Warren Buffett writes an annual letter to Berkshire Hathaway shareholders, with the latest one recently released. What lessons can be learned?
Warren Buffett’s major talking points
Mr Buffett’s comments about bonds may be the lesson that steals the headlines.
Bonds comments
He wrote: “Bonds are not the place to be these days. Can you believe that the income recently available from a 10-year US Treasury bond – the yield was 0.93% at year end – had fallen 94% from the 15.8% yield available in September 1981. In certain large and important countries, such as Germany and Japan, investors earn a negative return on trillions of dollars of sovereign debt. Fixed income investors worldwide – whether pension funds, insurance companies or retirees – face a bleak future.”
He also pointed out that some bond investors may try to increase the “pathetic” returns now available by shifting their purchases to obligations backed by shaky borrowers. He said that risky loans are not the answer to inadequate interest rates.
Another key point was about share buybacks.
Share buybacks
He pointed out that Berkshire Hathaway started buying Apple shares in late 2016 and by the middle of 2018 it owned around 5.2% of Apple for a cost of $36 billion. Since then it has enjoyed regular dividends averaging about $775 million per year and it also pocketed $11 billion by selling a portion of the position.
Mr Buffett wrote: “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.
“But that’s far from all of the good news. Because we also repurchased Berkshire shares during the 2 and a half years, you now indirectly own a full 10% more of Apple’s assets and future earnings than you did in July 2018.
“The math of repurchases grinds away slowly, but can be powerful over time. The process offers a simple way for investors to own an ever-expanding portion of exceptional businesses.”
Berkshire Hathaway has continued to repurchase its shares since the end of the period.
Bet on the US
Mr Buffett is still confident about the US’ long term future:
“In its brief 232 years of existence, however, there has been no incubator for unleashing human potential like America. Despite some severe interruptions, our country’s economic progress has been breathtaking.
“Beyond that, we retain our constitutional aspiration of becoming “a more perfect union”. Progress on that front has been slow, uneven and often discouraging. We have, however, moved forward and will continue to do so.
“Our unwavering conclusion: Never bet against America.”
