Warren Buffett released his annual message to Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) shareholders on Saturday, in a 14-page letter that stayed true to the Oracle of Omaha’s folksy nature and sage investment advice.
Most notably, the 89-year-old Buffett spent a sizable chunk of his letter talking about Berkshire’s future after his death, and provides the clearest picture yet about what investors can expect once Buffett and Berkshire’s vice chairman, 96-year-old Charlie Munger, are no longer at the helm.
Here are five things that we learned from Buffett’s annual letter to shareholders, including what Berkshire may look like in a post-Buffett world.
Buffett’s Estate Won’t Sell Berkshire Stock
The future of Berkshire Hathaway and its massive holdings has been a point of concern for years as Buffett and Munger advance in age. Nobody likes to think about Berkshire after Buffett, but the end is inevitable. It’s only responsible for Buffett to address it.
“Your company is 100% prepared for our departure,” Buffett says.
“Today, my will specifically directs its executors — as well as the trustees who will succeed them in administering my estate after the will is closed — not to sell any Berkshire shares. My will also absolves both the executors and the trustees from liability for maintaining what obviously will be an extreme concentration of assets.
He writes that he has included some follow-up instructions in his will. Each year, his executors and trustees will convert a portion of his A shares to B shares. Then, they will distribute those B shares to various foundations. He estimates that in 12-15 years all of his shares will move into the market.
Buffett says 99% of his fortune is comprised of Berkshire stock.
His Potential Successors Will Have a Bigger Role
Buffett announced that Berkshire’s key operating managers, Ajit Jain and Greg Abel, will take public roles at Berkshire’s annual meeting on May 2. Jain is Berkshire’s vice chairman of insurance operations. Abel is CEO of Berkshire Hathaway Energy and vice chairman of non-insurance operations.
Both of them will take questions from investors — a significant change from previous annual meetings.
“That change makes great sense. They are outstanding individuals, both as managers and as human beings, and you should hear more from them,” Buffett writes.
It’s unlikely that Buffett will publicly endorse Jain and Abel as his successors. But the fact that they are taking a more public role is still significant.
Buffett Doubles Down on Equities
Berkshire’s largest holdings includes $248 billion in stock of 15 large-capitalization companies where it does not have a controlling interest. These companies include American Express (NYSE:AXP), Coca-Cola (NYSE:KO) and Southwest Airlines (NYSE:LUV).
“What we see in our holdings, rather, is an assembly of companies that we partly own and that, on a weighted basis, are earning more than 20% on the net tangible equity capital required to run their businesses,” Buffett writes. “These companies, also, earn their profits without employing excessive levels of debt.” Buffett says.
Buffett goes on to say that while he doesn’t attempt to forecast interest rates, he’s confident in equity. He and Munger believe equities will outperform long-term, fixed-rate debt instruments well into the future.
Buffett Is Looking to Buy Back More Stock
Berkshire repurchased $2.2 billion of stock at the end of last year, according to its annual report. In total, it repurchased $5 billion in stock in 2019. That’s about 1% of the company.
Buffett says Berkshire buys its own stock when it sells for less than it’s worth. “If the price-to-value discount (as we estimate it) widens, we will likely become more aggressive in purchasing shares. We will not, however, prop the stock at any level.”
That said, he also put out a call to any shareholder who has at least $20 million of Berkshire stock. This means the numbers are still making sense in Buffett’s eyes.
Some Harsh Observations on Corporate Boards
Buffett devotes a sizable portion of his letter to the lucrative nature of corporate boards, noting that an appointment often comes with a salary of $250,000 or $300,000 per year and stock options. It’s a far cry, he says, from the 1960s when Buffett received $100 annually to be a director of Portland Gas Light.
Buffett notes that director salaries are so lucrative that people who aspire to collect have incentives to follow the CEO’s wishes. Many try to stay in his or her good graces, all with the hope of one day landing an appointment with a second company. Such a second appointment would vault a salary to $500,000 or $600,000 per year.
“When seeking directors, CEOs don’t look for pit bulls,” Buffett writes. “It’s the cocker spaniel that gets taken home. Despite the illogic of it all, the director for whom fees are important — indeed, craved — is almost universally classified as ‘independent’ while many directors possessing fortunes very substantially linked to the welfare of the corporation are deemed lacking in independence.”
Buffett takes note of companies when a board is comprised of people who have their own skin in the game.
“Paid-with-my-own-money ownership, of course, does not create wisdom or ensure business smarts. Nevertheless, I feel better when directors of our portfolio companies have had the experience of purchasing shares with their savings, rather than simply having been the recipients of grants.”
Patrick Sanders is a freelance writer and editor in Maryland, and from 2015 to 2019 was head of the investment advice section at U.S. News & World Report. Follow him on Twitter at @1patricksanders. As of this writing, he did not hold a position in any of the aforementioned securities.
