Annual Letter - 2020

[adesigar]

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.

 

Taxes

[DooDiligence]

It gets really quiet here right after the SEC alert to the 10K drops.

[adesigar]

My takeaway from the letter was he feels Berkshire is misunderstood/ignored and because of that it is undervalued so he is doing share buybacks.

 

1. Stock holdings earning don't come out on Berkshire Income statements.

2. BRK has been unfairly applied a Conglomerate discount.

3. BNSF Value as much as AAPL stock, Insurance value significantly higher.

4. Investors focused on coastal tech/finance and paying crazy valuations while ignoring/avoiding middle America and the boring businesses which BRK holds a lot of.

5. BHE is similar to BNSF from 10 years ago. It will pay out a lot 10 years from now when it done and will be almost impossible to compete against and this value is ignored.

 

He had an indirect reference to GME. Berkshire has the ultimate group of shareholders with   :D

 

 

[spartansaver]

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.

 

In 1999 and 2000, Buffett spoke of the market environment and the minimal returns investors could expect going forward. In 2008, Buffett discussed the financial crisis in the midst of it. Today we are in a pandemic and not a word is mentioned. I had expectations that Buffett would to some degree talk about the past year and his thoughts around it. I don't think it was that crazy of an expectation and I was let down. Perhaps I should have listened to Charlie and gone in with no expectations. I was disappointed and thought it was one of the most generic letters he's written.

[widenthemoat]

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.

 

In 1999 and 2000, Buffett spoke of the market environment and the minimal returns investors could expect going forward. In 2008, Buffett discussed the financial crisis in the midst of it. Today we are in a pandemic and not a word is mentioned. I had expectations that Buffett would to some degree talk about the past year and his thoughts around it. I don't think it was that crazy of an expectation and I was let down. Perhaps I should have listened to Charlie and gone in with no expectations. I was disappointed and thought it was one of the most generic letters he's written.

 

"In 1999 and 2000, Buffett spoke of the market environment and the minimal returns investors could expect going forward."

 

That was my exact takeaway from this year's letter. He was pretty clear on bond's being insanely overpriced, and you can deduce what you would like from that in relation to the level of the stock market.

[spartansaver]

"In 1999 and 2000, Buffett spoke of the market environment and the minimal returns investors could expect going forward."

 

That was my exact takeaway from this year's letter. He was pretty clear on bond's being insanely overpriced, and you can deduce what you would like from that in relation to the level of the stock market.

 

My issue was that we have a pandemic going on and I expected some commentary around that. The only commentary around that was that NFM was closed for six weeks.

[widenthemoat]

"In 1999 and 2000, Buffett spoke of the market environment and the minimal returns investors could expect going forward."

 

That was my exact takeaway from this year's letter. He was pretty clear on bond's being insanely overpriced, and you can deduce what you would like from that in relation to the level of the stock market.

 

My issue was that we have a pandemic going on and I expected some commentary around that. The only commentary around that was that NFM was closed for six weeks.

 

Agreed, it would have been nice to hear his thoughts on the pandemic for sure. This letter seemed to have a lot of subtle undertones. Warren has never been one to call out bubbles explicitly. Maybe I'm looking at it with a bias, but it screamed very very overpriced market to me.

[LC]

Perhaps based on his inaction 1 year ago and the general impression he left on me was that he overestimated the effect of the pandemic. Hey may have been kicking himself (gently) for missing an opportunity and/or misjudging the situation, and is therefore a bit humble on the topic?

 

Just one of many potential explanations.

[Buckeye]

"In 1999 and 2000, Buffett spoke of the market environment and the minimal returns investors could expect going forward."

 

That was my exact takeaway from this year's letter. He was pretty clear on bond's being insanely overpriced, and you can deduce what you would like from that in relation to the level of the stock market.

 

My issue was that we have a pandemic going on and I expected some commentary around that. The only commentary around that was that NFM was closed for six weeks.

 

Could it be that with the pandemic still on going it's too early to comment on it?

[Parsad]

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.

 

I fully agree with this sentiment.  You can tell he's preparing his shareholders/partners for the future without Buffett & Munger. 

 

I had not seen the Berkshire site since last year, and I only now saw the Past, Present & Future letter written by Warren and one by Charlie.  Clearly, they are preparing their goodbyes (hopefully still years and years away) and preparing the past, present and future shareholders.

 

Charlie and Warren will be together again at the AGM, with Ajit Jain and Greg Abel (the vice-chairmen) available for questions as well.

 

I hope if this is the slow, careful transition that it is, maybe we'll start to get Warren's annual letter, as well as smaller annual letters from both Ajit Jain and Greg Abel...but probably not, as that would be tipping the hand about who gets called to bat in the future.

 

Cheers!

[MarioP]

I had my list of subjects I was hoping to see in the letter. What wasn't in it : Why we invested in Snowflake, Why we invested in Japan, Why we didn't buy in march (btw I didn't neither), What is the long term impact of Covid.

 

My reflexion after finishing the reading and before coming to see what other has to tell here : Warren told me that all this stuff is noise, not very important in the long term. Focus on the four main businesses and what will happen to them, the rest is not really important.

