Welcome to a new week and the beginning of chapter 3 of 2021. Here is wishing you all a magnificent March.
This week, we will be looking at some of the interesting highlights from Warren Buffet’s annual letter to shareholders of Berkshire Hathaway.
Below are some of the interesting things to note:
- The value of his group’s stock holding was $281 billion as at December 2020. To put in proper context, there are only 3 out of the 54 countries in the African continent whose 2020 GDPs are larger than this amount.
In fact, the combined GDP of Algeria ($147.32 billion) and Morocco ($112.22 billion) is still less than this portfolio.
Mind you, these 2 countries have the 4th and 5th largest GDPs in Africa (after Nigeria, Egypt and South Africa).
Truly, there are levels to this thing!
- He does not view their portfolio as stocks but as businesses even if his company does not have day to day oversight of them. That way, he stays invested in their operations and performance.
The key question to ask here is, “How vested are you in the shares or businesses you own?”
- He took ownership of an acquisition error made in purchasing a company – Precision Cast Parts (PCC). He overpaid for the company in 2016, leading to a $11 billion write down in 2020.
There had been an overestimation of the company’s future earnings and in turn, more money than necessary was paid.
In Warren Buffet’s words, “PCC is far from my first error of that sort, but it is a big one”.
This to me, is still proof that even the best of us can and will make investing mistakes from time to time.
- According to Warren Buffet, “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.
In his words, it took his partner, Charlie Munger and his 20 year experience in the textile company owned by Berkshire to learn this lesson.
The learning points for me here are that we learn all the time and that ownership or control does not always matter. What matters is profitability!
In fact, there are several small businesses who are more profitable than many businesses bigger in size.
- From the letter, over 85% ($240 billion) of Berkshire Hathaway’s value resides in 4 businesses – 3 fully and 1 marginally (5.4%) owned. These businesses are –
- Insurance: GEICO and National Indemnity
- BNSF: America’s largest railroad by freight volume
- Berkshire Hathaway Energy
- Apple – 5.4% shareholding
About the Apple stake – Berkshire commenced staggered purchase of the shares in late 2016 up until mid-2018 (5.2% ownership then).
- Purchase value of stake – $36 billion (market value as at December 2020 – $120 billion)
- Average annual dividend from 2017 – $775 million (this amount is similar to what the Walton family make as annual dividend from their Walmart shares)
- Sold a portion in 2020 for a profit of $11 billion!
2 things comes to mind – the fact that Pareto’s principle holds true here and that truly, it is far better to have marginal ownership in a wonderful business indeed! The Apple stake is what we refer to in pidgin as “small but mighty”.
- The Berkshire portfolio also has an array of profitable privately owned businesses scattered around the United States of America; including Omaha – his home town.
He told the story of Nebraska Furniture Mart (NFM) owned by a Russian immigrant and her son; which started in 1946. When he purchased 80% equity in the business in 1980, turnover was $60 million.
By 2020, NFM owned the 3 largest home furnishing stores in the US and was still being run by the 3rd and 4th generation members of the same family. The business made record revenue despite being closed for 6 weeks due to COVID 19.
Like we mentioned last year during our discussions on angel investing; investing in businesses is a long term play and an altruistic way of giving back to one’s community.
- Warren Buffet is still unwilling to court Wall Street analysts and institutional investors, preferring to stick with individual shareholders. In his words, “we already have the investors we want and don’t think that they, on the balance, will be upgraded by replacements”.
Whilst discussing the company’s belief in sticking by its traditional shareholders, he referred to a book on investing – Common stocks and Uncommon Profits and other writings by Phillip A. Fisher in 1958.
There is power in numbers – over the years, Berkshire has built its business with consistency by pooling funds from a varied number of individuals and sticking with them through the years; in many cases, decades.
This is a key lesson for me, stick to what works best for you (provided it is the winning formular).
In this same vein, Berkshire has been serving hamburgers and coke at its annual meetings since 1956!
Like was done last year, the company’s annual general meeting will be streamed live on the 1st of May 2021 by Yahoo Finance. For those interested, do save the date!
Please remember that the COVID vaccines still are not yet readily available in the country and keep wearing your masks, washing your hands and continue to practise social distancing.
Do have a wonderful week!