5 key takeaways from Warren Buffett’s shareholder letter

<p>Warren Buffett released his annual announcement to Berkshire Hathaway (NYSE: BRK.A, NYSE: BRK.B) shareholders on Saturday, in a 14-page letter that remained true to Oracle of Omaha’s popular nature and sage investment advice.

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In particular, the 89-year-old Buffett spent much of his letter talking about Berkshire’s future after his death, giving the clearest picture yet of what investors can expect once Buffett and Berkshire’s vice president, 96-year-old Charlie Munger, are no longer at the helm.

Here are five things we learned from Buffett’s annual letter to shareholders, including what Berkshire might look like in a post-Buffett world.

Buffetts Estate will not sell the Berkshire share

The future of Berkshire Hathaway and its massive holdings has been a concern for many years as Buffett and Munger advance in age. No one likes to think of Berkshire after Buffett, but the end is inevitable. It’s only Buffett’s responsibility to deal with it.

“Your business is 100% prepared for our departure,” says Buffett.

“Today, my will specifically calls on its executors – as well as the trustees who will succeed in managing my property after the will is closed – not to sell any Berkshire shares. My will also absolves both executives and trustees from responsibility for maintaining what will obviously be an extreme concentration of assets.

He writes that he has included some follow-up instructions in the will. Every year, his executors and managers will convert some of his A shares into B shares. Then they will distribute these B shares to various foundations. He estimates that in 12-15 years, all his shares will move into the market.

Buffett says 99% of his wealth consists of Berkshire shares.

His potential successor will play a bigger role

Buffett announced that Berkshire’s chief operating officers, Ajit Jain and Greg Abel, will take on public roles at Berkshire’s annual meeting on May 2. Jain is Berkshire’s Vice President of Insurance. Abel is the CEO of Berkshire Hathaway Energy and Vice President of Non-Insurance.

Both will take questions from investors – a significant change from previous annual meetings.

“That change makes a lot of sense. They are outstanding individuals, both as managers and as people, and you should hear more from them, ”Buffett writes.

It is unlikely that Buffett will publicly support Jain and Abel as his successors. But the fact that they are taking on a more public role is still important.

Buffett doubles on shares

Berkshire’s largest holdings include $ 248 billion in stocks in 15 major capital firms where it has no controlling influence. These companies include American Express (NYSE: AXP), Coca-Cola (NYSE: KO) and Southwest Airlines (NYSE: LUV).

“What we see in our holdings is rather a composition of companies that we partly own and that on a weighted basis earn more than 20% of the tangible net capital required to run their business,” Buffett writes. “These companies also earn their profits without using excessive debt levels.” Says Buffett.

Buffett goes on to say that even if he does not try to forecast interest rates, he is confident in equity. He and Munger believe that equities will surpass long-term fixed-rate debt rates well into the future.

Buffett wants to buy back more stock

Berkshire repurchased $ 2.2 billion in stock at the end of last year, according to the annual report. In total, it repurchased $ 5 billion in inventory in 2019. That’s about 1% of the company.

Buffett says Berkshire buys its own stock when it sells for less than it’s worth. “If the price-to-value rebate (as we appreciate it) expands, we will probably become more aggressive when it comes to buying shares. However, we will not support the stock at any level. ”

That said, he also called out to all shareholders who have at least $ 20 million in Berkshire shares. This means that the numbers still make sense in Buffett’s eyes.

Some harsh observations on boards

Buffett devotes much of his letter to the lucrative nature of corporate boards, noting that a meeting often comes with a salary of $ 250,000 or $ 300,000 per year and stock options. It is far from, he says, from the 1960s when Buffett received $ 100 a year to direct Portland Gas Light.

Buffett states that directors’ salaries are so lucrative that people who strive to collect have incentives to follow the CEO’s wishes. Many try to stay in his or her good graces, all with the hope that one day they will have a meeting with another company. Such a second meeting would result in a salary of $ 500,000 or $ 600,000 per year.

“When looking for board members, the CEO is not looking for pit bulls,” Buffett writes. “It’s the cocker spaniel that is taken home. Despite the illogicality of everything, the director for whom the fees are important – actually in demand – is classified almost universally as “independent”, while many board members who have assets that are significantly linked to the company’s well-being are considered lacking in independence. ”

Buffett notes companies when a board consists of people who have their own skin in the game.

Of course, paid-with-my-own-money-ownership does not create wisdom or secure business smart. Still, I feel better when board members in our portfolio companies have experienced buying shares with their savings, rather than just receiving support. ”

Patrick Sanders is a freelance writer and editor in Maryland, and was from 2015 to 2019 head of the Investment Advisory Department at US News & World Report. Follow him on Twitter at @ 1patricksanders. At the time of writing, he had no position in any of the above-mentioned securities.