Warren Buffet reverses historical stance on buyback and other highlights from 2020 letter

Billionaire investor Warren Buffet released over the weekend Berkshire Hathaway Inc.’s (NYSE: BRK.A) annual letter to investors that detailed a major shift in stance related to share buybacks.

From zero to $25B

For many years, Buffett insisted against using Berkshire’s cash hoard to repurchase the company’s stock, The Wall Street Journal reported. This time around, Berkshire bought back nearly $25 billion worth of its shares in 2020.

Ironically, he explained in his letter to investors why other companies are in the wrong for allocated cash to buyback programs. He wrote that American CEOs have an “embarrassing record” of devoting more cash to share repurchase programs when “prices have risen than when they have tanked.”

But in Berkshire’s case, Buffett argues his $25 billion authorization in 2020 enhances the intrinsic value for investors while leaving enough cash in the bank for future investment opportunities, according to WSJ.

Buffett has publicly said over the past few years the market is void of any compelling investment opportunities. Investors had been expecting Buffett to reverse his stance in 2020 and allocate some of the $100 billion-plus cash to share buybacks.

Here is an Invezz.com guide on how investors can buy Berkshire Hathaway shares.

Absence of mega-deals

The company’s cash balance and short-term Treasury bonds in the fourth quarter were $138.3 billion. There were some decent-sized deals in 2020 by Berkshire’s standards, including an $8.6 billion bet on Verizon Communications Inc. (NYSE: VZ) and a $4.1 billion investment in oil giant Chevron Corp. (NYSE: CVX).

Combined, the $12.5 billion isn’t quite significant compared to its cash on hand. Smead Capital Chief Investment Officer Bill Smead told WSJ he was disappointed Buffett didn’t explain to investors in his letter why it is hoarding cash at a time when many other funds are splurging.

He said that investors need to know not only “what he’s doing but he’s not doing what he’s not doing.” 

Nevertheless, Buffett is doing all the right things as net earnings were higher by 23% year-over-year in the fourth quarter at $35.8 billion. Buffett's preferred financial metric, operating earnings, improved from $4.4 billion to $5 billion year-over-year.

Even Buffett makes mistake

The “Oracle of Omaha” himself isn’t immune to mistakes, even after decades of experience. He acknowledged in his letter that he “paid too much” for Precision Castparts in 2016.

Buffett acquired the company for more than $32 billion but took an $11 billion write-down in 2020. The write-off is due to an overly optimistic view of the company’s normalized profit potential. He wrote:

“Last year, my miscalculation was laid bare by adverse developments throughout the aerospace industry, PCC’s most important source of customers.