Warren Buffett published his annual Berkshire Hathaway letter this past weekend and as usual, it was full of insights on investment strategy, company culture and robust optimism about the future. Since his very first partnership 1956, his main focus has been on providing compounded returns over time above the S&P 500 for individual investors. What can we learn from Buffett’s insights?
What Does He Own?
Shareholders in Berkshire Hathaway stock own a mixture of public and private enterprises. Buffett and his team seek to identify and own large portions of American businesses. They own 63 private businesses such as Geico, BNSF Railway and See’s Candy and major stakes in 15 public companies.
The Apple investment is by far his largest and most successful investment to date. Buffett acquired a 5% stake in Apple in 2016 for $30B. As of the end of last year, that stake was worth $120B, for an unrealized gain of $90B in less than 5 years. No other famous investor has come anywhere close to recording an investment success of that scope of magnitude. His latest major acquisitions were an $8B purchase of 3.5% of Verizon, and a $4B purchase of 2.5% of Chevron.
Where we differ from Buffett is our comfort with technology-related investments. Buffett has little to no direct exposure in those areas although he did step into cloud computing last year with his acquisition of Snowflake of which he owns 12%, currently worth apx $1.7B.
Buffett is well known for mentioning his mistakes and selling the associated investments. The two most recent examples are the airlines and IBM. It’s natural to make investment mistakes. Buffett stands out as one who is willing to take a loss even after many years.
The Value of Intangible Assets and Inflation
Buffett admits that it took him more than 20 years to realize in 1983 that intangible assets were going to play a large role in his investing activities going forward. In the 80’s Buffett identified intangible assets as goodwill and brand value and determined that those assets increase in value along with inflation.
“What is more likely is that the Goodwill will increase – in current, if not in constant, dollars – because of inflation.
That probability exists because true economic Goodwill tends to rise in nominal value proportionally with inflation.” – 1983 shareholder letter
This is important today given the inflationary scenario we may be facing due to quantitative easing, bailouts and yield curve control.
We wrote about the value of intangible assets last Fall, which you can read here: The Triumph Of Intangible Assets. It’s one of our favorite topics. Our investments typically have a large portion of their value represented by intangibles like brands, IP, distribution networks, etc.
Buffett repeatedly stresses that the most important thing to him is his relationship and partnership with individual investors. “Beyond legal requirements, Charlie and I feel a special obligation to the many individual shareholders of Berkshire.” Buffett has always managed money for his friends, family, neighbors and colleagues.
“These individuals – either intuitively or by relying on the advice of friends – correctly concluded that Charlie and I had an extreme aversion to permanent loss of capital and that we would not have accepted their money unless we expected to do reasonably well with it.
We feel the exact same way at Osbon Capital.
The many partnerships of his early days eventually grew too complex and were merged into a single public holdings company. It wasn’t until after Berkshire went public that he had institutional investors as partners.
The American System
Buffett continues to invest exclusively in American companies. He reasons that the best opportunities are here due to our free markets and capitalist systems. The big US companies he is interested in have extensive international operations. He points out that politicians and pundits constantly moan about the terrifying problems facing America, yet despite our dark days, we continue to express our full human potential and creativity.
“Americans have combined human ingenuity, a market system, a tide of talented and ambitious immigrants, and the rule of law to deliver abundance beyond any dreams of our forefathers.”
Despite endless insurmountable challenges around the world, don’t bet against human ingenuity or the American entrepreneurial system.
We’ve said many times: it’s always a good time to invest in the future. That holds true in the best of times and the worst of times.
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