If you hold shares of a particular company, it can be a good idea to read the CEO's annual letter to shareholders. These missives can help you put the financial figures that predominate corporate filings into context, providing an inside look at a company's culture and the thinking behind its corporate strategy.
But even if you don't hold any Berkshire Hathaway stock, the firm's annual CEO letter, the latest of which went live on Saturday, is worth a read, too. Its famous author, Warren Buffett, has written yearly notes to shareholders since 1965. Buffett's letters are the gold standard. Not only does he walk readers through the ins and outs of his company — a conglomerate of wholly owned subsidiaries and an investment portfolio of publicly traded firms — but he stops to give insights on his investing thought process, sharing candid, personal stories along the way.
Taken together, Buffett's letters represent the collected wisdom of America's greatest investor. Here are three lessons he offers in the latest installment.
Throughout the years, Buffett has given much of the credit for his enormous wealth to the good fortune of having been born in the U.S., which he considers to be the greatest economy in the history of the world. This year's sentiments were no different.
"In its brief 232 years of existence, however, there has been no incubator for unleashing human potential like America," he writes. "Despite some severe interruptions, our country's economic progress has been breathtaking."
It's Buffett's belief in the country of his birth that gives him the confidence to advise that most investors buy a "cross-section" of America, investing in low-cost mutual funds or exchange-traded funds that track the performance of the U.S. stock market. Over the course of Buffett's career, that would have been a very good idea. From 1965 through 2020, the S&P 500 produced a 10% annualized gain, for an overall gain of more than 23,000%.
"Our unwavering conclusion: Never bet against America," Buffett writes.
It's wise not to bet against Buffett, either. Berkshire shares climbed 20% per year, on average, over the same period.
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Building wealth slowly and steadily is the style at Berkshire, and Buffett hopes to keep it that way, even after he and right-hand man Charlie Munger are no longer running things. His recent letter cautions investors against seeking out advice from (or investing in companies run by) folks looking to turn a quick buck.
"[Investors] will find CEOs and market gurus with enticing ideas. If they want price targets, managed earnings and 'stories,' they will not lack suitors," he writes. "'Technicians' will confidently instruct them as to what some wiggles on a chart portend for a stock's next move. The calls for action will never stop."
Most of those investors, Buffett says, can actually do well, provided they don't act rashly. "Indeed, a patient and level-headed monkey, who constructs a portfolio by throwing 50 darts at a board listing all of the S&P 500, will – over time – enjoy dividends and capital gains, just as long as it never gets tempted to make changes in its original 'selections,'" Buffett writes.
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"All that's required," he continues, "is the passage of time, an inner calm, ample diversification and a minimization of transactions and fees."
The message is clear: Hold an adequately diversified portfolio over the long term and you're well-positioned to reap the benefits of the overall upward trajectory of the U.S. stock market. By hanging on patiently, you avoid the mistakes that come with trying to time the market. And by keeping your expenses low, you keep more money in your pockets.
"Investors must never forget that their expenses are Wall Street's income," Buffett writes. "And, unlike my monkey, Wall Streeters do not work for peanuts."
Berkshire Hathaway spent nearly $25 billion in 2020 repurchasing shares of its own stock, a company record and a marked uptick from $5 billion the company spent in 2019, Buffett announced in the letter.
Share repurchases, also known as buybacks, are touted as a way that companies can return cash to shareholders. By reducing the number of overall shares on the market, the thinking goes, each share than an investor owns represents a large piece of the overall company.
Executives use buybacks to goose firms' financials, critics say, since reducing the share count boosts a company's earnings per share, a common measure of profitability. Critics have also decried large buyback programs at companies in poor financial shape, especially when companies bought back shares in lieu of spending on, say, paying higher wages to their workers or investing in research and development.
Video by Courtney Stith
Buffett has long thought buybacks can be reasonable. "Charlie and I favor repurchases when two conditions are met: First, a company has ample funds to take care of the operational and liquidity needs of its business; second, its stock is selling at a material discount to the company's intrinsic business value, conservatively calculated," Buffett wrote in his 2011 letter to shareholders.
Buffett evidently thought his shares were selling at a good price in 2020, having returned just 2% by year's end compared with an 18% gain in the S&P 500.
It's worth noting what Buffett didn't do with his firm's money. In many other years, Berkshire would have used some of the $140 billion in cash and cash equivalents the firm had on the books in the fourth quarter to buy a significant stake in, or outright acquire, a company Buffett saw as undervalued. Though Buffett doesn't address it directly in his letter, apparently he saw nothing on the market worth acquiring.
That's especially interesting since there was a boom in companies going public in 2020: A record number of firms popped up with the express purpose of acquiring hot, new start-ups. It may indicate that Buffett sees a significant amount of froth in the market and brings to mind another famous maxim of the Oracle's: "Be fearful when others are greedy."
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