Top takeaways from Warren Buffett's letter: One big mistake and four family jewels

NEW DELHI: The much awaited Warren Buffett’s annual letter to Berkshire Hathaway shareholders finally arrived on Saturday, giving a glimpse into the year gone by--struggles, achievement and missed opportunities.

Buffett reiterated his trust in America to create miracles day in and day out, despite reeling under a mismanaged pandemic. He recounted the power of repurchases in creating wealth and also outlined why high capex businesses will eventually pay rewards, though that may take some time.

Here are 10 key takeaways from Warren Buffet's letter:


1) A big mistake: Buffett accepted that his purchase of aircraft component maker Precision Castparts in 2016 was a “big” mistake. Berkshire Hathaway wrote off $10 billion of the investment. Buffett accepted that he miscalculated its future earnings and paid more than its worth.

2) No big acquisitions: Berkshire’s focus is to increase income and to acquire large and favorably-situated businesses. Last year, however, the company missed both the goals. Berkshire made no sizable acquisitions and operating earnings fell 9 per cent.

3) Share buyback: Berkshire said its share buyback program, in which it bought 5 per cent of its shares, has made investors hold a bigger pie of the cocktail of business it owns. The company is sitting on a huge cash pile and is hard pressed to use that.

4) Berkshire not a conglomerate: Buffett asserted that Berkshire Hathaway is not a conglomerate in the usual sense of the word but rather “a holding company that owns a hodge-podge of unrelated businesses.”

5) Buying cos using shares unethical?: Buffett also scoffed at the idea of conglomerates acquiring shares of another company by using their own shares. “Often, the tools for fostering the overvaluation of a conglomerate’s stock involved promotional techniques and ‘imaginative’ accounting maneuvers that were, at best, deceptive and that sometimes crossed the line into fraud,” said the 'Oracle of Omaha'.

6) Family jewels: Buffett said most of Berkshire’s value resides in four businesses--three controlled and one in which it has only a 5.4 per cent interest--and termed them as jewels. These four businesses are its collection of insurance companies (GEICO, National Indemnity, etc.), BNSF (America’s largest railroad), Apple (most valuable company in its portfolio) and Berkshire Hathaway Energy ( in which it holds 91 per cent stake).

7) ‘Apple’ of the eye: The smartphone maker is the pride of Buffett’s portfolio as it “vividly illustrates the power of repurchases.” Berkshire’s investment in the company cost $36 billion. Since then, Berkshire has received $775 million annually as dividends and also pocketed an additional $11 billion by selling a small portion of its position. Incidentally, Berkshire still owns 5.4 per cent--more than the initial acquisition--because Apple keeps buying its shares back.

8) Never bet against America: Buffett reiterated his long held belief that one should never bet against the USA. He said in “its brief 232 years of existence, there has been no incubator for unleashing human potential like America.”

9) Berkshire biggest owner of fixed assets: Berkshire owns American-based property, plant and equipment – the sort of assets that make up the ‘business infrastructure’ of the country – with a valuation exceeding the amount owned by any other US company. Berkshire’s depreciated cost of these domestic ‘fixed assets’ is $154 billion. Next in line on this list is AT&T, with property, plant and equipment of $127 billion.

10) Annual meeting: Taking a break from tradition, the company will hold its meeting this year in Los Angeles, instead of Omaha. This year, on May 1st, the company is planning to hold the meeting and answer shareholder questions virtually. Yahoo will livestream the event at 1 pm Eastern Daylight Time. Q&A will begin at 1.30 pm and go until 5 pm.