Warren Buffett is undoubtedly one of the most respected investors in the market. His investment style is highly sought after, as investors and traders look to emulate the tried and tested recipe he uses to pick stocks.
For those looking to get insight into how Buffett manages the $554bn valued Berkshire Hathaway [BRK-A], his annual shareholder letters make for interesting reading.
Many will be watching closely to see what Buffett says about a range of issues including his succession, stock repurchases and reductions, dividends, and his most recent foray into the ETF market.
Valuation of Berkshire Hathaway
Investors will also be looking to see what he says about Berkshire Hathaway’s struggling stock price performance. While shares in the mammoth holding company grew almost 11% in 2019, it has been a muted start to 2020 for Warren Buffett’s Berkshire.
At the end of January, the stock began a three-day slide that shaved off more than 3% to reach a low of $333,621 on 27 January. Its shares recovered from the sell-off in February but have recently been trending down again. It is currently up 0.1% YTD (through 18 February).
With the letter due to be released this Saturday (22 February), what should investors expect from Buffett’s beloved Berkshire?
Focus on the forest, forget the trees
Warren Buffett’s 2018 letter to shareholders made a point not to focus on the details of the Berkshire’s individual businesses, calling them “economic ‘trees’”, but instead to look at the entire “forest”.
“A few of our trees are diseased and unlikely to be around a decade from now,” Buffett wrote. “Many others, though, are destined to grow in size and beauty.”
Indeed, throughout 2019 13F filings indicate that Buffett’s Berkshire grew its holdings from 48 in the first quarter to end the year at 52.
Some of the most surprising buys and increases in the fourth quarter include investments in American retail company Kroger [KR] and biotechnology company Biogen [BIIB], according to a 13F filing released on 14 February.
Most interestingly though was the new additions of a couple of passive ETFs. Berkshire now owns a combined $25m of the SPDR S&P 500 ETF and the Vanguard S&P 500 ETF in a pension plan, Buffett’s assistant Debbie Bosanek told Bloomberg.
Valuation of Berkshire Hathaway's share of SPDR S&P 500 ETF
This is the “ultimate endorsement” to the $4.6tn ETF market, Bloomberg Intelligence’s Eric Balchunas was reported as saying. He added that it is the liquidity that most attracts large institutions to invest in ETFs.
Notable sells and reductions that occurred during the quarter include a 14.6% reduction in Wells Fargo [WFC], a 34.6% drop in shares in Goldman Sachs [GS] and a 1.5% reduced position in Apple [AAPL], according to Fintel.
In Warren Buffett’s 2018 letter to shareholders, he briefly touched upon the management changes Berkshire made earlier in the year when Ajit Jain taking control of all of company’s insurance activities and Greg Abel given authority over operations.
“These moves were overdue. Berkshire is now far better managed than when I alone was supervising operations. Ajit and Greg have rare talents, and Berkshire blood flows through their veins,” Buffett wrote.
“These moves were overdue. Berkshire is now far better managed than when I alone was supervising operations. Ajit and Greg have rare talents, and Berkshire blood flows through their veins” - Warren Buffett
Any further announcements regarding Buffett’s succession will be closely watched. For Greggory Warren, a financial services strategist at Morningstar, the Sage of Omaha’s three main roles — chairman, CEO and investment manager — are expected to be split when he leaves.
“Our long-standing view has been that Buffett's son, Howard Buffett, will serve as nonexecutive chairman and that Ted Weschler and Todd Combs (who is now Geico's CEO) will oversee Berkshire's investment portfolio,” Warren writes in Morningstar. He believes Ajit Jain and Greg Abel could make good candidates for the CEO.