Warren Buffett’s 2021 Letter: ‘Never Bet Against America’

Warren Buffett released his eagerly anticipated annual letter to shareholders on 28 February, something the 90-year-old has done for six decades.

His annual letters are often seen as a chance to offer investors help in understanding his thinking on broad topics and market trends, in addition to details on how his conglomerate is faring.

Two of the takeaways in a year like no other are that his steadfast motto of holding steady is still key to investing and that despite “severe interruptions in its history” and slow, “often discouraging” progress toward becoming a “more perfect union,” “never bet against America.”

Here are some key takeaways from Buffett’s letter:

1. Buffett Relies on Buybacks Instead of Deals

Berkshire repurchased a record $24.7 billion of its own stock as Buffett struggled to find better ways to invest his enormous pile of cash.

And there’s more where that came from: The conglomerate has continued to buy its stock since the end of last year and is likely to keep at it, Buffett said Saturday in his annual letter.

“That action increased your ownership in all of Berkshire’s businesses by 5.2% without requiring you to so much as touch your wallet,” Buffett said in the letter, which pointed out that the company “made no sizable acquisitions” in 2020.

Berkshire did make a small amount of progress in paring the cash pile, which fell 5% in the fourth quarter to $138.3 billion. Buffett has struggled to keep pace with the flow in recent years as Berkshire threw off cash faster than he could find higher-returning assets to snap up, leading to the surge in share repurchases.

Photo: Bloomberg

2. Apple Is as Valuable to Berkshire as BNSF Railroad

Berkshire’s $120 billion investment in Apple Inc. stock has become so valuable that Buffett places it in the same category as the sprawling railroad business he spent a decade building.

He began building a stake in the iPhone maker in 2016 and spent just $31.1 billion acquiring it all. The surge in value since then places it among the company’s top three assets, alongside his insurers and BNSF, the U.S. railroad purchase completed in 2010, according to the annual letter.

“In certain respects, it’s his kind of business,” said James Armstrong, who manages assets including Berkshire shares as president of Henry H. Armstrong Associates. “It’s very much brand name, it’s global, it’s an absolutely addictive product.”

Buffett had always balked at technology investments, saying he didn’t understand the companies well enough. But the rise of deputies including Combs and Weschler has brought Berkshire deep into the sector. In addition to Apple, the conglomerate has built up stakes in Amazon.com Inc., cloud-computing company Snowflake Inc., and Verizon Communications Inc.

3. Buffett Concedes Error in $37.2 Billion Deal

Buffett admitted he made a mistake when he bought Precision Castparts Corp. five years ago for $37.2 billion.

“I paid too much for the company,” the billionaire investor said in his annual letter. “No one misled me in any way -- I was simply too optimistic about PCC’s normalized profit potential.”

Berkshire took an almost $11 billion writedown last year that was largely tied to Precision Castparts, the maker of equipment for aerospace and energy industries based in Portland, Oregon.

The pandemic was the main culprit. Precision Castparts struggled as demand for flights plummeted, prompting airlines to park their jets and slash their schedules. Less flying means lower demand for replacement parts and new aircraft. Precision slashed its workforce by about 40% last year, according to Berkshire’s annual report.

4. Profit Gains Thanks to Railroad, Manufacturers

Despite the pandemic’s effects continuing to hit Berkshire’s collection of businesses, the conglomerate posted a near 14% gain in operating earnings in the fourth quarter compared to the same period a year earlier.

That was helped by a record quarter for railroad BNSF since its 2010 purchase and one of the best quarters for the manufacturing operations since mid-2019.

5. Never Bet Against America

“Your railroad carries about 15% of all non-local ton-miles (a ton of freight moved one mile) of goods that move in the United States, whether by rail, truck, pipeline, barge or aircraft,” Buffett said. “The history of American railroads is fascinating. After 150 years or so of frenzied construction, skullduggery, overbuilding, bankruptcies, reorganizations and mergers, the railroad industry finally emerged a few decades ago as mature and rationalized.”

Buffett believes BHE will be a leader in delivering clean energy in the future. BHE began an $18 billion endeavor to rework and expand a substantial portion of the outdated grid that now transmits electricity throughout the West, Buffett noted.

“Unlike railroads, our country’s electric utilities need a massive makeover in which the ultimate costs will be staggering,” Buffett said in the letter. “The effort will absorb all of BHE’s earnings for decades to come. We welcome the challenge and believe the added investment will be appropriately rewarded.”

And Buffett reminded investors that miracles do occur in middle America despite much of the attention on coastal areas. After all, the legend started his conglomerate in Omaha, Nebraska and its home office remains based in the Cornhusker State.

“Success stories abound throughout America,” the investor said. “Since our country’s birth, individuals with an idea, ambition and often just a pittance of capital have succeeded beyond their dreams by creating something new or by improving the customer’s experience with something old.”

6. Not A Fan Of Bonds

On the topic of investing, Buffett said ultra-low interest rates around the world diminished the appeal of the bond market.

“Bonds are not the place to be these days,” Buffett said. “Fixed-income investors worldwide – whether pension funds, insurance companies or retirees – face a bleak future.”

Buffett noted that the benchmark 10-year Treasury yield had fallen drastically to 0.93% at the end of 2020 from 15.8% in September 1981. Meanwhile, investors earn a negative return on trillions of dollars of sovereign debt in Germany and Japan, he added.