Berkshire Hathaway recently released its annual letter written by its chairman and ace investor Warren Buffett — also known as the Oracle of Omaha, along with the fourth quarter earnings release. One can read the letter here. We try to glean some of the key learning and insights from the information-laden letter that symbolises prosperity, success and growth by gigantic proportions.
Mr Buffett wrote about the Berkshire’s special penchant for Apple stock in which the company now holds 5.55 percent shares, laments the lack of good ‘buy’ opportunities in the US market, justifies the sky-high cash reserves of $144 billion and his inclination for buyback of Berkshire’s shares.
Buffett said essentially all investments, including “stocks, apartments, farms, oil wells, whatever,” are expensive due to low long-term interest rates. However, he clarified that Berkshire Hathaway is looking forward to buying some good businesses instead of mere picking stocks for the short-term gains.
Repurchase of shares
The Oracle of Omaha underscored that company’s total ‘float’ has grown from $19 million when they entered the insurance business to $147 billion now. This massive increase speaks volumes of company’s financial strength, robust business model and healthy revenues.
Warren wrote that repurchases make good sense for Berkshire’s owners. During the past two years, the company repurchased 9 percent of the shares that were outstanding at year end 2019 for a total cost of $51.7 billion.
“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. As of February 23, 2022, since yearend we repurchased additional shares at a cost of $1.2 billion. Our appetite remains large but will always remain price-dependent,” he wrote.
He emphasises that repurchases raise the amount of ‘float’ per share. That figure has increased during the past two years by 25 percent, he noted.
Although Berkshire owns dozens of businesses but the operations of “Big Four” companies account for a huge chunk of company's value. Leading this list is the cluster of insurers. "Berkshire effectively owns 100 percent of this group," he wrote in the letter.
Warren said Apple is Berkshire’s runner-up ‘Giant’ where their ownership is 5.55 percent, up from 5.39 percent a year earlier. That appears to be a small increase. But it’s not. “Consider that each 0.1 percent of Apple’s 2021 earnings amounted to $100 million. We spent no Berkshire funds to gain our accretion. Apple’s repurchases did the job.. our share of Apple’s earnings amounted to a staggering $5.6 billion,” he wrote.
He also gave an insight into the status of the four significant non-US holdings.
Berkshire owns a 7.7 percent stake in the Chinese electric vehicle maker, BYD Company Limited. Berkshire Hathaway announced the acquisition of about five percent of some Japanese trading companies at the end of August 2020 and continues to keep a minimum of these stocks: Itochu, Mitsubishi, and Mitsui and Co. Ltd.
Massive cash reserves
The letter said Berkshire’s balance sheet includes $144 billion of cash and cash equivalents. Out of this sum, a whopping $120 billion is held in US Treasury bills — maturing in less than a year.
Berkshire, he said, is committed to holding more than $30 billion of cash and equivalents. “We want your company to be financially impregnable and never dependent on the kindness of strangers (or even that of friends). Both of us (Buffett and Munger) like to sleep soundly, and we want our creditors, insurance claimants and you to do so as well,” he wrote.
He said the company has 80 percent or so position (and not 100 percent) in businesses only because of its failure to find companies that meet the criteria for long-term holding. But he admitted that it’s not good to hold massive cash reserves.
“These periods are never pleasant; they are also never permanent… we have had a mildly attractive alternative during 2020 and 2021 for deploying capital,” he wrote.