Monday, February 24, 2020
Buffett’s Annual Letter
by Steve Haberstroh, Partner
Take twenty minutes out of your day and read the letter:
It’s approachable and contains valuable insight. If you don’t have the time, here are my three major takeaways (out of many).
1. Has Buffett Lost His Touch?
The first page of Buffett’s annual letter reminds us why we should be reading. Since 1965, the return of Berkshire shares has more than doubled that of the S&P 500 Index (SPX). Berkshire’s annual gain has averaged +20.3% and the SPX averaged +10.00%. Nobody owns a track-record this good, for this long—and Buffett doesn’t even charge a management fee!
Factor compounding into the equation (something Buffett spends time explaining in this year’s letter) an investor’s return in Berkshire has been +2,744,062% since 1965 compared to a “measly” +19,784% for the SPX. It pays to stay in the game. It has paid more when Buffett is your manager.
But it wasn’t always easy. Take last year as an example. Berkshire underperformed the SPX by over 20%, leaving many to question whether the Oracle of Omaha has lost his touch.
We’ve heard this before. In fact, since 1965, there have been 18 years where Berkshire has underperformed the SPX, including 11 times by more than 10%. One year (1999), Berkshire was down 19.9% while the SPX was up 21%—a difference of 40.9%! Ask my father what that was like.
Has Buffett lost his touch? I wouldn’t bet on it. Buffett’s genius is being patient, disciplined, and not overpaying when most are doing otherwise. Buffett has assembled a cash generating machine, and with it a track-record second to none. He’s done it by being Warren Buffett, not by changing his stripes when the market tells him to.
2. Stock Buybacks
Buffett bought back $5 billion worth of Berkshire shares last year, representing 1% of the company’s market cap. Investors are clamoring for more. Buffett used to limit buybacks to when shares traded for less than 1.2 times book value (simply defined as what would be left over if the company sold all of its assets today then paid off all of its debt). In a 2018 announcement, Warren Buffett eliminated that restriction.
This year’s letter took it a step further. Buffett solicited buyers and provided a Berkshire phone number to call for those interested in selling their shares.
Shareholders having at least $20 million in value of A or B shares and an inclination to sell shares to Berkshire may wish to have their broker contact Berkshire’s Mark Millard at 402-346-1400. We request that you phone Mark between 8:00-8:30 a.m. or 3:00-3:30 p.m. Central Time, calling only if you are ready to sell.
Why can’t Berkshire just buy shares in the market? With a cash hoard of $128 billion, any meaningful amount of buybacks would likely move the market. So Buffett would prefer to identify large holders interested in selling huge amounts of shares. That way, the transaction can occur in one trade without bidding up the price of shares over an extended period of time.
The takeaway? By soliciting sellers, Buffett is signaling he believes Berkshire shares are cheap. He’s a buyer.
3. Succession Plan
The letter ends with another clear signal. Ajit Jain and Greg Abel are the likely successors to Buffett and Munger. Jain heads Berkshire’s insurance business. Abel runs its energy business. Buffett telegraphed this move last year when he named the pair Vice Chairs. He takes it a step further in this year’s letter, announcing Jain and Abel will have a larger role at this year’s annual meeting.
On pages A-2 – A-3, you will find details about our annual meeting, which will be held on May 2, 2020. Yahoo, as usual, will be streaming the event worldwide. There will be one important change, however, in our format: I’ve had suggestions from shareholders, media and board members that Ajit Jain and Greg Abel—our two key operating managers—be given more exposure at the meeting. That change makes great sense. They are outstanding individuals, both as managers and as human beings, and you should hear more from them.
Shareholders who this year send a question to be asked by our three long-serving journalists may specify that it be posed to Ajit or Greg. They, like Charlie and me, will not have even a hint of what the questions will be.
The journalists will alternate questions with those from the audience, who also can direct questions to any of the four of us. So polish up your zingers.
Shareholders may now ask questions specifically of Jain and Abel, who are likely to be up on stage with Buffett and Munger. This is Buffett’s way of getting shareholders comfortable with the pair and serves as a live interview for Berkshire’s next generation.
Change is coming. Shareholders are hoping it will be more of the same for Berkshire after Buffett.