Annual Letter - 2020

[John Hjorth]

I am admittedly speculating here, but we are all just a bunch of fanboys girls,  fan-people offering up observations and ideas:

 

A.)  near the end of his letter he talks a fair amount about the types of shareholders that BRK has and he significantly prefers the Partners/Long Term shareholder owners, and he chuckles at the short term index/robo trade shareholders.

 

B.) Couple that with the Significant share repurchase.

 

C.)  AND- Q.E.D.  WEB and Charlie are happier to buy out partners at an increasing pace now who are not long term shareholders.  Certainly there is the compounding there, but there is WEB psychology implied.

 

Seems like more to come in the future at these present prices.

 

Thoughts?

 

I think that is accurate. I believe he’s just  trying to be transparent and fair about it. Let his long term partners/investors know that he’s not trying to take advantage of them - “ it’s worth more than what it trades for” “ now may not be the time to sell.” Pretty sure I’ve read him talk about buybacks and considering the partners you are buying back from - or I’m just making it up. Eg If there were just 10 investors/partners he wouldn’t try and buyback shares on the cheap from one of them them if they were either down and out or if prices were advantageous to him.

 

I agree with nicke & hasilp here,

 

Actually, I was chuckling while reading that particular part, too. However I think thare are shades and several dimensions in what has been done in the last few years. I think of it as a two step-process [perhaps there may be more steps than I imagine here]. To me, it's a fact there has been a major shift in the Berkshire portfolio composition within the last few years away from financials in general, while share buybacks would increase exposure to financials for the individual shareholder, thereby indicating a two step-process.

 

This is [naturally] also speculative thoughts for my part.

[Xerxes]

Had a read through it just now.

Good letter. I like the bits about middle America.

 

I view the buybacks to be more a testament on the directionality of the economy, and less so on BRK itself being cheap.

Said differently, no matter how cheap BRK would be, they would not go in significantly and consistently with buybacks quarter after quarter if the worse was about to come on the macro front.

 

I had maintained the view that (1) the pandemic provided a re-baseline view, from which Omaha now has an economic vector to work with, which it didn't have back in 2018, when first the buyback limits were lifted; (2) unrealized gain on Apple, provided a mental equity base and a much larger margin of safety 

 

No doubt, sceptic would point to March-April 2020, and how BRK is buying back at higher highs but it didnt buy en masse then.

 

 

[Cigarbutt]

^ Yes, the tax angle makes this even better. When I read the annual letter, it sounded to me that Buffet wanted to go even bigger with BHE, most likely with an large acquisition of an utility.

I can see the rationale for covering the entire amount of float (minus the $20B+ in spare change) with regulated investments in Railroads and Utilities. The Utilities yield about ~10% ROE and if that’s mostly tax free, it is a great deal compared to bonds yielding ~2-3%. He needs the insurance co to be overcapitalized because since is still equity, but very low risk. I think his last act may be just to do this and find a large acquisition to supplement BHE. it would be almost Malone like in terms of taxes.

Then his successor can run is on autopilot and just worry about the other holdings and the unregulated business within the BRK umbrella.

Interesting. When arguing with my teacher (wabuffo) last summer, i suggested the following:

...

If you were responsible for the 100% liability portfolio at BRK now, how would you deal with capital allocation? (would you allocate a portion to gold?  :) ) i wonder if one could imagine a float portfolio composed of a significant amount of regulated return equity positions (energy, utility, infrastructure) bought at reasonable prices in exchange for worthless cash, with the intention to hold forever, with the value of the regulated entities growing with the insurance float. Some kind of permanent virtuous circle, of lasting legacy. After all, BRK started out as a textile mill operation.

[wabuffo]

I view the buybacks to be more a testament on the directionality of the economy, and less so on BRK itself being cheap.

 

If I had to guess, I think Buffett (and Munger) realize that the odds of bagging that $100B "elephant" in their remaining lifetimes has probably dropped to zero.  That opinion may have been informed by the reaction of the Fed and US Treasury to the financial panic caused last March by the pandemic shutdowns.  That crisis lasted about 5 minutes before any company who needed emergency capital suddenly could borrow cheaply and in almost unlimited supply.

 

Buffett's opportunity to deploy large sums during panics has been taken away.  I think its no coincidence that the buybacks started coming in size in Q3, Q4 of last year and according to Buffett will continue in 2021.

 

wabuffo

[CorpRaider]

After 3Q

~7% annualized, not bad at all.

