Buffett reassures Berkshire investors on succession planning after underperformance
100% prepared
Warren Buffett assured Berkshire Hathaway investors the firm was “100% prepared” for his and deputy Charlie Munger’s departure at the weekend, as his annual letter noted 2019 was the company’s worst year for underperformance since 2009.
Buffet noted he, 89, and Munger, 96, "long ago entered the urgent zone", adding this was "not exactly great news for us, but Berkshire Hathaway shareholders need not worry".
The reasons for this were largely due to its strong portfolio of businesses, but also because of the "skilled and devoted top managers" it employs, "for whom running Berkshire is far more than simply having a high-paying and/or prestigious job".
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"Finally, Berkshire's directors - your guardians - are constantly focused on both the welfare of owners and the nurturing of a culture that is rare among giant corporations," Buffett continued.
"Charlie and I have very pragmatic reasons for wanting to assure Berkshire's prosperity in the years following our exit: The Mungers have Berkshire holdings that dwarf any of the family's other investments, and I have a full 99% of my net worth lodged in Berkshire stock. I have never sold any shares and have no plans to do so."
He added his will specified no shares in Berkshire Hathaway are to be sold; rather, the ‘A' shares will be converted into ‘B' shares and distributed to various charitable foundations over the course of 12 to 15 years.
Berkshire's share price delivered returns of just 11% for investors in 2019, well short of the S&P 500's 31.5% total gain for the year. In relative terms, it was the firm's worst year for a decade.
Stock attractions remain over fixed income
Buffett outlined the three criteria the businesses it seeks to buy must display: earning good returns on the net tangible capital required in their operation; they must be run by able and honest managers; and they must be available at a sensible price.
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"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," he added.
"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.
"Whichever way we go, Berkshire's financial results from the commitment will in large part be determined by the future earnings of the business we have purchased.
"Nonetheless, there is between the two investment approaches a hugely important accounting difference, essential for you to understand."
Buffett continued to extol the virtues of investing into stocks, rather than other instruments, noting the returns companies continue to produce "are truly mind-blowing when compared to the returns that many investors have accepted on bonds over the last decade".
He continued: "Forecasting interest rates has never been our game, and Charlie and I have no idea what rates will average over the next year, or ten or 30 years.
"Our perhaps jaundiced view is that the pundits who opine on these subjects reveal, by that very behaviour, far more about themselves than they reveal about the future.
"What we can say is that if something close to current rates should prevail over the coming decades and if corporate tax rates also remain near the low level businesses now enjoy, it is almost certain that equities will over time perform far better than long-term, fixed-rate debt instruments."
He added: "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.
"But the combination of The American Tailwind and the compounding wonders will make equities the much better long-term choice for the individual who does not use borrowed money and who can control his or her emotions."
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