Warren Buffett, the chairman and CEO of Berkshire Hathaway, released his annual letter to shareholders on Saturday alongside the company's fourth quarter 2019 earnings report. In the letter, Buffett discussed share buybacks, his death, and Berkshire Hathaway's acquisition strategy going forward. Here are the biggest takeaways from the letter. Read more on Business Insider.
It's an exciting day for Berkshire Hathaway shareholders and the broader investment community: Warren Buffett has released his annual letter to shareholders alongside the company's fourth-quarter earnings report. The letter, which Buffett has penned for decades, gives a glimpse into company operations, performance, and strategy, as well as an inside look into what the "Oracle of Omaha '' has been thinking about in the past year. This year's letter was 14 pages long and boasted quotes from economists such as Edgar Lawrence Smith and John Maynard Keynes. In it, Buffett lamented about the "fickle stock market," "rare" opportunities for buying companies, and the role of boards of directors. He also discussed some plans for his and vice chair Charlie Munger's death, and gave a hint about succession plans. Buffett also exhibited his usual flourish for humor and wisdom in the letter. In discussing the attributes of a board of directors, he wrote, "if I were ever scheduled to appear on Dancing With the Stars, I would immediately seek refuge in the Witness Protection Program." He continued: "We are all duds at one thing or another. For most of us, the list is long. The important point to recognize is that if you are Bobby Fischer, you must play only chess for money." In 2019, Berkshire Hathaway stock posted its worst underperformance of the broader market in a decade, and have gained 1.1% this year through Friday's close. Buffett again failed to make a major acquisition for Berkshire Hathaway. In the absence of a large company purchase, Berkshire Hathaway bought back a record $2.2 billion of its stock in the fourth quarter. Over the entire year, the company spent $5 billion on repurchasing its own stock. The company posted net earnings of $29.2 billion in the year, up from a loss of $25.4 billion a year earlier when the company had to take a major write-down on its investment in Kraft Heinz Co. Operating earnings fell 23% in 2019 to $4.4 billion. Berkshire Hathaway's record cash pile was $128 billion at the end of 2019, down only slightly from $128.2 billion at the end of the third quarter. Here are the main takeaways from Warren Buffett's annual letter to Berkshire Hathaway shareholders.Accounting rules
The first letter of Buffett's report was dominated by his thoughts on GAAP accounting rules. In 2019, the company earned $81.4 billion, broken down into $24 billion of operating earnings, $3.7 billion of realized capital gains and a $53.7 billion gain from an increase in the amount of net unrealized capital gains that exist in the stocks we hold. Each of those components of earnings is stated on an after-tax basis. The $53.7 billion gain comes from the GAAP accounting rule that went in place last year. "As we stated in last year's letter, neither Charlie Munger, my partner in managing Berkshire, nor I agree with that rule," Buffett wrote. He continued: "The adoption of the rule by the accounting profession, in fact, was a monumental shift in its own thinking. Before 2018, GAAP insisted – with an exception for companies whose business was to trade securities – that unrealized gains within a portfolio of stocks were never to be included in earnings and unrealized losses were to be included only if they were deemed "other than temporary." Now, Berkshire must enshrine in each quarter's bottom line – a key item of news for many investors, analysts and commentators – every up and down movement of the stocks it owns, however capricious those fluctuations may be." Stock buybacks
Berkshire Hathaway's annual report, released the same day as the letter, showed that the company repurchased a record $2.2 billion of its own stock at the end of the year, up from $700 million in the previous quarter. That brings the total the company spent on stock buybacks to $5 billion over the year. "Over time, we want Berkshire's share gown to go down," Buffett wrote. "If the price-to-value discount (as we estimate it) widens, we will likely become more aggressive in purchasing shares. We will not, however, prop up the stock at any level." Berkshire Hathaway loosened its rule around share buybacks in 2018 making it easier for Buffett and Munger to authorize buybacks when the repurchase price is "below Berkshire's intrinsic value," according to the company. Still, in previous quarters, analysts thought that the company could've spent more on share buybacks. Boards of directors
