Warren Buffett's Letter to shareholder- 2020

Warren Buffett released the most widely anticipated shareholder letter of the year on 22nd Feb 2020 and discussed the performance of Berkshire Hathaway’s business for 2019.

As usual, the was filled with page after page of valuable information for investors to digest. Here are some of the highlights of Buffett's latest letter, and what they mean to investors.


This year the "oracle of Ohama" urged the investors to focus on their companies’ operating earnings instead of obsessing over quarterly or yearly losses or gains. He also discussed the speculative nature of equity trading, the recent difficulty in finding a big acquisition target, his faith in Berkshire’s success in the decades to come and the changing world of corporate governance.

Though the letter contained a lot more than, what could be confined in an article. We have listed the key takeaways that as an investor could be valuable: 

1. Performance in comparison with index.

Maintaining the traditional format of the letters, the very first page showed an excellent outperformance of Berkshire Hathway's share in comparison with the S&P 500. While the S&P 500 has given a  compounded return of 10% year on year (on average) in the last 54 years but the Berkshire's share has grown with a rate of 20% year on year during the same period.

This clearly marks an outperformance of 10% over the index. 

2. Focus on operational Earnings. 

In the letter, consistently published each year for decades, Buffett urged investors to focus on their companies’ operating earnings instead of obsessing over quarterly or yearly losses or gains. 

Berkshire earned $81.4 billion in 2019, according to generally accepted accounting principles, but Buffett urged his investors to "focus on operating earnings — which are little changed in 2019 — and to ignore both quarterly and annual gains or losses from investments, whether these are realized or unrealized.

"Those market gyrations led to a crazy 1,900% increase in GAAP earnings! Meanwhile, in what we might call the real world, as opposed to accounting-land, Berkshire’s equity holdings averaged about $200 billion during the two years, and the intrinsic value of the stocks we own grew steadily and substantially throughout the period".

3.  The Power of long term Investing and the buying criterion: 

Anything can happen to stock prices tomorrow. Occasionally, there will be major drops in the market, perhaps of 50% magnitude or even greater. But the combination of The American Tailwind, about which I wrote last year, and the compounding wonders described by Mr. Smith [economist and financial advisor Edgar Lawrence Smith, writing in a 1924 book], will make equities the much better long-term choice for the individual who does not use borrowed money and who can control his or her emotions.

Buffett explained both he and Munger have no idea about the prices and interest rate about the future. They have always laid the three rules for picking up a business for investing-

The first aspect-  they focus on quality rather than quantity. They always focus on the business which a sustainable business model and has the means and capability to maintain their quality. 

The second aspect- they look for is the efficiency of the top management. The business is as good as the management running it. 

The third aspect- Price at which business is available to purchase. Buying a good business at a wrong price is as good as buying the wrong business at a good price.

"When we spot such businesses, our preference would be to buy 100% of them. But the opportunities to make major acquisitions possessing our required attributes are rare. Far more often, a fickle stock market serves up opportunities for us to buy large, but non-controlling, positions in publicly-traded companies that meet our standards"

4. Business acquisition.

Buffett did not make a major acquisition in 2019, marking the third year in a row since Berkshire has acquired any new business.

He emphasized patiently waiting for the right opportunity and then placing the bit at the right time and at the right valuation is the key to a successful acquisition.

Both Buffet and Munger follows the self-regulated philosophy of big and infrequent bits to buy a business.  

"We constantly seek to buy new businesses that meet three criteria...But the opportunities to make major acquisitions possessing our required attributes are rare."