 

the 2nd quarter of over 6% annualized share reduction + continuation in the 1st quarter shows that Berkshire is increasingly comfortable with a ~100% payou ration and capping the growth of excess capital (if the stock price is sufficiently cheap).

 

think we knew this already, but it's always good to get confirmation. Likewise, we could comp BNSF to UNP and get a number of $120B or whatever, but it's also great to see that "pretty much a toss up" language from the GOAT.

 

I think it would be totally rational to think about a 7% run rate distribution (still aiming for 10%+ returns on retained earnings, so you will still grow if you're achieving that...and shrink of not). Buybacks if stock is cheap/fair, special dividend if not.  May provide a useful template to set up for the Greg/successor and would work to allow Gates foundation to get steady funding.

[Viking]

I read this section and could not help but think of Fairfax...

———————————

(From page 4): Charlie and I want our conglomerate to own all or part of a diverse group of businesses with good economic characteristics and good managers. Whether Berkshire controls these businesses, however, is unimportant to us.

 

It took me a while to wise up. But Charlie – and also my 20-year struggle with the textile operation I inherited at Berkshire – finally convinced me that 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.

 

For those reasons, our conglomerate will remain a collection of controlled and non-controlled businesses. Charlie and I will simply deploy your capital into whatever we believe makes the most sense, based on a company’s durable competitive strengths, the capabilities and character of its management, and price.

 

If that strategy requires little or no effort on our part, so much the better. In contrast to the scoring system utilized in diving competitions, you are awarded no points in business endeavors for “degree of difficulty.” Furthermore, as Ronald Reagan cautioned: “It’s said that hard work never killed anyone, but I say why take the chance?”

[hasilp89]

I read this section and could not help but think of Fairfax...

———————————

(From page 4): Charlie and I want our conglomerate to own all or part of a diverse group of businesses with good economic characteristics and good managers. Whether Berkshire controls these businesses, however, is unimportant to us.

 

It took me a while to wise up. But Charlie – and also my 20-year struggle with the textile operation I inherited at Berkshire – finally convinced me that 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.

 

For those reasons, our conglomerate will remain a collection of controlled and non-controlled businesses. Charlie and I will simply deploy your capital into whatever we believe makes the most sense, based on a company’s durable competitive strengths, the capabilities and character of its management, and price.

 

If that strategy requires little or no effort on our part, so much the better. In contrast to the scoring system utilized in diving competitions, you are awarded no points in business endeavors for “degree of difficulty.” Furthermore, as Ronald Reagan cautioned: “It’s said that hard work never killed anyone, but I say why take the chance?”

 

As in Prem needs a Charlie?

[John Hjorth]

After 3Q

~7% annualized, not bad at all.

 

the 2nd quarter of over 6% annualized share reduction + continuation in the 1st quarter shows that Berkshire is increasingly comfortable with a ~100% payou ration and capping the growth of excess capital (if the stock price is sufficiently cheap).

 

think we knew this already, but it's always good to get confirmation. Likewise, we could comp BNSF to UNP and get a number of $120B or whatever, but it's also great to see that "pretty much a toss up" language from the GOAT.

 

I think it would be totally rational to think about a 7% run rate distribution (still aiming for 10%+ returns on retained earnings, so you will still grow if you're achieving that...and shrink of not). Buybacks if stock is cheap/fair, special dividend if not.  May provide a useful template to set up for the Greg/successor and would work to allow Gates foundation to get steady funding.

 

To me, a dividend while Mr. Buffett still being alive [perhaps not CEO and chairman at the time of af such decision] would actually be a [negative] Black Swan event. I'm not willing to bet anything on it though.

 

A dividend would dilute Mr. Buffett's pledges to the foundations.

[John Hjorth]

I read this section and could not help but think of Fairfax...

———————————

(From page 4): Charlie and I want our conglomerate to own all or part of a diverse group of businesses with good economic characteristics and good managers. Whether Berkshire controls these businesses, however, is unimportant to us.

 

It took me a while to wise up. But Charlie – and also my 20-year struggle with the textile operation I inherited at Berkshire – finally convinced me that 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.

 

For those reasons, our conglomerate will remain a collection of controlled and non-controlled businesses. Charlie and I will simply deploy your capital into whatever we believe makes the most sense, based on a company’s durable competitive strengths, the capabilities and character of its management, and price.

