On Saturday February 26th, Berkshire Hathaway released their 2021 annual report. The jewel within this report is Warren Buffett’s Chairman’s letter. Incredibly, Warren has personally written this Letter for 57 years with the intent to share what he and Charlie Munger would like to know if they were the absentee owner and you were the manager.
If you haven’t read this year’s Chairman’s letter I would highly recommend you do as you will not be disappointed. If you are very eager, you could also re-read my summary of his 56th Chairman’s letter, which ties in nicely to this year’s.
Warren taught his first class on investing 70 years ago. Teaching and writing has helped him clarify his thoughts, which Charlie Munger calls:
“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.”
I am thrilled to be sharing my thoughts on Warren’s 57th letter however, I have to tell you this is one of the hardest things for me to do. The amount of information Warren weaves into each Chairman’s letter is not only cumulative from year to year but he also weaves in historical and timely facts and figures, as well as subtle mentoring and educational lessons.
Hopefully after you have read my thoughts I don’t leave you confused or thinking I am the orangutan.
Warren Buffett turns 92 this year while his partner (side kick), Charlie Munger, turned 98. They both continue to work and do what they love with the people they like and trust.
Warren’s letter should inspire us all to envision ourselves in Warren and Charlie. We tend to overestimate what is going to happen in the short run but we don’t focus on what our daily efforts can accomplish over the long run. Warren and Charlie are living examples of what can be achieved and they emphasize the importance of persevering with the bigger picture in mind.
Berkshire Hathaway has evolved into an incredibly successful company. It is the product of 57 years of Warren’s leadership and vision. In his letter we learn more about this immense achievement.
Berkshire Hathaway is a collection of businesses which they own in their entirety or in part.
“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.”
What is truly fascinating is the merger of two businesses, Berkshire Fine Spinning and Hathaway Manufacturing, watched the company’s net worth decline from $51.4 million to $22.1 million over nine years starting in 1955.
“In part, this decline was caused by stock repurchase, ill-advised dividends and plant shutdowns. But nine years of effort by many thousands of employees delivered an operating loss as well. Berkshire’s struggles were not unusual: The New England textile industry had silently entered an extended and non-reversible death march.”
In 1965, things started to change.
“Berkshire installed new management that redeployed available cash and steered essentially all earnings into a variety of good businesses, most of which remained good through the years. Coupling reinvestment of earnings with the power of compounding worked its magic, and shareholders prospered.”
Wow, did shareholders ever prosper!
Today, Berkshire has what Warren calls the “Big Four” companies, which account for a large chunk of Berkshire’s value. There are many other companies however, it would take too long to cover them all here.
The first ‘Big Four’ is the Group of Insurers: In this group, Berkshire owns the entirety of the companies. The first purchase took place in 1967 and National Indemnity was acquired for $8.6 million dollars. The insurance float has grown from $19 million to the $147 billion it is today.
“Berkshire has become the world leader in insurance “float” - money we hold and can invest but that does not belong to us.”
Warren gives most of the credit to Ajit Jain for this growth. Warren met Ajit on a Sunday morning 35 years ago and asked him what insurance experience he had. Ajit responded by saying: “none.” Warren’s response was: “Nobody’s perfect” and hired him anyhow and the rest is history. The insurance float alone increased $9 billion in 2021.
In second, measured by year-end market value, is Apple: Berkshire owns 5.5% of the company which is up from 5.39% in the previous year. This increase was the result of Apple share buybacks. Apple paid Berkshire $785 million in dividends last year and Berkshire’s share of earnings equates to $5.6 billion.
Third is Burlington Northern Sante Fe Railway (BNSF): Burlington Northern had a record year of earnings in 2021 of $6 billion. Warren notes that in 2021 the BNSF trains traveled 143 million miles and carried 535 million tons of cargo, which surpassed any other American railway.
