Buffett on Stocks and Marriage

Warren Buffett released the annual Berkshire Hathaway shareholder letter with the usual fanfare, though this year the news was likely to be tough. After all, the Oracle of Omaha’s Berkshire Hathaway delivered an 11 percent return to its investors (measured as in Per-Share Market Value of Berkshire), versus the 31.5 percent increase in the S&P 500 (including dividends). The gap was glaring because it was the worst underperformance for Berkshire Hathaway since 2009.

Buffett cautioned investors “to focus on operating earnings, which were little changed in 2019, and to ignore both quarterly and annual gains or losses from investments, whether these are realized or unrealized.” That said, most are willing to cut him slack, because since he and partner Charlie Munger started their investing odyssey in 1965, they have grown Berkshire’s Per Share Book Value at an annualized rate of 20.3 percent, versus 10 percent annualized for the S&P 500’s total return.

It was another year when Berkshire was unable to find an “elephant-sized” target, so its cash position has soared to $128 billion. Buffett noted that any potential acquisition must meet three criteria. “First, they must earn good returns on the net tangible capital required in their operation. Second, they must be run by able and honest managers. Finally, they must be available at a sensible price.”

The last point was likely the biggest hurdle, because Buffett and Munger have held firm that they are unwilling to pay up to make a deal. Regarding the second point, it is interesting that Berkshire continues to hold an 8.4 percent position in banking giant Wells Fargo, which just agreed to a whopping $3 billion settlement with the Justice Department and Securities and Exchange Commission over the falsification of bank records and the unlawful misuse of customer personal information. Prosecutors noted the "staggering size, scope and duration" of the unlawful conduct that occurred between 2002 and 2016.

Looking ahead, Buffett believes that a low interest rate environment, combined with rock-bottom corporate tax rates, makes stocks the most attractive asset class over the long term. But “that rosy prediction comes with a warning: Anything can happen to stock prices tomorrow. Occasionally, there will be major drops in the market, perhaps of 50% magnitude or even greater…equities [will be] the much better long-term choice for the individual who does not use borrowed money and who can control his or her emotions. Others? Beware!”

The most delightful part of the letter was when the Oracle compared corporate acquisitions to nuptials. “In reviewing my uneven record, I’ve concluded that acquisitions are similar to marriage: They start, of course, with a joyful wedding, but then reality tends to diverge from pre-nuptial expectations. Sometimes, wonderfully, the new union delivers bliss beyond either party’s hopes. In other cases, disillusionment is swift. Applying those images to corporate acquisitions, I’d have to say it is usually the buyer who encounters unpleasant surprises. It’s easy to get dreamy-eyed during corporate courtships. Pursuing that analogy, I would say that our marital record remains largely acceptable, with all parties happy with the decisions they made long ago.”