Warren Buffett, Berkshire Hathaway — 2020
Berkshire’s Performance vs. the S&P 500 Annual Percentage Change Year in Per-Share Market Value of Berkshire in S&P 500 with Dividends Included 1965.........................................................................49.510.0 1966.........................................................................(3.4)(11.7) 1967.........................................................................13.330.9 1968.........................................................................77.811.0 1969.........................................................................19.4(8.4) 1970.........................................................................(4.6)3.9 1971.........................................................................80.514.6 1972.........................................................................8.118.9 1973.........................................................................(2.5)(14.8) 1974.........................................................................(48.7)(26.4) 1975.........................................................................2.537.2 1976.........................................................................129.323.6 1977.........................................................................46.8(7.4) 1978.........................................................................14.56.4 1979.........................................................................102.518.2 1980.........................................................................32.832.3 1981.........................................................................31.8(5.0) 1982.........................................................................38.421.4 1983.........................................................................69.022.4 1984.........................................................................(2.7)6.1 1985.........................................................................93.731.6 1986.........................................................................14.218.6 1987.........................................................................4.65.1 1988.........................................................................59.316.6 1989.........................................................................84.631.7 1990.........................................................................(23.1)(3.1) 1991.........................................................................35.630.5 1992.........................................................................29.87.6 1993.........................................................................38.910.1 1994.........................................................................25.01.3 1995.........................................................................57.437.6 1996.........................................................................6.223.0 1997.........................................................................34.933.4 1998.........................................................................52.228.6 1999.........................................................................(19.9)21.0 2000.........................................................................26.6(9.1) 2001.........................................................................6.5(11.9) 2002.........................................................................(3.8)(22.1) 2003.........................................................................15.828.7 2004.........................................................................4.310.9 2005.........................................................................0.84.9 2006.........................................................................24.115.8 2007.........................................................................28.75.5 2008.........................................................................(31.8)(37.0) 2009.........................................................................2.726.5 2010.........................................................................21.415.1 2011.........................................................................(4.7)2.1 2012.........................................................................16.816.0 2013.........................................................................32.732.4 2014.........................................................................27.013.7 2015.........................................................................(12.5)1.4 2016.........................................................................23.412.0 2017.........................................................................21.921.8 2018.........................................................................2.8(4.4) 2019.........................................................................11.031.5 2020.........................................................................2.418.4 Compounded Annual Gain – 1965-2020............................................20.0%10.2% Overall Gain – 1964-2020........................................................2,810,526%23,454% Note:Data are for calendar years with these exceptions: 1965 and 1966, year ended 9/30; 1967, 15 months ended 12/31. 2
BERKSHIRE HATHAWAY INC. To the Shareholders of Berkshire Hathaway Inc.: Berkshire earned $42.5 billion in 2020 according to generally accepted accounting principles (commonly called “GAAP”). The four components of that figure are $21.9 billion of operating earnings, $4.9 billion of realized capital gains, a $26.7 billion gain from an increase in the amount of netunrealizedcapital gains that exist in the stocks we hold and, finally, an $11 billionlossfrom a write-down in the value of a few subsidiary and affiliate businesses that we own. All items are stated on an after-tax basis. Operating earningsare what count most, even during periods when they arenotthe largest item in our GAAP total. Our focus at Berkshire is both to increase this segment of our income and to acquire large and favorably-situated businesses. Last year, however, we met neither goal: Berkshire made no sizable acquisitions and operating earnings fell9%. We did, though, increase Berkshire’s per-share intrinsic value by both retaining earnings and repurchasing about 5% of our shares. The two GAAP components pertaining to capital gains or losses (whether realized or unrealized) fluctuate capriciously from year to year, reflecting swings in the stock market. Whatevertoday’sfigures, Charlie Munger, my long-time partner, and I firmly believe that, over time, Berkshire’s capital gains from its investment holdings will be substantial. As I’ve emphasized many times, Charlie and I view Berkshire’s holdings of marketable stocks – at yearend worth $281 billion – as a collection ofbusinesses. We don’t control the operations of those companies, but we do share proportionately in their long-term prosperity. From an accounting standpoint, however, our portion of their earningsisnotincluded in Berkshire’s income. Instead, only what these investees pay us in dividends is recorded on our books. Under GAAP, the huge sums that investees retain on our behalf become invisible. What’s out of sight, however, shouldnotbe out of mind: Those unrecorded retained earnings are usually building value –lotsof value – for Berkshire. Investees use the withheld funds to expand their business, make acquisitions, pay off debt and, often, to repurchase their stock (an act that increases our share of their future earnings). As we pointed out in these pages last year, retained earnings have propelled American business throughout our country’s history. What worked for Carnegie and Rockefeller has, over the years, worked its magic for millions of shareholders as well. Of course, some of our investees will disappoint, adding little, if anything, to the value of their company by retaining earnings. But others will over-deliver, a few spectacularly. In aggregate, we expect our share of the huge pile of earnings retained by Berkshire’s non-controlled businesses (what others would label our equity portfolio) to eventually deliver us an equal or greater amount of capital gains. Over our 56-year tenure, that expectation has been met. 3
