Warren Buffett's 2020 to Shareholders: Investing Wisdom and Witty Insights
On Monday, February 24th, 2020, I completed an annual ritual that I've come to await like a holiday. When I arrived at my office, I printed the newly released Berkshire Hathaway annual letter to shareholders, grabbed a pen and highlighter, and begin reading and taking notes as I savored each sip of my coffee. I chuckled a few times as Mr. Buffett employed humorous metaphors, re-read several statements to ensure I fully understood them and highlighted lines that reappeared from previous installments, a testament to Berkshire’s renowned consistency. This year’s letter followed the general template of previous years; a review of the prior year's performance, some commentary on philosophical views, a review of various Berkshire subsidiaries and investments, and a look into the future.
Mr. Buffett is one of the few titans with the achievements, clout, and personality to make a piece of writing regarding retained earnings, business acquisitions, property/casualty insurance, and corporate governance better than mundane. He delivers yet again with witty one-liners, jabs at Wall Street bureaucracy, and even a few pop culture references, all mixed in with some serious investing insight. Here are some of my favorite excerpts from the newest letter from Warren Buffett.
“Anything can happen to stock prices tomorrow. Occasionally, there will be major drops in the market, perhaps of 50% magnitude or even greater. But the combination of The American Tailwind…and the compounding wonders described by Mr. Smith, will make equities the much better long-term choice for the individual who does not use borrowed money and how can control his or her emotions. Others? Beware”
The warning about stock market volatility is a staple in Warren’s letter, and rightly so. It’s also a staple of conversations with my clients and those interested in long-term investing. Mr. Buffett is an investor, not a trader. Having been an investor since he bought his first shares of stock in 1941 at just 11 years of age, Warren is no stranger to short-term volatility in the stock market. He’s witnessed recessions, wars, major political events, terrorist attacks, natural disasters, asset bubbles, and their subsequent bursting, and many other episodes that gyrate the markets. He knows there will be more, perhaps even bigger events than he’s experienced to date, but he doesn’t falter.
“I’ve concluded that acquisitions are similar to marriage: They start of course, with a joyful wedding – but then reality tends to diverge from pre-nuptial expectations. Sometimes, wonderfully, the new union delivers bliss beyond either party’s hopes. In other cases, disillusionment is swift.”
That one made me chuckle, but only because of the truth behind it. During the “courting” period before an acquisition closes, it’s easy to see the future through rose-colored glasses, drunk on the synergy expectations, the advantages of scale, and other edges gained through the union. It’s difficult, however, to delve deeply into the culture of both businesses, see the weaknesses, and anticipate the coming challenges. Berkshire Hathaway has a tremendous record of purchasing companies and beautifully integrating them. I suspect this is because of their due diligence and a level of honesty during their analysis that other firms rarely achieve.
“It would be an interesting exercise for a company to hire two “expert” acquisition advisors, one pro and one con, to deliver his or her views on a proposed deal to the board – with the winning advisor to receive, say ten tines a token sum paid to the loser.”
Warren goes on a mini-rant about the acquisition process and reverts to a favorite line - “don’t ask the barber whether you need a haircut.” His point? Most CEOs are surrounded by people looking to oblige them and unreservedly support their every decision. This is taken a step further when companies pay acquisition experts who are highly interested and compensated upon the completion of an acquisition. After proposing his two-advisor system, he continues to say, “Don’t hold your breath awaiting this reform: The current system, whatever its shortcomings for shareholders, works magnificently for CEOs and the many advisors and professionals who feast on deals.” The fact that Berkshire hasn’t completed a large acquisition in quite some time, despite having $128 billion in cash, speaks to the steadfastness of Berkshire’s leadership.
“If I were ever scheduled to appear on Dancing With the Stars, I would immediately seek refuge in the Witness Protection Program. We are all duds at one thing or another. For most of us, the list is long. The important part to recognize is that if you are Bobby Fischer, you must play only chess for money.”
Dancing with the Stars finally made it into a shareholder letter…what took so long, Warren? Mr. Buffett isn’t too proud to admit his flaws, and even before he wrote this, I would have predicted dancing isn’t his forte. Beyond the self-deprecation, Mr. Buffett was making an important point: no one is good at everything. He was referring to those who sit on corporate boards who are “good souls” but people he "would have never chosen to handle money or business matters.” The Berkshire Hathaway method, as Warren goes onto explain, involves looking for “business-savvy directors who are owner-oriented” who use “thought and principles, not robot-like process(es)” to guide their actions.
“We constantly seek to buy new businesses that meet three criteria. First, they must earn good returns on the net tangible capital required for their operation. Second, they must be run by able and honest managers. Finally, they must be available at a sensible price.”
I brought this up in a recent article in which criticized Charlie Munger’s comments on innovation. While I disagreed with that comment, I praised Berkshire’s disciplined and consistent approach to investing. It’s no surprise that these three criteria make an appearance again, as this statement is essentially a concise summary of the Berkshire approach.
“As I have repeatedly done in the past, I will emphasize now that happy outcomes in insurance are far from a sure thing: We will certainly not have an underwriting profit in 16 of the next 17 years. Danger always lurks.”
Another warning and this one reads like the famous financial disclaimer, “past results are not indicative of future results.” While the insurance business has been the bellwether for Berkshire Hathaway for many years, Warren recognizes that the sailing likely won’t be so smooth in the future. This exact mentality, though, is what makes their insurance business so well-prepared for rougher seas.
“Charlie and I expect our equity holdings – as a group – to deliver major gains, albeit in an unpredictable and highly irregular manner.”
Warren and company continue to be bullish on American business, as they have been for many years. This optimism and faith in American institutions and the future drive Berkshire’s continued investment in American companies. Like Mr. Buffett, I believe investing will continue to create prosperity if done with a long-term mindset and disciplined approach.
While this year’s letter didn’t contain any revelations or bombshells, it provided further insight into a company that has had tremendous success over a sustained period using principles that are repeatable and accessible to individual investors. I’m already looking forward to the next rendition of the annual shareholder letter and another Monday morning ritual with Mr. Buffett.
