Warren Buffet, the Oracle of Omaha and arguably, one of the most influential investors of all time just published his much-awaited annual letter and as you’d expect, it’s chock full of insights. Here are the highlights and as always, I’d recommend reading the entire leader, 10 times over.
Putting Berkshire Hathaway’s portfolio size in perspective
Wide swings in our quarterly GAAP earnings will inevitably continue. That’s because our huge equityportfolio – valued at nearly $173 billion at the end of 2018 – will often experience one-day price fluctuations of $2billion or more, all of which the new rule says must be dropped immediately to our bottom line. Indeed, in the fourthquarter, a period of high volatility in stock prices, we experienced several days with a “profit” or “loss” of more than$4 billion.
Size of Berkshire’s cash pile
In our fourth grove, Berkshire held $112 billion at yearend in U.S. Treasury bills and other cash equivalents,and another $20 billion in miscellaneous fixed-income instruments. We consider a portion of that stash to beuntouchable, having pledged to always hold at least $20 billion in cash equivalents to guard against external calamities.We have also promised to avoidanyactivities that could threaten our maintaining that buffer.
And here’s what Warren Buffet has to say about it
Berkshire will forever remain a financial fortress. In managing, I will make expensive mistakes of commission and will also miss many opportunities, some of which should have been obvious to me. At times, ourstock will tumble as investors flee from equities. But I will never risk getting caught short of cash. In the years ahead, we hope to move much of our excess liquidity into businesses that Berkshire will permanently own.
The immediate prospects for that, however, are not good: Prices are sky-high for businesses possessing decent long-term prospects. That disappointing reality means that 2019 will likely see us again expanding our holdings of marketable equities. We continue, nevertheless, to hope for an elephant-sized acquisition. Even at our ages of 88 and 95 –I’m the young one– that prospect is what causes my heart and Charlie’s to beat faster. (Just writing about the possibility of a huge purchase has caused my pulse rate to soar.)
On where the markets go
My expectation of more stock purchases is not a market call. Charlie and I have no idea as to how stocks will behave next week or next year. Predictions of that sort have never been a part of our activities. Our thinking, rather, is focused on calculating whether a portion of an attractive business is worth more than its market price.
15 biggest investments
On how Warren Buffet and Charlie Munger view these businesses
Charlie and I do not view the $172.8 billion detailed above as a collection of ticker symbols – a financial alliance to be terminated because of downgrades by “the Street,” expected Federal Reserve actions, possible political developments, forecasts by economists or whatever else might be the subject du jour. What we see in our holdings, rather, is an assembly of companies that we partly own and that, on a weighted basis, are earning about 20% on the net tangible equity capital required to run their businesses. These companies, also, earn their profits without employing excessive levels of debt.
On paying the right price
On occasion, a ridiculously-high purchase price for a given stock will cause a splendid business to become a poor investment – if not permanently, at least for a painfully long period. Over time, however, investment performance converges with business performance. And, as I will next spell out, the record of American business has been extraordinary.
On index funds and high fees>
Let’s put numbers to that claim: If my $114.75 had been invested in a no-fee S&P 500 index fund, and all dividends had been reinvested, my stake would have grown to be worth (pre-taxes) $606,811 on January 31, 2019 (the latest data available before the printing of this letter). That is a gain of5,288 for 1.
Meanwhile, a $1 million investment by a tax-free institution of that time – say, a pension fund or college endowment – would have grown to about $5.3billion.
Let me add one additional calculation that I believe will shock you: If that hypothetical institution had paidonly1%of assets annually to various “helpers,” such as investment managers and consultants, its gain would have been cut in half, to $2.65 billion. That’s what happens over 77 years when the 11.8% annual return actually achieved by the S&P 500 is recalculated at a 10.8% rate.
On worreis about budget deficits and investing in Gold
Those who regularly preach doom because of government budget deficits (as I regularly did myself for many years) might note that our country’s national debt has increased roughly 400-fold during the last of my 77-year periods. That’s 40,000%!
Suppose you had foreseen this increase and panicked at the prospect of runaway deficits and a worthless currency. To “protect” yourself, you might have eschewed stocks and opted instead to buy 31⁄4ounces of gold with your $114.75.And what would that supposed protection have delivered? You would now have an asset worth about $4,200, less than 1% of what would have been realized from a simple unmanaged investment in American business. The magical metal was no match for the American mettle.
On the great American story
In 1788 – to go back to our starting point – there really wasn’t much here except for a small band of ambitious people and an embryonic governing framework aimed at turning their dreams into reality. Today, the Federal Reserve estimates our household wealth at $108 trillion, an amount almost impossible to comprehend. **
Remember, earlier in this letter, how I described retained earnings as having been the key to Berkshire’sprosperity? So it has been with America. In the nation’s accounting, the comparable item is labeled “savings.” And save we have. If our forefathers had instead consumed all they produced, there would have been no investment, no productivity gains and no leap in living standards.