Annual Letter - 2020

[KJP]

I also was underwhelmed by the letter, given the raw material that the events of 2020 gave him. 

 

The passage about BHE's $18 billion grid transmission work was interesting.  I don't follow the company closely enough to even know what he's referring to.  And he didn't expressly compare it to a pipeline, but if you change a few words in the following three paragraphs, he could be describing Transco, which has worked out fairly well for its owners:

 

"Let me tell you about one of BHE’s endeavors – its $18 billion commitment to rework and expand a substantial portion of the outdated grid that now transmits electricity throughout the West. BHE began this project in 2006 and expects it to be completed by 2030 – yes, 2030.

 

The advent of renewable energy made our project a societal necessity. Historically, the coal-based generation of electricity that long prevailed was located close to huge centers of population. The best sites for the new world of wind and solar generation, however, are often in remote areas. When BHE assessed the situation in 2006, it was no secret that a huge investment in western transmission lines had to be made. Very few companies or governmental entities, however, were in a financial position to raise their hand after they tallied the project’s cost.

 

BHE’s decision to proceed, it should be noted, was based upon its trust in America’s political, economic and judicial systems. Billions of dollars needed to be invested before meaningful revenue would flow. Transmission lines had to cross the borders of states and other jurisdictions, each with its own rules and constituencies. BHE would also need to deal with hundreds of landowners and execute complicated contracts with both the suppliers that generated renewable power and the far-away utilities that would distribute the electricity to their customers. Competing interests and defenders of the old order, along with unrealistic visionaries desiring an instantly-new world, had to be brought onboard." 

[IceCreamMan]

Berkshire buybacks:

2018: $1.3 bil

2019: $5 bil

2020: $25 bil ($9 bil in Q4)

 

As I think thepupil pointed out, the company has been repurchasing shares at a 6.3% annualized rate over the past 5 months.

 

I think the implications of this activity for Berkshire's future are very positive.

[Xerxes]

On the comments about letter being rather empty given the eventful year we had, i kind of felt that aspect of the letter, given all the stuff that happened in 2020, made the Berkshire actually look timeless and durable for decades to come. Not to say that the tragedies were just a blip. Just my impression.

 

I bet neither Bruce Flatt nor Prem Watsa could get away by writing a letter like that. They are still in prove-me mode.

 

On BHE, me too, don't know much about it, other than it is gobbling cash flows for god knows what. Sounds like they are building the next Death Star.

[Xerxes]

Berkshire buybacks:

2018: $1.3 bil

2019: $5 bil

2020: $25 bil ($9 bil in Q4)

 

As I think thepupil pointed out, the company has been repurchasing shares at a 6.3% annualized rate over the past 5 months.

 

I think the implications of this activity for Berkshire's future are very positive.

 

I got to remind myself, with meaningful share buybacks, you don't need to double market capitalization to double the share price.

Not to say that it will get there, but just saying.

[no_free_lunch]

Thank you cigarbutt. Appreciate your thoughts on BHE.

 

I had not considered the switch to transmission but perfectly logical. This is certainly a daunting political / logistical task.  Could this be the formation of a new toll road, I can only hope.

 

The regulators seem the biggest risk here but as I read more they have tried to make it work in the past.  It could be very lucrative if the rates allowed can be achieved.

 

From a valuation perspective, other utilities trade at 2x book, BHE is a smaller piece of the empire but proportionally this seems to validate the buybacks.

[DooDiligence]

I like the letter.

WEB is candid re: overpaying for PCP.

He could've ignored it, as many CEO's do, but nobody here expected him to.

 

I'm probably being short sighted thinking he should trim Apple, but he did a good job of outlining the case for holding. He might also be thinking about the mistake of not keeping a long term ownership stake in Disney.

 

On another note, I'd prefer he reflect on the past rather than fluff me up for a hump that may never happen. I can see for myself that the bases are loaded. It's like he's built a power bat that swings itself. The occasional bunt will bring in runs too.

 

As Spek & Cigarbutt pointed out, BHE has opportunities in next generation transmission.

 

---

 

Considerable investments in the nation’s grid infrastructure are needed to adapt to new challenges and maintain system resiliency and reliability.

 

The utility industry is accelerating investments in electricity infrastructure. For transmission lines, investment increased from $2 billion–$4 billion per year between 1995 and 2005 to $10 billion– $16 billion per year between 2010 and 2015. Investment in distribution infrastructure — including advanced distribution management systems, smart meters and inverters, new poles, and buried power lines — grew from $15.5 billion in 2006 to nearly $22.0 billion in 2015.

