2020 Berkshire Hathaway Annual Letter [pdf](berkshirehathaway.com) |
2020 Berkshire Hathaway Annual Letter [pdf](berkshirehathaway.com) |
But there have been self-inflicted issues. The seemingly unconditional refusal to explore technology companies. (While his Apple investment was great, even Buffett would tell you this is a consumer company and not a tech company) The allowing of the two new managers to keep breaking Berkshire's rules, such as not investing in IPO's, or not investing in airlines. The large write down in PCP. The double-speak about "never bet against America" while remaining paralyzed during the COVID panic. Maybe these things are moot compared to the scale problem.
But I think the more disheartening issue is Buffett's last 5-6 letters have been forgettable, and today's was really just a recap of Berkshire's main assets, not offering anything particularly insightful or interesting. I think he's still doing an admirable job but Berkshire just isn't what it used to be. Everything has a cycle.
I, like a lot of people LOVE trading stocks and derivatives, and trying to beat the market -- more so as a hobby and as an opportunity to learn more about the more esoteric components of financial markets and how things operate. I've been doing it for over 15 years and I've paid my dues in terrible trades, and seen some great plays work out. The process of options pricing, managing ex-dividend dates and options, derivatives plays, trading styles like position and swing etc all are enormously fun to learn the nuances of. It's a fascinating world.
At the same time, the vast majority of the money that I save for retirement is your standard run of the mill dollar cost aversaging (DCA) into targeted funds based on my risk tolerance, age, and retirement objectives. Really boring stuff that works over 20 years, not 3 months.
Buffet is one of those guys that gets less sexy when volatility is increased, and more realistic when things are boring and people are licking their wounds.
Berkshire is going to be just fine. And they're doing just fine.
In Poker: find the fish, understand why they're fish and exploit it [example, 1].
In investing: find underpriced assets, understand why they're underpriced and exploit it [examples, 2, 3].
From this perspective, Buffett doesn't understand how price movement works in tech companies.
And that's ok.
[0] You can't win everything of course, but if you're going to play a losing game by default then you're basically buying information. Once you have enough information, then it's all about execution. I daresay that Warren Buffett has enough information on a particular method of successful investing. That's all he needs, so he needs to focus on games that he knows how to win.
[1] E.g. through math/theory or math/data -- if you can get your hands on it -- (random player vs tight aggressive player)
[2] E.g. through math/theory or math/data (population will grow to 11 Billion --> economic productivity will therefore grow because bigger global work force --> world economy will grow in the long-term)
[3] Buffett's famous example is of course his own brand of value investing. The central thesis of value investing is: if a company is going to close shop, the scrap value of that company will be higher than the market cap of that company. There's a lot more to it, but that's the gist of it. One nuance, for example, is that you then try to pick the companies that are the most severely underpriced, have amazing management and a solid competitive domination strategy (e.g. crazy brand recognition or a certain asset that has a really high barrier of entry).
For someone who allegedly doesn't understand that the recent $89bn gain on Apple stock is nice going. Luck perhaps?
Incidentally he's also talked about poker as a model for investing. After telling the Mr Market story in the 1987 letter he goes on:
>But, like Cinderella at the ball, you must heed one warning or everything will turn into pumpkins and mice: Mr. Market is there to serve you, not to guide you. It is his pocketbook, not his wisdom, that you will find useful. If he shows up some day in a particularly foolish mood, you are free to either ignore him or to take advantage of him, but it will be disastrous if you fall under his influence. Indeed, if you aren't certain that you understand and can value your business far better than Mr. Market, you don't belong in the game. As they say in poker, "If you've been in the game 30 minutes and you don't know who the patsy is, you're the patsy."
There's enough "more to it", to make this statement incorrect.
You're describing Graham's style of value investing, Buffet's style is significantly different.
In fact the term "value investing" has now a very loose definition, since so many different styles are grouped under this term.
I'd say this is the most appropriate definition: "Investment is most intelligent when it is most businesslike" (straight from the Intelligent Investor).
In other terms, any type of investing that's not based on speculation is value investing.
Price movement is not relevant if your stated goal is to hold the business and earn an income from its operations. Technology eventually becomes obsolete or commoditized.
As much of Berkshire's success has been based on limiting losses as pushing successes. "Buffett declines to invest in company" is a less sexy headline than "Buffett buys large stake in X" though.
Maybe Buffett's old. Maybe Berkshire is played out. Maybe they miscalled the pandemic churn. Or maybe the market is just so screwed up now that they're declining to swing.
I believe Berkshire has always been a macro-trend company? If we're looking for someone who traded in and out of pandemic dips and bubbles, that's very much not-Berkshire.
