Vlog: Buffett’s Annual Letter: Virus immunity

By David B. Armstrong, CFA | Feb 25, 2020 | Weekly Market Commentary

Hi, it’s Dave Armstrong, with Monument Wealth Management and today I want to talk about Coronavirus and Warren Buffett’s annual letter, so stick around.  

It’s that time of the year and Warren Buffett’s annual letter to shareholders has been published over the weekend. It’s an interesting read, especially in the context of the Coronavirus sell-off, and I want to share my thoughts on it because it reinforces one of our common themes that adversity really creates opportunity for long term investors. 

Once a year on a weekend morning in February, Buffett along with his buddy, Charlie Munger, release their annual shareholder letter. For anyone that doubts their status as the best investors of our lifetime, just take a look at their performance over time. The value of Berkshire Hathaway stock has compounded at about 20.3% annually from 1964 to 2019. And if you compare that with the S&P 500 (with dividends), that’s about 10%. Buffett’s performance includes their current cash level which exceeds 100 billion dollars so that’s a huge cash drag. 

Here are some of my initial takeaways from my very first read of this year’s letter.   

One: the intrinsic value of their equity holdings continues to grow steadily and substantially. This is a key point that all investors need to keep in mind. If these guys think that the idea of growing steadily and substantially is a good idea, you should too—no matter how boring it is.  

Second point: their retained earnings is like compound interest, and it just funds their future growth with higher and higher profits. They use their retained earnings strategically, and they seek to reinvest back into their businesses. Their internal investments and things like plant, property and equipment, have totaled over 120 billion dollars. This is important to keep in mind as an investor because over time, you also should be purposefully and strategically reinvesting back in your portfolio, too.  

Another point that I got out of the letter was the power of compounding and holding long term, rather than selling a stock and paying a federal tax of somewhere between 20 and 25%, based on your income in your state. That’s just clear as an investor. When you sell the stock in a taxable account that was purchased to hold for the long term, and then something like this coronavirus news comes up, and it causes you to worry about the short term and sell that stock, you would then have to wait for that stock to drop 20 to 25% before you can buy it back and even break even. That’s a huge move in stock. And this is why CNBC I feel like is so unhelpful. It gets investors to think like traders, and that’s just wrong.  

Okay, here’s another point: it’s almost certain that equities are going to outperform bonds over time and this letter really clarifies that and solidifies that for me. This is why a good solid portfolio coupled with a reasonable and well planned out time horizon is so important. Remember, always know what the money is for. And when you’re going to need it. Also, cash is the most effective and cheapest hedge available, while money that is not needed for several years, can weather events like the coronavirus news.  

Another point is they talk about their Board. They say a board should truly be independent with business savvy directors who are owner–oriented, and that got me thinking. People should be thinking about their advisory team, like Monument, as their Board of savvy Directors, who are “you”-oriented.  

Another point: Berkshire is going to go buy back in stock whenever Buffett or Munger perceive that it’s selling well beneath intrinsic value or in other words, at a discount. In 2019, they bought a record $5 billion back, or 1% of the total outstanding shares in the stock market. 

There are several analogies for the investor here, all the way from dollar cost averaging to dividend reinvestment, to using cash to buy low rather than getting fearful and selling equities like today.  

Berkshire will meet with their fellow capitalists at their annual meeting on May 2nd, and here’s my little political joke of the day…because I doubt that anybody’s going to see many Bernie Sanders supporters there at that annual meeting.  

The annual letter is always something great to reflect upon. It reminds us that we need to focus on long–term investing, rather than being influenced by the short–term events. There will always be peaks and valleys in the world of investing and the trick is to get better at looking from peak–to–peak rather than staring down into those valleys like today. We’re getting a great look today at people who are focusing on the valley, as they try to make guesses about this coronavirus. Days like today reinforce our constant mantra of having cash to fund your short–term liabilities, so you don’t have to sell them in down markets and focusing on the opportunities that long–term investing provides investors...just like Buffett and Munger do.  

If you have any questions or concerns about anything going on in your portfolio, give us a call, we’re happy to help. You can find us in all of our social media outlets–we’re always around so give us a ring. Thanks.

 

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