Berkshire Hathaway’s annual letter for shareholders has always been an event that investors around the world wait for. Time flies and the 2021 edition is out by none other than Warren Buffett himself. Though each year the big picture and message do seem similar, here are 3 key points to his 2021 annual letter.
1. Meaningful Investments = Businesses with durable economic advantages + first-class CEO
Warren Buffett and Berkshire Hathaway’s investment thesis is always the same regardless of the changing tides of time. In most, if not all of his letters, he preaches on the importance of buying businesses and not just stocks.
In his 2021 letter, he emphasizes that he, together with his partner Charlie Munger, are not stock-pickers, but business-pickers. Investments under Berkshire Hathaway are valued based on the long term expectation of the businessess’ performances.
Most rookie investors or traders these days still do not understand the beauty of buying wonderful businesses at wonderful prices. Hence, the self-proclaimed ability to predict market movements in short periods of time often ends up with them whipsawing their capital and gains.
2. Berkshire Hathaway owns and operates more infrastructure assets than financial assets
Contrary to the latest craze and intangibility of speculative assets (*ahem cryptocurrency), Warren Buffett’s favourite class of assets are actually infrastructure assets. This is evident when Warren Buffett highlights yet again the four giants of Berkshire Hathaway, quoting Burlington Northern Santa Fe (BNSF) as the number one artery of American commerce.
BNSF is the largest freight railway operator in the US. It has been one of the key contributing businesses to Berkshire Hathaway. On top of BNSF, other infrastructure assets under Berkshire Hathaway include Berkshire Hathaway Energy (BHE) and Berkshire Hathaway Renewables. These business pillars are mainly in the energy and power generating business and infrastructure, which is still very relevant today.
In an age where energy and fuel prices, together with the boom of logistical services, its no surprise that Warren Buffett values these businesses for their relevance and upside. Both BNSF and BHE are the 2 giants Warren Buffett cherishes as big giants of Berkshire Hathaway.
3. Currently 80% of net worth in equities, but favourite is 100%
Berkshire’s current cash in its balance sheet stands at USD 144 billion. The initial pledge on the cash position of both Warren Buffett and Charlie Munger is more than USD 30 billion. The huge difference of the current cash position versus the rule of thumb is Warren Buffett’s admission of failure to find companies to invest in for the long run.
Currently, Berkshire’s equities holding is still around 80%, but Warren Buffett would have liked to see equities holding increase. But due to little to no opportunities, Berkshire hence repurchased shares.
Share repurchases increase a shareholder of Berkshire’s stake in the many fantastic businesses under its portfolio. It also increases the “float” per share, which is money that Berkshire holds and can use for investing, but does not belong to them.
Most of the other parts of Warren Buffett’s letter detail the life and death of Paul Andrews. Paul was the founder and CEO of TTI, Inc., an electric component distributing company. In the eyes of Warren Buffett, Paul Andrews had the qualities of a first-class CEO and a business with durable economic advantages. While in the eyes of Paul Andrews, Berkshire Hathaway will always be there as an owner to ensure the sustainability of his company should he passes on.
Investing these days has always been about generating returns. But returns at the end of the day comes from sustainable growth. Venture capital and private equity are at the other end of the spectrum when it comes to market-beating returns. But when it comes long term compounded annual returns, along with growing with America, Berkshire Hathaway is second to none.
With Berkshire Hathaway still doing a 20.1% compounded annual gain from 1965 till 2021, Warren Buffett remains humble and wise. His quotes on investing may seem easy to understand. But to hold onto it as investing principles and to achieve such consistent results is definitely another level.
As we slowly champion Warren Buffett’s teaching and principles in honing our investing methodologies, we too have curated stocks that have achieved 24.5% in 2021. Check it out when you signup for Premium Club HERE.