Bonds, buybacks and Apple: three takeaways from Buffett’s annual letter

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Berkshire Hathaway (BRK.A) (BRK.B) Chairman Warren Buffett recently released his annual letter to shareholders, along with the company’s 2020 earnings.

Despite negative comments from Berkshire partner Charlie Munger last week about the market mania surrounding GameStop (GME), Bitcoin and SPACs, Buffett didn’t directly mention any of that in his letter. Instead, he extolled the virtues of long-term investing.

Here, we take a look at a few highlights from this year’s missive.

Bond investors’ ‘bleak future’

When it comes to fixed income investing, Buffett doesn’t pull any punches: “Bonds are not the place to be these days.”

He points out that the yield on the 10-year Treasury bond had fallen 94% between September 1981 and year-end 2020, and he reminds readers that around the globe, some investors are earning negative returns on sovereign debt. The solution to investing in a low-yield world isn’t stretching for income with lower-quality fare: the debacle in the savings and loan industry some 30 years ago is proof of that, notes Buffett.

“Fixed income investors worldwide – whether pension funds, insurance companies or retirees – face a bleak future,” he concludes.

Buybacks, Apple, and the ‘jewels’

Berkshire spent US$24.7 billion last year buying back its own shares, and Buffett notes that the firm has continued to repurchase shares in 2021. Why the buying spree? Because doing so enhances Berkshire’s intrinsic value per share for current shareholders while still leaving the firm with ample cash (to the tune of US$138 billion), he explains.

Further, the buybacks provide current shareholders with greater interest in what Buffett calls the four ‘jewels’ of the firm: controlling interests in its property and casualty business, railroad BNSF, Berkshire Hathaway Energy, as well as its 5.4% stake in Apple (AAPL). He wrote:

“In no way do we think that Berkshire shares should be repurchased at simply any price. I emphasise 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.”

Investing for the long term

Buffett breaks down Berkshire’s shareholder base into several buckets, including index funds, active institutional investors, active individual investors, and long-term individual investors. Buffett says he appreciates the mix, though he has no interest in attracting shareholders who don’t appreciate the firm’s “hamburgers and Coke” style. He writes:

“The tens of millions of other investors and speculators in the United States and elsewhere have a wide variety of equity choices to fit their tastes. They will find CEOs and market gurus with enticing ideas. If they want price targets, managed earnings and ‘stories,’ they will not lack suitors. ‘Technicians’ will confidently instruct them as to what some wiggles on a chart portend for a stock’s next move. The calls for action will never stop.”

For more on this topic, see Buffett’s 2020 scorecard

Buffett has a special affinity for the Berkshire ‘lifers’, the long-term investors who treat an investment in Berkshire as a partnership. He notes:

“Productive assets such as farms, real estate and, yes, business ownership produce wealth – lots of it. Most owners of such properties will be rewarded. All that’s required is the passage of time, an inner calm, ample diversification and a minimisation of transactions and fees.”

Buffett confirmed that Berkshire Hathaway’s annual meeting will be held on May 1 and will again be virtual this year. However, the event will be run out of Los Angeles rather than Omaha, and Munger will appear (after being absent last year). So will Vice Chairmen Ajit Jain and Greg Abel.

And if we’re lucky, maybe Buffett’s ukulele will make an appearance this year, too.

Susan Dziubinski is Director of Content for Morningstar.com. This article does not consider the circumstances of any investor.