Bloomberg
Buffett’s Letter to Break Months of Silence Amid Tumult in U.S.
(Bloomberg) — While 2020 raged, Warren Buffett mostly held his tongue.He stayed quiet through a heated presidential election, a racial reckoning that sparked nationwide protests and an exuberance for stocks that’s gripped millions of Americans. Not to mention a global pandemic. Now, the billionaire chief executive officer of Berkshire Hathaway Inc. has a chance to break his silence with the release of his annual letter Saturday.“If this letter doesn’t address some of the issues, people are going to be disappointed,” Cathy Seifert, an analyst at CFRA Research, said in a phone interview. “There is an appetite for his thoughts.”The letter is an annual tradition for the 90-year-old CEO, a chance to share wisdom with his loyal following of value investors. And Buffett isn’t usually shy about sharing that wisdom, even campaigning in the past for controversial politicians including Hillary Clinton. His annual missive ahead of the 2016 presidential election touched on politics, chiding the negative drumbeat from candidates.It’s been different since he spoke up at last year’s annual meeting in May, when he said his near-record cash pile wasn’t that huge when considering the “worst-case” possibilities of the Covid-19 pandemic. The CEO has since shared few, if any, of his opinions, even last year as President Joe Biden and former President Donald Trump squared off in one of the most contentious elections in U.S. history. The 2020 letter made no mention of the topic.“Maybe he just decided that there was no upside to getting into that fray,” Seifert said. “He was a little more open when the level of general discourse was a lot more civil, and I can certainly understand a desire to sort of pack up your tent and go home and not partake. It’s not a parlor game anymore. It’s a bloodsport.”Long ListIf he decides to weigh in, there are plenty of topics on which he could expound. How did he view the riot at the U.S. Capitol in early January? What did he say to Biden during his chat just weeks ahead of the election? What are investors to make of the recent drama involving short sellers of GameStop Corp. and other stocks? How about the surging equity market? And how should corporations address racial inequality?His business partner, Charlie Munger, didn’t shy away from talking about stock-market speculation on Wednesday at the annual meeting for the Daily Journal Corp., where he’s chairman. He bashed brokers such as Robinhood Markets Inc., saying that they’re essentially offering gambling services — a “dirty way” to make money.There are also more nuts-and-bolts questions for Buffett. Despite handily beating the S&P 500 over more than 50 years at the helm of Berkshire, Buffett has underperformed the index for at least a decade. And his cautious stance last May at Berkshire’s annual meeting drew questions from some who wanted to see him be more aggressive in making new investments.Still, investors such as Darren Pollock said the strategy, in retrospect, was admirable given Buffett’s desire to maintain Berkshire’s “Fort Knox” balance sheet.“The fact that he was more cautious was perfectly fine,” said Pollock, a portfolio manager at Cheviot Value Management LLC, which counts Berkshire as its largest holding. “It’s better to miss an opportunity and remain in great financial condition than it is to take a large swing, and swing and miss and strike out.”Berkshire is also plagued by its size. The company has grown so large that only massive acquisitions can move the needle. But they’ve been hard to find amid high prices and competition from buyers such as private equity firms. Even the company’s $6 billion in Japanese stock purchases last year would account for just 4% of Berkshire’s cash pile at the end of the third quarter. Now, Buffett can add the recent boom in SPACs, or special purpose acquisition companies, as another competitor swamping the dealmaking space.“There’s so many things right now that I think the market would benefit from, in terms of his wisdom,” Jim Shanahan, an analyst at Edward D. Jones & Co., said in a phone interview. He listed the rise of SPACs as well as “GameStop, short-selling, Reddit and the whole episode. But even just things like the underperformance of the stock, inflation, the stimulus — the size and maybe perhaps the necessity of another stimulus.”It’s a long list. Here are more topics that might come up Saturday:SuccessionWhile Buffett has given no indication he’s stepping down anytime soon, investors are always on the lookout for clues about how the nonagenarian is faring.He often uses the letter to joke with and reassure investors. Last year, Buffett said he and Berkshire Vice