 

If that strategy requires little or no effort on our part, so much the better. In contrast to the scoring system utilized in diving competitions, you are awarded no points in business endeavors for “degree of difficulty.” Furthermore, as Ronald Reagan cautioned: “It’s said that hard work never killed anyone, but I say why take the chance?”

 

As in Prem needs a Charlie?

 

Viking & hasilp,

 

Charlie is already "taken", and there is nobody out there like Charlie!. You just made my day! [ ; -D ]

[Viking]

I read this section and could not help but think of Fairfax...

———————————

(From page 4): Charlie and I want our conglomerate to own all or part of a diverse group of businesses with good economic characteristics and good managers. Whether Berkshire controls these businesses, however, is unimportant to us.

 

It took me a while to wise up. But Charlie – and also my 20-year struggle with the textile operation I inherited at Berkshire – finally convinced me that 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.

 

For those reasons, our conglomerate will remain a collection of controlled and non-controlled businesses. Charlie and I will simply deploy your capital into whatever we believe makes the most sense, based on a company’s durable competitive strengths, the capabilities and character of its management, and price.

 

If that strategy requires little or no effort on our part, so much the better. In contrast to the scoring system utilized in diving competitions, you are awarded no points in business endeavors for “degree of difficulty.” Furthermore, as Ronald Reagan cautioned: “It’s said that hard work never killed anyone, but I say why take the chance?”

 

As in Prem needs a Charlie?

 

More the ah-ha moment finally understanding the importance of ‘buy wonderful businesses’ that can ‘run themselves’.

 

I would be VERY happy if Fairfax moved more in this direction.

[no_free_lunch]

I would not want dividends from Brk. Hold it in the taxable account.  I'm sure I'm not the only one.

 

If price gets to point where buybacks don't make sense then they should do an acquisition.  Possibly even issue shares if it gets too high.

[John Hjorth]

I would not want dividends from Brk. Hold it in the taxable account.  I'm sure I'm not the only one. ...

 

no_free_lunch,

 

It's called "stashing deferred taxes on deferred taxes". At least for me, so far, I has worked out good.

[valueinvesting101]

Found this interesting tidbit from the annual report page K-29:

 

Berkshire had approximately 1,600 record holders of its Class A common stock and 18,900 record holders of its Class B common stock at February 16, 2021. Record owners included nominees holding at least 351,000 shares of Class A common stock and 1,332,000,000 shares of Class B common stock on behalf of beneficial-but-not-of-record owners.

 

So total number of shareholders is around 21K, much lower than typical meeting attendance :o. I guess that covers about 82% of the outstanding shares. That is 0.006% of the US population.

 

Number of Shareholders AR2019 => 1750 (Class A) & 19,200 (Class B)

Number of Shareholders AR2018 => 2000 (Class A) & 19,500 (Class B)

Number of Shareholders AR2017 => 2100 (Class A) & 19,800 (Class B)

 

Total shareholders are shrinking with Class A shrinking much faster. I guess there are shareholders selling boring Berkshire for exciting other investments in the market. I guess WEB has idea of the upcoming selling and hence patient/slower with buybacks.

 

I feel odds of Berkshire share price compounding at 9-12% are very high in next 10-20 years.

 

[Cigarbutt]

It seems like he really likes to put more funds into BHE. Come to think about it, an regulated utility is an ideal bond substitute to invest insurance float in - low risk and volatility, secure  and growing cash flow for decades and reinvestment potential - ROE around 10% give or take.

I really like the utility's, in theory, however the industry has challenges. Home based solar on demand side and carbon regulations on supply side. Meanwhile concern that regulations are stuck in the past. Any industry experts here?  Is it still a good industry?

Disclosure: not an industry 'expert' and not holding directly utilities now but i'm a vested fan of private-public partnerships, when done right.

From the report:

"BHE’s decision to proceed, it should be noted, was based upon its trust in America’s political, economic and judicial systems."

