To The Moon

Yang Delong, chief economist of Qianhai Kaiyuan Fund,

At the end of February every year, what everyone looks forward to the most is Buffett's letter to shareholders. In the letter, Buffett will elaborate on his investment gains and losses in the past year and his investment experience in the past few decades, with frequent golden sentences.

Buffett’s letter to shareholders published this year is rich in content, including some of his investment gains and losses in the past 58 years.

1. Investing in stock is to be a good shareholder of the company

For example, he said that neither Charlie Munger nor I choose stocks but companies, because short-term market trends are unpredictable. Stocks, thus gaining compound interest growth.

The data shows that the $S&P 500(.SPX)$ has risen 247 times in the past 58 years, while Berkshire Hathaway's net worth has increased by about 37,800 times, which means that Buffett's investment performance in the past 58 years is 150 times that of the $S&P 500(.SPX)$. It can be said that this performance is unprecedented, and it may be unprecedented.

https://www.berkshirehathaway.com/letters/2022ltr.pdf

https://www.berkshirehathaway.com/letters/2022ltr.pdf

In fact, if we look at a single year, Berkshire Hathaway's annualized rate of return in history is about 20.1%, and the $S&P 500(.SPX)$ is a little over 10%. That is to say, Buffett outperforms the $S&P 500(.SPX)$ index every year 10%, but due to the power of compound interest, the gap has become 150 times in 58 years, which allows us to see the charm of value investing.

Especially in 2022, when inflation in the United States is high, all three major stock indexes will fall sharply. For example, the $S&P 500(.SPX)$ fell by 18%, while the Nasdaq index fell by nearly 30%. It is not easy for Berkshire Hathaway to achieve a positive growth of 4% in 2022, which once again shows that Buffett's performance in the bear market is perfect.

2. Buffett attaches great importance to value investing

All of this is inseparable from Buffett's long-term focus on performance and value investing. Last year, Buffett increased his layout in stocks with good performance such as Occidental Petroleum, while the proportion of technology holdings was relatively small, which made Buffett beat U.S. stocks for the second consecutive year in 2022.

The secret of Buffett's investment comes from his unswerving implementation of the concept of value investment. Only dancing with great companies is the greatest encouragement to me. The miracle of Buffett is that in the past 58 years, the correct investment decision has actually been made more than a dozen times, an average of once every five years, but it is enough to make Buffett a legend.

3. Buffett also made investment mistakes

He invested in some great companies, and at the same time most companies did not develop well and were marginalized. But he made big bets when he invested in great companies, and made small bets when he made a mistake, so his overall performance was upward.

For example, he didn't invest in airline stocks before, but later he changed his original philosophy and invested in airline stocks. However, when the epidemic broke out in 2020, aviation stocks plummeted, and he believed that the epidemic may take three or four years to overcome. It turned out that he was right afterwards. The epidemic has indeed passed for three years, and the aviation industry has suffered a major impact.

Buffett admitted his mistake and cut the meat in time to stop the loss. Although he lost money, because he didn't hold a heavy position, he held only $5 billion , which was a small proportion compared to its total account number of more than $400 billion. When you are wrong, the loss is relatively small. And its heavily held $Apple(AAPL)$ has contributed $100 billion in net profit to him, which accounts for more than 40% of Buffett's holdings. It can be said that for certain opportunities, it will place heavy bets on high-quality companies. In this case, Buffett's long-term Investment performance can continue to achieve compound interest growth.

4. Buffett specifically emphasized the concept of operating profit

In 2022, $Berkshire Hathaway(BRK.A)$ $Berkshire Hathaway(BRK.B)$ 's operating profit will be $30.7 billion, the best record in history, and in 2021 it will be $27.4 billion.

However, the net profit attributable to Berkshire Hathaway shareholders will turn from profit to loss in 2022, that is, a loss of $22.8 billion for the whole year of 2022.

The main reason is that the current accounting rules implemented in the United States need to add the floating loss of holding stocks: In 2022, Berkshire Hathaway’s investment and derivatives business lost 53.6 billion, which is the root cause of the company’s annual net loss .