Chairman Munger, who’s 97, had long ago entered the “urgent zone” in terms of their ages. But he tried to reassure investors that the company is well-prepared for when the pair eventually depart.In fact, the future of the company has been telegraphed for a while now. Buffett elevated Greg Abel and Ajit Jain to vice chairmen in 2018, promotions that were called “part of the movement toward succession.”He promised to give the pair more of a platform to field questions at the annual meeting last year, but that changed when Covid-19 forced the meeting into a virtual format and limited attendance to Buffett and Abel, who lives closer to Omaha, Nebraska, where Berkshire is based.Pollock said investors would benefit if Buffett uses Saturday’s letter to share more about the influence of his investing deputies, Todd Combs and Ted Weschler. One of them was key to Berkshire’s Apple Inc. bet, which now ranks as the firm’s biggest common stock investment, but the company doesn’t typically say which executive is responsible for any particular investment. It’s known, however, that Combs and Weschler have pushed Berkshire into more tech-focused opportunities, such as its recent investment in cloud-computing company Snowflake Inc.All the MoneyBuffett’s been blessed in recent years with a high-class problem: too much cash. Berkshire keeps pulling in more funds than its CEO can quickly deploy into higher-returning assets, leading to a cash pile that topped $145 billion at the end of September.While not striking any of the “elephant-sized” acquisitions he’s been hankering for, Buffett was still active last year deploying funds. Berkshire ventured into Japan by snapping up the stocks of various trading companies. The company also purchased some natural gas assets from Dominion Energy Inc. And recently, Berkshire spent months accumulating a roughly $4.1 billion stake in Chevron Corp. and an $8.6 billion holding in Verizon Communications Inc.What Bloomberg Intelligence Says“We believe the record share repurchase of 2020 reflects a dearth of other options and Buffett’s conservatism in uncertain times. The company would need a large deal to move the needle on results.”–Matthew Palazola, senior analystThe Chevron and Verizon bets are more lucrative ways for Berkshire to park some of its cash instead of holding more Treasury bills, according to Pollock. Chevron and Verizon now rank among Berkshire’s top three common stock bets with the highest dividend yield, according to data compiled by Bloomberg.Still, Buffett is largely sticking to familiar areas. Berkshire knows the energy space well, and had already previously bet on Verizon. One of his biggest purchases last year was on the conglomerate’s own turf: Buying Berkshire stock. That cost about $15.7 billion in just the first nine months of 2020, already making it a record year for buybacks. Signs point to even more repurchases in the fourth quarter, with a filing indicating he bought back enough shares by late October to bring the annual total to at least $18 billion.“If he had made an $18 billion acquisition, we would have called it sizable,” Edward Jones’s Shanahan said. The total repurchases last year through late October are “very significant,” although the company is limited in how much it can buy back due to the lack of liquidity in Berkshire shares, according to Shanahan.MarketsBuffett was first asked almost a year ago about his thoughts on the coronavirus in China. The pandemic would go on to sweep through the U.S. and the rest of the world, pummeling stocks in March and early April.Buffett, who has told investors to be greedy when others are fearful, stayed uncharacteristically cautious in those early months, even dumping airline stocks and claiming that the world had changed for that industry.U.S. stocks largely rebounded in the later months of 2020, and climbed even further during the start of this year with the Reddit-induced mania around certain stocks such as GameStop. Buffett’s loyal investing fans may want to know what he makes of the recent market upheaval, depending on whether he wrote this year’s letter before or after the phenomenon emerged.Retail investors’ newfound exuberance harkens back to the mania of the dot-com bubble in 2001, when Buffett ridiculed some investors’ understanding of the market in a way he could easily resurrect 20 years later:“It was as if some virus,” Buffett wrote in his annual letter released that year, “racing wildly among investment professionals as well as amateurs, induced hallucinations in which the values of stocks in certain sectors became decoupled from the values of the businesses that underlay them.”For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2021 Bloomberg L.P.