Warren Buffett released his well-anticipated FY21 shareholder letter on 26 Feb 2022.
My immediate reaction was that it was a short letter and Buffett acknowledged it, “Alas, there was little action of that sort in 2021.”
There were 11 pages, lowest count in the past 5 years (13-16 pages). In fact, the last 5 years had fewer pages than the previous 5 (more than 20 pages). I’m not complaining as I prefer shorter, to-the-point reads. It was an observable pattern though.
More importantly, the takeaways…
#1 Berkshire has the most plant and equipment among American companies
“Berkshire owns and operates more U.S.-based “infrastructure” assets – classified on our balance sheet as property, plant and equipment – than are owned and operated by any other American corporation. That supremacy has never been our goal. It has, however, become a fact.”
That’s a cool fact. While the world is touting asset-light businesses, here we have Berkshire Hathaway being the asset heaviest company in America. It wasn’t deliberate but I think he saw these asset-heavy companies being irreplaceable (insurance, oil & gas and railroads), undervalued and competitor-less when investors move on to sexier tech.
I recalled Munger explained that no one is going to sink in billions to build another railroad in the US. BNSF has negligible threat of new entrants.
Unintentionally Buffett found himself in a good position in an inflationary environment with these assets.
Buffett has also made investments in Japanese trading companies in 2020 and three of them are within Berkshire’s largest public stock holdings – ITOCHU, Mitsubishi and Mitsui. These are stocks that should do well during inflation too.
#2 Berkshire’s “Big Four”
Berkshire’s “Big Four” are its Insurance Group, Apple, BNSF and Berkshire Energy.
Most investors look at Buffett’s public stock portfolio and know that Apple is the biggest position and along with long-time favourites such as Coca-Cola and American Express. Berkshire’s declaration of buys and sells in the public markets are well followed too.
But Berkshire is more than public markets as it has many wholly-owned subsidiaries and huge operations organic to the organisation. It is not merely an investment holding company.
In fact, Apple Inc is the only public company that made it into the Berkshire’s Big Four. The Insurance Operations, BNSF and Berkshire Energy are privately owned. Hence, evaluation of Berkshire Hathaway goes beyond its public stock portfolio performance.
#3 Berkshire’s largest 15 stocks
I know that investors care less about Berkshire’s organic operations and focus more on the listed equities because the latter is what most can invest in. Private equity is often out of reach for most retail investors.
So here are the top 15 stocks in Berkshire’s portfolio, ranked by market value:
| Stock | % of Berkshire Stock Portfolio | % gain / loss |
|---|---|---|
| Apple | 46% | +418% |
| Bank of America | 13% | +214% |
| American Express | 7% | +1,827% |
| Coca-Cola | 7% | +1,723% |
| Moody’s | 3% | +3,785% |
| Verizon | 2% | -12% |
| US Bancorp | 2% | +50% |
| BYD | 2% | +3,216% |
| Chevron | 1% | +31% |
| Bank of New York Mellon | 1% | +33% |
| General Motors | 1% | +92% |
| ITOCHU | 1% | +30% |
| Mitsubishi | 1% | +23% |
| Charter Communications | 1% | +288% |
| Mitsui | 1% | +37% |
These 15 stocks represent 89% of Berkshire stock portfolio.
#4 Business-pickers, not stock-pickers
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 not a particularly new thing as Buffett has always emphasized about buying a wonderful business and that he didn’t care if the stock market close for 10 years. He is not interested in the stock performance. It is the business performance that matters or what we colloquially say ‘the fundamentals’.
That said, it isn’t easy to accept when a fundamentally strong company (or so you think) continue to see its share price tanking. It is rather hard to delink business and stock performances in such cases. It is no wonder that Buffett prefers to buy an entire company if chances permit. There will be no worries about stock prices in the private equity world.
