Earlier today, Warren Buffett released his annual letter to shareholders. There were five interesting takeaways from this letter:
(1) He spends the most time criticizing the high fees charged by portfolio managers who generally produce sub-par results. “When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients. Both large and small investors should stick with low-cost funds.”
Also, he states: “There are, of course, some skilled individuals who are likely to out-perform the S&P over long stretches. In my lifetime, though, I’ve identified – early on – only ten or so professionals that I expected would accomplish this feat”.
But later he states: “Moreover, we have paid substantial sums for over-performance to our two in-house investment managers — and we hope to make even larger payments to them in the future.”
Todd Combs and Ted Weschler each manage about $10 billion. Since the two managers each year are eligible to receive as bonuses 10% of the amount by which their portfolios exceed the return on the S&P 500 (in addition to an annual salary of $1 million), both Combs and Weschler have been among the very few who have outperformed the S&P 500 over the past five years.
(2) Warren Buffett very rarely recommends the purchase of any stock. But he clearly makes a case that Bank of America is undervalued. Although Berkshire has until September 2, 2021 to convert its Bank of America Preferred stock with warrants, he states: “If the dividend rate on Bank of America common stock – now 30 cents annually – should rise above 44 cents before 2021, we should anticipate making a cashless exchange of our preferred into common”. (When the common stock dividend rises above 44 cents, the annual dividends on the common stock resulting from the conversion of the preferred would exceed the dividends on the preferred stock).
(3) Warren Buffett presents a convincing case for the repurchase of shares by companies whose shares are undervalued (trading below intrinsic value). This contradicts the perceived wisdom of many that share buybacks are just financial engineering.
(4) Buffett states for the first time: “we have made no commitment that Berkshire will hold any of its marketable securities forever.” (Previously, he has mentioned that his preferred holding period is forever.)
Buffett may be referring to recent stock sales of almost all of his shares in Wal-Mart. But more importantly, he is probably looking to the future by providing the flexibility to sell long-time holdings such as Coca-Cola or American Express. This statement also prepares shareholders for the future when Todd Combs and Ted Weschler are running Berkshire’s portfolio and grants them the complete freedom to make whatever portfolio changes they wish.
(5) He criticizes CEO’s who omit restructuring charges and stock compensation from expenses.
I am quoted in two articles in the Omaha World-Herald on Warren Buffett’s letter to shareholders.
In one article about no stock is “forever”:
David Kass, a Berkshire shareholder and business professor at the University of Maryland, said Saturday that Buffett may be referring to recent stock sales “but more importantly, looking to the future with providing the flexibility to sell long-time holdings such as Coca-Cola or American Express.”
Tweaking the ownership principle, Kass said, also “prepares shareholders for the future when Todd Combs and Ted Weschler are running Berkshire’s portfolio and grants them the complete freedom to make whatever portfolio changes they wish.”
In a second article about the absence of a discussion of the Presidential election:
“Warren Buffett’s optimism throughout his letter to shareholders communicates indirectly that the future for America remains bright regardless of who is in the White House,” said David Kass, a Berkshire shareholder and business professor at the University of Maryland.