Berkshire Hathaway 2020 Annual report [pdf] | Hacker News Reader

Berkshire Hathaway 2020 Annual report [pdf]

berkshirehathaway.com

68 pointsmxschumacher42 comments

"In no way do we think that Berkshire shares should be repurchased at simply any price. I emphasize that point because American CEOs have an embarrassing record of devoting more company funds to repurchases when prices have risen than when they have tanked. Our approach is exactly the reverse."

For many companies, the approach seems to be "we've paid our dividends, we have some cash left over, let's buy back our own stock" - with a complete disregard for the valuation. Buying your own shares at too high a price (see GE and US airlines) is equivalent to incinerating money, whereas buybacks at low prices (Teledyne, Apple) do wonders for returns. If you run a listed business you have to think long and hard about what your firm is worth without just looking at the market price. William Thorndike's book "The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success" [0] makes that point beautifully

Right now it is interesting to observe that many companies are doing the opposite of buybacks at a record clip, the share issuance of firms like Twillio is astounding.

[0] https://www.goodreads.com/book/show/13586932-the-outsiders

They don't know what to do with the money, when there's no R&D anymore.

So why not pay it out as dividends?

Dividends are a forced distribution for the shareholder. With the ability to sell fractional shares, stock buybacks are equivalent to optional dividends.

And friendlier in regards to taxation. Doing a roundtrip of buying more shares with dividends means paying income taxes.

I hear this a lot, but is it really true? For shares of US companies (or foreign companies listed on US exchanges) held for > 60 days before the ex-dividend rate, dividends are taxed at the long-term capital gains rate.[1]

1. https://www.investopedia.com/ask/answers/090415/dividend-inc...

The rate may end up the same in many situations, but it’s still helpful to control the timing on when you pay long term capital gains. With dividends you’re still paying now rather than later, or perhaps never. (There’s no capital gains on donated stock or inherited stock.)

The point is that you pay 0 tax until you sell. That’s better than being forced to pay long term capital gains every year on a dividend.

Do most people reinvest dividends in the same stock? What you say makes sense, but I can also see holding a stock and using the dividends for another use, for example just cash withdrawals or to buy another stock.

I don't know if it's "most people", but basically every dividend stock has a DRIP program that will automatically use your dividends to purchase shares of that stock. It's a very common strategy outside of the frenzied trading encouraged by apps like robinhood.

40% of corporate equity is owned by foreign funds that don't pay US taxes at all (thank you, capital inflows!)

30% of corporate equity is owned by tax advantaged retirement funds

Only 30% of shares are even subject to this tax trade off discussion.

Some would say this is equivalent to "we've got no better ideas, here, see if you can put the capital to work".

Given they are known for expert capital allocation that'd undermine investor confidence.

A buyback of company shares with company funds drives up the price of all the shares including those of the executives and board members making the decision.

Well, exchanging cash for an overvalued stock does not drive up prices for long. I have mentioned negative examples above

It only needs to be long enough to sell...

I wonder if there is any measurable impact from share buybacks propping up or raising price which increases market cap which causes index funds to increase their holdings which then also props up or raises the price, etc.

No it doesn't. There are fewer shares in the company, but the company is worse less. There's no good reason to think that in general the remaining shares in a company will be worth more or less after buyback than what they would be worth if the company had simply held onto the money.

Typically, when there is demand the price goes up, the stock price is not hard linked to the company value, it can lag, lead or even temporarily be correct but generally speaking it takes a while for an over or underpriced stock to catch up to the real value, long enough that there are whole industries dedicated to spotting these differences.

The best (worst) part is: they don't even need to use actual company funds. Thanks to our wonderful (awful) central banks, they can have the company borrow huge amounts of money at almost zero interest.

Outcomes: the company is more leveraged, executives make huge personal profits without doing anything meaningful, central banks observe the increased risk to the system (higher leverage) and decide they must keep rates lower for longer... inducing the cycle to repeat ad nauseam. It's an integral part of the monetary doom loop we're living through.

If we ignore shady deals, that I suppose happen, Central Banks rational for keeping the interest rate low is to facilitate investment in the economy when there is not risk of inflation (the real economy is under-performing). Keeping the interest rate low facilitates lending, that's the point. Hopefully, some of that money will be use for productive investments.

If a company can borrow money it's because the lender (a private bank normally) considers that operation makes business sense (for the lender). It's the company and the lender the responsible parts for that deal, not the central bank.

Yes, that's one of their stated reasons (there are others). But it hasn't worked for a long very time - the net effect is well and truly negative by now.

My view:

Deliberately stoking massive asset price inflation and wealth inequality while preventing wage inflation is a major cause (along with offshoring) of the social and political tension across the developed world.

