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4 takeaways from Berkshire Hathaway's shareholder letter

Susan Dziubinski  |  25 Feb 2020Text size  Decrease  Increase  |  
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Berkshire Hathaway (BRK.A)/(BRK.B) chairman Warren Buffett took corporate boards to task in his annual letter to shareholders, which was released along with the company's 2019 earnings over the weekend.

Morningstar's Berkshire analyst Gregg Warren shared his take on Berkshire's 2019 earnings.

Here, we take a look at a few highlights from Buffett's letter.


Equities are still the place to be

As Buffett notes in his letter, Berkshire doesn't view its investments as "stock market wagers." Rather, the firm considers its individual stock holdings to be businesses it partly owns. Moreover, Buffett says that interest-rate forecasts aren't his thing, admitting that he and partner Charlie Munger have no idea where rates are going in the next year--or next decade, for that matter. Further, Buffett acknowledges that anything can happen to stock prices tomorrow.

Yet long term, there's no better place for investors to be than equities.

"What we can say is that if something close to current rates should prevail over the coming decades and if corporate tax rates also remain near the low level businesses now enjoy, it is almost certain that equities will over time perform far better than long-term, fixed-rate debt instruments," he writes.

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Granted, Buffett's not going out on much of a limb here. But his comments are nevertheless a good reminder for long-term investors who worry that the market is "due" for a downturn. Maybe it is. Maybe it isn't. But Buffett argues that equities are the better choice over the long term "for the individual who does not used borrowed money and who can control his or her emotions."

'Your company is 100% prepared for our departure'

Buffett assures shareholders that they "need not worry" about the eventual departure of Buffett and Munger. Indeed, Buffett outlines five factors to illustrate that the company is prepared and is poised to be prosperous after their eventual exits. In addition, Buffett reveals some of the directives that the executors of his will and trustees of his estate have been given vis a vis his sizable ownership in the firm.

"In all I estimate that it will take 12 to 15 years for the entirety of the Berkshire shares I hold at my death to move into the market," he says.

Indeed, Morningstar's Warren has argued that ongoing fears about what will happen to Berkshire's stock price after Buffett's departure has kept investors on the sidelines. The stock is trading at 4-star levels as of this writing, suggesting that it's undervalued.

Hot topic: boards of directors

Buffett spends a good deal of time discussing the purpose of boards and their compositions.

"Once, debate about the responsibilities of boards was largely limited to lawyers; today, institutional investors and politicians have weighed in as well," he writes.

Buffett thinks plenty of work needs to be done when it comes to corporate boards. Women in the boardroom remain a "work in progress," for instance. Further, director compensation has soared and job security has increased: "Board members may get politely ignored but they seldom get fired," he notes. And Buffett finds that due to the generous compensation independent directors collect today and the job security that comes with the role, independent directors can be less valuable than those directors whose fortunes are closely linked to the welfare of the company, particularly if those independent directors have never purchased shares of the company using their own money (rather than relying exclusively stock grants as parts of their compensation.)

Warren and Charlie will have company at the company meeting

Due to requests from shareholders, media, and board members, two of Berkshire's key operating managers, Ajit Jain and Greg Abel, will participate in this year's question-and-answer session at Berkshire's Annual Meeting on May 2.

The addition is notable; Morningstar's Warren suggests that both are fine candidates for the CEO role. And shareholders will get to see more of these could-be CEOs in Omaha in early May.

is director of content for Morningstar.com.

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