 

Investment needs for grid modernization projects — which drive reductions in electricity bills, improve system reliability, and increase fuel and system efficiency — are estimated to range from $350 billion to $500 billion.

 

An estimated $25 billion–$40 billion in additional transmission infrastructure investment is needed through 2025 just to comply with requirements associated with existing state-level renewable portfolio standards.

 

www.businessroundtable.org/electricity-infrastructure

 

---

 

Integrating high levels of variable renewable energy into electric power systems

 

https://link.springer.com/article/10.1007%2Fs40565-017-0339-3

 

---

 

www.brkenergy.com/energy/transmission

 

This is an industry that can address a number of issues, clean energy and job creation. Might manage to make a buck or two along the way.

 

---

 

edit: Forgot to add, super happy about the buybacks  ;D

[Charlie]

"I like the letter.

WEB is candid re: overpaying for PCP.

He could've ignored it, as many CEO's do, but nobody here expected him to.

 

I'm probably being short sighted thinking he should trim Apple, but he did a good job of outlining the case for holding. He might also be thinking about the mistake of not keeping a long term ownership stake in Disney.

 

On another note, I'd prefer he reflect on the past rather than fluff me up for a hump that may never happen. I can see for myself that the bases are loaded. It's like he's built a power bat that swings itself. The occasional bunt will bring in runs too.

 

As Spek & Cigarbutt pointed out, BHE has opportunities in next generation transmission.

 

---

 

Considerable investments in the nation’s grid infrastructure are needed to adapt to new challenges and maintain system resiliency and reliability.

 

The utility industry is accelerating investments in electricity infrastructure. For transmission lines, investment increased from $2 billion–$4 billion per year between 1995 and 2005 to $10 billion– $16 billion per year between 2010 and 2015. Investment in distribution infrastructure — including advanced distribution management systems, smart meters and inverters, new poles, and buried power lines — grew from $15.5 billion in 2006 to nearly $22.0 billion in 2015.

 

Investment needs for grid modernization projects — which drive reductions in electricity bills, improve system reliability, and increase fuel and system efficiency — are estimated to range from $350 billion to $500 billion.

 

An estimated $25 billion–$40 billion in additional transmission infrastructure investment is needed through 2025 just to comply with requirements associated with existing state-level renewable portfolio standards.

 

www.businessroundtable.org/electricity-infrastructure

 

---

 

Integrating high levels of variable renewable energy into electric power systems

 

https://link.springer.com/article/10.1007%2Fs40565-017-0339-3

 

---

 

www.brkenergy.com/energy/transmission

 

This is an industry that can address a number of issues, clean energy and job creation. Might manage to make a buck or two along the way.

 

---

 

edit: Forgot to add, super happy about the buybacks  ;D"

 

 

+ 1

 

I don´t think a lot of people would have liked reading about theoretical worst case scenarios of 2020 with much more deaths and destruction....

 

No wonder he is doing so much buybacks with a cheap stock price (P/B 1,2569).

 

Very good solution for the annual meeting. It's just more fun and wisdom with Munger.

 

It's still the gift that's keep giving....  :)

[nwoodman]

The highlight of the letter for me was that they are pulling out all stops to have Charlie alongside Warren for the AGM.  Watching the DJCO AGM (

), the diminishment in capacity at 97 is negligible.  Truly amazing.  The buybacks and tone only reaffirmed my view that Berkshire can be a cornerstone for my portfolio (10% +/- opportunities) and means that retirement is a possibility  :).  As always appreciate everyone's very thoughtful comments

[Cigarbutt]

I had not considered the switch to transmission but perfectly logical. This is certainly a daunting political / logistical task.  Could this be the formation of a new toll road, I can only hope.

The regulators seem the biggest risk here but as I read more they have tried to make it work in the past.  It could be very lucrative if the rates allowed can be achieved.

This is an industry that can address a number of issues, clean energy and job creation. Might manage to make a buck or two along the way.

The extension into energy and infrastructure is likely to counter the diminishing return aspect that comes with size. The coming transition involves a time period where supra-regional grids will be put in place. The part included in the annual report is not only for (long-term) investors, it’s also a message to regulators and elected officials. For example, what PacifiCorp is trying to do in the West (‘gateway’ towards the California market), involves dealing with many regional regulators (dozens) and many more local and diversified interest groups. There is value in size (+ve long-term NPV) but it’s hard, at this point, to be precise. Also, the local constituents have to deal with conflicting objectives: paying for the infrastructure built in other states means assets and jobs ‘elsewhere’, the origin of the energy (coal vs gas vs others) may not harmonize with states’ objectives and local and regional authorities are bound to lose autonomy.