"Investing illusions can continue for a surprisingly long time. Wall Street loves the fees that deal-making generates, and the press loves the stories that colorful promoters provide. At a point, also, the soaring price of a promoted stock can itself become the “proof” that an illusion is reality.
Eventually, of course, the party ends, and many business “emperors” are found to have no clothes. Financial history is replete with the names of famous conglomerateurs who were initially lionized as business geniuses by journalists, analysts and investment bankers, but whose creations ended up as business junkyards."
He is using the example of conglomerates, but to me, it sounds like a warning about current valuations.
Regarding his investing performance, I think we should never judge his N last years - he's definitely looking longer term (which is amazing, given his advanced age). Berkshire is sitting on a huge pile of money, waiting for the bubble to pop. It may take a year, maybe 5, maybe even 10 - nobody knows. But when it does, we can safely bet that Buffett will put this money to work - and secure exceptional returns for the following 10-20 years.
Don't forget they bought a truckload of IBM in 2015, leaving everyone scratching their heads. Probably lots of IBM'ers on here with better insight, but from the outside it appeared they were pooping where they slept: selling off hardware units, dabbling badly in cloud, offshoring key consulting operations and in general hurting their brand. Of course Berkshire sold it all in 2018 and bought more Apple.
Please tell me they didn't think IBM was a consumer company, as an alternate play to Apple in the same space as Apple? Right now it seems to be a poor services company.
I also think that value investing has been 'automated away' to a certain extent such that him doing it (with staff help) no longer can compete with other market players.
> Berkshire has grown so large that it has significant scale problems.
This topic has actually been studied: (mutual) fund performance of top performing funds can be based on a manager's skill, but after a certain point that skill reaches the end of the runway. The more skilled the manager, the larger the AUM they can still get returns for, but at some point it's just too much.
> For an average fund in the cross-section, we estimate a drop in alpha of 20 basis points if the fund doubles its size over one year. We also find a non-negligible impact of the size of the fund industry, although its magnitude is significantly smaller than the impact of individual fund scale. We reconcile our findings with existing empirical studies. Taken as a whole, our results lend considerable support to theoretical models that build on the premise of decreasing return to scale for active portfolio management.
* https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2872385
Discussed in the Rational Reminder podcast:
* https://rationalreminder.ca/podcast/136 (~15m30)
* https://www.youtube.com/watch?v=LhluPwDaNAQ&t=18m30s
Something to consider for anyone piling into (e.g.) ARK:
* https://awealthofcommonsense.com/2020/12/a-short-history-of-...
If you think they are stagnating with their current mindset, then shouldn't breaking their existing rules be a good thing?
The tech thing is different, that was more Buffett just admitting it was outside his area of expertise. I think it's been especially confounding since Buffett has for a long time professed a deep admiration for Bezos and Amazon, yet never really acted on it.
5 of the top 10 most profitable companies are technology companies. The rest are financial firms (BRK is actually the most profitable). Most of these tech companies' value is related to network effects, platform control and such. These are "moats" that WB doesn't understand.
So yeah... I think times overtook the man. The space he was operating in shrank. That said, BRK is still doing fine, well run, etc. They also impact the world in ways a vanguard or softbank don't.
Given what he thinks he understand there's not enough opportunities to allocate this amount of capital.
I guess that's why he hired the two new managers. By the way they did come up with some of the best ideas in recent years like Apple and Snowflake.
Are these really the best ideas. Bought apple only couple of years ago, snowflake was arguably the most hyped stock of all time. I don't see what the insight was here.
I hear this often that berkshire isn't what it used to be because of 'scale'. What does this even mean. At what point does it become too big. Is there a general logic that after X billion $$, investment firms become inefficient?
Buffett is one of the few people that have "seen it all", from deflationary 30s, war 40s, greatest 50s, cultural 60s, inflationary 70s, capitalist 80s, excessive 90s, normal then excessive again 00s, deflationary 10s and whatever the 20s will be.
I'm going by CPI and other similar measures around the world. Almost all US yearly CPI prints have been below 3%, with a small exception of late 2011.
Also, if (some) corporate profits stay on the same trajectory and interest rates fall, those stocks will rally like crazy. Interest rates are the most important prices in any market.
Graph:
I get that 20% annual returns aren’t sustainable as you get into managing hundreds of billions but it seems to me the make up of the market has changed dramatically over the 2010s and Buffett hasn’t adapted or evolved.
Berkshire generates more operating profit than Salesforce has revenue; it generates 6x more profit than Nvidia and those numbers ignore both the gigantic stock portfolio and the cash position.
Valuations will eventually trend back to historical norms. Given that GDP is relatively stagnant (there is modest growth in real terms), it is impossible for all of these companies to grow indefinitely.
