Warren Buffett released his annual letter over the past weekend. It was, again, one of the shorter Berkshire shareholder letters on record. Though, it was not short on substance.
Buffett touched on a number of topics that offer lessons for investors summarized below. He also included a collection of pithy quotes from his partner Charlie Munger from an, I’m assuming, yet to be released, podcast which the worth the time to read. Let’s dive in.
Please note particularly that we own publicly-traded stocks based on our expectations about their long-term business performance, not because we view them as vehicles for adroit purchases and sales. That point is crucial: Charlie and I are not stock-pickers; we are business-pickers.
Buffett’s point is too often overlooked, especially, when people chase rising stock prices in a bull market or try to escape falling prices in bear market. When you buy a stock, you’re buying ownership in a business. The performance of the stock will mirror the performance of the business over the long run.
The same is true for any stock-based mutual fund. You’re not buying an S&P 500 index fund, you’re buying into 500(ish) businesses that happen to be tracked by the index.
It’s crucial to understand that stocks often trade at truly foolish prices, both high and low. “Efficient” markets exist only in textbooks. In truth, marketable stocks and bonds are baffling, their behavior usually understandable only in retrospect.
Last year was a perfect example of how wildly stock prices can swing from high to low.
Take Apple. The largest publicly traded company in the world hit a high of $182 on January 3, 2022. It fell 17% to $150 over the next three months. It then climbed 19%, back up to $179 in two weeks. Then it dropped 27% over the next 3.5 months to $130. Two months later it was up 34% to $175. Then fell again by 28% to hit a 52-week low of $125 on January 3, 2023.
Of course, the swings in Apple’s stock are mild compared to other stocks. The swings also say nothing about Apple’s valuation. The idea that a company’s value swings just as wildly over a 12-month period is insane. If anything, the wild swings show how quickly investors are to overreact to short-term news.
Market fluctuations are a feature of the system, impossible to predict, and an opportunity for those who understand just how foolish Mr. Market can be.
The math isn’t complicated: When the share count goes down, your interest in our many businesses goes up. Every small bit helps if repurchases are made at value-accretive prices. Just as surely, when a company overpays for repurchases, the continuing shareholders lose..
When you are told that all repurchases are harmful to shareholders or to the country, or particularly beneficial to CEOs, you are listening to either an economic illiterate or a silver-tongued demagogue (characters that are not mutually exclusive).
The anti-buyback crowd has grown louder of late. In some cases, it’s warranted. Some companies religiously use buybacks to offset shares issued from employee stock options. Rather than condemn the worst offenders, the anti-buyback brigade chose to label all buybacks as evil. It makes for a great soundbite but absolute thinking leaves a lot of room to be wrong.
Buybacks, done right, benefit shareholders. First, each share represents an equal slice of a company’s sales, cash flows, earnings, and dividends. Reducing the number of shares increases the size of the remaining slices. So a net reduction in the number of shares increases your ownership percentage in the business.
Second, when buybacks are done at a discounted share price, the money goes further. The company can buy more shares thanks to the reduced price and your slice grows even bigger.
Third, research shows that companies that reduce their shares outstanding (buyback yield) tend to perform better than those that don’t. Serial net issuers of shares perform the worst.
So the next time you hear someone raging about the evils of stock buybacks without offering any context, feel free to tune them out.
An important warning: Even the operating earnings figure that we favor can easily be manipulated by managers who wish to do so. Such tampering is often thought of as sophisticated by CEOs, directors and their advisors. Reporters and analysts embrace its existence as well. Beating “expectations” is heralded as a managerial triumph.
That activity is disgusting. It requires no talent to manipulate numbers: Only a deep desire to deceive is required. “Bold imaginative accounting,” as a CEO once described his deception to me, has become one of the shames of capitalism.
Financial chicanery, earnings manipulation, or whatever you want to call it has gone on for decades. In fact, Robert Wilson complained about it in 1968, when he said, “Every market has its grand fallacy, and I think the grand fallacy of this market is reported earnings.” He went on to explain how some companies at the time used accounting gimmicks like extending a depreciation schedule or reporting earnings before dilution in order to boost their current reported earnings. A few conglomerates were guilty of the latter.
It’s no coincidence that earnings manipulation is prevalent near the peak of big bull markets. CEOs incentivized to put short-term stock performance over long-term business success, have a habit of massaging the books to keep the party going as long as possible. Except, the party always ends and the stock suffers for it.
A Little Optimism Required
I have been investing for 80 years – more than one-third of our country’s lifetime. Despite our citizens’ penchant – almost enthusiasm – for self-criticism and self-doubt, I have yet to see a time when it made sense to make a long-term bet against America. And I doubt very much that any reader of this letter will have a different experience in the future.
There will always be a class of people known as serial complainers. They see negativity and faults in everything. And if they can’t find a legitimate issue they’ll manufacture one out of thin air. Pessimism, for whatever reason, sells. And social media just dials it up to eleven, making things appear far worse than they truly are.
What’s funny is that none of it is new. If you study enough history, you’ll realize that people are pessimistic about many of the same things today as they were decades ago.
The perceived problems, concerns, and worries that recur in the minds of the populace are surprisingly unoriginal. For example, “nobody wants to work anymore” has been a recurring complaint for over a century. (For more examples, check out Pessimists Archive.)
In other words, people find something to worry about every year since forever. And yet, things have turned out better than okay.
Of course, the stock market and the economy have their doomsayers too. Every drawdown brings out pessimists proclaiming how the economy is worse than the data suggests, hyperinflation is around the corner, and a crash is imminent. The end of the world has been predicted more times than anyone can count and yet here we still are. The stock market chugged along through the ups and downs, perceived and real problems, and overcome all of it and then some.
The point: You have to be a little optimistic about what’s to come to be a long-term investor. Besides, a little optimism makes for a far more enjoyable way to go about life.
2022 Berkshire Hathaway Shareholder Letter
Lessons from the 2021 Berkshire Letter
Lessons from the 2020 Berkshire Letter
Lessons from the 2019 Berkshire Letter