I have to digress momentarily as Warren shared an interesting story about how the BNSF acquisition took place. BNSF was the third largest holding they had in 2009 and at that point, Warren had never visited their head office in Fort Worth, Texas. Berkshire Hathaway had recently purchased TTI, a small electronics components distributor. Every Fall, the directors gather for a presentation by their executives and they thought with this new purchase and the fact that TTI is located in Fort Worth it would be a great place to meet. Warren planned on coming early and had his assistant, Deb Bosanek, set up a lunch with Matt Rose, the CEO of BNSF, who he greatly admired. It was not planned but it turned out that BNSF’s earning were released the day they met and with the economic meltdown in 2009 Wall Street was not kind to their earnings that day.
Warren met with Matt the following day and said that BNSF could have a better home within Berkshire Hathaway and told him what they were willing to pay. Matt presented the offer to the board and Berkshire Hathaway bought BNSF 11 days later.
If Paul Andrews, the owner of TTI, had not been encouraged to meet with Warren by a former CEO of a Fort Worth company that Berkshire had purchased in 2000, this purchase might not have happened.
The Fourth ‘Big Four’ is Berkshire Hathaway Energy (BHE): BHE had a record year with $4 billion in earnings up 30-fold from the $122 million earned in 2000 when Berkshire first purchased a stake in BHE. Berkshire now owns 91.1% of the company.
BHE has become a powerhouse in wind and solar generation. This was a sector that the company had none of when the first stake was made in 2000. BHE has become a leader in wind, solar, and transmission throughout the United States and has the management, experience, capital, and appetite for huge power projects that the United States needs.
I think this is a great place to add that Warren shared and it was not the plan but Berkshire has become the largest owner of property, plant and equipment of infrastructure assets as classified on their balance sheet compared to any other American corporation. Those assets are valued at $158 billion.
Warren once again waived the American flag and expressed how lucky and fortunate they have been able to create this wonderful company in the United States.
Warren explained Berkshire’s relationship with the United States Government by noting the amount of taxes they have paid. “During the nine post-merger years, the US Treasury suffered as well from Berkshire’s troubles. All told, the company paid the governments only $337,359 in income tax during that period-a pathetic $100 a day. Now Berkshire pays roughly $9 million daily to the Treasury.”
To put this into perspective, in 2021 Berkshire paid $3.3 billion and the U.S. Treasury reported the total corporate taxes paid at $402 billion. As Warren says: “I gave at the office.”
Warren’s main goal and task has always been to increase the intrinsic value of Berkshire Hathaway’s shares, which continued in 2021. Warren as humble as he is stated:
“I make many mistakes. Consequently, our extensive collection of businesses includes some enterprises that have extraordinary economics, many others that enjoy good economic characteristics, and a few that are marginal.”
Currently, Berkshire Hathaway has $144 billion dollars in cash. Warren describes the 3 ways to increase the value of Berkshire Hathaway. The first is to increase the earnings of existing businesses via internal growth or acquisitions. Internal opportunities have proven far better today than acquisitions. The second is to buy public companies. The third is to repurchase shares of Berkshire Hathaway stock and that they did in 2021, buying $51.5 billion worth.
“That expenditure left our continuing shareholders owning 10% more of all Berkshire businesses, whether these are wholly-owned (such as BNSF and GEICO) or partly-owned (such as Coca-Cola and Moody’s).”
Warren took a money losing company and turned it into something amazing over a 57 year period. Who would have thought that in 1965 he would be holding the Big Four today and by a happen stance lunch would lead to the purchase of Burlington Northern Sante Fe Railway?
Berkshire Hathaway is no different than your investment portfolio, it takes time. A portfolio is like a company. It is always changing and there are always opportunities and at times losses. By investing in wonderful companies that pay a growing cash flow and holding them for the long term and taking advantage of opportunities like Warren did, you are on the right path.
I hope you enjoyed my thoughts. Please feel free to give us a call if you have any questions.
“How will you replace your current income in retirement?”™ – Jim Seyers