The day before yesterday it was published The most read letter in the financial world. This is the one that every year Warren Buffett manages his shareholders, or as he and Charlie Munger call it, his “partners” of Berkshire Hathaway (BH). The letter is a must read not only for all of us who have intellectual concerns about the evolution of financial markets and business management, but, above all, because it is a true exercise in transparency and honesty. It is rare to find an annual review of a company's performance in which management errors or mistakes in investment decisions are recognized, and this is one of them.
In its letter for the 2020 financial year, the Oracle of Omaha begins by distributing the 42.5 billion US$ of annual profit into four components, in accordance with generally accepted accounting principles (“GAAP”). Among them stands out a Write-down or reduction in value by 11 billion US$ of Berkshire Hathaway's investment in the industrial products and metal manufacturing company Precision Castparts Corp. It is striking how Buffett recognizes as his own mistake the excessive optimism that led him to overestimate the potential of value in 2016, and although he points out that he was not wrong with the company, he did with the price he paid. In fact, he adds that it was a big mistake and not the first,”PCC is far from my first error of that sort. But it's a big one.”
In addition to the above, it should be noted that due to its length and content, the letter combines in a single document the management report and the Equity Story. In fact, Warren Buffett not only explains the components of last year's results, but he also explains how BH's business model operates with respect to sources of return on investments with and without control, highlighting the criteria for taking positions, even if they are minority but significant, as is the case of 5.2% in Apple.
With regard to the main business with control represented by all the companies participating in the insurance business, the narrative draws attention to the insistence with which the prudential criteria applied to management are highlighted, while informing the shareholder of the importance of understanding the different risks of this business. Also very illustrative is the section dedicated to explaining its management model over time through different examples of acquisitions that BH made on the West Coast, the East Coast and in the interior of the United States, some of them in Omaha itself, the headquarters of the conglomerate. The story he gives us is an authentic story of success stories of American entrepreneurship, and how one of the parents of Value Investing applies its investment principles to identify opportunities where there is entrepreneurial talent and good management skills.
Perhaps in response to what happened in relation to the GameStop case, Warren Buffett dedicates the penultimate section of the letter to describing the shareholding structure of BH, which is divided into five groups: i) a group represented by his own position as founder, ii) institutional investors represented by index funds, iii) actively managed institutional investment, with which he recognizes his openness to working for a better understanding of the fundamentals of BH (notice for navigators of passive management), iv) active retail investment, and v) the millions of individual investors who simply rely on Buffett and Mingus to represent their interests. It is interesting to see how the CEO of BH explains his relationship with this last group of shareholders whom he considers to be his “partners” and to whom he points out that although they do not have high levels of financial culture, they are nevertheless aware of how Berkshire Hathaway treats them.
Like almost everything Equity Story, I couldn't miss talking about the future and even giving some hint of guidance or guidance. Buffett's letter does so at the end of it, referring mainly to two of his three largest assets represented by the railway freight company BNSC, and the energy distribution company Berkshire Hathaway Energy (BHE), which highlights the opportunity presented by the energy revolution of renewables.
Without a doubt, the shareholders of the Omaha conglomerate recognize in their CEO's disposition a good practice in Investor Relations that generates trust beyond the long history of Performance positive that the company has had. This attitude contrasts with the policies of No comment or the ostrich that some companies apply in times of difficulty, and which are the best sign of management problems or negative results.
You can read the letter by clicking here.
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Francisco Blanco Bermúdez
Founding partner of Sigma Rocket