#5 Permanent Capital
“Of equal importance, float is very sticky. Funds attributable to our insurance operations come and go daily, but their aggregate total is immune from precipitous decline. When it comes to investing float, we can therefore think long-term.”
Again, this isn’t a new thing. We long know that Buffett got a lot of capital from its insurance business to invest. This massive capital cost next to nothing and coupled with Buffett’s ability to achieve high returns, the rest is history.
What I want to add is that Buffett has always thing long-term. Working backwards, he knows that his investment horizon is long so the capital he use has to be available for a long time too. Insurance float is one sticky source of capital – premiums are paid over long periods and have faraway maturities.
Besides insurance, Berkshire was structured as an investment holding company rather than a hedge fund. The latter would mean that investors may pull out capital during a market decline, thereby forcing the manager to liquidate investments even if they were meant for long-term. However, Berkshire doesn’t have this problem. Investors who buy and sell Berkshire stock has no impact to the capital that Buffett has access to. He has permanent capital.
What we individual investors can learn from this is this – invest with money that you don’t need so that you can really invest long-term.
#6 Berkshire didn’t find anything attractive to buy except their own shares
“Berkshire’s balance sheet includes $144 billion of cash and cash equivalents… 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 longterm holding.”
Berkshire has been hoarding a lot of cash as Buffett didn’t find any attractive investments.
He pointed out the interest rate issue briefly which I think was one of the key reasons for his inactivity.
“Other factors influence valuations as well, but interest rates will always be important.”
With rising interest rate in the horizon, he is thinking that all the stock valuations would have to turn down several notches. Hence most investments wouldn’t seem cheap enough for him.
Instead, he found Berkshire Hathaway shares trading at wonderful prices and he did share buybacks. He is still doing it as of now…
“As of February 23, 2022, since yearend we repurchased additional shares at a cost of $1.2 billion. Our appetite remains large but will always remain price-dependent.”
#7 Buffett has handed over more investment decisions
“Below we list our fifteen largest equity holdings, several of which are selections of Berkshire’s two long-time investment managers, Todd Combs and Ted Weschler.”
This is trying to say that Buffett is gradually handing over the reins of making investment decisions to the two investment managers. Buffett is 91 while Munger is 98. Many investors are concerned about succession for the last decade. We can see some evolutionary progress over the years as Buffett profile them more and more.
It confirmed that Greg Abel, currently CEO of the energy unit, will succeed Buffett as CEO. But he won’t be running the empire alone. He would still be assisted by Ajit Jain in the insurance arm while Combs and Weschler will be managing the public equity portfolio. Majority of the subsidiaries at Berkshire operate independently with good management from the day Berkshire acquire them. So we can say that the succession plan is already in motion.
#8 Berkshire holding a Face-to-Face AGM
“Clear your calendar! Berkshire will have its annual gathering of capitalists in Omaha on Friday, April 29th through Sunday, May 1st.”
Berkshire is going to hold a face-to-face AGM once again since Covid happened. This shows that we are ready to live again and I want to travel again to see the world. Expect Buffett to be the last person to hold an AGM in the metaverse.
Our battle against Covid is almost done but our war with viruses will not. There will be more pandemics or epidemics in the future. We will need to keep up and come out with solutions to save mankind.
#9 Luck determines where we are born
“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.”
Couple this with what’s happening in Ukraine, it is indeed true that we should be grateful to luck if we are born in a good place. I asked myself – Singapore can do without me but I could not say the same that I could have done what i have done without Singapore. What if I was born in Ukraine or Syria? It just makes a lot of the grievances or complaints insignificant.
#10 While we teach, we learn
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.
There is value in writing articles like this or to do investment trainings. It forces me to think clearly about my points and more often than not, I realise I know the name of something but I really don’t know much beyond that. I would do more research and my understanding improves. Sometimes I may even hold an opposite opinion at the end of the research.
Thus I don’t see myself stopping to share my thoughts publicly anytime soon. It is for me as much it is for you.