Each year, investors from all over the world keenly look out for the annual shareholder letter of Warren Buffett to drop. 2021 letter was no different, sharing gems of financial management.
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Some great insights from Buffets 2021 annual letter
Under GAAP, the huge sums that investees retain on our behalf become invisible.
What’s out of sight, however, should not be out of mind: Those unrecorded retained earnings are usually building value – lots of value
Buffet on his Investment in PCC Co –
I was wrong, however, in judging the average amount of future earnings and, consequently, wrong in my calculation of the proper price to pay for the business. PCC is far from my first error of that sort. But it’s a big one
Aspiring conglomerateurs knew the answer to this “overpayment” problem: They simply needed to manufacture a vastly overvalued stock of their own that could be used as a “currency” for pricey acquisitions. (“I’ll pay you $10,000 for your dog by giving you two of my $5,000 cats.”)
Investing illusions can continue for a surprisingly long time. Wall Street loves the fees that deal-making generates, and the press loves the stories that colorful promoters provide.
But Charlie–and also my 20-year struggle with the textile operation I inherited at Berkshire– finally convinced me that owning a non-controlling portion of a wonderful business is more profitable, more enjoyable and far less work than struggling with 100% of a marginal enterprise
On its buyback of Shares & how it adds value >
..repurchasing the equivalent of 80,998 “A” shares, spending $24.7 billion in the process. That action increased your ownership in all of Berkshire’s businesses by 5.2% without requiring you to so much as touch your wallet.
In no way do we think that Berkshire shares should be repurchased at simply any price. I emphasize that point because American CEOs have an embarrassing record of devoting more company funds to repurchases when prices have risen than when they have tanked.
Our approach is exactly the reverse.
Buffett is very clear that even when it comes to buying back its own shares, it has to be at a price and not buy at any price.
Same principle, but applied on its own holding when Apple did its buybacks and how it helped increasing Berkshire holdings indirectly… Next few tweets mention this
Berkshire’s investment in Apple vividly illustrates the power of repurchases. We began buying Apple stock late in 2016 and by early July 2018, owned slightly more than one billion Apple shares (split-adjusted).
Saying that, I’m referencing the investment held in Berkshire’s general account and am excluding a very small and separately-managed holding of Apple shares that was subsequently sold. When we finished our purchases in mid-2018, Berkshire’s general account owned 5.2% of Apple.
Our cost for that stake was $36 billion. Since then, we have both enjoyed regular dividends, averaging about $775 million annually, and have also – in 2020 – pocketed an additional $11 billion by selling a small portion of our position.
Despite that sale – voila! – Berkshire now owns 5.4% of Apple. That increase was costless to us, coming about because Apple has continuously repurchased its shares, thereby substantially shrinking the number it now has outstanding.
Buffett goes on to add that how Berkshire owns max number of fixed assets in US – exceeding the amount owned by any other U.S. company. Berkshire’s depreciated cost of these domestic “fixed assets” is $154 billion. Next in line on this list is AT&T, with at $127 billion.
Asset heavy doesnt always point towards a successful business (perhaps hinting towards ROCE)
Our leadership in fixed-asset ownership, I should add, does not, in itself, signal an investment triumph.
The best results occur at companies that require minimal assets to conduct high-margin businesses – and offer goods or services that will expand their sales volume with only minor needs for additional capital.
#WarrenBuffett 2021 annual letter also has insights into the world of Bond investing.
And bonds are not the place to be these days.
Can you believe that the income recently available from a 10-year U.S. Treasury bond – the yield was 0.93% at year end – had fallen 94% from the 15.8% yield available in September 1981?
In certain large and important countries, such as Germany and Japan, investors earn a negative return on trillions of dollars of sovereign debt. Fixed-income investors worldwide – whether pension funds, insurance companies or retirees – face a bleak future.
Some insurers, as well as other bond investors, may try to juice the pathetic returns now available by shifting their purchases to obligations backed by shaky borrowers. Risky loans, however, are not the answer to inadequate interest rates.
If you are interested in reading all of the past annual letters, you could read them here > Berkshire Annual Letters