The best of Buffett's annual letter: No 'exciting' deals, thanks America, Jimmy Buffett's party boat

Published Sat, Feb 26 202210:24 AM EST

Warren Buffett released on Saturday his much-anticipated annual letter to Berkshire Hathaway shareholders. Here are the highlights... In his remarks , he pointed out how Berkshire's value has nearly doubled the S & P 500's value from 1965 to 2021 — with an annual compound growth rate of 20.1% versus the broader market index's 10.5%. Buffett also acknowledged Apple as one of the four pillars driving Berkshire's value, alongside railroad operator BNSF, energy company BHE and the conglomerate's " cluster of insurers ." The "Oracle of Omaha" lauded Apple's Tim Cook for the way he manages the company , noting the CEO "quite properly regards users of Apple products as his first love, but all of his other constituencies benefit from Tim's managerial touch as well." Apple is Berkshire's largest stock holding, with the stake worth roughly $161.2 billion, according to the letter. Berkshire also owned $24.8 billion worth of American Express shares at the end of 2021 and nearly $46 billion in Bank of America stock. Berkshire also boasted a $23.6 billion stake in Coca-Cola and $3.1 billion in General Motors shares. Buffett also wrote about Berkshire's massive cash holdings, noting that periods like this — in which the company holds large amounts of cash — "are never pleasant; they are also never permanent." At the end of 2021, Berkshire held more than $146 billion in cash and cash equivalents . The investing legend described why repurchasing stock is currently the most attractive option to add value for shareholders, he believes, saying that there was very little by way of outright acquisitions that "excites" him and Vice Chairman Charlie Munger. The Berkshire Hathaway chairman also noted that the company has undoubtedly benefited "mightily" from operating in America. "Our country would have done splendidly in the years since 1965 without Berkshire. Absent our American home, however, Berkshire would never have come close to becoming what it is today. When you see the flag, say thanks," Buffett said. Below are some more highlights from the 11-page letter. Business pickers, not stock pickers "Whatever our form of ownership, our goal is to have meaningful investments in businesses with both durable economic advantages and a first-class CEO. Please note particularly that we own stocks based upon our expectations about their long-term business performance and not because we view them as vehicles for timely market moves. That point is crucial: Charlie and I are not stock-pickers; we are business-pickers." Insurance is 'made to order for Berkshire' "The insurance business is made to order for Berkshire. The product will never be obsolete, and sales volume will generally increase along with both economic growth and inflation. Also, integrity and capital will forever be important. Our company can and will behave well. There are, of course, other insurers with excellent business models and prospects. Replication of Berkshire's operation, however, would be almost impossible." We want Berkshire to be 'financially impregnable,' but $144 billion in cash? "Berkshire's balance sheet includes $144 billion of cash and cash equivalents (excluding the holdings of BNSF and BHE). Of this sum, $120 billion is held in U.S. Treasury bills, all maturing in less than a year. That stake leaves Berkshire financing about 1⁄2 of 1% of the publicly-held national debt. Charlie and I have pledged that Berkshire (along with our subsidiaries other than BNSF and BHE) will always hold 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 like to sleep soundly, and we want our creditors, insurance claimants and you to do so as well." "But $144 billion? That imposing sum, I assure you, is not some deranged expression of patriotism. Nor have Charlie and I lost our overwhelming preference for business ownership. Indeed, I first manifested my enthusiasm for that 80 years ago, on March 11, 1942, when I purchased three shares of Cities Services preferred stock. Their cost was $114.75 and required all of my savings. (The Dow Jones Industrial Average that day closed at 99, a fact that should scream to you: Never bet against America.) After my initial plunge, I always kept at least 80% of my net worth in equities. My favored status throughout that period was 100% – and still is. Berkshire's current 80%-or-so position in businesses is a consequence of my failure to find entire companies or small portions thereof (that is, marketable stocks) which meet our criteria for longterm holding. Charlie and I have endured similar cash-heavy positions from time to time in the past. These periods are never pleasant; they are also never permanent. And, fortunately, we have had a mildly attractive alternative during 2020 and 2021 for deploying capital." There's 'little that excites us' right now "There are three ways that we can increase the value of your investment. The first is always front and center in our minds: Increase the long-term earning power of Berkshire's controlled businesses through internal growth or by making acquisitions. Today, internal opportunities deliver far better returns than acquisitions. The size of those opportunities, however, is small compared to Berkshire's resources. Our second choice is to