Warren Buffett, 89, likes to wax poetic each year in his Berkshire Hathaway investment letter. Within it are dozens of tidbits on the markets, accounting, history, human behavior and much more. We highlight 10 of his latest musings here. (Image: Shutterstock/Chris Nicholls — ALM)
1. ANYTHING CAN HAPPEN: "Occasionally, there will be major drops in the market, perhaps of 50% magnitude or even greater. But the combination of the American Tailwind, ... and the compounding wonders described by [Adam] Smith, will make equities the much better long-term choice for the individual who does not use borrowed money and who can control his or her emotions. Others? Beware!" the Sage of Omaha said. (Photo: Shutterstock)
2. MIND THE GAAP: Buffett says Berkshire's $53.7 billion gain in '19 was tied to the '18 accounting rule requiring it to include the net change in unrealized gains and losses of securities in its reports. The market movement of 2019 “led to a crazy 1,900% increase in GAAP earnings! … Charlie [Munger] and I urge you to focus on operating earnings — which were little changed in 2019.” (Photo: Bloomberg)
3. GIVE RETAINED EARNINGS MORE LOVE: Buffett points to John Maynard Keynes’ views: “Over [time] ... , the real value of the property of a sound industrial investment is increasing at compound interest, quite apart from the dividends.” Buffett adds: “Though investors were slow to wise up, the math of retaining and reinvesting earnings is now well understood.” (Photo: Shutterstock)
4. 'FOREVER FOCUS': "During the past decade, Berkshire’s depreciation charges have aggregated $65 billion whereas the company’s internal investments in property, plant and equipment have totaled $121 billion. Reinvestment in productive operational assets will forever remain our top priority," Buffett said. (Photo: Shutterstock)


5. KEY BUYING CRITERIA: Berkshire "constantly seek[s] to buy new businesses that meet three criteria. First, they must earn good returns on the net tangible capital required in their operation. Second, they must be run by able and honest managers. Finally, they must be available at a sensible price." (Photo: Shutterstock)
6. DEALS AS MARRIAGES: "In reviewing my uneven record, I’ve concluded that acquisitions are similar to marriage: I would say that our marital record remains largely acceptable, with all parties happy with the decisions they made long ago. Some of our tie-ups have been positively idyllic. A meaningful number, however, have caused me all too quickly to wonder what I was thinking when I proposed," Buffett explained. (Photo: Bloomberg)
7. AN IMPORTANT DISTINCTION: With its two main investment approaches, there's "a hugely important accounting difference," he explains. "In our controlled companies, (... in which Berkshire owns more than 50% of the shares), the earnings of each business flow directly into the operating earnings that we report to you. What you see is what you get. In the non-controlled companies, in which we own marketable stocks, only the dividends that Berkshire receives are recorded in the operating earnings we report." (Photo: Shutterstock)
8. THE SUPERSTAR: "Our property/casualty (P/C) insurance business has been the engine propelling Berkshire’s growth since 1967, the year we acquired National Indemnity [which today] … is the largest P/C company in the world as measured by net worth," said the Oracle of Omaha. "Insurance is a business of promises, and Berkshire’s ability to honor its commitments is unmatched." (Photo: AP)
9. VALUE OF A TRUE ASSEMBLY: "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. These companies, also, earn their profits without employing excessive levels of debt," he said. (Photo: AP)


10. OPTIMISTIC OUTLOOK: Buffett says he and Munger base their optimism on five factors: "First, Berkshire’s assets are deployed in an extraordinary variety of wholly or partly owned businesses that, averaged out, earn attractive returns on the capital they use. Second, Berkshire’s positioning of its 'controlled' businesses within a single entity endows it with some important and enduring economic advantages. Third, Berkshire’s financial affairs will unfailingly be managed in a manner allowing the company to withstand external shocks of an extreme nature. Fourth, we possess skilled and devoted top managers for whom running Berkshire is far more than simply having a high-paying and/or prestigious job. Finally, Berkshire’s directors ... are constantly focused on both the welfare of owners and the nurturing of a culture that is rare among giant corporations.” (Photo: AP)

As he does each year in his letter to investors, Berkshire Hathaway Chairman Warren Buffett explained what’s driving the conglomerate’s short-term and long-term results.

He puts these performance figures in the context of the latest accounting rules, the current investing climate and “The American Tailwind” that he believes supports Berkshire’s continued success.

Berkshire’s Earnings

Berkshire had a return of 11% in 2019 vs. 31.5% for the S&P 500. In 2018, though, Berkshire had a 2.8% return vs. -4.4% for the S&P.

After taxes, the conglomerate earned $81.4 billion in 2019: $24 billion of operating earnings, $3.7 billion of realized capital gains and a $53.7 billion gain from an increase in the amount of net unrealized capital gains in its stocks (as per a new accounting rule).

The conglomerate’s $237 billion in public holdings at year-end included Apple ($73 billion), Coca-Cola ($23.5 billion), Delta Air Lines ($3.9 billion) and Amazon ($1.1 billion) — as well as a host of financial services companies.

Check out the gallery above to glean some pearls of wisdom from the yearly letter.

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