When I was doing BBA, I made a habit of reading the Annual report of companies. But that time, as my knowledge was not extensive, I only read the Balance sheet and profit and loss account ( income statement). But Then I decided to learn how to read an annual report. At that time, I learned the importance of Management discussion and analysis. So one essential thing it does is it keeps the annual report SUBJECTIVE.
The commentary of management becomes more critical when the management includes Warren Buffett. His letter to Shareholders is nothing but a pure treasure for many. In this post, I will write about his recent letter to shareholders.
You can download it from here.
As Always, we can see the chart of annual performance against the S&P 500 index on the first page. Berkshire Hathaway Gained 11% against 31.5% gains in the S&P 500. Next, we get the information about Berkshire Hathway Earnings and a Small commentary of warren Buffett on it. In the last year’s letter, Warren Buffett explains it correctly when you have a huge equity investment, then the movement of $2 billion is effortless. But that is not a highlight of this year’s letter.
The highlight of this letter starts from the statement, “Charlie and I urge you to focus on operating earnings and to ignore both quarterly and annual gains or losses from investments, whether these are realized or unrealized.” which is entirely correct. The usage of the words’ Urgent zone.’ As Warren Buffett is the name that makes this stock price worth a million dollars, he mentions Berkshire’s assets are deployed in extraordinary businesses that, averaged out, earn attractive returns on the capital they use. It was more of giving assurance to shareholders.
“Berkshire’s financial affairs will unfailingly be managed in a manner allowing the company to withstand external shocks of an extreme nature. In addition, we possess skilled and devoted top managers for whom running Berkshire is far more than simply having a high-paying and/or prestigious job. Finally, Berkshire’s directors – your guardians – are constantly focused on both the welfare of owners and the nurturing of a culture that is rare among giant corporations.” Warren Buffett mentions.
Warren Buffett also mentions that his succession plan is 100% ready for him and Charlie Munger. I expect some big news on 2 May 2020 from the Annual General Meeting. We can expect more time from Ajit Jain and Greg Abel.
As Warren Buffett is well known for making significant acquisitions, he mentions some criteria like they must earn good returns on the net tangible capital required in their operation; able and honest managers must run them, and they must be available at a sensible price.
As he is one of only two entities in the world with $100 billion in cash, he mentions that he prefers to buy 100% of such businesses when they fulfill such criteria. In his words, “But the opportunities to make major acquisitions possessing our required attributes are rare. Far more often, a fickle stock market offers us options to buy large but non-controlling positions in publicly-traded companies that meet our standards.
In a world where Asset Management Companies prefer Robots and algorithms, Warren Buffett mentions in his letter that he will choose life and principles, not robot-like processes,” He further said. “In representing your interests, they will, of course, seek managers whose goals include delighting their customers, cherishing their associates, and acting as good citizens of both their communities and our country,” Buffett wrote to Berkshire shareholders.
One highlight which attracts many eyes is the independence of the board of directors and why not. In India, we saw many examples of how even independent directors work. So yes. Warren Buffett keeps on highlighting many things.