buy non-controlling part-interests in the many good or great businesses that are publicly traded. From time to time, such possibilities are both numerous and blatantly attractive. Today, though, we find little that excites us. That's largely because of a truism: Long-term interest rates that are low push the prices of all productive investments upward, whether these are stocks, apartments, farms, oil wells, whatever. Other factors influence valuations as well, but interest rates will always be important. Our final path to value creation is to repurchase Berkshire shares. Through that simple act, we increase your share of the many controlled and non-controlled businesses Berkshire owns. When the price/value equation is right, this path is the easiest and most certain way for us to increase your wealth. (Alongside the accretion of value to continuing shareholders, a couple of other parties gain: Repurchases are modestly beneficial to the seller of the repurchased shares and to society as well.)" Ajit Jain, vice chair of insurance operations, a big value creator for Berkshire "Much of our huge value creation in insurance is attributable to Berkshire's good luck in my 1986 hiring of Ajit Jain. We first met on a Saturday morning, and I quickly asked Ajit what his insurance experience had been. He replied, "None." I said, "Nobody's perfect," and hired him. That was my lucky day: Ajit actually was as perfect a choice as could have been made. Better yet, he continues to be – 35 years later. One final thought about insurance: I believe that it is likely – but far from assured – that Berkshire's float can be maintained without our incurring a long-term underwriting loss. I am certain, however, that there will be some years when we experience such losses, perhaps involving very large sums. Berkshire is constructed to handle catastrophic events as no other insurer – and that priority will remain long after Charlie and I are gone." Most 'infrastructure assets' in America "Many people perceive Berkshire as a large and somewhat strange collection of financial assets. In truth, Berkshire owns and operates more U.S.-based "infrastructure" assets – classified on our balance sheet as property, plant and equipment – than are owned and operated by any other American corporation. That supremacy has never been our goal. It has, however, become a fact. At yearend, those domestic infrastructure assets were carried on Berkshire's balance sheet at $158 billion. That number increased last year and will continue to increase. Berkshire always will be building." Berkshire's sizable contribution to U.S. tax receipts "Every year, your company makes substantial federal income tax payments. In 2021, for example, we paid $3.3 billion while the U.S. Treasury reported total corporate income-tax receipts of $402 billion. Additionally, Berkshire pays substantial state and foreign taxes. "I gave at the office" is an unassailable assertion when made by Berkshire shareholders." Operating in America "In fairness to our governmental partner, our shareholders should acknowledge – indeed trumpet – the fact that Berkshire's prosperity has been fostered mightily because the company has operated in America. Our country would have done splendidly in the years since 1965 without Berkshire. Absent our American home, however, Berkshire would never have come close to becoming what it is today. When you see the flag, say thanks." The 'Four Giants' "Leading this list is our cluster of insurers. Berkshire effectively owns 100% of this group, whose massive float value we earlier described. The invested assets of these insurers are further enlarged by the extraordinary amount of capital we invest to back up their promises." "Apple – our runner-up Giant as measured by its yearend market value – is a different sort of holding. ... It's important to understand that only dividends from Apple are counted in the GAAP earnings Berkshire reports – and last year, Apple paid us $785 million of those. Yet our "share" of Apple's earnings amounted to a staggering $5.6 billion. Much of what the company retained was used to repurchase Apple shares, an act we applaud." "BNSF, our third Giant, continues to be the number one artery of American commerce, which makes it an indispensable asset for America as well as for Berkshire. If the many essential products BNSF carries were instead hauled by truck, America's carbon emissions would soar." "BHE, our final Giant, earned a record $4 billion in 2021. That's up more than 30-fold from the $122 million earned in 2000, the year that Berkshire first purchased a BHE stake. Now, Berkshire owns 91.1% of the company." 'Cousin' Jimmy Buffett's party boat "I will end this letter with a sales pitch. "Cousin" Jimmy Buffett has designed a pontoon "party" boat that is now being manufactured by Forest River, a Berkshire subsidiary. The boat will be introduced on April 29 at our Berkshire Bazaar of Bargains. And, for two days only, shareholders will be able to purchase Jimmy's masterpiece at a 10% discount. Your bargain-hunting chairman will be buying a boat for his family's use. Join me."

Warren Buffett at Berkshire Hathaway's annual meeting in Los Angeles, California. May 1, 2021.

Gerard Miller | CNBC

Warren Buffett released on Saturday his much-anticipated annual letter to Berkshire Hathaway shareholders. Here are the highlights...