Every year, Berkshire Hathaway’s Chairman and CEO Warren Buffett sends a thoughtfully crafted letter to its shareholders. The investment industry gleans whatever newfound wisdom possible. Given that 2020 was an unusual year by economic, social, and financial standards, there is much to glean.
Despite the difficulties the U.S. has experienced managing the COVID-19 virus, Buffett has one sustaining message: “Never bet against America.” He also is a man who aligns his money with his beliefs. Presently, Berkshire Hathaway owns the highest value of U.S. business assets – property, plants, and equipment – than any other company in the country.1
Berkshire is a conglomerate of disparate companies. Buffet spends much time in his letter imparting what he’s learned about being a majority shareholder versus running a business. He says that “owning a non-controlling portion of a wonderful business is more profitable, more enjoyable – and far less work.”2
Fortunately, that’s also what it can be like to be an individual investor. While we may not be significant shareholders, investors are often rewarded with a slice of the profit pie when we choose a well-run and profitable business. The key, of course, is to pick the right ones. Short-term investors may look to high trade risk for a quick profit. In contrast, longer-term investors may seek more reliable performance and give a company plenty of time to deliver. Sometimes, it’s a matter of first figuring out what you want to accomplish with the money you make and then developing a strategy from there. Let us know if we can help.
One concept Buffett often reiterates is the need to hold a margin of safety when investing. Millions of people who lost their jobs during the pandemic learned just how narrow that margin of safety was within their own households. Those lucky enough to continue working maybe even better off than before – simply because the pandemic shut down normal spending activities. That means many families can now reduce their debt and financial risks and create an emergency fund they may not have had previously.3
Another hallmark move Buffett made in 2020 was an outsized buyback of Berkshire Hathaway’s own shares. The total 2020 tab came to $24.7 billion – compared to the combined total of $6.4 billion from the two prior years. Buffett noted that while he usually shies away from repurchases, the strategy offered “a simple way for investors to own an ever-expanding portion of exceptional businesses.” The process proved to be appropriate for an unpredictable year such as 2020.4
Lastly, another critical component of the shareholder letter was that Buffett admitted to making a big mistake in the past that came to a head in 2020. In 2016, Berkshire purchased aerospace-parts manufacturer Precision Castparts for $37 billion. He still believes the company is the aerospace industry leader and will generate solid returns in the future. Buffett cops to an earnings miscalculation that led him to pay too much for the company.5
1 Yun Li. CNBC. February 27, 2021. “Warren Buffett says ‘never bet against America’ in letter trumpeting Berkshire’s U.S.-based assets.” https://www.cnbc.com/2021/02/27/warren-buffett-says-never-bet-against-america-in-letter-trumpeting-berkshires-us-based-assets.html. Accessed March 8, 2021.
2 Warren Buffett. Berkshire Hathaway. February 27, 2021. “To the Shareholders of Berkshire Hathaway Inc.” https://www.berkshirehathaway.com/letters/2020ltr.pdf. Accessed March 8, 2021.
3 Chris Farrell. Star Tribune. March 6, 2021. “Take advantage of this rare opportunity to reduce financial risk.” https://www.startribune.com/take-advantage-of-this-rare-opportunity-to-reduce-financial-risk/600031093/?refresh=true. Accessed March 8, 2021.
4 Aparna Narayanan. Investor’s Business Daily. February 27, 2021. “Warren Buffett’s Key Investment Strategy Rests On These ‘Family Jewels.’” https://www.investors.com/news/warren-buffett-annual-letter-signals-maintaining-berkshire-hathaway-strategy-2021/. Accessed March 8, 2021.
5 James Leggate. Fox Business. February 27, 2021. “In Warren Buffett’s annual letter, he admits making this ‘big’ mistake.” https://www.foxbusiness.com/markets/warren-buffett-admits-making-this-big-mistake-in-annual-letter-to-investors. Accessed March 8, 2021.