Key takeaways from the Berkshire Annual Letter to shareholders

Here are some of the key takeaways from Berkshire’s annual letter to shareholders.

Feb 25, 2020 04:02 IST India Infoline News Service

For fundamental value investors, the Berkshire Hathaway annual letter to shareholders is like a virtual Bible on value investing. In a way, for more than 50 years, the Berkshire annual letter has mirrored the personality of Warren Buffett and the investment philosophy of Berkshire Hathaway. The 2019 annual letter does not contain anything off the hook. For example, in his 2016 newsletter, Buffett had been effusive in praising Jack Bogle of Vanguard (a world leader in passive funds) for saving over a trillion dollars in fees for American investors. This annual letter is a lot more business-like. Here are some of the key takeaways from Berkshire’s annual letter to shareholders.
Berkshire underperformed the S&P500 in 2019 by a huge margin
It is not often that you get to see Berkshire Hathaway giving annual returns of 11% when the S&P 500 index has given 31.5%. However, if you look at the last 55 years since Berkshire Hathaway came into existence, the CAGR returns on Berkshire Hathaway has been 20.33% as compared to just 10% on the S&P 500. Interestingly, in the last 11 years since the financial crisis, Berkshire has underperformed the S&P 500 in 4 years, performed at par with the S&P in 3 years and managed to beat the index convincingly on 4 occasions. However, on a longer term basis, Berkshire still rules over the index. For example, $10,000 invested in the S&P500 in 1965 would have been worth $1.72 million. If the same $10,000 had been invested in Berkshire Hathaway in 1965 it would have been worth a whopping $218.87 million. That probably settles the debate. For over 50 years, Buffett and Munger have adhered to their belief in the power of retained earnings compounding wealth and that stood them in good stead.
The legendary Warren Buffett portfolio

Data Source: Berkshire Annual Newsletter
Apple has now been the clear leader in the Berkshire portfolio, largely driven by stellar performance in the previous year. Most of the other stocks have been around in the Berkshire portfolio for a very long time. Of course, Buffett appears to have done a course correction after his initial enthusiasm shown for IBM. In fact, Apple accounts for close to 30% of the equity investment portfolio of $250 billion that Berkshire Hathaway owns. That is quite an ask for an investor who had always been wary of technology stocks and still refuses to invest in trillion dollar names like Microsoft, Amazon and Alphabet.
What about the cash stash at Berkshire?
That has remained the billion dollar question. Berkshire cash stash of over $128 billion has been too good to be true. Over the last few years, Buffett has not committed big investments into any stock or even into majority acquisitions. In between, Buffett had shown some interest in oil and gold but that was more of a fleeting interest. As Buffett himself admits, he finds stocks too overpriced to really make a large commitment at these levels. According to him, it is hard to find stocks or businesses that offer margin of safety at this point of time. Buffett is perfectly comfortable letting his cash idle in government treasuries. That is largely in sync with the long term approach that Buffett and Munger have always advocated. In short, Berkshire Hathaway is in no tearing hurry and is willing to wait and bide it’s time for the right investment opportunities.
After Buffett who – is yet to be answered?
Apart from seeking answers on the cash stash, the other big question that the markets were expecting answers was the succession plan at Berkshire Hathaway. It would most likely be Greg and Jain who would assume charge but there have been no commitments. However, Buffett has clearly mentioned in his annual letter that both he and Munger would prefer to move on. They have emphasized that the systems and processes as well as the investment process was well established not to be disrupted by the absence of two people. The AGM which will be held at Omaha on May 02nd could see the actual announcement of the names for the top job.
Clearly, filling into the shoes of larger than life personalities like Buffett and Munger will not be easy. They have led from the front for nearly 55 years. While Buffett is 89, Munger is on the wrong side of the nineties. Despite the concerns, the baton will pass on. Shareholders would do well to remember that Buffett’s larger holding, Apple, had a similar problem after the death of Jobs. But Apple not only survived under Cook but also thrived. Clearly, smart organizations are larger than the smart people who created them. That could be the biggest take away from the annual letter this year.

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