Warren Buffet is known as the “Oracle of Omaha,” because when he talks about the markets and investing, people tend to listen.
On February 22, 2020, Buffett delivered his annual letter in which he discusses the annual performance of his company Berkshire Hathaway and its future. Buffett also urged investors to pay closer attention to company operations and less on short-term earnings. Here are highlights from the letter.
The new accounting rule
Berkshire Hathaway earned $81.4 billion in 2019, which includes $53.7 billion in net unrealized capital gains in the stocks owned by the company. However, Buffett warned against a new accounting rule which requires companies to disclose unrealized capital gains and losses.
An unrealized gain is when an investor owns stock in a company whose stock rises, but does not sell that stock. In contrast, a realized gain is when the stock rises and the investor sells, thereby locking in his gains. An unrealized loss occurs when a stock falls, and the investor doesn’t sell.
Rather than focus on earnings that include unrealized gains and losses, Buffett urged shareholders to focus on operating earnings. Operating profit is the profit a company makes, excluding income from investments and derivatives, which are contracts between buyers and sellers based on an underlying stock, bond, or some other asset. Berkshire Hathaway saw $24 billion in operating earnings in 2019.
The rules of buying a business
Buffett also explained that an important part of his approach to business is investing in and acquiring other businesses. The CEO revealed the three qualifications he seeks in a company when he considers purchasing it.
- The business must earn “good returns” on the money it requires to function.
- The business must be run by “able and honest managers.”
- The business must be reasonably priced.
Buffett said that it is rare for a company to meet all those standards. Berkshire Hathaway did not buy a major company for the third year in a row, according to Business Insider.
In addition to companies that Berkshire owns outright, it is a major shareholder in Apple, American Express, and Delta:
|Company||Percentage that Berkshire Hathaway Owns|
|Delta Air Lines||11.0%|
Source: Berkshire Hathaway
You can loosely follow Buffett’s rules when you’re researching stocks and ETFs in which you want to invest.
On what makes a good board of directors, Buffett emphasized the importance of business experience, and emphasized his own directorship at 21 different companies over the course of his career. While Buffett celebrated the increased presence of women in boardrooms since the 1960s, he also said that this advancement remains a “work in progress.”
Buffett also explained the challenges of finding the right people to sit on a board of directors. He wrote: “we will continue to look for business-savvy directors who are owner-oriented and arrive with a strong specific interest in our company.”
Buffett also mentioned that different directors can bring different skills to the table, joking that he would never participate in Dancing with the Stars.
The future and potential successors
Finally, Buffet broached the subject of his age and the age of his business partner Charlie Munger and potential successors. Buffett is 89 years old and Munger is 96 years old.
The CEO assured shareholders that Berkshire Hathaway has a plan for life after Buffett and Munger and that he trusts company leadership to lead the company when he decides to step down from his position.
Buffett also alluded to a couple of different possible successors, including Ajit Jain and Greg Abel.
More background on Warren Buffett and Berkshire Hathaway
Buffett started out small, working a paper route as a boy in Nebraska, and holding various odd jobs, until he eventually bought a struggling Massachusetts cloth mill called Berkshire Hathaway in 1962.
Much of Berkshire Hathaway’s success has been based on Buffett himself, who built the company from a struggling cloth spinning company, to its current gargantuan size. Buffett is currently worth $87.5 billion.
Berkshire Hathaway owns many well-known companies including:
|Companies Owned by Berkshire Hathaway|
|Fruit of the Loom|
*Source: Berkshire Hathaway
If you’re inspired by Warren Buffett, you can get started investing with any amount on Stash.
With Stash, you can purchase fractional shares of stock in companies including Berkshire Hathaway.
You can learn more about all of the ETFs and single stocks that Stash offers.