SAT, FEB 27, 2021

WARREN BUFFETT WATCH
Shareholder Letter Edition

No big surprises

Warren Buffett's annual letter to shareholders, posted this morning, along with Berkshire's annual report, doesn't include any major shockers, although there are two smallish surprises detailed below.

There's nothing new on succession, no explanations for Berkshire's bank stock sales or the Chevron and Verizon purchases, no comments about Joe Biden and Donald Trump, and no direct attacks against "meme" stocks and SPACs.

It's very much in keeping with the tone and content of his past letters.

Here's what he did say.

Buffett's "big" error

Buffett acknowledges he paid too much when Berkshire bought Precision Castparts (PPC) for $37.2 billion, including debt, in 2016. The result: an "ugly" $11 billion write-down in the subsidiary's value in 2020.

Buffett writes he wasn't "misled" by anyone. He was "simply too optimistic" about the company's average future earnings, a "miscalculation laid bare by adverse developments throughout the aerospace industry, PCC's most important source of customers."

(When it was announced in 2015, he did note in a CNBC interview that it was a "very high multiple for us to pay.")

How to build a conglomerate

Buffett writes that many conglomerates "earned their terrible reputation" by using deceptive, and sometimes even fraudulent, accounting tricks, to boost the value of their stock so it could be used as a currency to pay for the "control" premiums needed to buy an entire business.

And since "truly great businesses had no interest in having anyone take them over ... deal-hungry conglomerates had to focus on so-so companies."

With help from Munger, Buffett eventually understood that in many cases it makes more sense to simply buy shares of a good company's stock.

"Owning a non-controlling portion of a wonderful business is more profitable, more enjoyable and far less work than struggling with 100% of a marginal enterprise."

The "miracles" of middle America

In an effort to show that "success stories abound throughout America," and not just on its coasts, Buffett extensively details how entrepreneurs without much capital, but with a strong work ethic, created now prosperous Berkshire subsidiaries in Omaha (National Indemnity and Nebraska Furniture Mart) and Knoxville, Tennessee (Clayton Homes and Pilot Travel Centers).

While "many people forge similar miracles throughout the world," Buffett writes, "There has been no incubator for unleashing human potential like America."

There is still more work to do to create "a more perfect union," but Buffett's familiar, "unwavering conclusion" is "never bet against America."

"Bonds are not the place to be these days"

Buffett noted that unlike many insurance companies that are forced to invest their incoming premiums in bonds, Berkshire insurers can "safely follow an equity-heavy investment strategy" due to the financial strength provided by the cash that comes from Berkshire's non-insurance businesses.

Citing as an example the 94% drop of the 10-year U.S. Treasury yield from 15.8% 40 years ago to 0.93% at the end of 2020, Buffett wrote, "Bonds are not the place to be these days."

"Fixed-income investors worldwide – whether pension funds, insurance
companies or retirees – face a bleak future."

The "powers of repurchases"

While Buffett repeated his criticism of CEOs who do stock buybacks at any price, he noted that Berkshire had bought back $24.7 billion of its own stock last year because he and Munger believed the buys would "both enhance the intrinsic value per share for continuing shareholders" and leave the company with enough money for opportunities or problems.

"That action increased your ownership in all of Berkshire's businesses by 5.2% without requiring you to so much as touch your wallet."

"Special kinship" with Berkshire's individual investors

A lengthy section recounts Buffett and Munger's pre-Berkshire investment partnerships, where regular people "simply trusted is to treat their money as we treated our own," to illuminate why they "feel a special kinship" with the more than one million individual shareholders who "simply trust us to represent their interests, whatever the future may bring."

Citing one Omaha doctor who is 100, and another two who are in their high-90s, all early investors, and the fact both he are Munger are also in their 90s, Buffett mischievously asks, "Could it be that Berkshire ownership fosters longevity?"

Since stocks generally go up over time, other investors may do quite well following "CEOs and market gurus with enticing ideas," "price targets, managed earnings and 'stories'," and technicians who "confidently instruct them as to what some wiggles on a chart portend for a stock's next move."

But those non-Berkshire investors should "never forget that their expenses are Wall Street's income. And, unlike my monkey, Wall Streeters do not work for peanuts."

A "surprise" Berkshire number

In a section detailing how Berkshire's BNSF railroad and BHE (Berkshire Hathaway Energy) utility company are planning to make big capital expenditures in coming years, including BHE's $18 billion commitment to "rework and expand" the Western electricity grid, Buffett reveals "a fact about our company that I had never suspected."

Berkshire owns American-based property, plant, and equipment with a GAAP valuation greater than any other U.S. company.

Its depreciated cost of those assets in $154 billion, with AT&T coming in second at $127 billion.

A surprise Berkshire venue

The letter ends with Buffett's revelation that Berkshire's May 1 annual meeting will be held in Los Angeles so that Munger can join him on stage for the 3 1/2 hour question period.

CNBC's Becky Quick will be asking the questions again, like last year. (Suggested "zingers" may be sent to BerkshireQuestions@cnbc.com.)

Also like last year, no shareholders will be at the event, but it will be live streamed by Yahoo Finance (https://finance.yahoo.com/brklivestream), with questions starting at 1:30 PM ET.

Vice-chairmen Ajit Jain and Greg Abel will also be there to answer questions.

Buffett writes that he hopes and expects 2022 will bring an "honest-to-God annual meeting, Berkshire-style."

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