Buffett also discussed the compensation and purpose of corporate boards over the last few years, a "hot topic." "Over the years, many new rules and guidelines pertaining to board composition and duties have come into being. The bedrock challenge for directors, nevertheless, remains constant: Find and retain a talented CEO – possessing integrity, for sure – who will be devoted to the company for his/her business lifetime. Often, that task is hard. When directors get it right, though, they need to do little else. But when they mess it up,......" he wrote. He continued: "At Berkshire, we will continue to look for business-savvy directors who are owner-oriented and arrive with a strong specific interest in our company. Thought and principles, not robot-like "process," will guide their actions. In representing your interests, they will, of course, seek managers whose goals include delighting their customers, cherishing their associates and acting as good citizens of both their communities and our country." Acquisitions
Buffett did not make a major acquisition in 2019, marking the third year in a row since Berkshire Hathaway has completed a company purchase. In this year's annual letter, he spelled out his three criteria for buying companies for shareholders and investors. "First, they must earn good returns on the net tangible capital required in their operation. Second, they must be run by able and honest managers. Finally, they must be available at a sensible price," he wrote. He continued: "When we spot such businesses, our preference would be to buy 100% of them. But the opportunities to make major acquisitions possessing our required attributes are rare. Far more often, a fickle stock market serves up opportunities for us to buy large, but non-controlling, positions in publicly-traded companies that meet our standards." Succession plans
In this year's annual letter, Buffett told shareholders that Berkshire Hathaway is "100% prepared" for his death. He also wrote that two key executives thought to be in the running to succeed him — Greg Abel and Ajit Jain— will be given more exposure at the company's annual shareholder meeting in Omaha, Nebraska. This year, shareholders at the meeting will be able to address questions to Abel and Jain as well as Buffett and Munger, according to the letter. "That change makes great sense. They are outstanding individuals, both as managers and as human beings, and you should hear more from them." Buffett has been the CEO and chairman of Berkshire Hathaway since 1970. This week, Buffett became the longest-tenured CEO in the S&P 500 when Les Wexner at L brands stepped down. Market performance
Buffett wrote that stocks will likely outperform bonds long-term, especially if interest rates and corporate taxes remain low. "What we can say is that if something close to current rates should prevail over the coming decades and if corporate tax rates also remain near the low level businesses now enjoy, it is almost certain that equities will over time perform far better than long-term, fixed-rate debt instruments," he wrote. He continued: "That rosy prediction comes with a warning: Anything can happen to stock prices tomorrow. Occasionally, there will be major drops in the market, perhaps of 50% magnitude or even greater," he said. Buffett added that equities are "the much better long-term choice for the individual who does not use borrowed money and who can control his or her emotions. Others? Beware!" Politics
Buffett notably did not discuss politics in this year's shareholder letter, a departure from last year's letter where he spoke about how bipartisanship has spurred prosperity in the US. Buffett campaigned for Hillary Clinton in 2016 and wrote in 2013 that he voted for Barack Obama. While he has not yet endorsed a candidate for the November 2020 election, he told CNBC in early 2019 that he would support Mike Bloomberg for president.
