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My Takeaways from Warren Buffett’s Annual Letter
I don’t like setting an alarm clock.
Except for one Saturday in February each year.
For the value investor inside of me, the release of Warren Buffett’s annual letter can only be compared to Christmas morning. Around 8 a.m. on the last Saturday of February, Buffett’s letter appears on Berkshire Hathaway’s nondescript website — and, in it, page after page of wit and wisdom from the greatest investor of all time.
So, obviously, I set my alarm for 7:45 a.m., popped out of bed like a little kid on the hunt for presents, and continually refreshed www.berkshirehathaway.com until striking gold. I devoured his letter in record time and then went back for a second helping. No matter how many times you read one of Buffett’s letters, you’ll always come away with something new.
And, with it looking unlikely that he will ever write a book, these letters are Warren Buffett’s written legacy. Thankfully, there are a lot of them. Start with his first one from 1957 and don’t stop until reaching the present day. There, you just got an MBA in value investing.
Seriously, you should read Buffett’s 2021 letter in its entirety. Here’s the link.
But, if you’re in that TL;DR mood, I’m here to help. Check out my seven key takeaways from Warren Buffett’s latest annual letter…
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(1) After two straight blowout losses against the red-hot S&P 500, Berkshire beat the index by 0.9% last year. That might not sound like a lot, but every minuscule tenth of a percent pays off handsomely in the long run.
Case in point: From 1965 to 2021, Berkshire grew at an otherworldly 20.1% annualized rate while the S&P 500 managed 10.5%.
So Berkshire did about twice as well as the larger market, right?
The difference between 10% and 20% annual returns compounded over fifty-some years is the S&P’s 30,000% total return versus Berkshire’s eye-popping 3,600,000% return. (That’s 3.6 million percent for the math-averse.)
Beating the broader market by any amount over a long enough period of time will result in some seriously impressive returns.
(2) The past two years might seem like quiet ones at Berkshire, but that doesn’t mean Warren Buffett and Charlie Munger haven’t been busy. In 2020 and 2021, they used $51.7 billion to repurchase 9% of Berkshire’s outstanding shares.
That means shareholders’ ownership of Berkshire companies and securities increased by that amount, too.
Imagine the market frenzy that would kick off if Buffett plowed $50+ billion into an acquisition or stock purchase. That’s exactly what he’s done with share buybacks. And it has mostly flown under the radar.
(3) Even after $51 billion of buybacks, Berkshire still holds $144 billion of cash on hand. Buffett hates sitting on that much cash, but has struggled to find value in this late-stage bull market. (Just like the rest of us.)
Eventually, all of that dry powder should pay off. “These [cash-heavy] periods are never pleasant,” he writes. “They are also never permanent.”
(4) Buffett named the “four giants” of Berkshire Hathaway.
“The insurance business is made to order for Berkshire. The product will never be obsolete, and sales volume will generally increase along with both economic growth and inflation. Also, integrity and capital will forever be important. Our company can and will behave well.”
“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.”
Burlington Northern Santa Fe:
“BNSF trains traveled 143 million miles last year and carried 535 million tons of cargo. Both accomplishments far exceed those of any other American carrier. You can be proud of your railroad.”
Berkshire Hathaway Energy:
“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. Now, Berkshire owns 91.1% of the company.”
(5) Of course, I won’t ignore the letter’s one (kind of) Cleveland connection.
Not that there was ever any doubt, but Buffett reaffirmed his plan to boost Berkshire’s ownership of Pilot Flying J to 80% in 2023. He first bought a stake in Pilot (Cleveland Browns owner Jimmy Haslam’s family biz) five years ago.
In my mind, this makes the Browns the official NFL team of Berkshire. Get Warren a jersey!
(6) Buffett also used Berkshire’s tax payments to highlight the company’s growth from failing textile manufacturer to corporate empire. During the 1960s and early 1970s, Berkshire paid a paltry $100 per day in taxes. Now? $9 million a day.
He doesn’t mind, though.
“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.”
(7) My biggest takeaway is also the most actionable. Circling back to Berkshire’s share repurchases, Buffett mentions that he has already made $1.2 billion of buybacks so far in 2022.
With $BRK.B over $300 these days, many wondered if Buffett considered that price too high for continued repurchases. Apparently not.
He’s not buying back shares at the same voracious pace as 2020 and 2021, but he’s not completely turned off by the price either. In other words, this seems to indicate that Warren Buffett thinks Berkshire Hathaway is still somewhat under-valued.
Do with that what you will.
Disclosure: This is not financial advice. I am not a financial advisor. Do your own research before making any investment decisions.