The partnership between electric utilities and the rest in the US has a very long and interesting history. About a hundred years ago, the model was defined and the negotiated contract for investor-owned utilities included a 'reasonable' return and other significant attributes such as eminent domain. The model has evolved and there is new transition coming. Let's see. A very interesting part happened in the 80s and later when it was realized that utilities had invested too much in nuclear plants largely because they had responded to contract clauses with the public (and their representatives) changing expectations along the way (resulting in a supply-demand mismatch). This was a time when the "regulatory compact" was questioned and the doctrine was refined. The definition of "stranded costs" came up and utilities eventually were able to refinance debt and to recover costs over time with 'fees' built into customer bills. This played out in a very interesting fashion in the 80s with the Washington Public Power Supply System who built large nuclear power plants in the 70s. The interesting part was that some of the distress was related to the above mentioned regulator-related changed expectations and some of the distress was due to poor management (WPPSS was a muni corporation and integrated within the sometimes disorderly regulatory environment). The process (price discovery) was somewhat messy but things got worked out (eventually) according to Mr. Buffett's quote above. Interestingly, then (1982-3), Mr. Buffett bought the bonds in the middle of the capital structure (those that could rely on the regulatory compact) and bonds went back to par. The bonds lower in the capital structure (those tied to power plants #4 and #5 and tied to poor management) did not really recover.

So, what about now and the future? Utilities valuations now are elevated (opinion) but there is a possibility that capitalism can become again premised on the idea that capital is a scarce commodity. At this point, the threats are related to the utility death spiral with distributed energy and to flat demand and to the fact that the present model is outdated. New models are being looked at and may include both a fixed (to maintain access to the grid, think what happened recently in Texas) and a variable component according to volume. It's likely that there will be ways to provide a reasonable return to utility investors even with limited growth opportunities for established markets.

The bottom line is that investors want a reasonable return and customers want a reasonably reliable source of energy.

 

There is a huge grid-related opportunity coming and i bet that private players will play a key role in the US. BHE may be in a good spot.

 

[WneverLOSE]

As I expected, nothing about controversial stuff like record margin loans by investors, the gamification of investing by brokerages, retail frenzy, SPACs, questionable business models, market valuation, how much gamestop he owns  ::) etc.

[hasilp89]

I read this section and could not help but think of Fairfax...

———————————

(From page 4): Charlie and I want our conglomerate to own all or part of a diverse group of businesses with good economic characteristics and good managers. Whether Berkshire controls these businesses, however, is unimportant to us.

 

It took me a while to wise up. But Charlie – and also my 20-year struggle with the textile operation I inherited at Berkshire – finally convinced me that 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.

 

For those reasons, our conglomerate will remain a collection of controlled and non-controlled businesses. Charlie and I will simply deploy your capital into whatever we believe makes the most sense, based on a company’s durable competitive strengths, the capabilities and character of its management, and price.

 

If that strategy requires little or no effort on our part, so much the better. In contrast to the scoring system utilized in diving competitions, you are awarded no points in business endeavors for “degree of difficulty.” Furthermore, as Ronald Reagan cautioned: “It’s said that hard work never killed anyone, but I say why take the chance?”

 

As in Prem needs a Charlie?

 

More the ah-ha moment finally understanding the importance of ‘buy wonderful businesses’ that can ‘run themselves’.

 

I would be VERY happy if Fairfax moved more in this direction.

 

Haha yes that is what I meant. I’m on the same page. I owned FAirfax for a while but at some point I just got concerned with how complicated Prem seemed to make things. The dollar doesn’t know how hard you worked to make it.

[Jurgis]

OK, I am going to get a lot of flak for this, but I prefer investor/manager who is looking at the present and future and not waxes nostalgic about deals he did 50 or 70 years ago and people he worked with at the time. Yeah, it's all nice and grand and maybe even interesting in general. But Berkshire is a business and shareholders letter should be about the current and future state of affairs. OK, maybe Buffett does not want to tip his hand and talk about the future. How about talking about 2020 then? There's a number of things he did or did not do that get zero mention in the letter.  ::)

[Buckeye]

OK, I am going to get a lot of flak for this, but I prefer investor/manager who is looking at the present and future and not waxes nostalgic about deals he did 50 or 70 years ago and people he worked with at the time. Yeah, it's all nice and grand and maybe even interesting in general. But Berkshire is a business and shareholders letter should be about the current and future state of affairs. OK, maybe Buffett does not want to tip his hand and talk about the future. How about talking about 2020 then? There's a number of things he did or did not do that get zero mention in the letter.  ::)

 

Fair point Jurgis.

[aws]

 

So total number of shareholders is around 21K, much lower than typical meeting attendance :o. I guess that covers about 82% of the outstanding shares. That is 0.006% of the US population.

 

Since the vast majority of the stock is held in Street name, that really doesn't tell you anything about the actual number of shareholders.  I imagine it is well in excess of a million shareholders in the US.

