Warren Buffett, chairman and CEO of Berkshire Hathaway, is one of America’s great investors—arguably, the greatest ever. Over the last 50 years, Buffett (now 85) and his partner Charlie Munger (91) have executed one of the greatest allocations of capital in history. They have transformed Berkshire Hathaway from a failing textile company to a worldwide conglomerate comprising about 90 businesses across diverse industries. Last year, Berkshire Hathaway had total revenue of $210 billion and net earnings of roughly $24 billion.
I find Buffett’s annual shareholder letter to be a must-read—whether you own Berkshire stock or not. The letters demonstrate Buffett’s wit and wisdom, while offering a look at the market the overall economy. I want to share some excerpts from this year’s letter, released on February 27.
Buffett has a strong opinion on the country’s outlook and this year’s presidential candidates:
It’s an election year, and candidates can’t stop speaking about our country’s problems (which, of course, only they can solve). As a result of this negative drumbeat, many Americans now believe that their children will not live as well as they themselves do. That view is dead wrong: The babies born in America today are the luckiest crop in history.
Furthermore, Buffett believes America has always been a world leader when it comes to innovation and gains in efficiencies:
For 240 years it’s been a terrible mistake to bet against America, and now is no time to start. America’s golden goose of commerce and innovation will continue to lay more and larger eggs…And yes, America’s kids will live far better than their parents did.
Berkshire Hathaway owns or has a stake in about 90 companies. It owns outright 10¼ companies (including 25% of Kraft Heinz) so large that they would be part of the Fortune 500 if they were standalone businesses. As part of their strategy, Buffett and Munger look for “bolt-on” acquisitions—those companies that can be added to one of the existing platform companies:
Charlie and I encourage bolt-ons, if they are sensibly priced. (Most deals offered us most definitely aren’t.) These purchases deploy capital in operations that fit with our existing businesses and that will be managed by our corps of expert managers.
Despite Buffett’s skill and resources, he admits some acquisitions have poor returns:
In most of these cases, I was wrong in my evaluation of the economic dynamics of the company or the industry in which it operates, and we are now paying the price for my misjudgments. At other times, I stumbled in evaluating either the fidelity or the ability of incumbent managers or ones I later appointed. I will commit more errors; you can count on that. If we luck out, they will occur at our smaller operations.
Regardless, like many investors, Buffett thinks long term and big picture:
None of these problems, however, is crucial to Berkshire’s long-term well-being. When we took over the company in 1965, its risks could have been encapsulated in a single sentence: “The northern textile business in which all of our capital resides is destined for recurring losses and will eventually disappear.” That development, however, was no death knell. We simply adapted. And we will continue to do so.
Buffett gives a compelling example of the productivity gains achieved over the last century.
In 1900, 40% of the workforce (11 million people) worked in farming, and 90 million acres of corn produced 30 bushels per acre (for a total of 2.7 billion bushels).
Today, 2% of the workforce (3 million people) work in farming, and 85 million acres of corn produces 150 bushels per acre (for a total of approximately 13 billion bushels).
He comments on these gains this way, concluding with an important message for all investors:
The productivity gains that I’ve just spelled out – and countless others that have been achieved in America – have delivered awesome benefits to society. That’s the reason our citizens, as a whole, have enjoyed – and will continue to enjoy – major gains in the goods and services they receive.
To this thought there are offsets. First, the productivity gains achieved in recent years have largely benefitted the wealthy. Second, productivity gains frequently cause upheaval: Both capital and labor can pay a terrible price when innovation or new efficiencies upend their worlds.
We need shed no tears for the capitalists (whether they be private owners or an army of public shareholders). It’s their job to take care of themselves. When large rewards can flow to investors from good decisions, these parties should not be spared the losses produced by wrong choices. Moreover, investors who diversify widely and simply sit tight with their holdings are certain to prosper: In America, gains from winning investments have always far more than offset the losses from clunkers. (During the 20th Century, the Dow Jones Industrial Average – an index fund of sorts – soared from 66 to 11,497, with its component companies all the while paying ever-increasing dividends.)
We can all learn a lot from the Messrs. Buffett and Munger.
We hope you’ve found this review to be educational and helpful. It is our job to assist you. Please feel free to give us a call with any questions or concerns. Finally, let us say once again that we are honored and humbled to serve as your financial confidant and advisor. We never take your trust for granted.
DISCLOSURES: The information provided in this letter is for general informational purposes only and should not be considered an individualized recommendation of any particular security, strategy or investment product, and should not be construed as investment, legal, or tax advice. The Nalls Sherbakoff Group, LLC makes no warranties with regard to the information or results obtained by third parties and its use and disclaim any liability arising out of, or reliance on the information. These indexes reflect investments for a limited period of time and do not reflect performance in different economic or market cycles and are not intended to reflect the actual outcomes of any client of The Nalls Sherbakoff Group, LLC. Past performance does not guarantee future results.