Both before the .com crash and the 2008 financial crisis lots of companies have vastly outperformed Berkshire, a wave of bankruptcies and 95% declines ensued.
It's basically a place to distribute information about them.
* ethnically diverse happy people stock photos (80% of the page content)
* carousels and pages with vague two sentence statements and a link. Link leads to missions statements and values and maybe a short paragraph.
* detailed information about what the company sells hidden behind 3-4 clicks at minimum (can be omitted).
I get it's expected in the B2B "we sell to idiot VPs" world, but jesus... have at least one page somewhere with a tech stack and platform summary.
So, effectively, it's setting up a win/tie dynamic on change/expected. Vs a lose/tie dynamic on change/expected when investing with the current sentiment.
Buffet talks pridefully about holding $250+ BILLION in cash, as if it were pegged to a gold standard. Nearly half his life was based on such a system, and so it’d be hard to remove that idea.
Yet he sits on it proudly seemingly unaware that sitting on such an amount has eaten up 3%+ via the printing press of the FED.
That and you know... not buying when everyone was selling back in March. Selling out of the airlines seems like a rookie mistake but to a 90 yo, flying again is actually a “never again” due to his age.
I don't understand what you are trying to say about MacBooks being 11% more expensive?
The stock price also in no way impacts the price of a a company's product. If that was the case, Teslas would be some of the most expensive cars in the world. There is literally no correlation because they are independent things that don't affect each other.
No, BRK would (eventually) receive 10% of net income, not revenue.
> Is it good for customers that Macbooks are 11% more expensive than they should be?
Would it be better for consumers if the price was cheaper? Well, yes....but the fact that customers are willingly paying for Macbooks implies that they are receiving more value from the product than the cash they pay. Not sure what point you're trying to make.
And what a year - what it doesn't say is far more important than what it does. Where's the grappling with the fact that their 2020 return was only 2% when the indexes are up 20%? (Did I read that right?!) For that matter, shouldn't the fact that their return in 2020 was so low be grounds for very serious soul-searching? Buffett has always justified the cash reserves and passive investing as enabling him to make awesome deals during the proverbial rainy day. Well, was not 2020 the mother of all rainy days? Where are his deals? If he couldn't do anything with his bankroll in 2020, when is he ever going to be able to do anything with it? What did they do all year? Does he really have no thoughts about how the pandemic was handled? About Western governance and economics? Is it not astonishing that the sole and only reference I noticed to coronavirus is a throwaway clause about some furniture stores being closed? WTF. This is not at all the letter I was expecting.
Has anyone seen Buffett in person recently? Are we sure he wasn't kidnapped and replaced with Deepfaked Zoom calls a year ago?
We might as well ask why his shareholder letters were interesting before? It’s a fairly unusual tradition.
Maybe the next CEO will have something to say, but it’s pretty optional.
And they should have an Instagram account with the same letter tl;dr to a 5 image post, for young investors.
That would sum most of it up.
It doesn't look like they are trying to attract young investors.
And when a young investor does become attracted to Berkshire, they would be likely to review more than just one single letter.
Which is actually pretty short for what it has to say.
My general point being that even if he's aware and picks some number less than 5% inflation (which is debatable), sitting on a giant cash pile and getting fear paralysis or whatever it is he's waiting on (clearly not a buying opportunity) isn't what a present day champion would do. But thats fine. Just can't expect him to be the past champion he once was.
Realistically his cash liquidity has been dramatically rising but has not ever topped $150 billion:
https://ycharts.com/companies/BRK.A/cash_on_hand
So you're about $100 billion off-target in paper value, but what's $100 billion betwen friends?
OTOH your perception could be quite accurate as to how powerful an effect he may be able to enjoy with so much cash.
Probably could get more accomplished than someone having "only" $250 billion worth of credit.
Of course one is parking lots full of 18-wheelers full of hundred-dollar bills, and the other is a promissory note.
A convoy like that coming in to any city could initiate changes that could not be stopped.
Look at what drug cartels are doing and they usually don't even fill one semi-trailer with cash.
Buffet's huge stake in America itself puts him at an order of magnitude not often seen, not much differently than when the dollars were backed by gold, and for him his position in the US does not come under threat even as the currency becomes devalued. He can stll afford to build cash reserves faster than they are being devalued internationally.
For the Saudis and their convoys of world currencies, there would be pressure to sell the lowest performing one(s) so they could buy more of the notes having a more positive outlook.
He did dump airline stocks at the start of the pandemic on the basis that their business wasn't going to do great for a while.
