Warren Buffett's 9 nuggets of wisdom for investors: 2021
Buffett's 2021 letter to shareholders also includes some mea culpas explaining why operating earnings fell last year and shares underperformed.
Berkshire Hathaway reported $45.2 billion in earnings for 2020 on Saturday, down 48% from the previous year as operating income fell 9%, according to Warren Buffett’s 2021 letter to shareholders.
“Operating earnings are what count most,” wrote Buffett, noting that the firm not only failed to increase earnings but also failed to make any sizable acquisitions — both key goals of the firm.
The decline in operating earnings resulted largely from an $11 billion writedown due almost entirely to Berkshire’s ownership of Precision Castparts (PCC), bought in 2016.
“I paid too much for the company,” wrote Buffett. “I was simply too optimistic about PCC’s normalized profit potential … “laid bare by adverse developments throughout the aerospace industry, PCC’s most important source of customers.” Buffett called the error “a big one.”
Berkshire Hathaway did, however, increase the company’s per-share intrinsic value by retaining earnings and repurchasing about 5% of its shares, according to Buffett. Its stock finished 2020 with a 2.4% gain, its weakest performance since 2015 when shares fell 12.5% and far below the 18.4% gain in the S&P 500.
Throughout this year’s annual shareholder letter, like the others that preceded it, Buffett offered words of wisdom for investors, and he disclosed what he termed a surprise: He will appear on stage in Los Angeles, along with his partner Charlie Munger and Vice Chairmen Ajit Jain and Greg Abel — considered the two front-runners as his successor — at this year’s annual shareholder meeting set for May 1, which will otherwise be a virtual meeting live-streamed by Yahoo with questions relayed by CNBC’s Becky Quick.
Nowhere in the letter did Buffett mention the coronavirus pandemic, which has claimed over 500,000 lives in the U.S. and more than 2.5 million globally and which was a major factor in global bond markets last year and at times for stock markets as well.
What follows are some of Buffett’s words of wisdom for investors.
1. “Bonds are not the place to be these days,” wrote Buffett, referencing the 0.93% yield in the 10-year Treasury at year-end — it has since spiked to near 1.5% — and negative bond returns in Germany and Japan.
“Fixed income investors worldwide — whether pension funds, insurance companies or retirees — face a bleak future.” He cautioned against owning risky bonds backed by “shaky borrowers” paying higher yields. “Three decades ago, the once-mighty savings and loan industry destroyed itself, partly by ignoring that maxim.”
2. Stock repurchases can enhance the intrinsic value of shares but not at any price. “American CEOs have an embarrassing record of devoting more company funds to repurchases when prices have risen than whey they have tanked,” Buffett wrote. “Our approach is exactly the reverse.”
Berkshire Hathaway purchased the equivalent of 80,998 shares in 2020, spending $24.7 billion, according to Buffett. It also benefited when Apple, whose shares it owns, repurchased its own shares.
Although Berkshire sold some of its Apple position in 2020, its stake actually increased from the 5.2% it held in 2019 to 5.4% in 2020 because of April’s repurchases, which shrunk the number of its outstanding shares.
3. Ownership of stocks is a “positive-sum game,” but investors “must never forget that their expenses are Wall Street’s incomes” and “Wall Streeters do not work for peanuts.”
4. “Productive assets such as farms, real estate, and business ownership produce wealth. … All that’s required is the passage of time, an inner calm, ample diversification and minimization of transitions and fees.”
5. “The best results [in fixed asset ownership] occur at companies that require minimal assets to conduct high-margin businesses — and offer goods or services that will expand their sales volume with only minor needs for additional capital.” Berkshire Hathaway owns a few such “exceptional businesses,” according to Buffett.
6. Asset-heavy companies can also be good investments but they can require major capital investments, according to Buffett, whose Berkshire Hathaway owns two such giants — BNSF, a railroad company, and BHE (Berkshire Hathaway Energy).
The two companies earned a combined $8.3 billion 2020, almost double the $.4.2 billion earned in 2011, but both will require major capital expenditures for decades to come, wrote Buffett.
Since Berkshire acquired BNSF in 2010, it has invested $41 billion in fixed assets — $20 billion more than its depreciation charges, but it has earned the firm $41.8 billion.
7. The outdated electric grid coupled with the advent of renewable energy creates opportunities, but also requires massive investment. BHE has committed $18 billion to rework and expand a substantial portion of the outdated grid that transmits electricity throughout the West in a project that is expected to be completed by 2030.
“Billions of dollars needed to be invested before meaningful revenue would flow,” wrote Buffett. He expects BHE “will be a leader in delivering ever-cleaner energy” and he’s searching for similar big projects to take on.
8. “Conglomerates have earned their horrible reputation.” History shows that many conglomerates created by leaders once “lionized as business geniuses” …. ”ended up as business junkyards.” Their leaders bought whole businesses that were mediocre and used promotional, often deceptive techniques that overvalued their own stocks in order to take over other companies.
9. Berkshire Hathaway differs from the conglomerate prototype because it owns some companies it controls and some it doesn’t and deploys capital into companies that Buffett and Munger believe make the most sense based on competitive strengths, capabilities and character of management and price.
While Berkshire owns BNSF, BSE and some other companies outright, it has double-digit stakes in American Express (18.8%), Moody’s Corp. (13.2%) and Bank of America (11.9%) and smaller stakes in other companies.
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