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Warren Buffett's Berkshire Hathaway has lost Bill Ackman as an investor. The hedge-fund manager revealed the...Warren Buffett's Berkshire Hathaway has lost Bill Ackman as an investor. The hedge-fund manager revealed the sale of his Pershing Square fund's $1 billion Berkshire stake in a conference call on Wednesday. Pershing sold Berkshire in the last few weeks to free up cash so it can capitalize if prices fall again, Ackman said on the call. The move is surprising as Ackman boosted his Berkshire holdings by more than a third in the first quarter. Visit Business Insider's homepage for more stories. Warren Buffett's Berkshire Hathaway has lost billionaire hedge-fund manager Bill Ackman as an investor. Ackman revealed the sale of his Pershing Square fund's $1 billion stake in Berkshire, and its exit from much smaller positions in Blackstone and Park Hotels & Resorts, in a conference call on Wednesday. Berkshire accounted for just over 15% of Pershing Square $6.6 billion stock portfolio at the end of March. Pershing Square sold its Berkshire stake in the last few weeks to free up cash so it can capitalize if juicy investing opportunities emerge, Ackman explained on the call, according to a transcript on Sentieo, a financial-research site. "Today, we have $10 billion of capital to invest, we can be much more nimble," he said, highlighting Pershing's smaller size relative to Berkshire. "And so our view was generally we should take advantage of that nimbleness, preserve some extra liquidity in the event that prices get more attractive again." Pershing Square confirmed the sale to Business Insider, but declined to comment further. Bloomberg first reported the news. Read More: Billionaire and legendary investor David Booth: Here's how to invest smartly right now so you come out of the pandemic with financial security Ryan Israel, a partner at Pershing, elaborated on the decision to dump Berkshire during the conference call. While Pershing's bosses expect Berkshire to be a "strong investment over the longer term," their view is that "the current environment means there may be more than typical opportunities for us to see very high-returning investments." Berkshire has showcased the quality of its subsidiaries and made strides towards boosting its profit margins relative to peers during the recent downturn, Israel continued. However, Buffett's company has bucked Pershing's expectations by not deploying its $137 billion in cash reserves to buy stocks and other securities, acquire companies, strike deals, and repurchase shares, he added. If Berkshire does put its cash to work in the short term, Israel argued, it will likely be during a period when Pershing also enjoys a choice of enticing investment options. Following the Berkshire sale, Pershing will be armed with enough cash to take advantage of them, and be able to move more nimbly than Berkshire due to its smaller size, he added. Read More: GOLDMAN SACHS: These are the 20 stocks hedge funds piled into most aggressively last quarter — and history suggests they're set for big gains Still, Ackman's exit from Berkshire is surprising. Pershing only invested in Berkshire last year, and boosted its stake in the company by more than a third to about 5.5 million shares in the first quarter. Those shares were valued at almost $1 billion at the end of March. Moreover, Ackman has repeatedly praised the famed investor and his business. "Berkshire Hathaway was built by Warren Buffett to withstand a global economic shock like this one," he wrote in Pershing's 2019 annual report. "We believe that Berkshire will emerge from this crisis as a more valuable enterprise," he added. Ackman famously turned $27 million into $2.6 billion by hedging his fund against the coronavirus sell-off, offsetting the damage to its equity portfolio. He used the windfall in March to boost Pershing's stakes in Berkshire as well as Hilton, Lowe's, and Burger King-parent Restaurant Brands, and to reinvest in Starbucks. Read More: A Wall Street chief strategist analyzes 4 recessions throughout history to explain why investors should still be buying stocks — even as the economy hurtles into depressionJoin the conversation about this story » NOW WATCH: Why Pikes Peak is the most dangerous racetrack in America
Warren Buffett bought 3,500 tons of silver in 1997. The purchase helped make Thomas Kaplan a billionaire.
