My Ten Takeaways from the Berkshire Hathaway 2019 Annual Shareholder Letter

The Berkshire Hathaway annual shareholder's meeting was held last month, so I thought it appropriate to highlight my takeaways from the annual shareholder's letter that's part of the annual report. There are ten statements from the letter that I think can be used by individual investors or in general financial planning. In each case, I've listed the quote from the shareholder's letter, then my interpretation or conclusion. They are (in the order in which they were presented in the letter):

1. “Our advice? Focus on operating earnings, paying little attention to gains or losses of any variety. My saying that in no way diminishes the importance of our investments to Berkshire. Charlie and I expect them to deliver substantial gains, albeit with highly irregular timing.”

This is typical Buffett advice which you can apply to all your investments, not just Berkshire Hathaway. If the business is delivering a growing stream of healthy operating earnings (the return from the core of the company), then you can safely ignore how Mr. Market values the investment. Equities will go up and down, but keep your eye on the actual earnings of the company.

2. “A few of our trees are diseased and unlikely to be around a decade form now. Many others, though, are destined to grown in size and beauty.”

Another Buffett-ism that can be applied to your investments outside Berkshire. If you practice asset allocation (dividing your portfolio into percentages allocated to stocks, bonds, cash, real estate, etc.), then you’ll always have losers – diseased trees. And you’ll never be correct with each investment, you’ll have your share of misses. But if you pay attention to the entire “forest” – you’ll quickly realize that your winners will outpace those misses in the long run.

3. “In recent years, the sensible course for us to follow has been clear: Many stocks have offered far more for our money than we could obtain by purchasing businesses in their entirety…Charlie and I believe the companies in which we invested offered excellent value, far exceeding that available in takeover businesses.”

This is as close to a market call as you’ll ever hear Warren Buffett make. What he’s saying is that it’s much cheaper to put his money into publicly traded companies in the stock market than it is to buy an entire company. Despite the length of this bull-market (more than ten years), Buffett is saying he can still find bargains.

4. “For example, managements sometimes assert that their company’s stock-based compensation shouldn’t be counted as an expense. (What else could it be – a gift from shareholders?)”

This is a warning against taking “adjusted EBITDA” at face value. Too many companies calculate their earnings, then “adjust” them by removing things like the options or restricted stock shares they pay to executives. If you see these types of things in an annual report for a company you own, run for the hills (right after you sell the stock).

5. “But I will never risk getting caught short of cash.”

Warren is referring to the company finances, and making sure it can survive “external calamities,” it’s a good reminder for your own financial picture. Always have an emergency fund, in cash, to survive your own calamities.

6. “This happening materially increased the intrinsic value of the Berkshire shares you and I own. The same dynamic, moreover, enhanced the intrinsic value of almost all of the stocks Berkshire holds.”

These are comments on the latest tax changes – meaning lower taxes increase the amount of earning Berkshire will generate, thus increasing the value of the shares. The same increase will also occur in each of the companies Berkshire holds shares in.

7. “At rare and unpredictable intervals, however, credit vanishes and debt becomes financially fatal.”

Again, this is a warning that it’s much better to have too much cash on hand rather than too much debt. Kind of the opposite of the warning above.

8. “All Berkshire shareholders owe Tony their thanks. I head the list.”

Management matters. When you’re looking at which stocks to buy, or which ones already in your portfolio that should be kept – don’t just look at balance sheets and income statements. The management team that runs the company makes a huge difference in culture and performance.

9. “Charlie and I do not view the $172.8 billion detailed above as a collection of ticker symbols – a financial dalliance to be terminated because of downgrades by “the Street,” expected Federal Reserve actions, possible political developments, forecasts by economists or whatever else might be the subject du jour.”

Nor should you. When you buy shares in a company, you are becoming a part-owner. You should act like an owner.

10. “Over time, however, investment performance converges with business performance.”

This is classic Buffett. And it should be prominently displayed somewhere that you’ll see before you make every trade. The market may under- or over-value a company at times, but eventually, the price finds its level based on business performance – how much cash is generated.

The shareholder's letter in its entirety can be found at the Berkshire Hathaway website (as well as past communications going back to 1977) at https://www.berkshirehathaway.com/letters/2018ltr.pdf .