Every year, Warren Buffett writes a letter to the shareholders of Berkshire Hathaway.
The goal of this is to quote “report to you what we would like to know if we were
the absentee owner and you were the manager”.
These letters often contain valuable insights that could apply to your investing strategy,
business operations, and life.
I’d highly recommend reading these letters and listening to his annual meetings as well.
If you don’t believe me, his performance speaks for itself.
From 1965 to 2021, his compounded annual gain is 20.1%, compared to the S&P 500 with dividends
reinvested at 10.5%.
This makes the overall gain greater than 3.6 million percent compared to 30,209%.
Pretty impressive.
In this video, I’m going to share 5 lessons I thought were important from Warren Buffett’s
2021 annual letter.
(Intro Vid)
My name is Zach and you should leave a like and subscribe to the channel if you enjoy
the video.
Before we get to the lessons, it’s important to understand the business of Berkshire Hathaway.
Buffett writes: “Berkshire owns a wide variety of businesses, some in their entirety, some
only in part.
The second group largely consists of marketable common stocks of major American companies”.
“Whatever our form of ownership, our goal is to have meaningful investments in businesses
with both durable economic advantages and a first-class CEO.
Please note particularly that we own stocks based upon our expectations about their long-term
business performance and not because we view them as vehicles for timely market moves.
That point is crucial: Charlie and I are not stock-pickers; we are business-pickers”
This is a very important fact to understand about their investing strategy.
The next line is just as important…
“I make many mistakes”.
Lesson Number 1: Surprise, Surprise.
In this video, I’m going to try and let Buffett's words speak for themself as much
as possible.
“Here are a few items about your company that often surprise even seasoned investors”.
First, “Many people perceive Berkshire as a large and somewhat strange collection of
financial assets.
In truth, Berkshire owns and operates more U.S.-based “infrastructure” assets than
are owned and operated by any other American corporation”.
This is quite impressive, including Berkshire Hathaway Energy and the BNSF Railroad, which
we’ll touch on later.
Second, “Berkshire has become the world leader in insurance “float” – money
we hold and can invest but that does not belong to us.
Including a relatively small sum derived from life insurance, Berkshire’s total float
has grown from $19 million when we entered the insurance business to $147 billion”.
The insurance business and their ability to invest float are some of the most important
aspects of Berkshire Hathaway.
Those are both interesting, but I found the section on taxes to be the most informative.
“Every year, your company makes substantial federal income tax payments.
In 2021, for example, we paid $3.3 billion while the U.S. Treasury reported total corporate
income-tax receipts of $402 billion.
Additionally, Berkshire pays substantial state and foreign taxes.”
“Berkshire’s history vividly illustrates the invisible and often unrecognized financial
partnership between government and American businesses.”
When Warren Buffett first bought into Berkshire Hathaway, they were a dying New England Textile
Mill.
During the nine years before Buffett, “The U.S. Treasury suffered as well from Berkshire’s
troubles.
All told, the company paid the government only $337,359 in income tax during that period
– a pathetic $100 per day.”
“Early in 1965, things changed.
Berkshire installed new management that redeployed available cash and steered essentially all
earnings into a variety of good businesses, most of which remained good through the years.
Coupling reinvestment of earnings with the power of compounding worked its magic, and
shareholders prospered.
Berkshire’s owners, it should be noted, were not the only beneficiary of that course
correction.
Their “silent partner,” the U.S. Treasury, proceeded to collect many tens of billions
of dollars from the company in income tax payments.
Remember the $100 daily?
Now, Berkshire pays roughly $9 million daily to the Treasury.”
“In fairness to our governmental partner, our shareholders should acknowledge – indeed
trumpet – the fact that Berkshire’s prosperity has been fostered mightily because the company
has operated in America.
Our country would have done splendidly in the years since 1965 without Berkshire.
Absent our American home, however, Berkshire would never have come close to becoming what
it is today.
When you see the flag, say thanks.”
This is the most compelling take on taxes I’ve ever read.
The idea of the government as your silent partner.
It perfectly lays out how the success of businesses like Berkshire Hathaway have helped fund the
government and add to the American experiment.
At the same time, building something like Berkshire wouldn’t be possible without the
stability and freedom the US system has provided.
Lesson 2: Our Four Giants.
