criteria for purchases/investments:
- First, they must earn good returns on the net tangible capital required in their operation.
- Second, they must be run by able and honest managers.
- Finally, they must be available at a sensible price.
- Per the accounting rules, earnings from controlled companies fully flow into “operating earnings”; but for noncontrolled companies, only the dividend portion of their earnings is reflected in Berkshire’s operating earnings.
- There is a large part of companies’ value that is embedded in their retained earnings
- some may argue the changes in stock prices (thus the unrealized gains) capture it; but it’s a poor reflection I think.
- “Overall, the retained earnings of our investees are certain to be of major importance in the growth of Berkshire’s value.”
- “What we see in our holdings, rather, is an assembly of companies that we partly own and that, on a weighted basis, are earning more than 20% on the net tangible equity capital required to run their businesses. These companies, also, earn their profits without employing excessive levels of debt.”
- “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.”
- “It would be an interesting exercise for a company to hire two “expert” acquisition advisors, one pro and one con, to deliver his or her views on a proposed deal to the board – with the winning advisor to receive, say, ten times a token sum paid to the loser. Don’t hold your breath awaiting this reform: The current system, whatever its shortcomings for shareholders, works magnificently for CEOs and the many advisors and other professionals who feast on deals. A venerable caution will forever be true when advice from Wall Street is contemplated: Don’t ask the barber whether you need a haircut.”
- Board independence is unlikely to be real for many companies.
- Berkshire is going to repurchase shares when price-to-value discount is meaningful and Berkshire is left with ample cash; but, value is somewhat subjective.
Live stream for the annual meeting on May 2nd: https://finance.yahoo.com/brklivestream