Warren Buffett's purchase of almost 3,500 tons of silver in 1997 helped turn Thomas Kaplan into...Warren Buffett's purchase of almost 3,500 tons of silver in 1997 helped turn Thomas Kaplan into a billionaire. After the silver bubble burst in early 1980, the precious metal plunged in price from $50 an ounce to below $10, and it was widely dismissed as a bad investment. "What really put an end to it was when Warren Buffett bought [those] ounces of silver," Kaplan, the chairman of NovaGold Resources, told shareholders this month. "It became public that he had done this the week when I was taking my silver company public," Kaplan said. "That changed everything." Kaplan told Business Insider he personally thanked Buffett at a dinner years later. Visit Business Insider's homepage for more stories. Warren Buffett made an unusual move in 1997 when he bought 111 million ounces, or nearly 3,500 tons, of silver. The famed investor's purchase helped make Thomas Kaplan a billionaire. "That changed everything" Kaplan was in his early 30s, with a doctorate in history from Oxford University but zero industry experience, when he founded a mining company named Apex Silver Mines in 1993. Despite his lack of credentials, he received a $10 million investment from billionaire investor George Soros in 1994. At the time, the global silver market was still recovering from oil tycoon Nelson Bunker Hunt and his brothers almost cornering it in 1979. The silver bubble had burst in early 1980, slashing the price of the precious metal from $50 an ounce to less than $10, and making it a toxic asset for many investors. "What really put an end to it was when Warren Buffett bought [those] ounces of silver," Kaplan, now the chairman of NovaGold Resources, said during the miner's virtual shareholder meeting this month, according to a transcript on Sentieo, a financial-research site. "I remember it vividly because there but for the grace of God, it became public that he had done this the week when I was taking my silver company public," Kaplan continued, referring to Apex. "And otherwise, not a very good time to be in the market, but that changed everything." Read more: Jefferies breaks down the top 22 stocks it thinks you should buy right now — including 6 fast-risers that just captured its attention Berkshire's wager Buffett and his partner Charlie Munger's silver investment didn't just benefit Kaplan. It also generated a pre-tax return of more than $97 million for their Berkshire Hathaway conglomerate, Buffett said in his 1997 letter to shareholders. The Berkshire CEO described the wager as a "return to the past" as he bought silver in the 1960s in anticipation of its demonetization by the US government. In 1997, he bet on the metal again as he predicted shrinking stockpiles would push up the silver price. "In recent years, bullion inventories have fallen materially, and Charlie and I concluded that a higher price would be needed to establish equilibrium between supply and demand," Buffett said in the letter. Bill Gates, the Microsoft cofounder and Buffett's close friend, must have come to the same conclusion. He took a stake in a miner, Pan American Silver, in 1999. Read more: The world's biggest investors are notoriously skeptical of the stock market's bet for a quick economic recovery — and warning that the 'fantasy' rally will soon come crashing down "Gold on steroids" Buffett's vote of confidence restored the perception of silver as a viable investment. "From that moment on, I never had to explain to people the rationale for owning silver," Kaplan said on the NovaGold call, referring to the metal having many industrial uses and serving as a store of value. "The fact that it has both components means that it's gold on steroids," he added. Buffett's endorsement of silver enabled Apex to list its shares successfully, paving the way for Kaplan to cash out most of his stock by 2004. He went on to score huge returns from investing in an African platinum miner and founding a Texas oil-and-gas company, both of which ballooned in value and were acquired in 2007. Today, Kaplan leads The Electrum Group, an investment firm focused on natural resources. He also heads up Panthera, an organization devoted to "big cat" conservation, and boasts the world's largest private collection of Rembrandts. The billionaire credits some of his success to Buffett's surprise bet on silver in 1997. "I owe him one," Kaplan told Business Insider, adding that Buffett's purchase was "one of a string of just ridiculous strokes of luck." Read more: 'Likely to be excruciating': A notorious stock bear says investor reliance on Fed money-printing is misguided — and warns of more than 50% crash from current levels Silver could surge again Precious metals are poised for another historic rally as investors seek to safeguard their wealth from the coronavirus pandemic, Kaplan predicted on the NovaGold call. "Buffett took his position at $4 or $4.50, and silver ultimately went back to $50," he said. "You're going to see something not dissimilar once again, in silver, but very much in gold." The Berkshire chief's dearth of stock purchases when the market tanked in March suggests he's worried, Kaplan argued, strengthening the case for investing in gold and silver. "We're in a world where Warren Buffett is standing aside — that's not his stock and trade during these crises," he said. "Anyone who listened in on his annual general meeting will see that this was not the same gung ho, 'you've got to buy this pullback,'" Kaplan continued. "That tells me that he, too, is looking for ways to preserve wealth and preserve value." There's no sign yet that Buffett is eyeing a return to silver or planning to pile into gold. But it's safe to say that Kaplan would welcome another boost from the Berkshire boss. Read more: The investment chief of a $12 billion wealth-management firm breaks down how to build the perfect portfolio using just 7 ETFs — one designed to sidestep a dramatically 'overvalued' stock marketJoin the conversation about this story » NOW WATCH: How waste is dealt with on the world's largest cruise ship
LIVE UPDATES: Warren Buffett discussed coronavirus, the economy, and stocks at Berkshire Hathaway's annual meeting. Here are the highlights.
