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A Berkshire Hathaway decade in review: Here are the biggest takeaways from Warren Buffett's annual shareholder letters
A Berkshire Hathaway decade in review: Here are the biggest takeaways from Warren Buffett's annual shareholder letters
Carmen ReinickeDec 18, 2019, 18:42 IST
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In the last decade, Warren Buffett has gained more fame as a value investor and Berkshire Hathaway has outperformed the S&P 500.
This year, however, the company has stumbled, trailing the broader market and failing to secure a major acquisition.
In addition, Berkshire Hathaway's cash pile has grown to a record $128.2 billion, sparking investor concern that Buffett is having trouble finding appealing opportunities in a fully valued market.
Here are the biggest takeaways from Berkshire Hathaway's annual letters to shareholders from the last decade.
Over the last decade, Warren Buffett, the "oracle of Omaha" and leader of Berkshire Hathaway has continued to grow his fame as a long-time value investor.
Berkshire Hathaway's stock performance has been spectacular as well. Even with some down years, the company has outperformed the broader market since 2010, growing share price roughly 245% through December 16 while the S&P 500 index gained about 186%.
This year, however, the company has been having a down year. From the end of 2018 to December 16, Berkshire Hathaway has trailed the S&P 500, gaining about 11% while the market is up about 27%.
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Although the 2019 annual letter won't be released until early 2020, Berkshire Hathaway's quarterly reports have given investors a glimpse into the company's inner workings this year. The latest report showed that the company had a record $128.2 billion in cash during the quarter ending September 30, 2019.
Buffett's last acquisition, Precision Castparts, was finalized in 2016, and he hasn't made another successful purchase since. In his 2018 letter to shareholders, Buffett wrote that he hasn't made a major purchase because "prices are sky-high for businesses possessing decent long-term prospects."
It's not the first time that Buffett has ended the year without making a major purchase, and he often expresses his disappointment in his annual letters. In the 2012 annual shareholder letter, Buffett wrote, "It's back to work; Charlie and I have again donned our safari outfits and resumed our search for elephants," which is what he calls major acquisitions.
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Without the ability to make as many major purchases as he'd like, Buffett has bumped up allocations in a number of his favorite stocks over the last decade, which included companies such as American Express, Coca-Cola, IBM, Wells Fargo, and Apple.
"Yearly figures, it should be noted, are neither to be ignored nor viewed as all-important. The pace of the earth's movement around the sun is not synchronized with the time required for either investment ideas or operating decisions to bear fruit," Warren Buffett wrote in the annual shareholder letter.
He continued: "At Berkshire we face no institutional restraints when we deploy capital. Charlie and I are limited only by our ability to understand the likely future of a possible acquisition. If we clear that hurdle – and frequently we can't – we are then able to compare any one opportunity against a host of others.
"When I took control of Berkshire in 1965, I didn't exploit this advantage. Berkshire was then only in textiles, where it had in the previous decade lost significant money. The dumbest thing I could have done was to pursue 'opportunities' to improve and expand the existing textile operation – so for years that's exactly what I did. And then, in a final burst of brilliance, I went out and bought another textile company. Aaaaaaargh! Eventually I came to my senses, heading first into insurance and then into other industries."
Source: annual shareholder letter, company filings
2011
Corporate performance versus the S&P 500: 2.1%
Acquisitions: Lubrizol
Cash: $38 billion
Highlights:
"Our major businesses did well last year. In fact, each of our five largest non-insurance companies – BNSF, Iscar, Lubrizol, Marmon Group and MidAmerican Energy – delivered record operating earnings. In aggregate these businesses earned more than $9 billion pre-tax in 2011," Warren Buffett wrote in the annual shareholder letter.
He continued: "Charlie and I favor repurchases when two conditions are met: first, a company has ample funds to take care of the operational and liquidity needs of its business; second, its stock is selling at a material discount to the company's intrinsic business value, conservatively calculated.
"Charlie and I measure our performance by the rate of gain in Berkshire's per-share intrinsic business value. If our gain over time outstrips the performance of the S&P 500, we have earned our paychecks. If it doesn't, we are overpaid at any price."
Source: annual shareholder letter, company filings
2012
Corporate performance versus the S&P 500: 16%
Acquisitions: None.
Cash: $47 billion
Highlights:
"When the partnership I ran took control of Berkshire in 1965, I could never have dreamed that a year in which we had a gain of $24.1 billion would be subpar, in terms of the comparison we present on the facing page. But subpar it was," Warren Buffett wrote in the annual shareholder letter.
He continued: "the second disappointment in 2012 was my inability to make a major acquisition. I pursued a couple of elephants, but came up empty-handed.
"But we still have plenty of cash and are generating more at a good clip. So it's back to work; Charlie and I have again donned our safari outfits and resumed our search for elephants."
"When I count my blessings, I count GEICO twice."
