Highlights from Warren Buffett’s 2019 Letter

Highlights from Warren Buffett’s 2019 Letter to Berkshire Hathaway shareholders.

Berkshire Hathaway 2019 Letter

• 2019 letter to shareholders released on Saturday February 22, 2020.
• Berkshire earned $81.4 billion in 2019 according to GAAP rules (which is a measurement that neither Warren Buffett nor his partner Charlie Munger agree with).
• Buffett advises investors to focus on operating earnings and to ignore quarterly/annual gains or losses from investments, whether these are realized or unrealized.
• Berkshire’s annual meeting, which will be held on May 2, 2020 with Yahoo streaming the event worldwide.
• Questions may be directed blind to Buffett, Munger, Ajit Jain, and Greg Abel (two key operating managers).

Non-Insurance Business

• BNSF railroad and Berkshire Hathaway Energy (“BHE”) – the two lead dogs of Berkshire’s non-insurance group – earned a combined $8.3 billion in 2019 (including a 91% share of BHE), an increase of 6% from 2018.
• Next five non-insurance subsidiaries, as ranked by earnings (but presented here alphabetically), Clayton Homes, International Metalworking, Lubrizol, Marmon and Precision Castparts, had aggregate earnings in 2019 of $4.8 billion, little changed from what these companies earned in 2018.
• Next five, similarly ranked and listed (Berkshire Hathaway Automotive, Johns Manville, NetJets, Shaw and TTI) earned $1.9 billion last year, up from the $1.7 billion earned by this tier in 2018.
• Remaining non-insurance businesses that Berkshire owns had aggregate earnings of $2.7 billion in 2019, down from $2.8 billion in 2018.
• Total net income in 2019 from the non-insurance businesses Berkshire controls amounted to $17.7 billion, an increase of 3% from the $17.2 billion this group earned in 2018.

Property/Casualty (“P/C”) Insurance Business

• If premiums exceed the total of expenses and eventual losses, insurance operation registers an underwriting profit that adds to the investment income the float produces. When such a profit is earned, Berkshire enjoys the use of free money – and, better yet, get paid for holding it.
• Where once insurers could safely earn 5 cents or 6 cents on each dollar of float, they now take in only 2 cents or 3 cents (or even less if their operations are concentrated in countries mired in the never-never land of negative rates).
• Berkshire’s situation is more favorable than that of insurers in general with unrivaled mountain of capital, abundance of cash and a huge and diverse stream of non-insurance earnings allow us far more investment flexibility than is generally available to other companies in the industry.
• When a mega-catastrophe strikes, Berkshire will get its share of the losses and they will be big – very big. Unlike many other insurers, however, handling the loss will not come close to straining Berkshire’s resources, and Berkshire will be eager to add to their business the next day.

Well-managed industrial companies do not, as a rule, distribute to the shareholders the whole of their earned profits. In good years, if not in all years, they retain a part of their profits and put them back into the business. Thus there is an element of compound interest (Keynes’ italics) operating in favour of a sound industrial investment. Over a period of years, the real value of the property of a sound industrial is increasing at compound interest, quite apart from the dividends paid out to the shareholders.

Investment Insights

Berkshire’s Top 15 common stock investments (excluding Kraft Heinz which is excluded as a control group)

• Buffett constantly seek to buy new businesses that meet three criteria:
  1. Must earn good returns on the net tangible capital required in their operation.
  2. Must be run by able and honest managers.
  3. Finally, they must be available at a sensible price.
• Berkshire’s holdings is an assembly of companies that are partly owned and that, on a weighted basis, are earning more than 20% on the net tangible equity capital required to run their businesses without employing excessive levels of debt.
• If something close to current interest rates prevail over the coming decades and if corporate tax rates also remain near the low level businesses now enjoy, it is almost certain that equities will over time perform far better than long-term, fixed-rate debt instruments. But as a warning: Anything can happen to stock prices tomorrow.

“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. Pursuing that analogy, I would say that our marital record remains largely acceptable, with all parties happy with the decisions they made long ago.”  ~ Warren Buffett

Berkshire Share Buybacks

• Berkshire will buy back its stock only if it is selling for less than it is worth and the company, upon completing the repurchase, is left with ample cash.
• In 2019, the Berkshire price/value equation was modestly favorable at times, and Berkshire spent $5 billion in repurchasing about 1% of the company.
• Over time, it is desired for Berkshire’s share count to go down.
• If the price-to-value discount widens, Berkshire will likely become more aggressive in purchasing shares.
• However, Berkshire will not prop the stock at any level.

The Future of Berkshire Hathaway

• Buffett and Munger assure Berkshire shareholders to not worry that the company is 100% prepared for their departure (Buffett is 89 and Munger is is 96).
• 5 factors are outlined
  1. Berkshire’s assets are deployed in an extraordinary variety of wholly or partly-owned businesses that, averaged out, earn attractive returns on the capital they use.
  2. Berkshire’s positioning of its “controlled” businesses within a single entity endows it with some important and enduring economic advantages.
  3. Berkshire’s financial affairs will unfailingly be managed in a manner allowing the company to withstand external shocks of an extreme nature.
  4. Berkshire possesses skilled and devoted top managers for whom running Berkshire is far more than simply having a high-paying and/or prestigious job.
  5. Berkshire’s directors are constantly focused on both the welfare of owners and the nurturing of a culture that is rare among giant corporations.
• Buffett’s will specifically directs its executors – as well as the trustees who will succeed them in administering his estate after the will is closed – not to sell any Berkshire shares.
• The will goes on to instruct the executors – and, in time, the trustees – to each year convert a portion of Buffett’s A shares into B shares and then distribute the Bs to various foundations who will be required to deploy their grants promptly.
• It will take 12 to 15 years for the entirety of the Berkshire shares I hold at my death to move into the market.
• Buffett feels comfortable that Berkshire shares will provide a safe and rewarding investment during the disposal period.

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