Warren Buffett stands by strategy of pouring cash into stocks

Warren Buffett, chairman of Berkshire Hathway. Photo / Getty Images

Berkshire Hathaway's Warren Buffett on Saturday stood by his decision to plough ever greater sums of the company's cash pile into stocks as he struggled to find multibillion-dollar acquisition targets, after a year in which the sprawling conglomerate suffered its worst performance against the broader market in a decade.

The so-called Oracle of Omaha told Berkshire stockholders in his annual letter that his ability to find quality companies to buy outright at the right price was "rare". Instead the company's equity portfolio, which counts shares in blue-chip groups such as Apple and American Express, has continued to grow.

"Far more often, a fickle stock market serves up opportunities for us to buy large, but non-controlling, positions in publicly traded companies that meet our standards," he said.

He defended the move, noting that Berkshire's share of retained earnings generated by its largest stock investments was more than $8bn. That figure does not flow into the company's net profits.

"At almost all major companies other than Berkshire, investors would not find what we'll call this 'non-recognition of earnings' important," he wrote. "For us, however, it is a standout omission."

The annual letter is long awaited by Berkshire shareholders and the general investing public, who have often found wisdom in the words of the 89-year-old chief executive. But this year he was light on missives about the state of the economy and did not dive into his views on political affairs in the US ahead of the election this November.

Instead, Mr Buffett repeated several of his previous maxims: that changes to tax policy had skewed Berkshire's results, the importance of compounding interest, and how the company was prepared for his eventual departure.

Berkshire in 2018 named two new vice-chairman as part of a succession plan on which investors had long sought insights. Investors will this year have the opportunity to ask the two men, Greg Abel and Ajit Jain, questions at Berkshire's annual meeting in May, Mr Buffett said. He also noted that he had directed the executors of his will not to sell Berkshire shares on his death.

"Charlie and I long ago entered the urgent zone," he wrote, referring to 96-year-old Berkshire vice-chairman Charlie Munger. "That's not exactly great news for us. But Berkshire shareholders need not worry: your company is 100 per cent prepared for our departure."

Berkshire reported a profit of $81.4bn last year, up from $4bn the year before. Earnings figures at the company, which owns the BNSF railroad and private jet operator NetJets, have swung significantly since changes to the tax code required the company to begin marking gains and losses on its stock holdings.

Excluding the $53.7bn rise in the value of those holdings, Berkshire reported a 3.3 per cent decline in operating profits for the full year. Its mammoth cash pile was little changed from the end of September at $128bn.

Written by: Eric Platt

© Financial Times 2020