It feels like Christmas morning all over again; Warren Buffett released his annual Letter to Shareholders which comes packed with business lessons and life advice all in a concise 15-page package. Each year I eagerly await this moment when I get to take in insights from, arguably, the greatest investor to ever live.
As with the letters from 2014, 2015, and 2017, I will once again share what I see to be the three vital components of this year’s Letter.
Table of Contents
Key Takeaway No. 1
There has been plenty of commentary recently around Buffett not doubling down on the market’s dip in December. For some, that signaled that Buffett wasn’t responsive to the gyration and potentially missed an opportunity. For others, it meant he felt that the market was still overvalued.
Through 2018, however, Berkshire Hathaway (BRK.A) made $24B in net purchases ($43B purchases, $19 sales). This suggests that while the market itself may still be elevated based on any number of valuation metrics, Buffett–along with Todd Combs and Ted Weschler–must still feel it is better to be a net buyer of marketable equities. On that note, he highlighted the importance of remaining an owner for the long-term:
Truly good businesses are exceptionally hard to find. Selling any you are lucky enough to own makes no sense at all.
– Page 6
Having noted the above, Buffett did make a statement on the lofty tags currently sported by private businesses. He indicated that BRK remains on the lookout for an “elephant-sized acquisition” but has been held back due to “sky-high” prices on high quality businesses at the moment, the ilk of which BRK would love to take permanent ownership. As a result, Buffett indicated that it will again be likely that BRK looks to the stock market to deploy some of its sideline capital as 2019 proceeds.
As an advocate of investing in the stock market myself, I am encouraged by the fact that Buffett still feels there is value out there to be had; if he didn’t, he wouldn’t have suggested that is where BRK will be focusing its investment dollars in the near-term. I have never been one to coattail, but history has shown it doesn’t hurt to be investing on the same side as Buffett.
Key Takeaway No. 2
Buffet highlighted on more than one occasion in this year’s Letter that Ajit Jain will be responsible for all insurance activities and Greg Abel is taking care of all other options. While this structure has been in place since early 2018, Buffett’s emphasis in the Letter is important.
Jain has long been regarded by many as the future successor to Buffett’s throne. I believe this move brings us one step closer to seeing this become a reality. Throughout this year’s remarks–as in the past–it was quite clear that Buffett feels the float from insurance underwriting is one of the key underlying components of BRK’s success. The company has posted an underwriting profit in 15 of the past 16 years ($2B this year alone) and as such actually gets paid to put $133B of other people’s money to work.
As such, giving Jain free rein with the insurance operations is the highest vote of confidence I can imagine Buffett making. I also view it as a considerable positive that these moves are being made while Buffett and Munger are still around in the flesh to help with the transition. While their management style is largely hands-off when it comes to companies with BRK’s dominion, this finally feels like a genuine passing of the torch.
Key Takeaway No. 3
Investment fees count, particularly when the time frame for an investor lengthens. In this year’s blast from the past section of the Letter, Buffett takes a look at the return on equities from 1942 when he made his first investment in Cities Services preferred stock for $114.75. From that time until January 31 of this year, there were gains of 5,288 to 1 (if one had been invested in a no-fee S&P 500 index fund with dividends reinvested and before taxes).
That CAGR of 11.8% over the 77 years would have turned an investment of $1M into roughly $5.3B. However, if you reduce the return to 10.8% (as you would if paying investment fees of 1%), the return is $2.65B, or half of the actual return.
Buffett illustrates the above in a section entitled “The American Tailwind” in which he espouses the benefits of investing in America. He discusses how the nation has seen outsized growth over three 77-year periods and is likely to consider succeeding in the years to come. What is interesting about this is that BRK is regarded by many–including myself–to be the best no-fee mutual fund (or proxy thereof) in the markets today. Further, given the varied, domestic nature of the businesses under BRK’s umbrella, the company’s fortunes largely represent the advance of American business in general.
As I read these parts of the Letter, I asked myself whether Buffett was simply highlighting the greatness of America or whether he was also leaving it to the reader to draw the conclusion that BRK is in fact a better bet than an index fund tracking the overall market; Buffett himself has on many occasions said investors can be well served with a low-fee index fund for the long-term. By investing in BRK, it is possible to both gain a wide breadth of diversification while also betting in America, all without any explicit investment fees to be churned off as the decades roll by, all of which adds up to more compounding for the investee.
Having initiated my own position in BRK.B for the first time this year, I hope to reap the benefit of Buffett’s words.
Bonus Announcement
For the first time ever, my brother and I are planning to take Buffett up on his invitation to Omaha! Learning in this year’s Letter that the annual Shareholder Meeting will be taking place on the weekend of May 3-5, we’re just now making final preparations to make the pilgrimage.
I’m not sure which part of the event has me most excited. Being there live for the Q & A session with Buffett and Munger is likely top of the list, though I have to say dining at Gorat’s Steakhouse which I’ve read about every year is another milestone to be checked off.
Conclusion
As always, this year’s Letter provided plenty of food for thought. Buffett’s strong-suit has always been his ability to take a step back with complex matters and highlight a perspective on what really counts. My favourite snippet this year (though not the first time I’ve heard it from him):
Rational people don’t risk what they have and need for what they don’t have and don’t need.
– Page 10
It is good to know Buffett will still be looking to the stock market for purchases through 2019 and it is a great sign that the transition at BRK is progressing smoothly with Jain and Abel (it’s hard not to read something biblical into their names when placed side-by-side, but that’s neither here nor there).
As always, America is still Buffett’s favourite place to live and invest; I’m looking forward to hearing that from him in person when I see him in person in Omaha this May. I’ll be sure to keep all of you informed when the time comes. It is long overdue and should be a trip to remember.
Thank you for reading.
Full Disclosure: Long BRK.B