[Cigarbutt]

OK, I am going to get a lot of flak for this, but I prefer investor/manager who is looking at the present and future and not waxes nostalgic about deals he did 50 or 70 years ago and people he worked with at the time. Yeah, it's all nice and grand and maybe even interesting in general. But Berkshire is a business and shareholders letter should be about the current and future state of affairs. OK, maybe Buffett does not want to tip his hand and talk about the future. How about talking about 2020 then? There's a number of things he did or did not do that get zero mention in the letter.  ::)

Who knows, maybe it has to do with an unusual long-term mindset that may be necessary for the future?

When all is said and done, 2020 was a pretty unremarkable year.  8)

As I expected, nothing about controversial stuff like record margin loans by investors, the gamification of investing by brokerages, retail frenzy, SPACs, questionable business models, market valuation, how much gamestop he owns  ::) etc.

This is something which is remarkable. He may have felt like writing a Mr.-Paul-Singer-type of annual letter but instead suggests that it is about successors.

[thowed]

Total shareholders are shrinking with Class A shrinking much faster. I guess there are shareholders selling boring Berkshire for exciting other investments in the market.

 

Thanks for this info.  I took this to mean that there are a number of Class A shareholders who are 'of an age' and for whatever reason don't want to pass their shares on.

 

The BHE stuff: I took this to mean that he is doing this as an inflation hedge - obvs he knows a lot about this i.e. the famous 70s article.  Maybe this is also the case with BNSF?

 

It's human to think that 'things aren't as good as they used to be', but with that anchor, I have not found the past few years of letters to have the same resonance as reading the 70s & 80s letters for the first time.

 

However we must also remember that he's a man in his 90s, and maybe he just thinks, f&%k it, I can't be bothered to write a long, incisive letter any more.

 

I agree with Jurgis about the frustration of not talking more about the future.

 

Having said that, I look at the portfolio and I see: Apple, I see Snowflake, and in particular I see BYD, and I think - this is not completely antiquated.

[boilermaker75]

It is National Retro Day after all,

 

https://nationaldaycalendar.com/national-retro-day-february-27/

[LearningMachine]

Wondering if folks noticed how he thinks about businesses from customer perspective:

• "customer's experience"
  
• "non-essential customer product": Looks like he distinguishes businesses based on whether they are selling an essential or a non-essential customer product, and that is input into determining how much power does the business have, e.g. to raise prices
  
• "customer is the boss"
  
• "satisfied customers are a store's best salespeople": Looks like he might have been handicapping NPS maybe even long before NPS measurements were started
  

 

Also, interesting how he described BNSF: "Your railroad carries about 15% of all non-local ton-miles (a ton of freight moved one mile) of goods that move in the United States, whether by rail, truck, pipeline, barge or aircraft. By a significant margin, BNSF’s loads top those of any other carrier...Railroading is an outdoor sport, featuring mile-long trains obliged to reliably operate in both extreme cold and heat"

 

You could almost use his quoted words to describe his investment in Verizon in a future letter, e.g.:

"Your wireless data carrier carries about x% of all local wireless data traffic in highly dense areas.  By a significant margin, Verizon's loads top those of any other wireless carrier in dense areas.  With highest ownership of high-band spectrum in dense areas, even though what Verizon provides has become an essential customer product similar to a utility, Verizon hasn't forgotten that customer experience and network reliability is what leads to satisfied customers that are a carrier's best salespeople."

[Spekulatius]

OK, I am going to get a lot of flak for this, but I prefer investor/manager who is looking at the present and future and not waxes nostalgic about deals he did 50 or 70 years ago and people he worked with at the time. Yeah, it's all nice and grand and maybe even interesting in general. But Berkshire is a business and shareholders letter should be about the current and future state of affairs. OK, maybe Buffett does not want to tip his hand and talk about the future. How about talking about 2020 then? There's a number of things he did or did not do that get zero mention in the letter.  ::)

 

Yes, the letter itself was disappointing. One thing they did do was participate in the Snowflake IPO. I realize it wasn’t him most likely but it should still be mentioned? What did they learn from this. BRK due to their size and diversity is a huge user of technology, can they lever the insight gained from this for investing? I would have liked to hear something about this.

2020 was such an eventful year, but this shareholder letter seems lame. It’s a missed opportunity.

[ValueMaven]

sorry it disappointed you...but I couldn't disagree more actually.