Berkshire owns a countless number of businesses, but operations of their “Big Four” companies
account for a very large chunk of Berkshire’s value.
“Leading this list is our cluster of insurers.
Berkshire effectively owns 100% of this group, whose massive float value we earlier described.”
“The product will never be obsolete, and sales volume will generally increase along
with both economic growth and inflation.”
“Apple – our runner-up Giant as measured by its year-end market value – is a different
sort of holding.
Here, our ownership is a mere 5.55%, up from 5.39% a year earlier.
That increase sounds like small potatoes.
But consider that each 0.1% of Apple’s 2021 earnings amounted to $100 million.
We spent no Berkshire funds to gain our accretion.
Apple’s repurchases did the job.
It’s important to understand that only dividends from Apple are counted in the GAAP earnings
Berkshire reports – and last year, Apple paid us $785 million of those.
Yet our “share” of Apple’s earnings amounted to a staggering $5.6 billion.
Much of what the company retained was used to repurchase Apple shares, an act we applaud.”
“BNSF, our third Giant, continues to be the number one artery of American commerce,
which makes it an indispensable asset for America as well as for Berkshire.
If the many essential products BNSF carries were instead hauled by truck, America’s
carbon emissions would soar.
Your railroad had record earnings of $6 billion in 2021.”
Buffett makes sure to distinguish this as old-fashion earnings and not EBITA, which
he views as “deceptive adjustments”.
“BHE, our final Giant, earned a record $4 billion in 2021.
That’s up more than 30-fold from the $122 million earned in 2000, the year that Berkshire
first purchased a BHE stake.”
Buffett also explains the significant progress they’ve made in investing in renewable energy
sources.
The most interesting part of this section is how significant their Apple position is.
They own 5.55% of the company, which keeps increasing due to share repurchases.
Their ownership of Apple’s 2021 earnings amounted to $5.6 Billion.
That's nuts.
They got paid $785 million in dividends as well.
In time, I think we’ll look back as this being one of Buffett’s best investments.
A career highlight.
Apple represents 46% of Berkshire’s publicly traded portfolio.
Others include American Express, Bank of America, Chevron, Coca-Cola, General Motors, Moody’s,
Verizon, etc.
I’m not going to dive too heavily into these.
Lesson 3: U.S. Treasury Bills or as I like to call the Cash Cushion.
“Berkshire’s balance sheet includes $144 billion of cash and cash equivalents.
Of this sum, $120 billion is held in U.S. Treasury bills, all maturing in less than
a year.
That stake leaves Berkshire financing about 1⁄2 of 1% of the publicly-held national
debt.”
This is an absolutely staggering thing to think about.
“Charlie and I have pledged that Berkshire will always hold more than $30 billion of
cash and equivalents.
We want your company to be financially impregnable and never dependent on the kindness of strangers
(or even that of friends).
Both of us like to sleep soundly, and we want our creditors, insurance claimants and you
to do so as well.
But $144 billion????
That imposing sum, I assure you, is not some deranged expression of patriotism.
Hilarious.
Warren’s got the jokes.
Back to his writing now.
“Nor have Charlie and I lost our overwhelming preference for business ownership.”
“ I always kept at least 80% of my net worth in equities.
My favored status throughout that period was 100% – and still is.
Berkshire’s current 80%-or-so position in businesses is a consequence of my failure
to find entire companies or small portions thereof (that is, marketable stocks) which
meet our criteria for long-term holding.
Charlie and I have endured similar cash-heavy positions from time to time in the past.
These periods are never pleasant; they are also never permanent.
And, fortunately, we have had a mildly attractive alternative during 2020 and 2021 for deploying
capital.”
Lesson 4: Share Repurchases.
“There are three ways that we can increase the value of your investment.
The first is always front and center in our minds: Increase the long-term earning power
of Berkshire’s controlled businesses through internal growth or by making acquisitions.
Today, internal opportunities deliver far better returns than acquisitions.
The size of those opportunities, however, is small compared to Berkshire’s resources.
Our second choice is to buy non-controlling part-interests in the many good or great businesses
that are publicly traded.
From time to time, such possibilities are both numerous and blatantly attractive.
Today, though, we find little that excites us.
That’s largely because of a truism: Long-term interest rates that are low push the prices
of all productive investments upward, whether these are stocks, apartments, farms, oil wells,
whatever.
