Lessons from the 2019 letter from Warren Buffett to Berkshire Hathaway investors

After a few years of reading the famous annual letter from Buffett (tag) to his investors, and three years of following the live Yahoo! stream of the annual meeting in Omaha, last year I shared my impressions for the first time. Here is the second installment.

This year’s letter was not as juicy as the last one, I must admit. He rants quite a bit (started ranting last year) about his dislike toward new GAAP reporting rules (more details at the bottom of this post).

The interesting stuff

If you call a dog’s tail a leg, how many legs does it have? Four, because calling a tail a leg doesn’t make it one -Abraham Lincoln

Buffett quotes Lincoln while discussing again his issue with Wall Street regulations regarding reporting in a section of the letter titled “Focus on the forest – Forget the trees”. And Buffett complains because the new rules will make one count the trees more often, too often, maybe even micromanaging them and making us lose sight of the forest.

Repurchasing shares

Buffett has said many times over the years that he believes in repurchasing shares of Berkshire itself as a way of returning value to investors. On the other hand, he does not like paying out dividends. I think he said once that he can make better decisions with his shareholders’ money, or something along those lines.

Well, it seems that he also likes holding shares of companies that have this same policy. Point in case, Berkshire owns now 17% of American Express, more than the 12% it owned 8 years ago, even though they never bought a single share. How did this happen? American Express was doing really well and decided the price the market was putting on its share price was below the “intrinsic value” (Buffet uses this term to refer to his policy for Berkshire) so they bought so many shares back that Berkshire ownership of Amex shot up almost 50%.

To add more, Berkshire’s portion of Amex’s earnings last year are almost the same as Berkshire paid for its shares eight years ago. So they almost got their money back and still own 17% of Amex. Quite outstanding.

Stock prices are too damn high

“I will never risk getting short of cash”, he says. But on the other hand, he knows he now has too much liquidity and is trying to buy a business he would like to keep for the long run. But he can’t find anything… “elephant-size” (yep, his own words). Berkshire is by now too big to be buying anything that is not huge, as of now the latest acquisition was BNSF which is, of course, huge, and was even part of the Dow Transportation index. Even though what Buffet is looking for is very specific, the stock market has heated up maybe too much by now.

The technicalities

If you want to know more about Buffett’s issue with the GAAP rules you can read a more informed discussion here, an accountant’s take on the issue. The actual rule is the ASC 321 (link -paid…-), and it will cause constant (unrealized) gains and losses due to mark-to-market re-valuations. This affects Barkshire tremendously since they hold billions in shares of other companies (Apple, Coca-Cola, etc).

In any case, this year’s full original letter is here, commented on in this post you are reading. Last year’s letter is here and it was commented on in this previous post on this blog.

…

I probably should have titled this post “New Lessons…” as Buffett again touches on many of his main ideas: forget the last quarter results and focus on the next few years, he mentions that last year was the first after the tax reform which gave back to Berkshire quite a bit of money but he almost downplays this (remember he authored the “Buffett rule” and for the most part thinks taxes are currently too low, especially for billionaires), only invest on what you know. He also reaffirms again how much he believes in the “American Tailwind”, even giving America credit for much of his success…

Have you read the letter? What have you learned?

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