Our glorious central bankers (with a few honorable exceptions) still believe that this pursuit of the "wealth effect" is the right thing to do, and the benefits of their monetary diarrhoea will eventually trickle down to everyone. It's not happening and it won't happen.

Some governments are waking up and looking at unifying fiscal and monetary policy. Some are even directing where the credit goes. Frankly I think "independent" central banking exists today in name only, and may disappear within 10 years.

So prepare for inflation to return, to "surprise" everyone, and for our central banks to ignore it and keep suppressing rates right up to the bitter end. And when the rates do rise again, all the zombie firms, malinvestment, bezzles, and unpayable debts will float to the surface and we'll have a bigger version of 2008 to deal with. And a pensions crisis to follow.

I'd like to see a book about 8 CEOs who did everything wrong and wound up bankrupting the company. Not a blurb, like these 25[0], but an in-depth, biographical play-by-play. It takes decades to destroy a Blockbuster or Borders and likely there was more than one CEO involved. Decades is a long time to watch a train wreck and keep doing the wrong thing.

[0] https://www.gobankingrates.com/money/business/most-epic-corp...

Take a look at Jim Collins’ How the Mighty Fall. https://www.amazon.com/How-Mighty-Fall-Companies-Never/dp/09...

Yahoo is a case study I think.

But doesn't he mention how good the gains in apple ownership made by berkshire due to apples' own buyback program and their near future plans to buyback more.

> repurchases when prices have risen

Apple did and planning to the exact thing

Another example of good use of share issuance would be AMC. They have been raising a lot of capital during the pandemic through share issuing. Saving their business.

Interesting that there are no comments on the 750m investment in Snowflake made last year, which is now valued at 1.7b

https://whalewisdom.com/filer/berkshire-hathaway-inc#tabhold...

What kind of commentary would you expect on such a small position?

Its their first pure tech play, surely deserves a mention of this major shift of their attitude towards 1. unprofitable 2.tech stocks? Surely their investors are anxious to know where they stand on it

They were notoriously for buying $10.7b worth of IBM shares in 2011 and selling in 2018 for a loss north of 30% [0]. In retrospect it was an obvious mistake, but these investment decisions always are.

SNOW is unique in their portfolio because it is the only investment in tech. What comes to mind is:

-how and who made the investment decision (does Buffett knows how valuable Snowflake is for tech?);

- will they start investing in later-stage pre-ipo companies (Stone Payments is a Brazilian fintech that is akin to Snowflake in the timing and size of committment)?

[0] https://www.cnbc.com/2018/05/04/warren-buffett-says-berkshir...

> SNOW is unique in their portfolio because it is the only investment in tech.

In addition to the 1.72B in Snowflake, I see 1.74B in Amazon and another 117.7B in Apple.

https://www.sec.gov/Archives/edgar/data/1067983/000095012321...

While these are certainly tech companies, Amazon and Apple both primarily make their money by selling physical things. I believe part of his reservation in “tech” historically has been with companies that do not - not that he thinks they’re bad investments, just that he doesn’t understand them well enough to invest himself.

The major difference is the risk profile of the decisions (although the time horizon might ultimately be the same): both Amazon and Apple were more mature (and significantly older, larger orgs, brand awareness, etc) running B2B and B2C businesses, while Snowflake is less than 10 years old and not well known outside some circles

I would love to see a long term comparison between Berkshires performance and a "Buy and hold the Nasdaq and reinvest the dividends" strategy.

Without dividends, the Nasdaq 100 had an annualized ROI of 13.85% since 2021-03-31 which is the first date Google shows in the Nasdaq chart.

Any ideas how to get data on Nasdaq with reinvested dividends?

It's going to depend on your tax rate and the expense ratio of whatever Nasdaq ETF you choose unless you're planning to self-manage 100+ company investments. Dividends get taxed (usually) as income, so you'd have to deduct that from the average dividend yield. QQQ, for example, has a 0.2% expense ratio and around 0.55% yield. If you assume 30% tax rate on the dividends, the after-tax, after-expense yield is under 0.2%, or basically negligible even with compounding.

If you want to compare dividend reinvestment, you should stick to non-tech indexes.

In the U.S., dividends are taxed at the capital gains rate if you’ve held the stock for a year or more. They are taxed as income only if youv’ve held the stock for less than a year.

Anecdotally I can tell you that lately the buy Nasdaq was a much better option.

I bought VTI and BRK.B at roughly the same time, and VTI has doubled and BRK.B has had a modest return.

Who cares about short term fluctuations?

Charlie Munger spoke at the Daily Journal annual meeting. There wasn't a live audience this year and it felt stiff and uncomfortable.

Dupe: https://news.ycombinator.com/item?id=26285185

This thread is older, you are linking to the duplicate

Not exactly a dupe, Annual Letter != Annual Report.

Reply on news.ycombinator.com