U.S. stocks will fall sharply in 2022, so $Berkshire Hathaway(BRK.A)$ , which has a net position of more than $200 billion, will inevitably face a shrinking market value. In fact, it is not the loss of Berkshire Hathaway's operating profit, but according to the new accounting rules, there is indeed a loss of net profit. Everyone must be clear about this.

5. Buffett is not afraid of volatility to ride through the bear markets

As mentioned above, although stock price fluctuations happen every day, even if the U.S. stock market plummeted due to the epidemic in March 2020, Buffett was very calm at that time.

He said that the companies I invested in were doing well and operating normally. I hold There is no shortage of shares in the company, so what does the decline in the stock price have to do with me?

It is precisely this calm attitude that Buffett was not affected by stock price fluctuations and successfully survived the period of market slump. It can be said that it is Buffett, the stock god, who values the value of the company itself more than short-term stock price fluctuations, so he can calmly face market fluctuations. This is also very worth learning for our investors.

6. Berkshire Hathaway is essentially a collection of shares in many great companies

The stocks he holds are basically the most profitable and largest companies in the United States, belonging to corporate giants, such as $American Express(AXP)$ , $Bank of America(BAC)$ , $Chevron(CVX)$ , $Coca-Cola(KO)$ , $Hewlett Packard Enterprise(HPE)$ , $Moody's(MCO)$ , $Occidental(OXY)$ and $Paramount(PGRE)$ worldwide.

Top 10 Berkshire Hathaway Holdings, source: https://hedgefollow.com/funds/Berkshire+Hathaway

In addition to these eight listed companies, Berkshire Hathaway also holds two unlisted companies, including 100% of Burlington Northern Santa Fe Railroad Transportation Company, and Berkshire Hathaway 92% of the shares of energy companies, Buffett said that if the two companies go public, they will also be included in the top 500 companies.

It can be seen that Buffett actually invests in the secondary market through equity investment. Regardless of whether the company is listed or not, Buffett only values whether the company can bring him good profits and whether it can have long-term growth.

This is Burke The reason why Hill Hathaway can be built to last. And he has an advantage over doing business directly, that is, if the company's operations do not meet expectations, he will sell them in time. For example, he once invested in$IBM(IBM)$ , but later IBM did not meet expectations in the era of mobile Internet, so he sold IBM The warehouse was cleared, and Apple was configured later, making the right decision. So Buffett grasped the crux of the problem, which is to be a good shareholder of the company.

7. Buffett's prudent risk management: cash is very important

Buffett is also very cautious in terms of risks, as Berkshire Hathaway still holds a large amount of cash and U.S. debt. As of the end of 2022, $Berkshire Hathaway(BRK.A)$ cash reserves are $128.6 billion. Holding cash and U.S. Treasury bonds, on the one hand, is to wait for opportunities to buy good companies.

For example, when there is a stock market crash, Buffett will sell. On the other hand, avoid the risk of capital chain when financial panic occurs.

Buffett said that our CEO will always be the chief risk officer, even though he doesn't have to. It is Buffett who has always maintained a high position in cash investment, which has played a key role in escaping countless moments of market crisis and stock market crashes.

This is the same as a football game. It is not only about offense, gaining income through investment, but also about defense. It is necessary to guard the company's gate and control risks.

8. Buffett takes stock buybacks very seriously

U.S. stocks attach great importance to stock repurchases, because when the company’s stock price plummets, repurchases can increase earnings per share and improve shareholders’ interests. Therefore, Berkshire Hathaway has, over the past few decades, Almost every year, a certain amount of cash is used for stock repurchases.

Last year, the amount of repurchases was relatively small because Buffett believed that there were more cheap targets in the market that were more cost-effective than repurchasing his own company, because Berkshire Hathaway’s stock price has indeed risen very high. By repurchasing and then canceling the shares, the company's earnings per share can be increased, thereby rewarding investors, so canceling through repurchases is also a way of dividends.

In addition, it has also been confirmed in Buffett's letter to shareholders that Buffett's shareholder meeting will be held in Omaha from May 5th to 6th this year, and both Buffett and Munger will attend. Buffett has insisted on holding the offline Berkshire Hathaway annual meeting for many years, sharing value investment concepts with tens of thousands of investors from all over the world. Let keep an eye on it.

Source: https://www.bloomberg.com/

What's your reading and understanding from Warren Buffet's Annual letter？