Warren Buffett discussed a range of topics at Berkshire Hathaway's annual meeting on Saturday, often touted...Warren Buffett discussed a range of topics at Berkshire Hathaway's annual meeting on Saturday, often touted as "Woodstock for capitalists." The billionaire investor and Berkshire CEO joined Greg Abel, vice chairman of non-insurance operations, to host the virtual event and answer questions. Buffett revealed that Berkshire's net $6.1 billion in stock sales in April reflected sales of airline stocks. The investor also discussed coronavirus, the economy, and other subjects. Visit Business Insider's homepage for more stories. Warren Buffett discussed a range of topics at Berkshire Hathaway's annual meeting on Saturday, famously described as "Woodstock for capitalists." The famed investor and Berkshire CEO, along with Greg Abel, vice chairman of non-insurance operations, hosted the virtual event and answers questioned posed by journalists. The event was livestreamed by Yahoo Finance. The pair spoke hours after Berkshire released its first-quarter earnings. The company posted a record quarterly loss of about $50 billion, largely due to $55 billion in investment losses. It also grew its cash pile from $128 billion to $137 billion in the period, and sold about $6.1 billion in stock on a net basis in April, upending expectations that it would capitalize on the coronavirus sell-off and buy stocks on the cheap. Read more: 'Brace for selling': A Wall Street quant strategist warns that stock-market buying power could evaporate just one week from now — opening the floodgates for a 'sell in May' episode Here are the highlights from the Berkshire annual meeting: "Charlie is in fine shape" Buffett opened the meeting by lamenting the absence of Charlie Munger, Berkshire's vice chairman and his longtime partner. "Charlie is in fine shape, his mind is as good as ever, his voice is as strong as ever," he said. It "just didn't seem like a good idea" for the 96-year-old to fly from his California home to attend the meeting in Omaha, Nebraska. "He's added Zoom to his repertoire," Buffett continued, referring to the video-conferencing app. "He's just skipped right by me technologically. Like stepping over a peanut." "It's been a flip of the switch" Buffett tackled the topic of coronavirus early on in the meeting. "It's been a flip of the switch in a huge way in terms of national behavior, the national psyche, it's dramatic," he said. "There was an extraordinarily wide variety of possibilities on both the health side and the economic side," he continued. A few months on, it's become clear that "we're not getting a best case and we know we're not getting a worst case." "The range of possibilities is still extraordinarily wide," Buffett continued. "We do not know what exactly happens when you shut down a substantial portion of your society." Whereas the economic train fell off the tracks in the 2008 financial crisis, Buffett said, "This time we just pulled the train off the tracks and put it on its siding." Read more: Quant megafund AQR explains why investors should be more worried about prolonged slumps than virus-style crashes — and details a 3-part process for protecting against them "We are a very, very young country" Buffett discussed America's rapid progress since its creation. "We are a very, very young country," he said. "What we have accomplished is miraculous." Buffett shared some crude calculations of national wealth gain over the past 231 years. He estimated America's wealth grew from about $1 billion in 1789 to well over $100 trillion in 2020, or at least $100,000 for each original dollar. The investor highlighted the Civil War as an example of a massive disruption that the nation overcame. "Nothing can stop America" Buffett reflected on the Great Depression, pointing out that someone who invested on the day of his birth in August 1930 needed to wait more than 20 years to make back their money. He also discussed the challenges that his father faced at that time, when he had no job and two children to fee and couldn't access his savings as the bank was closed. "Don't worry about your groceries," Buffett's grandfather, who owned a grocery store, told his father. "I'll let your bill run." "He cared about his family, but he wasn't going to go crazy," Buffett joked. Read more: Famed economist David Rosenberg nailed the housing crash. Now he says this crisis won't end as quickly as it began and