Warren Buffet’s Annual Letter and the Advices for Financial Market

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Since 1970, investors have been waiting every year for a letter to Berkshire Hathaway shareholders from Warren Buffett. And this year, the 90-year-old continues to write the 16-page letter.

Experts say that Warren Buffett’s annual letters to the shareholders of Berkshire Hathaway are arguably better than business books for those entering the investing world.

It can be said that over the past several decades, Buffett’s letters have become the “holy grail” for investors. It provides insights into how the “Oracle of Omaha” and his team select and evaluates businesses and investment strategies along with the work culture, future prospects of Berkshire…

In those strategies, the way that Buffett identified valuable companies and bought a part of them like Coca-Cola, American Express, Apple, and General Motors… is still valid.

This year, Buffett’s letter was released on Saturday, in addition to providing an overview of Berkshire’s performance over the past year, an account of investment mistakes and cautionary advice on investing in bonds before a bleak future is the main content of the letter.

Buffett’s Mistake

The Oracle of Omaha said he made a mistake, a mistake that cost billions of dollars when talking about his 2016 acquisition of Precision Castparts.

Precision Castparts is a supplier of components to aircraft manufacturers, power companies, and other industries. Some of its major customers are the multinational corporation General Electric, and the two aircraft manufacturers Airbus and Boeing.

But the COVID-19 pandemic has put the aviation industry in serious crisis, and Precision has cut more than 13,400 jobs, or 40% of its workforce, in 2020 and has only recently begun to improve profit margins.

Buffett frankly took responsibility for himself, saying: “My miscalculation was paid off by adverse developments in the aerospace industry. Precision is not my first such mistake. But it is the biggest.”

Two years ago, Buffett admitted he was “paying too much” for Kraft Foods when Berkshire and private equity firm 3G Capital merged with HJ Heinz to form Kraft Heinz in 2015. Additionally, the acquisition of Dexter Shoe in 1993 was also a “bad deal”.

Be careful with bond investment

Also in his annual letter, Buffett noted that extremely low global interest rates have undermined the attractiveness of the bond market. “Bonds are not a place to put trust.” In some large countries, such as Germany and Japan, investors make negative returns on trillions of dollars of government debt, he argues. Fixed-income investors around the world, whether pension funds, insurance companies or retirees are facing a bleak future.

Clearly, Buffett doesn’t believe in bonds because, despite the recent uptick, yields are still at historic lows.

A successful year for Berkshire

With Berkshire’s investment strategy, Buffett describes it as a classic diner. Although he’s been dipping his toes in tech stocks like Apple and Amazon recently, most of Berkshire’s investments are in slower-growing value stocks like Chevron, Verizon, American Express and Coca-Cola.

Warren Buffet's Annual Letter and the Advices for Financial Market
Warren Buffett of Berkshire Hathaway Inc.

The acquisition of Burlington Northern Santa Fe Railway is said to be one of Warren Buffett’s successes.

Despite the damage from Warren Buffett’s mistakes and the impact of the pandemic in general, Berkshire’s businesses have performed well for 2020.

Most of Berkshire’s value is in four businesses, three of which are controlled by the company, and one of which has only a 5.4% interest. All four are gems.

Berkshire has 100% ownership of the Burlington Northern Santa Fe Railway – America’s largest railroad by freight volume, and 5.4% ownership in Apple. In addition, Berkshire has a 91% ownership interest in the energy company Berkshire Hathaway Energy.

The sprawling conglomerate, which owns multiple consumer, financial, industrial, and energy companies, posted a net profit of $35.8 billion in the fourth quarter, up 23%. Berkshire’s operating profit rose nearly 14% in the quarter to $5 billion.

Adam Fayed
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