Warren Buffett, the Chairman, and CEO of Berkshire Hathaway Inc (BRK.A) and (BRK.B), published his annual shareholder letter for 2021 to his shareholders last month. This article provides highlights from Warren Buffett’s annual letter for 2021. The letter makes for excellent reading, and many experienced investors look to his wisdom annually.
As a historical note, the first annual letter on the website is from 1977. You can also download all the letters between 1977 and 2021 from the Berkshire Hathaway website. In addition, there is a book containing unedited letters from 1965 to 2014, including ones not on the website.
Warren Buffett’s Beat the S&P 500 Index
Buffett’s annual shareholder letter always starts with a listing of yearly gains for Berkshire Hathaway compared to the S&P 500 Index since 1965. In 2021, Buffett returned 29.6%, while the S&P 500 Index returned 28.7%. This year is the first year Buffett has outperformed the Index in four years. The past three years were characterized by solid gains in tech momentum stocks, which reversed in 2021, as value surpassed growth, to the benefit of Berkshire Hathaway shareholders.
An investment in 1965 in Berkshire Hathaway would have returned a compounded annualized gain of 20.1% and an overall increase of 3,641,613%. Over the same period, the S&P 500 Index had a compound annualized increase of 10.5% and an overall gain of 30.209%, with dividends included.
Anyone who started investing with Buffett in 1965 would be very wealthy by this point. For example, the Othmers were early investors in Buffet’s partnerships and eventually owned Berkshire Hathaway stock by 1970. They almost became billionaires before they died in the late-90s.
Notably, not all years were gains for Berkshire Hathaway. There were ten down years, and the worst year was a (-48.7%) decline in 1975. Interestingly, the S&P 500 Index did much better in 1975, with a loss of only (-26.4%). But in most years, Warren Buffett’s Berkshire Hathaway outperformed the S&P 500 Index by a wide margin. In turn, this fact has led to outsized total returns.
Berkshire Hathaway’s Stock Holdings
Berkshire Hathaway’s stock holdings continue to grow in value over time. The market value of the company’s stocks when the annual letter was published was $350,719 million with a cost basis of $104,605 million. The market value rose from $281,170 million in 2020; the cost basis declined from $108,623 million in 2020.
Berkshire Hathaway’s stock holdings have a market value greater than almost all US companies except for about the 20 largest companies in the world. For instance, the stock holdings are more than the entire market capitalization of Exxon Mobil (XOM) or Home Depot (HD).
Berkshire is a major and often the largest shareholder for some of these companies. For instance, it owns over 19.9% of American Express Company (AXP) as well as 12.8% of Bank of America Corp (BAC) and 13.3% of Moody’s Corporation (MCO). Berkshire’s holdings in Apple are the most significant amount at $161,155 million, but this is only 5.6% of the company.
Berkshire’s ownership percentage tends to rise each year due to share buybacks by the individual companies. Since Warren Buffett does not sell the shares of other companies Berkshire owns, the percentage increases each year. For example, twelve years ago, at the end of 2010, Berkshire owned only 12.6% of American Express. The ownership stake is roughly 50% greater since then and is now 19.9%.
Below is the list of Berkshire’s 15 largest holdings of common stock. AbbVie (ABBV) and Merck (MRK) are the new stocks on this list. Two stocks no longer on the list are Mitsubishi & Co and Mitsui & Co.
In addition, Berkshire invested $10 billion in Occidental Petroleum (OXY) in a combination of preferred stock and warrants to buy common stock. This holding was valued at $10.7 billion at the end of 2021. Notably, Berkshire has been actively buying OXY common stock in 2021.
Next, Berkshire Hathaway owns 26.6% of Kraft Heinz (KHC), carried at $13.1 billion. The company also owns 38.6% of Pilot Corp, which will increase to 80% in 2023.
The Four Giants
Berkshire owns and controls a large and growing list of companies. In some cases, these companies have little-to-no connection with each other. For instance, Berkshire owns See’s Candies, Dairy Queen, GEICO, Burlington Northern Santa Fe (BNSF), McLane, and others.
