It is once again that time of the year where Warren Buffett has released his 2019 Shareholder’s Letter. Over the last 40 years, these letters have become an annual read across the value investors, where each letter always provides certain investing wisdoms that we can learn as beginners or refresh ourselves as more seasoned investors.
In this article, I will be sharing a summary of the 3 biggest takeaways I had after reading Berkshire Hathaway’s 2019 Shareholder’s Letter. For those interested in the full letter, you may find it here.
Power of Retained Earnings
For the crux of Smith’s insight, I will quote an early reviewer of his book, none other than John Maynard Keynes: “I have kept until last what is perhaps Mr. Smith’s most important, and is certainly his most novel, point. Well-managed industrial companies do not, as a rule, distribute to the shareholders the whole of their earned profits. In good years, if not in all years, they retain a part of their profits and put them back into the business. Thus there is an element of compound interest (Keynes’ italics) operating in favour of a sound industrial investment. Over a period of years, the real value of the property of a sound industrial is increasing at compound interest, quite apart from the dividends paid out to the shareholders.”
So what are retained earnings?
This term refers to the profits retained, or held back from the shareholders and not paid out as dividends. As individuals we are always taught the importance for saving for a rainy day. Similarly, it is the same for companies where it is important that they keep a certain portion of earnings every year back within the company. This percentage of earnings that is held back and redeployed back into the business is called retained earnings.
Such retained earnings redeployed back into the business will grow earnings further and eventually be reflected in the growth in price of the stock. This creates a compounding effect, that drives stocks (on average) to outperform bonds over the long run.
Stock as Businesses
Charlie and I do not view the $248 billion detailed above as a collection of stock market wagers – dalliances to be terminated because of downgrades by “the Street,” an earnings “miss,” 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 more than 20% on the net tangible equity capital required to run their businesses.
While this may sound very duh, stocks are not a piece of paper nor just a ticker symbol with a bunch of numbers displayed next to it on a screen. A single share / stock of a company represents a small but part ownership in a company.
Forecasting where the stock price will be tomorrow or the day after is pointless as no one will really know. Furthermore, as JP Morgan replied when asked what will have to the stock price, ‘…it will fluctuate…’ and that is the best reply anyone can give.
Instead, we should focus on the fundamentals of a company as what we are investing in is a business. We should take the time and effort to understand the business, management and financials of the company. This is more crucial than worrying about the daily estimates, forecasts, and opinions and try to place bets on how the market might react to it.
Repurchase of Berkshire Hathaway’s Shares
Shareholders having at least $20 million in value of A or B shares and an inclination to sell shares to Berkshire may wish to have their broker contact Berkshire’s Mark Millard at 402-346-1400. We request that you phone Mark between 8:00-8:30 a.m. or 3:00-3:30 p.m. Central Time, calling only if you are ready to sell.
Buffett mentioned that repurchase of company shares will only be done when a) both Charlie and himself believes that the company is selling for less than it is worth and b) the company, upon completing the repurchase, is left with ample cash.
Through FY2019, Buffett revealed that US$5 billion of Berkshire Hathaway was repurchased, representing approximately 1% of the company. Furthermore, he actually urged shareholders with US$20 million or more of stock to give the company a call directly if they are interested to sell. This suggests that Buffett is still be interested at current prices.
While no exact amount was shared of what Buffett believes the intrinsic value of Berkshire Hathaway is worth, such a call-to-action for prospective sellers does speak volumes on Buffett’s view on the current share price.
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