Shareholder letters, when written well, are a great source of knowledge, wisdom and interesting things. Berkshire Hathaway’s is one of those letters. Today, the company, which is based in Omaha where I currently reside, published its 2020 letter. I read it with a hot cup of coffee and pleasure, and now I want to share my take-aways in this post. You can read the letter in full here
You don’t always win every year, but being patient and having a long-term horizon matters
On the second page of the letter, readers can see the annual and compounded return of Berkshire Hathaway for the last 55 years. The firm didn’t always have a positive return every year. Far from it. It fluctuated greatly from one year to the next, from 28% return this year to -32% the following year. If these professional capital allocators who have more years of investing than my years of living don’t have a positive return every year, I think I shouldn’t set that bar for myself or neither should you. The main thing is that Berkshire had a compounded annual return of 20% in the last 55 years, meaning that the overall gain is some 2.8 million percent, a ridiculous return. Everyone prefers getting rich fast, but in the long term, it is likely better to be patient and have a long term horizon. The results will come, if you do it right.
Having an investing philosophy
Once in a while, I ran across some FinTwit folks who questioned the wisdom of holding large cap stocks such as Apple or Amazon. You know, the familiar big names across industries. These people claimed that to earn an outsized return, investors should look somewhere else where the fish isn’t fished as often. That may be true, but in the age of information, it’s really hard to get information that others can’t. What is harder to possess is patience and willingness to adopt a long term horizon. Back to Berkshire Hathaway, the company said that its Apple position was likely its 2nd most important asset. I mean, if these people upon whom thousands of investors entrust their savings choose Apple and earn excellent returns, why shouldn’t anyone, provided that they did their homework?
Berkshire’s investment in Apple vividly illustrates the power of repurchases. We began buying Apple stock late in 2016 and by early July 2018, owned slightly more than one billion Apple shares (split-adjusted). Saying that, I’m referencing the investment held in Berkshire’s general account and am excluding a very small and separately-managed holding of Apple shares that was subsequently sold. When we finished our purchases in mid-2018, Berkshire’s general account owned 5.2% of Apple.
Our cost for that stake was $36 billion. Since then, we have both enjoyed regular dividends, averaging about $775 million annually, and have also – in 2020 – pocketed an additional $11 billion by selling a small portion of our position.
Despite that sale – voila! – Berkshire now owns 5.4% of Apple. That increase was costless to us, coming about because Apple has continuously repurchased its shares, thereby substantially shrinking the number it now has outstanding.
To Charlie and Warren, I think they don’t care about being a contrarian like so many aspire to be. What they want to be is to be right with their allocation of capital, as it is their fiduciary duty to shareholders. If we can get excellent returns, will it matter if those returns come from a tech giant or a company few heard of? Nah. So if you are only comfortable with the companies you know, don’t listen to the “advisors” who seem to be more eager to be “contrarian” (whatever that means) than to be right.
On page 4 of the letter, Warren and Charlie laid out their investment philosophy. They prefer owning a piece of a great business to 100% of that business. Their reasoning is that great businesses are rarely available for the taking, and even if they are, they will be greatly expensive. Owning a piece of a great business is cheaper, more profitable and cheaper. Berkshire Hathaway’s favorite companies are good to great businesses with a competent leadership that retain most of their annual earnings. As the investees grow their businesses over time, Berkshire’s ownership becomes more valuable. Over a long period of time, the growth in value will be aided by the 8th wonder of the world, compound interest. It may sound easy, but it isn’t. Identifying great businesses to buy is a challenge in and of itself. Sitting on those investments patient for a long period of time is not an easy task either.
What’s out of sight, however, should not be out of mind: Those unrecorded retained earnings are usually building value – lots of value – for Berkshire. Investees use the withheld funds to expand their business, make acquisitions, pay off debt and, often, to repurchase their stock (an act that increases our share of their future earnings). As we pointed out in these pages last year, retained earnings have propelled American business throughout our country’s history. What worked for Carnegie and Rockefeller has, over the years, worked its magic for millions of shareholders as well.
Admittedly, I learned a lot from Charlie and Warren in terms of investing. I try to read up as much as possible about a business and if I like what I read, I buy the stock and try not to sell it. The decision not to sell isn’t driven by my financial determination that a stock has more upside to go. That piece, I still have to learn, even though I don’t find it easy. Instead, my choice to keep stocks over time is mainly driven by my laziness. I don’t want to get up every day and day trade. Plus, I believe that once I own a piece, a very small piece of a great business, it will be more beneficial to keep the ownership as long as possible. A lesson from the two wise old men.
Charlie is now 97 years old and Warren is 90 years old. They are still actively managing their firm, making investment decisions and interacting with shareholders, either through letters like this or a meeting. In the letter, they talked about the story of Nebraska Furniture Mart and its founder, Mrs B, which is one of my favorite business stories:
The company’s founder, Rose Blumkin (“Mrs. B”), arrived in Seattle in 1915 as a Russian emigrant, unable to read or speak English. She settled in Omaha several years later and by 1936 had saved $2,500 with which to start a furniture store. Competitors and suppliers ignored her, and for a time their judgment seemed correct: World War II stalled her business, and at yearend 1946, the company’s net worth had grown to only $72,264. Cash, both in the till and on deposit, totaled $50 (that’s not a typo).
One invaluable asset, however, went unrecorded in the 1946 figures: Louie Blumkin, Mrs. B’s only son, had rejoined the store after four years in the U.S. Army. Louie fought at Normandy’s Omaha Beach following the D-Day invasion, earned a Purple Heart for injuries sustained in the Battle of the Bulge, and finally sailed home in November 1945. Once Mrs. B and Louie were reunited, there was no stopping NFM. Driven by their dream, mother and son worked days, nights and weekends. The result was a retailing miracle.
By 1983, the pair had created a business worth $60 million. That year, on my birthday, Berkshire purchased 80% of NFM, again without an audit. I counted on Blumkin family members to run the business; the third and fourth generation do so today. Mrs. B, it should be noted, worked daily until she was 103 – a ridiculously premature retirement age as judged by Charlie and me.
Mrs B worked daily till she was 103. Charlie and Warren are in their 90s and still working. I mean, I find it inspiring. Sometimes, I feel old whenever I think about the time when I was 16, even though I am just approaching 31. But these great examples remind me that I still have a few decades to work and enjoy life. Such a reminder can be hugely valuable.