From an investor point of view, you can't categorize companies as one label. You can categorize companies as tags. This is because every perspective that allows you to give you an edge and make money in a fairly reliable manner is a valid perspective.
Apple can be seen as a consumer/physical product company. Warren knows a lot about consumer behavior and branding. If he finds from that perspective that Apple is underpriced, then he can still make a bet while having a limited understanding of the technology by simply saying: a laptop is a laptop, it allows you to do laptop things (i.e. they're interchangeable), but Apple has an amazing brand like Coca Cola.
Of course, this isn't fully true (e.g. Windows enables different things than Apple in some cases like gaming) but combining it with superior knowledge in branding, it's good enough to make a bet.
Also Buffet is old enough to have remembered other "pandemias" and times of volatility. He was there during the hong kong flu of 69. He was around when Polio was a thing. Hes been through Black Monday and 9/11.
Tons of money to be made in volatility. You're using that word in a negative manner. Volatility up is a great thing.
Buffet is well known to play long, big, safe, predictable bets, with recent exception with airlines with bad COVID timing. All this is consistent with his personality and history as an investor.
Why would they always be finding one opportunity. Can't they find 100 $100 million opportunities. Why doesn't "finding opportunists" model scale ?
Finding one such opportunity is hard, finding two is harder because you have to find the first and then do more work to find the second. This pattern continues indefinitely for as many opportunities as you'd like to find.
Isn't this typical scaling problem though? I wasn't imagining they go one by one. I guess your Implication here is that because there only one warren buffet. I guess that makes sense if Berkshire is ultimately one man Buffet show that can only scale as much as that one man can perform. That probably explains the recent under performance, age catches up to everyone.
How though? How can the market stay a same size while berkshire size went from 1 billion to 100 billion. Where is 100 fold investment coming in if the market stays at a constant size. That doesn't compute. Why wouldn't the market also expand at like the investments.
If the market grows at a rate of 6% and your company is growing at 8%, then your company will eventually slow down to 6% or else the market will speed up to 8%, but in neither situation will you "outperform" the market forever.
In the case of Buffet, Berkshire Hathaway has about $800 billion in assets under management. If the market size is 50 Trillion, and let's say that 10% of that consists of reliably undervalued companies then the size of the market for companies that Berkshire can buy is 5 Trillion. This market will grow at 6%, if you think Berkshire can have 8% returns, then it will own half of all undervalued companies in 63 years, 2/3 of all undervalued companies in 78 years, and all undervalued companies in 100 years. But of course Buffet can't find 100% of all undervalued companies and there are other people also trying to find them.
And of course each individual company that Buffet buys will itself stop making above average returns as it itself grows, and therefore every year, the returns on the companies in Buffet's own portfolio will go closer to the market average even as new undervalued companies are harder to find. Thus the overall return of Buffet's fund will be dragged down to the market return much sooner than the theoretical limits I outlined above.
Not sure how you are defining "market". How is it finite size? What is the number after which it stops growing?
> If the market grows at a rate of 6% and your company is growing at 8%
Total market valuation of Dow has grown at faster pace than Berkshire portfolio size. your 6% , 8% example doesn't hold at all. Not sure where you got your your "market size" numbers from. Did you do an actual analysis of market size growth or are you just pulling these theories out of thin air.
Right because Berkshire stopped overperforming. In fact it has been underperforming the last 10 years, and Buffet was trying to explain why. https://investorplace.com/2020/10/berkshire-hathaway-stock-u...
But what what I was doing was explaining a counterfactual to show why every firm must stop outperforming. It's not just Berkshire, or 6%, 8%.
So I ran some numbers to explain to you how if A is part of B than the compound growth rare of A cannot forever be greater than the compound growth rate of B.
(Please do not reply to this comment with an argument that you are not talking about any stock called "A" and "B", just as the 6/8 seems to have tripped you up)
Berkshire is part of the market, thus it cannot outperform the market forever. In fact you expect reversion to the mean -- companies that outperform then underperform and vice versa. Why is there reversion to the mean? Because the special techniques discovered by the company are copied and disseminated, key people are poached, ideas that used to work reliably stop working, etc. So these social constraints kick in long before mathematical constraints, but even if in theory you can overcome the social constraints, you can never overcome mathematical constraints, and thus Berkshire and all other investment holding companies must eventually stop overperforming, and most only eek out a few years of net overperformance.
Numbers matter here, you cannot have one member of the market grow at a faster rate than the market forever.
Not sure what else I can do to explain this more clearly. Try using a spreadsheet or calculator to work out some examples for yourself.
Understood. Thank you!
Now I wonder why brekshire investors keep holding the stock. Shouldn't the stock crash and burn. What is their logic ? Sunk cost bias?