shares an investing strategy for the next 3 years and beyond. When the Dow Jones passed the 381 mark in the 1950s, he said, investors feared the market was overheated and it was going to be 1929 again. Buffett's mentor and boss at the time, Benjamin Graham, was called to Washington along with a slew of other experts to assess whether the US economy was in trouble. Now, the Dow is above 24,000. "You're looking at a market today that has produced $100 for every $1," he said. "Nothing can stop America when you get right down to it." Buffett put up a slide reading, "Never bet against America," emphasizing that the country faces tough periods but always emerges stronger. "We are now a better country as well as an incredibly more wealthy country than we were in 1789," the next slide read. "We have gone dramatically in the right direction." "I hope I've convinced you to bet on America" Buffett linked his optimism back to the current threat to the global economy. He also underlined his company's commitment to funding its own operations, and warned against the dangers of debt. "When something like the current pandemic happens it's hard to factor that in and that's why you never want to use borrowed money to buy into investments," he said. "We run Berkshire that way." "There's no reason to use borrowed money to participate in the American tailwind," he added. Buffett also trumpeted the merits of stocks. Equities are an "enormously sound investment," he said, that will outperform US Treasuries and the money people have stashed under their mattresses over time. However, he sounded the familiar note that investors shouldn't be constantly changing their minds about stocks. "People bring the attitude to them too often," he said, "that it's important that you develop an opinion on them minute by minute. That's really foolish." Buffett also discouraged people from selling stocks purely because their prices change. "If you owned the businesses you liked prior to the virus arriving, it changed prices, but nobody's forcing you to sell." Buffett also recommended "the best thing" for investors to bet on is the S&P 500 index, as it gives them a broad cross-section of American businesses. "I will bet on America the rest of my life," Buffett said. "I hope I've convinced you to bet on America." "It hurts some of our businesses a lot" Buffett addressed the impact of coronavirus on Berkshire's companies. "For some period, certainly during the balance of year ... our operating earnings will be considerably less than if the virus hadn't come along," he said. "It hurts some of our businesses a lot. While Berkshire's three biggest businesses — insurance, the BNSF railroad, and Berkshire Hathaway Energy — are in a "reasonably decent" position," Buffett said, other businesses have been "effectively shut down." Buffett also defended the company's growing cash reserves. "We don't want to be dependent on the kindness of friends even, Buffett said, let alone strangers. "There are times when money almost stops," he added, pointing to the 2008 financial crisis and the liquidity crunch just over a month ago. "Investment-grade companies were essentially going to be frozen out of the market" in late March, Buffett said, before the Federal Reserve "reacted in a huge way." "Fear is the most contagious disease you can imagine, makes the virus look like a piker," he added, using a term for a gambler who only makes small bets. "I was wrong" Buffett also discussed Berkshire's $1.7 billion in stock and sold $2.2 billion in the first quarter. "We did very little in the first quarter." "I want you to know what Berkshire's actually doing now," he said. He pointed to Berkshire's sales of $6.1 billion in stocks on a net basis in April, and explained that reflected its sales of the airlines. It turned out I was wrong," Buffett said. He explained that the airline business has "changed in a very major way." He questioned whether people would fly as much in the next two or three years, and pointed to the government loans that the airlines recently agreed to, which will have to be repaid out of its earnings. Buffett also highlighted that even if 70% or 80% of the airline business returns, the airlines will be left lumped with "too many planes." "The future is much less clear to me," he said. This story is still developing....Join the conversation about this story » NOW WATCH: Why thoroughbred horse semen is the world's most expensive liquid