In a special section of the annual report, ahead of his letter to shareholders, Warren Buffett pays tribute to Charlie Munger, calling him the “architect” of Berkshire Hathaway, while Buffett “acted as the ‘general contractor’ to carry out the day-by-day construction of his vision.”
WARREN BUFFETT WATCH Shareholders Letter Special Edition
‘Charlie Munger – The Architect of Berkshire Hathaway’
In a special section of the annual report, ahead of his letter to shareholders, Warren Buffett pays tribute to Charlie Munger, calling him the “architect” of Berkshire Hathaway, while Buffett “acted as the ‘general contractor’ to carry out the day-by-day construction of his vision.”
He recounts how Munger, who was “part older brother, part loving father,” told him “correctly!” that he had made a “dumb decision” when he bought control of what was a troubled Massachusetts textile mill in 1965.
Munger, however, told him how to fix his mistake.
“‘Warren, forget about ever buying another company like Berkshire. But now that you control Berkshire, add to it wonderful businesses purchased at fair prices and give up buying fair businesses at wonderful prices.
‘In other words, abandon everything you learned from your hero, Ben Graham. It works but only when practiced at small scale.’ With much back-sliding I subsequently followed his instructions.”
Buffett writes that Munger “never sought to take credit for his role as creator but instead let me take the bows and receive the accolades.”
“In the physical world, great buildings are linked to their architect while those who had poured the concrete or installed the windows are soon forgotten.
“Berkshire has become a great company.
“Though I have long been in charge of the construction crew; Charlie should forever be credited with being the architect.”
Buffett’s tribute is especially fitting given Munger’s great interest in designing buildings, although his plans for a windowless dorm at a California university did generate some controversy, which he dismissed with his usual bluntness.
‘Secret’ financial stock buying accelerated in the fourth quarter
Buffett’s letter to shareholders is just one section of a much longer 152-page annual report from the company.
On the 109th page, there is a small clue that appears to be connected to the stock Berkshire has been buying, but not including (with the SEC’s permission), in its portfolio disclosures for the third and fourth quarters.
The cost basis, or purchase price, of its holdings of “banks, insurance and finance” equities increased by $2.4 billion in the fourth quarter compared to the third quarter, without a corresponding purchase, or purchases, in its 13F report.
That’s even more than the $1.2 billion jump in the third quarter, indicating that Berkshire accelerated its purchases toward the end of the year.
Since the company still hasn’t revealed its new holding(s) to prevent “copycats” from driving up the price, it is presumably still buying in the current quarter.
Pilot purchase price revealed
Another secret was revealed in the 10-K.
Berkshire says it paid $2.6 billion in January to buy the 20% of Pilot Travel Centers it did not already own.
The amount was not included when the company and the Haslam family, which created the truck stop chain, announced a settlement of their lawsuits over how the price would be calculated.
‘Worse than useless’
As he often does, Buffett emphasizes that the “net earnings” number that “quickly gets transmitted throughout the world” ($37.6 billion for Q4) is “worse than useless” because accounting rules require that unrealized capital gains and losses be included. “That at times can exceed $5 billion a day” as market prices rise and fall.
Operating earnings, Buffett’s preferred measure, increased by 28% to $8.5 billion, compared to $6.6 billion in last year’s fourth quarter, with help from big gains for its insurance operations.
No ‘eye-popping performance’ for big Berkshire
Buffett says Berkshire’s enormous size is making it very difficult to acquire a business that is “capable of truly moving the needle” at the company.
The “handful” of U.S. companies that are big enough “have been endlessly picked over by us and by others.”
And outside the U.S., “There are essentially no candidates that are meaningful options for capital deployment at Berkshire.”
As a result, “We have no possibility of eye-popping performance.”
The investment rule that ‘will not change’
Berkshire will “never” risk permanent loss of capital. “Thanks to the American tailwind and the power of compound interest, the arena in which we operate has been – and will be – rewarding if you make a couple of good decisions during a lifetime and avoid serious mistakes.”
Buffett assures shareholders that “Berkshire is built to last” and can “handle financial disasters of a magnitude beyond any heretofore experienced” with cash “far in excess of what conventional wisdom deems necessary.”
At the end of the fourth quarter, that number was a record $167.6 billion, up from $157.2 billion three months before.
Two investments ‘we expect to maintain indefinitely’
While Buffett repeated that Berkshire “has no interest in purchasing or managing” Occidental Petroleum (as he first said at last year’s annual meeting), “We particularly like its vast oil and gas holdings in the United States, as well as its leadership in carbon-capture initiatives, though the economic feasibility of this technique has yet to be proven.”
The companyalso likes its “passive and long-term” interest, currently around 9%, in five Japanese “trading house” stocks: Itochu, Marubeni, Mitsubishi, Mitsui, and Sumitomo.
Buffett says they “follow shareholder-friendly policies that are much superior to those customarily practiced in the U.S.,” with all five reducing their outstanding shares “at attractive prices.”
Earnings at the railroad “declined more than I expected, as revenues fell.”
While fuel costs dropped, “Wage increases, promulgated in Washington, were far beyond the country’s inflation goals. This differential may recur in future negotiations.”
He acknowledges that profit margins have “slipped” compared to its competitors, but “I believe that our vast service territory is second to none and that therefore our margin comparisons can and should improve.”
“A century from now, BNSF will continue to be a major asset of the country and of Berkshire. You can count on that.”
A burned tuck sits in front of burned homes in a mobile home park that was destroyed by wildfire in Phoenix, Oregon, September 20, 2020. REUTERS/David Ryder
BHE was an “even more severe earnings disappointment.”
Buffett warns “the regulatory climate in a few states (California and Hawaii) has raised the specter of zero profitability or even bankruptcy.”
Berkshire’s Pacific Gas and Electric faces billions of dollars in judgments after being found responsible for some forest fires.
“It will be many years until we know the final tally from BHE’s forest-fire losses and can intelligently make decisions about the desirability of future investments in vulnerable western states.”
He concedes that he “did not anticipate or even consider the adverse developments in regulatory returns and … made a costly mistake in not doing so.”
No mention of Todd and Ted
Disappointment for anyone hoping Buffett would discuss the performance of investments being handled by portfolio managers Todd Combs and Ted Weschler.
Like last year, neither name appears in today’s Buffett letter.