 

So, in a way, the very large investments are a bet that people will be able, together, to figure out the value of the projects. Contrary to other issues (healthcare, how to deal with a pandemic), this appears to be doable now (and for a while) in a relatively (although potentially messy) cost-effective way.

Who will remember Roaring Kitty in 20 years?

 

[ValueMaven]

I'd love to see what type of cash flow projections underpinned this $18B 2030 project that Warren is talking about at BHE.  Both BNSF and BHE have really unique competitive advantages. 

[NBL0303]

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

 

Likewise, couldn't disagree more with the notion that Warren should focus his communications on excogitations about the future. Those who want discussions of Snowflake and explorations of the future development of Berkshire are in the wrong place. Read through the 50-plus letters and it is apparent what Warren tries to do/likes to do with these letters and with his Berkshire-specific communications in general. There are people who would like him to do quarterly conference calls, to discuss current investments with more depth (why did you investor in this?). I mean the most glaring omission would be the dearth of Apple discussion right? They have $120 billion in the company but he did not even review basic thoughts of the business, its moat, its value, etc. Essentially the only substantive discussion of Apple was an empirical description of its buybacks. So it may be reasonable to expect a discussion, at least a minimal one, of this $120 billion investment....BUT that is not the kind of thing he generally does. That is as a part of Berkshire as much as GEICO.

 

Also the nature of annual report documents and letters is to review the past. That is their essential function - they are concerned with what has happened to get to this point.

 

I do believe Warren is addressing the future though by addressing the past. These letters and Warren's Berkshire-specific communications shape and cement the culture and character that he intends to endure at Berkshire into the future. Reading through 50-plus years of Berkshire letters and the way he discusses the companies they've purchased, how those companies were built, the way the Buffett Partnership became Berkshire - and how that indelibly shaped the present, and he hopes future-Berkshire, is a powerful message to Greg, Ted, Todd and their successors. The communication has been so clear and the transmission of values through these communications so powerful, for instance, that if Greg immediately started quarterly conference calls after he takes over - then every single long-time Berkshire shareholder that I know of would revolt. That is because of Warren's clear communication in these letters.

[ValueMaven]

+1

 

very well said!

[IceCreamMan]

Also the nature of annual report documents and letters is to review the past. That is their essential function - they are concerned with what has happened to get to this point.

 

Was anyone else surprised that he didn't address the pandemic?

[clutch]

Regarding the lack of discussion on the pandemic... It would have highlighted his mistakes during the March-May period...Selling the airlines at the bottom and not making any meaningful purchases. It was very un-Buffett like and he was obviously too pessimistic.

 

I don't know if he is Intentionally avoiding to discuss his mistakes... or he is still thinking that was the best course of action to take and he doesn't want to sound like making excuses.

[Viking]

Buffett may have chosen to stay tight lipped on lots of topics in this years annual letter because we are still in the middle of them. Often the best time to comment/best learnings (via the letter) is a couple of years after the fact once the dust has settled.

 

Regardless, he will get lots of questions on all these topics at the AGM so investors will get more information shortly.

———————

From my perspective the biggest news was the meaningful buybacks of BRK stock. With continued purchases in Q1. That is a big deal for shareholders.

[aceskc]

Couple of other interesting observations- he has absolutely disappeared from the financial media , seemingly deliberately. Dont see the usual Monday morning cnbc interivew scheduled the day after the annual report is released, one he has done for years. Probably wants to keep the share price in check to chug away at the outstanding shares.

 

Secondly, its also interesting when you think about 1) Apple is our 2nd or 3rd largest business 2) We never trim our positions 3) Coca cola buybacks in late 1999/2000s were value reductive 4) He has sold ~90M shares in H2 of 2020, i'd assume at prices around 135+...

if thats the case, he had quite a window in January to substantially further reduce his  AAPL stake when prices traded 140+, even though the tone in his letter indicates other wise.  Quite possible given he has been transparent about Q1 TD repurchases that he has trimmed further and ploughed proceeds into Berkshire.

 

 

[IceCreamMan]

Buffett may have chosen to stay tight lipped on lots of topics in this years annual letter because we are still in the middle of them. Often the best time to comment/best learnings (via the letter) is a couple of years after the fact once the dust has settled.

 

This is an interesting guess, Viking, thanks for sharing.

 

From my perspective the biggest news was the meaningful buybacks of BRK stock. With continued purchases in Q1. That is a big deal for shareholders.

 

Agreed.

[skanjete]

The letter certainly isn't what is was anymore.

 

It used to be a platform for Buffett's teachings, but I have the impression that Buffett the teacher is gone.

This has been the case for some years now. Up to say 5 years ago, the letters always contained some in-depth analysis of a subject from an original and very rational angle.

