Every year, Warren Buffett publishes an annual letter to investors, and many people look forward to what he has to say about the market.
It’s that time of the year, and in this blog post, I’ll review the key points from this year’s letter.
The letter comes as part of Berkshire Hathaway’s annual report, which has recently been released. Berkshire Hathaway is – but you probably know this already – Warren Buffett’s publicly listed company through which he makes all his acquisitions and stock investments.
Warren Buffett prepares this letter carefully, weighing every word. Everything in this letter is intentional.
Here are the five most important points:
1. Value Investing Works
The very first thing in the letter is a comparison of the development in Berkshire Hathaway’s market value compared to the stock index S&P 500.
The numbers speak for themselves.
Berkshire Hathaway has had a compounded annual return of over 20% since 1965. S&P 500 has had an annual return of 10.5%.
This means that Warren Buffett’s company has had an overall return of over… well, that’s such a large number… 3,641,613% in the period against S&P 500’s 30,209%.
It’s no coincidence that he decided to make that comparison and that he sets it up so clearly and looks at such a long-term period.
It’s his way of showing that value investing (by his method) definitely works – especially if you’re thinking long term.
2. Pick Companies, Not Stocks
Warren Buffett writes that Berkshire Hathaway invests in whole companies – and occasionally in pieces of a company – but never in stocks.
“Whatever our form of ownership, our goal is to have meaningful investments in businesses with both durable economic advantages and a first-class CEO. Please note particularly that we own stocks based upon our expectations about their long-term business performance and not because we view them as vehicles for timely market moves. That point is crucial: Charlie and I are not stock-pickers; we are business-pickers,” Warren Buffett writes. Charlie is, of course, Charlie Munger, his longtime partner.
Warren Buffett’s point here is that you should not invest on the basis of short-term considerations of whether a stock goes up or down.
You need to assess a company and its long-term potential.
Among other things, you must decide whether you trust the management and whether the company has competitive advantages that protect their service and products and make it possible for them to retain their customers.
You can learn more about how to assess a company’s long-term potential in my e-book here.
- He Has a Lot of Cash Because We are In a Bubble
Berkshire Hathaway aims to hold around 30 billion USD in cash and cash-like instruments (such as short-term bonds) to make sure Berkshire Hathaway can withstand any crisis.
“We want your company to be financially impregnable and never dependent on the kindness of strangers (or even that of friends). Both of us like to sleep soundly, and we want our creditors, insurance claimants and you to do so as well,” he writes.
However, by the end of 2021, Berkshire Hathaway had 144 billion USD in cash and equivalent.
Why almost five times more cash than they aim to hold? The explanation is that they can’t find anything to invest in.
He says he and Charlie are having a hard time finding anything which meets their criteria for long-term holding. They say they would like to make acquisitions or even just buy publicly traded stocks.
“From time to time, such possibilities are both numerous and blatantly attractive. Today, though, we find little that excites us,” he writes.
What does that really mean?
Surely there are plenty of wonderful businesses out there?
Yes, but not at the price they want to pay. Which is another way of saying that everything is priced at a very high level compared with the value of the company.
“Long-term interest rates that are low push the prices of all productive investments upward, whether these are stocks, apartments, farms, oil wells, whatever. Other factors influence valuations as well, but interest rates will always be important,” he writes.
So what can we learn from this?
Warren Buffett and Charlie Munger are very careful these days about what they pick. They are not afraid of staying in cash.
As a private investor, I would also be careful about what I invest in, and like them, I wouldn’t be afraid of staying in cash for a while as I wait patiently for the right investment.
Because one thing is for sure. At some point, it will change.
“Charlie and I have endured similar cash-heavy positions from time to time. These periods are never pleasant. They are not permanent either.”
4. He is Buying Back Berkshire Shares
In the absence of better investment opportunities, Berkshire Hathaway has made share buybacks in 2021 of 27 billion USD.
He also writes that they have bought back shares in early 2022 for 1.2 billion USD. He doesn’t write at what price level they had bought them back, but he does stress that they are not willing to make share buybacks at any share price.
“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,” he writes.
The smart thing to do would be to match buying Berkshire Hathaway’s stocks to the level that Warren Buffett decides is a good price.
The lowest price level for Berkshire B-shares last year was 230 USD. I would personally be pretty comfortable buying Berkshire at that level again.
The lowest level in the first two months of 2022 was 292 USD per share, which, however, is above the 2021 share price.
5. You Learn From Writing and Teaching
Warren Buffett expresses his gratitude that he has been able to write and teach for many years.
He says it has helped him develop and clarify his own thoughts.
“Charlie calls this phenomenon the orangutan effect: If you sit down with an orangutan and carefully explain to it one of your cherished ideas, you may leave behind a puzzled primate, but will yourself exit thinking more clearly,” he writes.
I can only agree. I appreciate blogging and teaching value investing. I would have just skimmed the annual letter if it hadn’t been for this blog. Now, I’m really absorbing the lessons in it.
But how can you use that knowledge if you are sitting at home by yourself?
It’s easy: take notes.
When reviewing a business, remember to write down why you want to invest in it. Save your notes so you can review them if you have any doubts about whether or not to sell later on. Make it a priority to write to and explain to the future you.
In the value investing courses that I run, I also make sure that the students have to review companies for each other. That’s the best way to learn it: by actually doing the work and explaining your analysis to others. It will stick forever.
Is This a Goodbye?
Warren Buffett is 91 years old, and Charlie Munger is 98 years old.
After all, no one lives forever.
I got the feeling that the letter was a goodbye.
Especially when Warren Buffett expressed his gratitude for all the years he has been able to write and teach. It gave me the feeling that this is the last annual letter we see from him (or with Charlie).
But it may well be that I read too much into it.
In any case, the annual meeting will be held in Oklahoma from Friday, April 29th through Sunday, May 1st.
This is the first time in two years.
It’s hard not to think about if it’s going to be our last chance to see Warren Buffett and Charlie Munger onstage together.
I was supposed to go for the first time in 2020. Now it may be the first and only time I go.
Don’t forget to download my e-book Free Yourself where you’ll learn to invest like Warren Buffett. You can download it here.
