Buffett extols value of stock bets in year without big deals
NEW YORK — Warren Buffett sought to justify the importance of his $248 billion stock portfolio, saying the investments are more than just “dalliances” with the companies he takes stakes in.
The billionaire investor spent a portion of his annual shareholder letter, released Saturday, detailing how an accounting difference between his stock picks and his outright business takeovers creates a “standout omission” in Berkshire Hathaway Inc.’s financial results. The conglomerate’s equity investments will produce capital gains that are at least equal to Berkshire’s share of the individual companies’ retained earnings, Buffett argued.
“Overall, the retained earnings of our investees are certain to be of major importance in the growth of Berkshire’s value,” Buffett said in the letter. For its equity investments, “only the dividends that Berkshire receives are recorded in the operating earnings we report. The retained earnings? They’re working hard and creating much added value, but not in a way that deposits those gains directly into Berkshire’s reported earnings.”
The value of Buffett’s equity portfolio last year increased about 44%, helped by the best year for Apple Inc. stock since 2009 and gains on holdings such as Bank of America Corp. and Coca-Cola Co. His own Berkshire shares didn’t fare quite as well, posting their worst annual underperformance relative to the S&P 500 Index in a decade.
Buffett has been hunting for ways to deploy his $128 billion cash pile to generate higher returns, but has struggled to find a massive deal amid “sky-high” prices. He ended up taking another path in 2019, spending $5 billion on repurchases and being an overall net buyer of the stocks of other companies.
Here are some other take-aways from Buffett’s annual letter and Berkshire’s fourth-quarter earnings report:
■ Berkshire gives preview of life after Buffett
Buffett waited until the last page to reveal a big change: Investors will be hearing more from top lieutenants Ajit Jain and Greg Abel. The pair, seen as the top contenders to eventually replace Berkshire’s 89year-old CEO, have often remained behind the scenes, tending to Buffett’s vast collection of businesses.
■ Buffett spends record $2.2 billion on buybacks
The Oracle of Omaha kicked his stock-buyback program into high gear, spending $2.2 billion on repurchases in the last three months of 2019, the most ever in a single quarter — and said he’s looking to buy even more.
■ Berkshire’s earnings hurt by insurance losses
Berkshire’s operating earnings fell to $4.42 billion in the fourth quarter, down 23% from a year earlier, driven by underwriting losses at its namesake reinsurance group.
■ Buffett chides CEOs for wanting cocker spaniels
Buffett often uses his annual letter to talk not just about Berkshire, but also the wider corporate environment. This year, Buffett, who’s served as a director at 21 publicly traded firms over the years, complained that too many companies seek board members who won’t challenge a CEO’s decisions.
“When seeking directors, CEOs don’t look for pit bulls,” Buffett said in Saturday’s letter. “It’s the cocker spaniel that gets taken home.”