Highly anticipated by his worldwide followers, Berkshire Hathaway chairman and CEO Warren Buffett’s annual letter came out on Feb. 25th, 2022. Reading his letters always feels like inhaling a breath of fresh air.
After generating a 19.8% annual return over 58 years, turning $1,000 into $37.9 million, Mr. Buffett still demonstrated humility by writing, “Over the years, I made many mistakes,” and “Most of my capital-allocation decisions have been no better than so-so,” and “The lesson for investors: The weeds wither away in significance as the flowers bloom. Over time, it takes just a few winners to work wonders. And, yes, it helps to start early and live into your 90s as well.”
He went on to explain the simple (but not easy) approach that resulted in Berkshire’s success: costless insurance float and ownership in both private (100% controlled) and publicly traded (pieces of) businesses “with both long-lasting favorable economic characteristics and trustworthy managers.”
He provided helpful reminders to everyday investors in the stock market about the investing principles we at Rational Capital Advisors work hard to follow. In the face of many uncertainties in the world, Mr. Buffett reminded us that “near-term economic and market forecasts are worse than useless.” He wrote, “Please note particularly that we own publicly- traded stocks based on our expectations about their long-term business performance, not because we view them as vehicles for adroit purchases and sales. That point is crucial: Charlie and I are not stock-pickers; we are business-pickers,” and, “One advantage of our publicly-traded segment is that – episodically – it becomes easy to buy pieces of wonderful businesses at wonderful prices. It’s crucial to understand that stocks often trade at truly foolish prices, both high and low. “Efficient” markets exist only in textbooks.”
It is refreshing to read about Mr. Buffett’s simple example and rational view on stock repurchases, as we are always baffled by the strongly negative and illogical sentiments toward them.
“Gains from value-accretive repurchases, it should be emphasized, benefit all owners – in every respect. Imagine, if you will, three fully informed shareholders of a local auto dealership, one of whom manages the business. Imagine, further, that one of the passive owners wishes to sell his interest back to the company at a price attractive to the two continuing shareholders. When completed, has this transaction harmed anyone? Is the manager somehow favored over the continuing passive owners? Has the public been hurt? When you are told that all repurchases are harmful to shareholders or to the country, or particularly beneficial to CEOs, you are listening to either an economic illiterate or a silver-tongued demagogue (characters that are not mutually exclusive).”
Mr. Buffett also pointed out that accounting earnings for Berkshire can disguise its true economic value and some companies do manipulate earnings to beat Wall Street “expectations.” He calls such practice “disgusting” and “one of the shames of capitalism.”
Berkshire paid $32 billion in taxes during the decade ending in 2021 and Mr. Buffett hopes and expects the company will pay much more taxes in the future. He considers the American Tailwind – the dynamism of our capital system – as one of the key contributors to Berkshire’s success: “America would have done fine without Berkshire. The reverse is not true.”
Mr. Buffett has been writing annual letters for decades and they are all accessible on Berkshire’s Website (https://www.berkshirehathaway.com/reports.html). These letters are full of investing and life wisdom, all laid out there for anyone who is willing to learn from the GOAT.