This is the worst day for the markets since December 2018 with fears surrounding the outbreak of the coronavirus. This is not a reason to panic sell. If we know our history, we will see that such panic sells are always followed by days of massive repurchase. As for our portfolio, we are doing better than the market even if we are down as well. Our bond positions $TLT and our $GOLD miner Polymetal, and arbitrage positions are playing their roles.
Such a bad day for the markets certainly makes Warren Buffett happy as this is when he becomes greedy. Let's see what he had to say in his last letter to shareholders published last Saturday.
Warren Buffett's Annual Letter to Berkshire Hathaway Shareholders 2020
Berkshire Hathaway $BRK.B filed their annual report on Saturday along with Warren Buffett's letter to shareholders. Let's talk about the main points.
The overall gain of Berkshire Hathaway stock since 1965 is 2.4 million percent while the S&P 500 $SPX500 gained only 15000%. On a yearly basis, Berkshire Hathaway gained 20.3% while the S&P 500 gained 10.0%, which means, if you had $10 000 in Berkshire Hathaway in 1965, you would have $215 million today and only $1.7 million with the S&P 500. You don't need unrealistic gains of 90% per year. With only 20% a year, you can be a great investor and 20% a year is hard to achieve.
These gains come from compound interest and compound interest itselfs come from retained earnings according to Warren Buffett. He is only required to give us the dividends as earnings on the income statement but he tells us that a business reinvesting its earnings is more important and he shows in the letter how Apple $AAPL, for example, paid Berkshire Hathaway $773 million in dividends last year but the retained earnings are $2.5 billion. These retained earnings will be used to grow the business and this will eventually add to the capital gains in the books of Berkshire Hathaway and over the long-term compound to be a fortune.
The GAAP net income of Berkshire Hathaway in 2019 were $81 billion, which is wrong as it takes into accounts non-realized capital gains on their stock investments. These are not real earnings. Whenever you are anlayzing a company you need to make sure you understand what is the real earnings. Warren Buffett prefers looking at operating income or cash flow.
Berkshire Hathaway right now has $129 billion in cash and cash equivalents, which Warren Buffett refers to as float. How do they use the float? First invest in businesses they already own, then buy whole companies or buy stocks. Here's what Warren Buffett looks for in companies:
1. High returns on net tangible assets
2. Good management
3. Sensible Price
Warren Buffett says that they don't try to predict interest rates but if interest rates and taxes remain low, stocks remain a better investment compared to bonds.
Warren Buffett also talks about the future of Berkshire Hathaway. In the next annual meeting, questions will be asked not just to Charlie Munger and him but also to Ajit Jain and Greg Abel.
Warren Buffett also talked about board of directors.
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