Archives for March 2022

Berkshire Hathaway (BRK) released its 2021 Letter to Shareholders over the weekend, which is how Warren Buffett updates his fellow shareholders annually on the status of the business. Direct ownership of Berkshire Hathaway shares (above my passive index fund allotment) was one of my first “explore” investments where I set aside a percentage of my portfolio to buy something that wasn’t an index fund for both educational and profit purposes. The education has been very valuable, possibly worth more than the investment gains. This year’s letter is only 10 pages long. Here are my personal highlights.

Investing is not always about pure optimization. It is better to have a reasonable plan that you understand and can keep the faith in times of stress. I think about my index fund portfolio and BRK shares the same way: The price may fluctuate in the short-term, but earnings power will continue to increase in the long-term and there will be as close to 0% chance of permanent loss as possible.

To a truly unusual degree, however, Berkshire has as owners a very large corps of individuals and families that have elected to join us with an intent approaching “til death do us part.” Often, they have trusted us with a large – some might say excessive – portion of their savings.

Berkshire, these shareholders would sometimes acknowledge, might be far from the best selection they could have made. But they would add that Berkshire would rank high among those with which they would be most comfortable. And people who are comfortable with their investments will, on average, achieve better results than those who are motivated by ever-changing headlines, chatter and promises.

Owning quality businesses, either wholly or partially. BRK seeks to own only quality businesses. They find the needles in the haystack. Index funds own the whole haystack.

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.

Easier to find mis-pricing amongst common stocks.

One advantage of our common-stock segment is that – on occasion – it becomes easy to buy pieces of wonderful businesses at wonderful prices. That shooting-fish-in-a-barrel experience is very rare in negotiated transactions and never occurs en masse. It is also far easier to exit from a mistake when it has been made in the marketable arena.

Personal asset allocation varies between 80% and 100% stocks. Here was an interesting peek about his personal stock allocation over the last 80 years. Buffett has never been shy about owning stocks where he believes that there is a good margin of safety because he paid a a price below intrinsic value.

Nor have Charlie and I lost our overwhelming preference for business ownership. Indeed, I first manifested my enthusiasm for that 80 years ago, on March 11, 1942, when I purchased three shares of Cities Services preferred stock. Their cost was $114.75 and required all of my savings. (The Dow Jones Industrial Average that day closed at 99, a fact that should scream to you: Never bet against America.)

After my initial plunge, 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.

Most stocks are too expensive right now. That will eventually change.

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. Read on.

The only thing attractive was Berkshire stock itself. So they bought that. Existing shareholders own ~10% more of Berkshire than they did a couple years ago. Side note: You know when I buy some more BRK shares? When WEB does.

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).

The orangutan effect. I found this quote very true, as writing on this blog helps me develop and clarify my thoughts. But did I just get called an orangutan?

Teaching, like writing, has helped me develop and clarify my own thoughts. Charlie calls this phenomenon the orangutan effect: If you sit down with an orangutan and carefully explain to it one of your cherished ideas, you may leave behind a puzzled primate, but will yourself exit thinking more clearly.

Past shareholder letters.

• 1977-2021 are free on the Berkshire Hathaway website (PDF). 1965-2020 are $2.99 at Amazon (Kindle). Three bucks seems pretty reasonable for a permanent digital copy with the ability to search text and maintain highlights.
• 2020 Letter notes
• 2019 Letter discussed why BRK will continue to do fine without Warren Buffett around.
• 2018 Letter discussed using debt very sparingly and the importance of holding productive assets over a long time.
• 2017 Letter discussed patience, risk, and why they have so much cash.
• 2016 Letter touched on the rarity of skilled-stock pickers and some insight on his own stock-picking practices.
• 2015 Letter discussed his optimism in America and his “Big 4” stock holdings.
• 2014 Letter discussed the power of owning shares of productive businesses (and not just bonds).
• 2013 Letter included Buffett’s Simple Investment Advice to Wife After His Death.

The annual shareholder meeting will be in-person this year. Unfortunately, this will not be the year I finally get to go. CNBC will livestream it on Saturday, April 30th. I’ll try to watch it while eating some See’s peanut brittle and bridge mix.