Buffett is Betting on America

A billion here and a billion there. Soon enough we’re talking real money.

And in 2020 Buffett’s Berkshire Hathaway made $42.5 billion. Those operating earnings include a $11 billion loss. Unbelievable.

Today we’ll do a quick deep dive in Buffett's Annual Shareholder Letter. If you’d like, you can watch my video summary on YouTube or read his 14-page letter here.

Shh..the Oracle is Speaking

Let’s start from the beginning. Berkshire Hathaway comprises two main businesses: operating and investing.

Buffett’s operating arm has wholly owned businesses by Berkshire. All of their operating earnings flow back to the holding company and Buffett reallocates the capital across the board. By reinvesting free cash flow from one business, let’s say candy, into a capital intensive one, like energy, has given him a competitive advantage in business.

“For those reasons, our conglomerate will remain a collection of controlled and non-controlled businesses. Charlie and I will simply deploy your capital into whatever we believe makes the most sense, based on a company’s durable competitive strengths, the capabilities and character of its management, and price.”

Last year his operating earnings fell by 9% but still made $21.9 billion in profit. Not bad. This included a $11 billion loss (!) from a previous deal, Precision Castparts. You may remember this as Buffett’s last major acquisition in 2016 for $37 billion. Yeah well even the great ones make mistakes.

He overpaid for a great business. The recent changes in the aerospace industry worked against him. And Buffett likes to remind his investors that this wasn’t his first or last mistake.

“Investing illusions can continue for a surprisingly long time. Wall Street loves the fees that deal-making generates, and the press loves the stories that colorful promoters provide. At a point, also, the soaring price of a promoted stock can itself become the “proof” that an illusion is reality.”

Buffett’s competitive advantage

Now let’s talk about his investment portfolio. This is what investors want to hear. Today Berkshire’s marketable securities are worth $281 billion. These are non-control positions like Coca-Cola and American Express. They do not feed to the bottom line and show up as unrealized gains. But his real crown jewels are the following core assets.

Insurance is sexy

Today, most of Berkshire’s value resides in four core businesses: three controlled and one non-controlled.

First let’s discuss the property/casualty insurance business. His largest and most valuable asset.

Combined with the free cash flow from his non-insurance operating businesses, his insurance companies have ample capital. In fact, this fortress balance sheet allows Berkshire to make more equity-focused investments for the long-term. Something most insurers are not capable of doing. Competing insurance companies must focus on bonds, for both regulatory and credit-rating reasons.

His insurance business has far more capital deployed than any of its competitors worldwide. You may know some of his insurance businesses like Geico.

Railroads and Apples

Berkshire’s second and third most valuable assets are BNSF and Apple.

BNSF or Burlington North Santa Fe, was one of his last few major acquisitions. Today BNSF provides 15% of the country’s freight volume. This asset heavy business made $8.3 billion last year. Remember, America isn’t building anymore railroads at the moment. It took 150 years for the industry to mature in which Buffett has a monopoly.

In 2016, Buffett made his first purchase of Apple stock. Today he owns 5.4% of the company. In fact, Buffett only purchased 5.2% of the company but because of Apple’s buyback program, Berkshire’s equity stake increased. This doesn’t include the near $1 billion in dividends he’s received in five years as well.

The last major business is Berkshire Hathaway Energy.

While everyone loves asset-light, high margin businesses, someone still needs to buy capital intensive assets. And last year, Berkshire invested $18 billion to upgrade the company’s outdated power grid. On top of that, this utility business pays NO dividends to the parent company. Buffett reinvests all the proceeds to keep growing this business.

Today Berkshire Hathaway owns more US infrastructure assets than any other company. These fixed assets are worth $154 billion while the runner-up is AT&T with only $127 billion in its portfolio.

Although Berkshire didn’t make any major purchases in 2020, the company did have a record level of share repurchases. Spending $24.7 billion in the process. Let’s dive into this next.

Increasing equity through buybacks

Buffett is all about equity ownership. In the past he’s been known to buyback shares at a 10% discount to intrinsic value. If he can’t find any good outside investments, he’ll buy back Berkshire stock.

Remember, it was Apple’s buyback program that increased Berkshire’s ownership stake from 5.2% to 5.4%.

So last quarter, Berkshire bought back $9 billion of its stock. And another $9 billion in Q3. Bringing Berkshire’s total buyback for 2020 to $24.7B.

That boosts shareholders' ownership "in all of Berkshire's businesses by 5.2% without requiring you to so much as touch your wallet,"

Never bet against America

Buffett continues to be long America. He keeps purchasing more critical assets to secure Berkshire’s position in America’s infrastructure.

Look, I’ve read all Buffett’s shareholders letters since 1965. I recommend it to anyone interested in finance. They are a mini-MBA in investing. In fact, several notable investors only recommend reading Buffett’s shareholder letter to master value. He breaks down the simplest ideas into a few sentences. Never complicates a topic or invests in anything he doesn’t understand.

Again, you can read his entire 2020 shareholder letter here. But I also recommend reading his first 50 letters which are compiled in this book.

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