The final component in our GAAP figure – that ugly $11 billion write-down – is almost entirely the quantification of a mistake I made in 2016. That year, Berkshire purchased Precision Castparts (“PCC”), and I paid too much for the company. No one misled me in any way – I was simply too optimistic about PCC’s normalized profit potential. Last year, my miscalculation was laid bare by adverse developments throughout the aerospace industry, PCC’s most important source of customers. In purchasing PCC, Berkshire bought a fine company – the best in its business. Mark Donegan, PCC’s CEO, is a passionate manager who consistently pours the same energy into the business that he did before we purchased it. We are lucky to have him running things. I believe I was right in concluding that PCC would, over time, earn good returns on the net tangible assets deployed in its operations. I was wrong, however, in judging theaverageamount of future earnings and, consequently, wrong in my calculation of the proper price to pay for the business. PCC is far from my first error of that sort. But it’s a big one. Two Strings to Our Bow Berkshire is often labeled a conglomerate, a negative term applied to holding companies that own a hodge-podge of unrelated businesses. And, yes, that describes Berkshire – but only in part. To understand how and why we differ from the prototype conglomerate, let’s review a little history. Over time, conglomerates have generally limited themselves to buying businessesin their entirety. That strategy, however, came with two major problems. One was unsolvable: Most of the truly great businesses had no interest in havinganyonetake them over. Consequently, deal-hungry conglomerateurs had to focus on so-so companies that lacked important and durable competitive strengths. That was not a great pond in which to fish. Beyond that, as conglomerateurs dipped into this universe of mediocre businesses, they often found themselves required to pay staggering “control” premiums to snare their quarry. Aspiring conglomerateurs knew the answer to this “overpayment” problem: They simply needed to manufacture a vastly overvalued stock of their own that could be used as a “currency” for pricey acquisitions. (“I’ll pay you $10,000 for your dog by giving you two of my $5,000 cats.”) Often, the tools for fostering the overvaluation of a conglomerate’s stock involved promotional techniques and “imaginative” accounting maneuvers that were, at best, deceptive and that sometimes crossed the line into fraud. When these tricks were “successful,” the conglomerate pushed its own stock to, say, 3x its business value in order to offer the target 2xitsvalue. Investing illusions can continue for a surprisingly long time. Wall Street loves the fees that deal-making generates, and the press loves the stories that colorful promoters provide. At a point, also, the soaring price of a promoted stock can itself become the “proof” that an illusion is reality. 4
Eventually, of course, the party ends, and many business “emperors” are found to have no clothes. Financial history is replete with the names of famous conglomerateurs who were initially lionized as business geniuses by journalists, analysts and investment bankers, but whose creations ended up as business junkyards. Conglomeratesearnedtheir terrible reputation.
Charlie and I want our conglomerate toownall or part of a diverse group of businesses with good economic characteristics and good managers. Whether Berkshirecontrolsthese businesses, however, is unimportant to us. It took me a while to wise up. But Charlie – and also my 20-year struggle with the textile operation I inherited at Berkshire – finally convinced me that owning a non-controlling portion of a wonderful business is more profitable, more enjoyable andfarless work than struggling with 100% of a marginal enterprise. For those reasons,ourconglomerate will remain a collection of controlledandnon-controlled businesses. Charlie and I will simply deploy your capital into whatever we believe makes the most sense, based on a company’s durable competitive strengths, the capabilities and character of its management, and price. If that strategy requires little or no effort on our part, so much the better. In contrast to the scoring system utilized in diving competitions, you are awardednopoints in business endeavors for “degree of difficulty.” Furthermore, as Ronald Reagan cautioned: “It’s said that hard work never killed anyone, butIsay why take the chance?” The Family Jewels and How We Increase Your Share of These Gems On page A-1 we list Berkshire’s subsidiaries, a smorgasbord of businesses employing 360,000 at yearend. You can read much more about these controlled operations in the 10-K that fills the back part of this report. Our major positions in companies that we partly own anddon’tcontrol are listed on page 7 of this letter. That portfolio of businesses, too, is large and diverse. Mostof Berkshire’s value, however, resides in four businesses, three controlled and one in which we have only a 5.4% interest. All four are jewels. The largest in value is our property/casualty insurance operation, which for 53 years has been the core of Berkshire. Our family of insurers is unique in the insurance field. So, too, is its manager, Ajit Jain, who joined Berkshire in 1986. Overall, the insurance fleet operates withfarmore capital than is deployed by any of its competitors worldwide. That financial strength, coupled with the huge flow ofcashBerkshire annually receives from its non-insurancebusinesses, allows our insurance companies to safely follow an equity-heavy investment strategy not feasible for the overwhelming majority of insurers. Those competitors, for both regulatory and credit-rating reasons, mustfocus on bonds. And bonds arenot the place to be these days. Can you believe that the income recently available from a 10-year U.S. Treasury bond – the yield was 0.93% at yearend – had fallen94%from the 15.8% yield available in September 1981? In certain large and important countries, such as Germany and Japan, investors earn anegativereturn on trillions of dollars of sovereign debt. Fixed-income investors worldwide – whether pension funds, insurance companies or retirees – face a bleak future. 5
Some insurers, as well as other bond investors, may try to juice the pathetic returns now available by shifting their purchases to obligations backed by shaky borrowers. Risky loans, however, arenotthe answer to inadequate interest rates. Three decades ago, the once-mighty savings and loan industry destroyed itself, partly by ignoring that maxim. Berkshire now enjoys $138 billion of insurance “float” –