Insights from Berkshire Hathaway's 2020 Shareholder Letter
Focus on Long-Term Value Creation
Think like a business owner, not a trader: "What worked for Carnegie and Rockefeller has, over the years, worked its magic for millions of shareholders as well."
Prioritize operating earnings: "Operating earnings are what count most," even during periods when they are not the largest item in GAAP totals.
Accept inevitable fluctuations: Capital gains or losses (whether realized or unrealized) "fluctuate capriciously from year to year, reflecting swings in the stock market."
Stock Selection Philosophy
View stocks as businesses: "Charlie and I firmly believe that, over time, Berkshire's capital gains from its investment holdings will be substantial."
Look beyond GAAP accounting: "From an accounting standpoint, our portion of their earnings is not included in Berkshire's income. Instead, only what these investees pay us in dividends is recorded on our books. Under GAAP, the huge sums that investees retain on our behalf become invisible."
Value retained earnings: "Those unrecorded retained earnings are usually building value—lots of value—for Berkshire."
The Power of Stock Repurchases
Repurchase only at sensible prices: "In no way do we think that Berkshire shares should be repurchased at simply any price."
Buy when prices are down: "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."
Appreciate the math: "The math of repurchases grinds away slowly, but can be powerful over time. The process offers a simple way for investors to own an ever-expanding portion of exceptional businesses."
Asset and Business Selection
Seek businesses with durable competitive advantages: Look for companies like GEICO and See's Candy that maintain their edge over decades.
Value honest, passionate management: Identify leaders like the Blumkins, Claytons, and Haslams who are fully committed to their businesses.
Recognize that asset-light is ideal, but asset-heavy can work: "The best results occur at companies that require minimal assets to conduct high-margin businesses... Asset-heavy companies, however, can be good investments."
Investor Temperament
Maintain consistent principles: "Your message to potential customers must be consistent with what they will find upon entering your premises."
Focus on partnerships, not transactions: "Although our form is corporate, our attitude is partnership."
Practice patience: "All that's required is the passage of time, an inner calm, ample diversification and a minimization of transactions and fees."
Remember the Wall Street dynamic: "Investors must never forget that their expenses are Wall Street's income."
Risk Management
Avoid debt-fueled investing: "Risky loans are not the answer to inadequate interest rates."
Maintain abundant capital: Berkshire's insurance companies "operate with far more capital than is deployed by any of [their] competitors worldwide."
Never bet against America: "In its brief 232 years of existence, there has been no incubator for unleashing human potential like America."
