American business magnate Warren Buffett released his annual letter to Berkshire Hathaway shareholders and others interested.
Every year, Warren Buffett, now the longest-serving CEO in the S&P 500, shares his ideals and vision towards the new year as well as a glimpse into company operations, performance, and financial results.
In his most recent delivery, 14 pages long and boasted quotes from economists such as John Maynard Keynes, Buffet wrote about the role of board directors, a “fickle stock market,” accounting rules, accomplishments, “rare” market opportunities for buying companies and other investments. According to The Wall Street Journal, he set out to reassure investors about Berkshire Hathaway Inc.’s long-term future following a rough 2019, where his bets missed the broader record bull market in 2019 by a long shot, per Market Insider, as Berkshire Hathaway ended the year with its worst underperformance in a decade, with shares finished up 11%, while the S&P 500 gained 29%. He also gave hints about succession plans.
Among the strong points, he discussed the compensation and purpose of corporate boards over the last few years, a “hot topic”, writing:
“Over the years, many new rules and guidelines pertaining to board composition and duties have come into being. The bedrock challenge for directors, nevertheless, remains constant: Find and retain a talented CEO – possessing integrity, for sure – who will be devoted to the company for his/her business lifetime. Often, that task is hard. When directors get it right, though, they need to do little else. But when they mess it up,……”
“At Berkshire, we will continue to look for business-savvy directors who are owner-oriented and arrive with a strong specific interest in our company. Thought and principles, not robot-like “process,” will guide their actions.”
Warren Buffett also spelled out his three criteria for buying companies for shareholders and investors as Berkshire Hathaway reached the third year in a row without completing a company purchase. He suggested:
“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 (…) When we spot such businesses, our preference would be to buy 100% of them. But the opportunities to make major acquisitions possessing our required attributes are rare. 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.”
“Over time, he adds, we want Berkshire’s share count to go down. 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.”
On terms of legacy, he was clear in writing to shareholders that Berkshire Hathaway is “100% prepared” for his death, while Greg Abel and Ajit Jain –two key executives thought to be in the running to succeed Buffett– will be given more exposure at the company’s annual shareholder meeting in Omaha, Nebraska.
“That change makes great sense. They are outstanding individuals, both as managers and as human beings, and you should hear more from them.”