There was always something to be learned, but this is no longer the case.

 

Actually, you would learn more today if you read his 1980 letter (a great one about impact of inflation on equity values) instead of his 2020 letter.

 

Same with his interviews. His answers are more vague, more predictable than they used to be and very often repeat expressions and viewpoints from the past.

Actually, Charlie kept his originality somewhat longer, but I had the same impression from his Q&A in the DJCO AGM.

 

It's a pity, but that's life.

[compoundinglife]

It was a good letter. Most of what Warren is going to write or say he has already said. There are little nuggets in between the lines, everyone once in a while they surprise us. But I don't read the letter as soon as it prints anymore. I don't read it expecting to get any earth shattering insights. But I read it and enjoy reading it. After reading the letter or going to the meeting the few years I went, I always feel re-affirmed about owning Berkshire. It is a check point and a reminder for me.

 

One thing I noticed which I had not noticed before, is Warren stating in plain English that some of his equity positions are parking lots for cash until he has better ideas. I remember Charlie being asked about XOM once and he said Warren considered it a cash substitute. But don't remember Warren coming out and saying it.

 

I also got the impression the PCP explanation was possibly trying to provide more color around selling the airline positions. Maybe he felt the combination of Airlines (what was it, 4B total?) + ownership of PCP was too much risk for Berkshire given the uncertainty at the time? Additionally they have their finger on the pulse of PCP's order backlog, maybe that was enough to convince them.

 

I didn't expect it but would like to have read his thoughts on CVX and oil/gas in general. Outside of Petro China has he had any other wins in the oil patch? He bought COP and sold it at a loss in the GFC. He got in an out XOM fairly quickly and dodged a bullet there. Occidental was a mistake. Clearly must be somewhat bullish on Oil consumption and prices to plow 4B into CVX. Maybe just parking some cash.

 

 

[StevieV]

It was a good letter. Most of what Warren is going to write or say he has already said. There are little nuggets in between the lines, everyone once in a while they surprise us. But I don't read the letter as soon as it prints anymore. I don't read it expecting to get any earth shattering insights. But I read it and enjoy reading it. After reading the letter or going to the meeting the few years I went, I always feel re-affirmed about owning Berkshire. It is a check point and a reminder for me.

 

One thing I noticed which I had not noticed before, is Warren stating in plain English that some of his equity positions are parking lots for cash until he has better ideas. I remember Charlie being asked about XOM once and he said Warren considered it a cash substitute. But don't remember Warren coming out and saying it.

 

I also got the impression the PCP explanation was possibly trying to provide more color around selling the airline positions. Maybe he felt the combination of Airlines (what was it, 4B total?) + ownership of PCP was too much risk for Berkshire given the uncertainty at the time? Additionally they have their finger on the pulse of PCP's order backlog, maybe that was enough to convince them.

 

I didn't expect it but would like to have read his thoughts on CVX and oil/gas in general. Outside of Petro China has he had any other wins in the oil patch? He bought COP and sold it at a loss in the GFC. He got in an out XOM fairly quickly and dodged a bullet there. Occidental was a mistake. Clearly must be somewhat bullish on Oil consumption and prices to plow 4B into CVX. Maybe just parking some cash.

 

I think dumping the airlines was pretty simple.  They were all in big trouble, but bailed out by the government.  Relying on whims of government assistance isn't part of BRK's investment philosophy.  So, they dumped them.  Makes sense to me.  I don't have any criticism of that move.

[no_free_lunch]

I am actually quite confused about PCP.  I don't know them well but why is a business like TDG doing so well and meanwhile castparts is taking huge write downs?  Is the business really down over the long term or is this a temporary move.

[wescobrk]

Has anyone done the math of what Buffett's average cost per share for the buybacks last year?

[gfp]

Has anyone done the math of what Buffett's average cost per share for the buybacks last year?

 

203.3 on the B-shares (corrected calculation error)

 

80,998 A share equivalents for $24.7 Billion.  5.2% share count reduction for calendar year 2020.

 

December average basis was 225.73 and he was willing to pay higher average prices, continuing through the first month and a half of 2021.

[treasurehunt]

Has anyone done the math of what Buffett's average cost per share for the buybacks last year?

 

218.62 on the B-shares

 

80,998 A share equivalents for $24.7 Billion.  5.2% share count reduction for calendar year 2020.

 

December average basis was 225.73 and he was willing to pay higher average prices, continuing through the first month and a half of 2021.

 

I get $203.30 when I do the math ($24.7 billion divided by 1,500 x 80,998)

[gfp]

You are correct - not sure what went wrong with my calculation but 304,946 / A share does indeed correspond to 203.3 / B share.