This down-to-earth quality comes through in Buffett’s letters, too. In between accounts of Berkshire’s current holdings, he tells jokes, shares anecdotes, and relates quippy aphorisms to help illuminate his core points. At the age of 26, a Nebraska stockbroker and school teacher named Warren Buffett took his “retirement fund” of $174,000 and decided to start his own investment business. This should be required reading for anyone thinking about managing theirs or other people’s money.
Buffett’s distrust of bargains comes mostly from a series of poor acquisitions and investments he made early on in the life of Berkshire Hathaway. He argues that asset-heavy companies “can be good investments,” with the Burlington Northern Santa Fe Railway and Berkshire Hathaway Energy as prime examples. These two Berkshire-owned companies had combined earnings of $8.3B in 2020.
What we must do is provide a concert hall in which business artists of this class will wish to perform,” he writes. For Buffett, investment bankers are too often simply using whatever math is most preferable for their preferred outcome, whether or not it is deceptive to the buyers and sellers involved in the transaction. Sometimes this thirst for action even leads them to use fuzzy accounting to value https://forexarena.net/ the companies they’re selling. While Buffett and Berkshire Hathaway conduct plenty of business with investment banks and have invested in a few, he has issued some pointed criticisms at the industry over the years. Companies are eager to find these kinds of directors, Buffett says, but counterintuitively short-change those who have a large amount of their net worth tied up in the companies they serve.
This electric-utility company is channeling all of its earnings into modernizing and expanding the outdated grid. These years-long investments are vital to ensure that electricity, produced by wind and solar sources in remote areas, can reach densely populated areas in the western US. Once completed, the modernized infrastructure will enable BHE to increase revenue and even start paying dividends. Buffett is a bigger advocate of buybacks than many other investors and neutral observers of the stock market.
Hire people who have no need to work
But consider that each 0.1% of Apple’s 2021 earnings amounted to $100 million. It’s important to understand that only dividends from Apple are counted in the GAAP earnings Berkshire reports – and last year, Apple paid us $785 million of those. Yet our “share” of Apple’s earnings amounted to a staggering $5.6 billion. Much of what the company retained was used to repurchase Apple shares, an act we applaud. Tim Cook, Apple’s brilliant CEO, quite properly regards users of Apple products as his first love, but all of his other constituencies benefit from Tim’s managerial touch as well. Warren Buffett is well known for his love of companies that pay dividends, and Berkshire Hathaway has profited greatly from companies making payouts to their shareholders.
Berkshire Hathaway also owns just under 19% of American Express, 11.9% of Bank of America, and 9.8% of US Bancorp. It has purchased controlling stakes in some 60 companies, including well-known brands like GEICO, Dairy Queen, and Fruit of the Loom. Impressively, most all of the content is enjoyable to read too. I’m a bit sad having concluded it though of course can find more subsequent letters to enjoy and learn more. As one goes through 50 AGMs, which are like a fair, one can visualize Berkshire turn into Goliath from David.
The Future of Investing
If you are new to reading investment books, English is not your mother tongue, and your Kindle has a tendency to discharge on its own, you are not in for a treat. It took me almost 4 years to finish, but I only recently developed what it takes to drag the finish line on the horizon – daily reading. If you treat it as a full time job perhaps you can do it in 2 months. At least I took my time and didn’t skip anything, and highlighted hundreds of passages that are worthy of a re-read.
Post that, I read another book named The Essays of Warren Buffett – it is an excellent compilation of all the letters by Lawrence A. Cunningham. Yet you can see he never wavered his approach across 6 decades. His large derivatives stakes involving sales of both single-name and tranche-based credit default swaps and long-dated equity index puts in 2008. Buffett goes to great detail to simplify these to thinking in terms of insurance contracts and float cost over their duration, as well as the importance of not being forced to put up collateral. Buffett doesn’t routinely comment on Berkshire’s stock purchases beyond what he is required to disclose, and he didn’t immediately respond to questions about this Occidental investment Tuesday morning.
Google’s Biggest Acquisitions
Buffett has several issues with the practice of CEOs granting themselves stock options as compensation. Buffett is a strong believer in this kind of “eat what you kill” philosophy of executive compensation. Together, they form a compendium of the beliefs and advice of the man widely regarded to be the greatest investor in history. Berkshire Hathaway’s fundamental strategy has been to identify valuable companies and then acquire increasingly large portions of them.
And conglomerates then have to focus on mediocre companies that often lack competitive strengths. By 1983, however, Buffett’s attitude had changed — largely because of the success of one of his favorite businesses at the time, See’s Candy berkshire hathaway letters to shareholders Stores. Download the free report to get insight into Buffett’s views on market volatility, value investing, and more. Across the world, companies shuttered their doors and investors lost thousands or even millions on their holdings.