Other factors influence valuations as well, but interest rates will always be important.
Our final path to value creation is to repurchase Berkshire shares.
Through that simple act, we increase your share of the many controlled and non-controlled
businesses Berkshire owns.
When the price/value equation is right, this path is the easiest and most certain way for
us to increase your wealth.”
“Periodically, as alternative paths become unattractive, repurchases make good sense
for Berkshire’s owners.
During the past two years, we, therefore, repurchased 9% of the shares that were outstanding
at yearend 2019 for a total cost of $51.7 billion.
That expenditure left our continuing shareholders owning about 10% more of all Berkshire businesses,
whether these are wholly-owned (such as BNSF and GEICO) or partly-owned (such as Coca-Cola
and Moody’s)”.
This also applies to insurance float per share.
“That figure has increased during the past two years by 25% – going from $79,387 per
“A” share to $99,497, a meaningful gain that, as noted, owes some thanks to repurchases.”
“I want to underscore that for Berkshire repurchases to make sense, our shares must
offer appropriate value.
We don’t want to overpay for the shares of other companies, and it would be value-destroying
if we were to overpay when we are buying Berkshire.”
The main takeaway from these 2 sections is that Berkshire is always trying to deploy
as much of its capital as possible.
It has no issue waiting for an opportunity, but cash itself is not an investment.
An important point he makes is about long-term interest rates being low and inflating the
prices of assets.
This is true, but the question remains how long interest rates will remain low and if
they will rise to significant levels again.
This is difficult to predict, but one of the main conversations in the stock market right
now, given our high inflation.
In the meantime, Berkshire has found Share Repurchases to be an attractive opportunity
to drive shareholder value.
Lesson 5: A Wonderful Man and a Wonderful Business.
Warren shares the story of Paul Andrews, who died recently and founded TTI, a Fort Worth-based
subsidiary of Berkshire.
The story underscores the Role Berkshire can play for founders.
“Paul, at 63, then found himself happy with his family, his job, and his associates.
But he had one nagging worry, heightened because he had recently witnessed a friend’s early
death and the disastrous results that followed for that man’s family and business.
What, Paul asked himself in 2006, would happen to the many people depending on him if he
should unexpectedly die?
For a year, Paul wrestled with his options.
Sell to a competitor?
From a strictly economic viewpoint, that course made the most sense.
After all, competitors could envision lucrative “synergies” – savings that would be
achieved as the acquirer slashed duplicated functions at TTI.
But . . . Such a purchaser would most certainly also retain its CFO, its legal counsel, its
HR unit.
Their TTI counterparts would therefore be sent packing.
And ugh!
If a new distribution center were to be needed, the acquirer’s home city would certainly
be favored over Fort Worth.”
“Whatever the financial benefits, Paul quickly concluded that selling to a competitor was
not for him.
He next considered seeking a financial buyer, a species once labeled – aptly so – a
leveraged buyout firm.
Paul knew, however, that such a purchaser would be focused on an “exit strategy.”
And who could know what that would be?
Brooding over it all, Paul found himself having no interest in handing his 35-year-old creation
over to a reseller.
When Paul met me, he explained why he had eliminated these two alternatives as buyers.
He then summed up his dilemma by saying – in far more tactful phrasing than this – “After
a year of pondering the alternatives, I want to sell to Berkshire because you are the only
guy left.”
So, I made an offer and Paul said “Yes.”
One meeting; one lunch; one deal.
To say we both lived happily ever after is an understatement.
When Berkshire purchased TTI, the company employed 2,387.
Now the number is 8,043.
A large percentage of that growth took place in Fort Worth and its . Earnings have increased
673%.
Annually, I would call Paul and tell him his salary should be substantially increased.
Annually, he would tell me, “We can talk about that next year, Warren; I’m too busy
now.”
This story sums up the culture of Berkshire Hathaway.
It’s a long-term home for businesses where they know they won’t be taken advantage
of or milked for profits.
Berkshire’s decentralized nature lets founders continue running their business with very
little oversight.
Additionally, they have the assurance that it will be okay long after they’re gone.
All right so those are the most important lesson’s from Warren Buffett’s 2021 Annual
Letter.
I recommend reading it all and checking out previous years.
Thank you for watching Dividend Data.
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