Source: annual shareholder letter, company filings
2013
Corporate performance versus the S&P 500: 32.4%
Acquisitions: NV Energy and HJ Heinz
Cash: $48 billion
Highlights:
"Berkshire increased its ownership interest last year in each of its 'Big Four' investments – American Express, Coca-Cola, IBM and Wells Fargo," Buffett wrote in the annual shareholder letter.
He continued, "Indeed, who has ever benefited during the past 237 years by betting against America? If you compare our country's present condition to that existing in 1776, you have to rub your eyes in wonder. And the dynamism embedded in our market economy will continue to work its magic. America's best days lie ahead.
"A 'flash crash' or some other extreme market fluctuation can't hurt an investor any more than an erratic and mouthy neighbor can hurt my farm investment. Indeed, tumbling markets can be helpful to the true investor if he has cash available when prices get far out of line with values. A climate of fear is your friend when investing; a euphoric world is your enemy."
Source: annual shareholder letter, company filings
2014
Corporate performance versus the S&P 500: 13.7%
Acquisitions: Van Tuyl Automotive
Cash: $63 billion
Highlights:
"Our bad news from 2014 comes from our group of five as well and is unrelated to earnings. During the year, BNSF disappointed many of its customers. These shippers depend on us, and service failures can badly hurt their businesses," Buffet wrote in the annual letter to shareholders.
He continued: "While Charlie and I search for new businesses to buy, our many subsidiaries are regularly making bolt-on acquisitions. Last year was particularly fruitful: We contracted for 31 bolt-ons, scheduled to cost $7.8 billion in aggregate.
"With the acquisition of Van Tuyl, Berkshire now owns 91/2 companies that would be listed on the Fortune 500 were they independent (Heinz is the 1/2). That leaves 4901/2 fish in the sea. Our lines are out."
Source: annual shareholder letter, company filings
2015
Corporate performance versus the S&P 500: 1.4%
Acquisitions: Precision Castparts Corp.
Cash: $72 billion
Highlights:
"The most important development at Berkshire during 2015 was not financial, though it led to better earnings. After a poor performance in 2014, our BNSF railroad dramatically improved its service to customers last year. To attain that result, we invested about $5.8 billion during the year in capital expenditures, a sum far and away the record for any American railroad and nearly three times our annual depreciation charge. It was money well spent.
"With the PCC acquisition, Berkshire will own 101/4 companies that would populate the Fortune 500 if they were stand-alone businesses. (Our 27% holding of Kraft Heinz is the 1/4.) That leaves just under 98% of America's business giants that have yet to call us. Operators are standing by."
Source: annual shareholder letter, company filings
2016
Corporate performance versus the S&P 500: 12%
Acquisitions: None
Cash: $86 billion
Highlights:
"After all, as stewards of your capital, Berkshire directors have opted to retain all earnings. Indeed, in both 2015 and 2016 Berkshire ranked first among American businesses in the dollar volume of earnings retained, in each year reinvesting many billions of dollars more than did the runner-up. Those reinvested dollars must earn their keep," Buffett wrote in the annual shareholder letter.
"During such scary periods, you should never forget two things: First, widespread fear is your friend as an investor, because it serves up bargain purchases. Second, personal fear is your enemy. It will also be unwarranted. Investors who avoid high and unnecessary costs and simply sit for an extended period with a collection of large, conservatively-financed American businesses will almost certainly do well."
Source: annual shareholder letter, company filings
2017
Corporate performance versus the S&P 500: 21.8%
Acquisitions: None
Cash: $116 billion
Highlights:
"Berkshire's gain in net worth during 2017 was $65.3 billion, which increased the per-share book value of both our Class A and Class B stock by 23%. Over the last 53 years (that is, since present management took over), per share book value has grown from $19 to $211,750, a rate of 19.1% compounded annually," wrote Buffett in the annual shareholder letter.
He continued: "The format of that opening paragraph has been standard for 30 years. But 2017 was far from standard: A large portion of our gain did not come from anything we accomplished at Berkshire.
"The $65 billion gain is nonetheless real – rest assured of that. But only $36 billion came from Berkshire's operations. The remaining $29 billion was delivered to us in December when Congress rewrote the U.S. Tax Code."
Source: annual shareholder letter, company filings
2018
Corporate performance versus the S&P 500: -4.4%
Acquisitions: None.
Cash: $112 billion
Highlights:
"Wide swings in our quarterly GAAP earnings will inevitably continue. That's because our huge equity portfolio – valued at nearly $173 billion at the end of 2018 – will often experience one-day price fluctuations of $2 billion or more, all of which the new rule says must be dropped immediately to our bottom line," Buffett wrote in the annual shareholder letter.
He continued: "Indeed, in the fourth quarter, a period of high volatility in stock prices, we experienced several days with a 'profit' or 'loss' of more than $4 billion.
"Our advice? Focus on operating earnings, paying little attention to gains or losses of any variety. My saying that in no way diminishes the importance of our investments to Berkshire. Over time, Charlie and I expect them to deliver substantial gains, albeit with highly irregular timing."
Source: annual shareholder letter, company filings
