Buffett issues 2021 open letter to shareholders

Mr. Buffett has just published his annual open letter to shareholders on Berkshire Hathaway's official website. The performance of Berkshire's stock price in the past year, five years and ten years is not as good as that of the U.S. stock market. Warren Buffett's cautious attitude towards new investment and the company's uneven acquisition record in the past decade are topics of concern to the outside world. In addition, whether Berkshire will change its position to pay dividends, as well as the succession plan of Buffett, has always been the focus of attention from all walks of life.
In addition, in the face of global investors who, in the past year, have caught up with the number of U.S. stock circuit breakers only once less than his own five, he will send an open letter to shareholders in 2021. How can he discuss this unprecedented global economic and market situation? Investors all over the world hope to learn about the latest research and judgment of this legendary investor, and help them predict the future economy and market. The full text of this 15 page letter is translated and attached to help investors, especially value investors, retain this "biblical" learning material.
According to convention, the letter begins with a comparison between Berkshire's performance and that of the S & P 500 index. In 2020, the growth rate of Berkshire's market value per share is only 2.4%, while the growth rate of the S & P 500 index is as high as 18.4%. Berkshire lost 16 percentage points. But in the long run, from 1965 to 2020, the compound annual growth rate of Berkshire's market value per share is 20.0%, which is significantly higher than that of the S & P 500 index by 10.2%. From 1964 to 2020, the growth rate of Berkshire's market value is an astonishing 2810526%, which is more than 28105 times, while that of the S & P 500 index is 23454%, which is more than 234 times.
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The comparison between Berkshire's performance and US stock benchmark: the performance of S & P 500 index
Note to the above table: the data in the table are normal calendar year data, except for the following years: 1965 and 1966 are as of September 30 of that year, while 1967 is 15 months in total, ending on December 31 of that year.
Warren Buffett's 2021 open letter to shareholders
Berkshire Hathaway to shareholders:
According to GAAP, Berkshire will make a profit of $42.5 billion in 2020. The four components of this figure are US $21.9 billion in operating profit, US $4.9 billion in realized capital gains, US $26.7 billion in gains from the increase in net unrealized capital gains in our shares, and finally US $11 billion in losses due to write downs in the value of some of our subsidiaries and subsidiaries. All items are listed on a after tax basis.
Operating profits are the most important, even if they are not the largest item in our total GAAP. Our focus at Berkshire is to increase this part of our revenue and acquire large, well positioned businesses. But last year, we didn't achieve either: Berkshire didn't make a big acquisition, and operating profit fell by 9%. However, by retaining earnings and repurchasing about 5% of the shares, we did improve Berkshire's intrinsic value per share.
The two components of GAAP related to capital gains or losses (whether realized or unrealized) fluctuate repeatedly every year, which reflects the volatility of the stock market. Regardless of today's data, my long-term partner Charlie Munger and I firmly believe that over time, Berkshire's investment income will be considerable.
As I've stressed many times, Charlie and I see Berkshire's listed shares (worth $281 billion at the end of last year) as a collection of businesses. We don't control the operations of these companies, but we do share their long-term prosperity in proportion. However, from an accounting point of view, that part of our profits is not included in Berkshire's earnings. On the contrary, only the dividends paid to us by these investees will be recorded in our books. According to generally accepted accounting standards, the huge amount of funds retained by the investee on behalf of us also become intangible assets.
However, these invisible things should not be ignored: these unrecorded retained earnings often create value for Berkshire - a lot of value. The investees use the retained funds to expand their business, make acquisitions, repay debts, and usually buy back shares (which increases our share of their future earnings).
As we pointed out in our shareholder letter last year, retained earnings have driven the development of American enterprises throughout American history. What worked for Carnegie and Rockefeller worked for millions of shareholders over the years.
Of course, some of our investors will be disappointed that their retained earnings hardly add value to their companies. But other companies will overfulfil the task, and a few of them do well. All in all, we expect that our share of the huge earnings retained by Berkshire's non controlling business (which others will think is our stock portfolio) will eventually bring us the same or more capital gains. That expectation has been met throughout our 56 year term.
The last component of our GAAP data - the ugly $11 billion write down - is almost all about quantifying a mistake I made in 2016. That year, Berkshire bought precision castings (PCC), and I paid too much.
No one misled me in any way - I was just too optimistic about PCC's normal profit potential. Last year, as the most important customer source of PCC, the adverse development of the entire aerospace industry exposed my misjudgment.
In the process of acquiring PCC, Berkshire acquired a very good company, the best in the industry. Mark Donegan, PCC's chief executive, is a passionate manager who, as always, devotes the same energy to our acquired business. We are lucky to have him in charge.
I think my conclusion is correct that PCC will get a good return on the net tangible assets deployed in its operations over time. However, my judgment of future earnings was wrong, so I miscalculated the reasonable price to pay for the acquisition of the company.
PCC is far from my first mistake. But it was a big mistake.