Berkshire’s reach has become vast, and you are likely buying something from a company that Berkshire owns. You can check the 10-K for the list of major companies. However, they are primarily organized into five business units: Insurance and Reinsurance Businesses, Railroad Business – Burlington Northern Santa Fe, Utilities and Energy Business – Berkshire Hathaway Energy (BHE), Manufacturing Businesses, and Service and Retailing Businesses.
Last year Warren Buffett defined four businesses as the family jewels. This year he called them the Four Giants. Three are owned, and one is a significant investment.
The largest business in terms of value is the property and casualty insurance business. This business is run by Ajit Jain, who has been with Berkshire since 1986. The insurance business gave Berkshire its float at an incredible $147 billion when the annual letter was published.
Buffett thinks highly of Ajit Jain. He narrates a story about his hiring that makes for good reading and the following quote summarizes it.
Much of our huge value creation in insurance is attributable to Berkshire’s good luck in my 1986 hiring of Ajit Jain. We first met on a Saturday morning, and I quickly asked Ajit what his insurance experience had been. He replied, “None.”
I said, “Nobody’s perfect,” and hired him. That was my lucky day: Ajit actually was as perfect a choice as could have been made. Better yet, he continues to be – 35 years later.”
The float does not belong to Berkshire but is used to offset losses from its insurance operations. However, the float can be invested either in bonds or equities, in the case of Berkshire. Most insurers must invest in bonds due to regulatory and credit-rating reasons. Berkshire’s financial strength allows it to invest in equities. The company has an AA / Aa2 high investment-grade credit rating from S&P Global and Moody’s and an A++ financial strength rating from A.M. Best.
As Buffett indicates,
The insurance business is made to order for Berkshire. The product will never be obsolete, and sales volume will generally increase along with both economic growth and inflation. Also, integrity and capital will forever be important. Our company can and will behave well.
There are, of course, other insurers with excellent business models and prospects. Replication of Berkshire’s operation, however, would be almost impossible.”
Warren Buffett lists its 5.6% ownership stake in Apple (APPL) as the runner-up. The company received $785 million in dividends last year from Apple. In addition, the ownership stake percentage rose because of Apple’s share buybacks. Tim Cook, the CEO of Apple, has increased shareholder value, and recently Apple gained a ‘AAA’ prime investment-grade credit rating making it one of the safest dividend stocks to own. In addition, Apple is a Dividend Contender. Apple is an excellent stock to own the past 20 years since 2021.
The next business referred to as a giant is a railroad, BNSF. It had record earnings of about $6 billion in 2021. The railroad carries more cargo, and its trains travel more miles than any other carrier.
The fourth and last giant is the 91.1% stake in Berkshire Hathaway Energy. This segment earned a record $4 billion in 2021. Earnings have grown 30 times from $121 million in 2000. Under Greg Abel and David Sokol, BHE has become a leader in renewable energy for wind and solar.
The Balance Sheet
Berkshire’s balance sheet has $144 billion in cash and cash equivalents. This amount does not include the cash position of BNSF and BHE. Approximately $120 billion of this amount is held in US Treasury bills. Buffett and Munger have stated they would keep about a $30 billion minimum. However, the large amount held now means Buffett cannot find companies or stocks to buy.
More recently, Berkshire has been adding to its OXY holdings. Berkshire is also buying back shares. However, this is the least preferred of the four options.
Final Thoughts on Highlights from Warren Buffett’s Annual Letter for 2021
Warren Buffett’s Annual Letter always makes for good reading. He covers a wide array of items about Berkshire. In addition to the above, Buffett discusses Paul Andrews, who died in 2021. He was the founder of TTI, a Berkshire company.
Buffett also discusses his love of teaching. One thing he has tried to convey was to find a job in a field and with the people who they would select. Arguably, this translates as “do what you love,” and “work with people you trust.” Both are hard things to find but worth it.
This article is originally on Dividend Power.