BHE, our final Giant, earned a record $4 billion in 2021. That’s up more than 30-fold from the $122 million earned in 2000, the year that Berkshire first purchased a BHE stake. BHE’s record of societal accomplishment is as remarkable as its financial performance.
Don’t give your executives stock options as compensation
But when a company buys back its own stock while it is priced at or above the stock’s intrinsic value, the company is by definition overpaying. And a company that is in the habit of overpaying for anything — be it stock buybacks or new acquisitions — is not a good hold for a careful shareholder. In his1996 letter to shareholders, Buffett recounts Coca-Cola’s 1896 shareholder report, admiring how the company had set — and closely followed — its 100-year growth plan, while the core product of the company had not changed at all.
In his shareholder letter that year, Buffett talked about a few of the reasons why. Today, the “Oracle of Omaha” has a net worth of around $85B — making him the fourth wealthiest person in the United States after Jeff Bezos , Bill Gates, and Mark Zuckerberg. Berkshire Hathaway, Buffett’s firm, has the most expensive share price of any company in history, with each Class A share costing upwards of $330,000. It was really fun to read through the history and see how Buffett went from small time to big time. Knowing the ending didn’t ruin the surprises about which investments panned out and which ones didn’t (some, like Coke, weren’t surprising, but others, like Blue Chip, were more so).
That’s why Buffett is a fan of some kinds of debt, just not the kind that can leave consumers broke when the market swings down. Prior to World War I, the average annual salary of an executive at a large corporation was $9,958, or $220,000 in today’s dollars. Between 1936 and the mid-1970s the average CEO was paid about $1M a year in today’s money. By 2017, that average pay had ballooned to $18.9M, according to the Economic Policy Institute. “Managers of this stripe cannot be ‘hired’ in the normal sense of the word.
I want to underscore that for Berkshire repurchases to make sense, our shares must offer appropriate value. We don’t want to overpay for the shares of other companies, and it would be value-destroying if we were to overpay when we are buying Berkshire. 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.
The company set itself up to distribute small electronic components, and first-year sales totaled $112,000. Today, TTI markets more than one million different items with annual volume of $7.7 billion. Berkshire’s balance sheet includes $144 billion of cash and cash equivalents .
In the aftermath of the crisis, retail and institutional investors offloaded massive numbers of stocks in businesses weak and strong. Buffett, however, went on a personal buying spree, even penning an impassioned New York Times op-ed titled “Buy American”about the billions he had spent buying up marked-down stock. Buffett concedes that those who invest in companies on the speculation that they may one day be worthwhilecould reap returns — he just has no interest in that kind of investment. He prefers to invest in companies that are already successful and that have a strong chance of continuing success over the long term. “We agreed to pay $2.3 billion for the half of the company we didn’t own. But it gives us full ownership of a growing enterprise whose business remains exceptional for precisely the same reasons that prevailed in 1951,” Buffett wrote in his1995 letter.
And “a Russian roulette equation — usually win, occasionally die — may make financial sense for someone who gets a piece of a company’s upside but does not share in its downside. But that strategy would be madness for Berkshire,” he writes. All across the business world, from big, corporate boardrooms to the offices of venture capitalists, managers employ the use of debt to juice returns. Warren Buffett could not be farther from that image of the hustling networker. In fact, he is an advocate of a much more passive, 99% sloth-like approach to investing. For him, it is CEOs and shareholders’ constant action — buying and selling of stocks, hiring and firing of financial advisers — that creates losses.
- After losing a huge defense contract, the company fired thousands of employees, including Paul.
- Before this, Berkshire Hathaway had mostly made money from investing in stocks.
- Absent our American home, however, Berkshire would never have come close to becoming what it is today.
- Paul was the founder and CEO of TTI, a Fort Worth-based subsidiary of Berkshire.
- General Re had been operating as a dealer in the swap and derivatives market, making money on futures, options on various foreign currencies and stock exchanges, credit default swaps, and other financial products.
BHE has been faithfully detailing its plans and performance in renewables and transmissions every year since 2007. To further review this information, visit BHE’s website at brkenergy.com. There, you will see that the company has long been making climate-conscious moves that soak up all of its earnings. BHE has the management, the experience, the capital and the appetite for the huge power projects that our country needs. Berkshire installed new management that redeployed available cash and steered essentially all earnings into a variety of good businesses, most of which remained good through the years. Coupling reinvestment of earnings with the power of compounding worked its magic, and shareholders prospered.
Also, a significant portion of the dollars that Todd and Ted manage are lodged in various pension plans of Berkshire-owned businesses, with the assets of these plans not included in this table. When ordinary people borrow money to buy stocks, they’re putting their livelihoods in the hands of a market whose swings can be random and violent, even when it comes to a reliable stock like Berkshire’s. In doing so, they risk potentially losing much more than their initial investment. Buffett’s warning was a prescient one for retail investors who decided to take it.