 

I think the timeline of when the jewells where added is interesting : Insurance 1967 BHE 1999  BNSF 2010 Apple 2016. Geico 1996 Gen Re 1998 were important milestone. So there is many years between each jewell acquisition. Everything's else was just noise. So the 100B+ available will be reserved for a new jewell when the opportunity will be there. In the mean time almost all the operating earnings will be return to the shareholder. For now it is via buybacks. If the price of the share made it not accretive to do buyback we will see what will happen.

 

My take on the value of Berkshire with the clue we have : Around 4 times the value of Apple (not the price which is Higher than then value because he sold 11 billions).

 

What will move the value in the future? Look at BHE because it have enormous opportunity.

[Dooba]

I can't believe the share price has barely budged since the letter came out. Continuing to add while the getting is good.

[mattee2264]

 

I think Buffett probably sees the AGM as a better format for some of those questions. I think the style shift is to allow for continuity/comparability for future reports he might not be authoring.

 

No doubt he has private views on some of the crazy speculation. But I suspect that for the S&P 500 he probably feels the same that it is cheap if interest rates stay low.

[manuelbean]

Any ideas on what Warren meant when he said that he was right on his opinion that Precision Cast Parts would "earn good returns on net tangible assets" but that he had made a mistake "in judging the average amount of future earnings"?

 

If the earnings are lower than expected, shouldn't the return on assets be lower as well?

[spartansaver]

Any ideas on what Warren meant when he said that he was right on his opinion that Precision Cast Parts would "earn good returns on net tangible assets" but that he had made a mistake "in judging the average amount of future earnings"?

 

If the earnings are lower than expected, shouldn't the return on assets be lower as well?

 

Looks like it earned close to around 40% ROTIC for the few years leading up to it getting acquired. Earnings could get cut in half and it'd still be generation solid returns on net tangible assets.

[Cigarbutt]

^He has expressed similar sentiments concerning the Kraft-Heinz ownership (especially the 'expensive' Kraft part).

With Precision Castparts, the acquisition made in 2016 contained the assumption that return on capital trends would return to previous levels. The goodwill paid for above-normal earning power was too high but has become a sunk cost.

[manuelbean]

The chart and the heading don't really match, do they?

 

I found this to be interesting

https://behavioralvalueinvestor.com/blog/warren-buffett-pcc

 

Gary makes an attempt at uncovering the profits after the acquisition (I don't know if they're disclosed on the AR, but from the article it doesn't seem so).

[Cigarbutt]

The chart and the heading don't really match, do they?

I found this to be interesting

https://behavioralvalueinvestor.com/blog/warren-buffett-pcc

Gary makes an attempt at uncovering the profits after the acquisition (I don't know if they're disclosed on the AR, but from the article it doesn't seem so).

This aspect is interesting because it may explain (IMO) some of the cash build-up at holdco.

When Mr. Buffett made the PCP acquisition, he paid a normalized PE of 18 (earnings yield of about 5.5%). The idea then was that the rest of the return would come from growth (organic and acquisitions). From 2003 to 2015, operating earnings had grown at a CAGR of 15-16%. When announced, many people suggested that the switch in investment mindset (pay more for growth) was the right one and many suggested that he had under-paid for the acquisition (i just checked for fun what people here said at the time).

So, for this specific transaction, the outcome is likely to be satisfactory over time but the price paid was too high as a result of assumptions that were initially too optimistic. Of course, it's easy to say in retrospect.

 

[Spekulatius]

The chart and the heading don't really match, do they?

I found this to be interesting

https://behavioralvalueinvestor.com/blog/warren-buffett-pcc

Gary makes an attempt at uncovering the profits after the acquisition (I don't know if they're disclosed on the AR, but from the article it doesn't seem so).

This aspect is interesting because it may explain (IMO) some of the cash build-up at holdco.

When Mr. Buffett made the PCP acquisition, he paid a normalized PE of 18 (earnings yield of about 5.5%). The idea then was that the rest of the return would come from growth (organic and acquisitions). From 2003 to 2015, operating earnings had grown at a CAGR of 15-16%. When announced, many people suggested that the switch in investment mindset (pay more for growth) was the right one and many suggested that he had under-paid for the acquisition (i just checked for fun what people here said at the time).

So, for this specific transaction, the outcome is likely to be satisfactory over time but the price paid was too high as a result of assumptions that were initially too optimistic. Of course, it's easy to say in retrospect.

 

PCP is unlike Heico as was asked before. PCP is basically in the precision metal forming business while Heiko makes parts.

 

PCP was first hit by the energy , while it was acquired in 2016 after the crash, t(r lingering effects also caused energy generation (turbines etc) which was one of PCP’s end markets,

Then came COVID-19 which affected aerospace where PCP had redirected some of their capacity in the mean time. I also think that PCP was over optimized to show earnings when Buffet bought it. At least recall reading about this issue at the time of the acquisition. I think it was a so- spur chase when he bought it already and that was totally exposed with COVID-19.

 

Lubrizol actually is another not so great purchase, but better than PCP. I believe Berkshire had to write off some goodwill on the Lubrizol acquisition as well.

[coc]

Berkshire wrote down a bolt on acquisition Lubrizol added later.