Berkshire Hathaway CEO Warren Buffett published his annual letter to shareholders last Saturday and as usual, it packs the witty, wise and sometimes unpopular view.
On repurchases, he explains why they should be value-accretive (meaning increase in value), “Every small bit of repurchases helps if they are made at value-accretive prices. Just as surely, when a company overpays for repurchases, the continuing shareholders lose. At such times, gains flow only to the selling shareholders and to the friendly, but expensive, investment banker who recommended the foolish purchases”.
This is a critical point as the local market has started witnessing repurchases - unfortunately, the two carried out to date have been value-dilutive.
On the same point, he added a few choice words for those dismissive of repurchase programmes, “When you are told that all repurchases are harmful to shareholders or to the country, or particularly beneficial to CEOs, you are listening to either an economic illiterate or a silver-tongued demagogue (characters that are not mutually exclusive).”
His recognition of “the float” as Berkshire’s secret sauce is important. He explains, “Though not recognised in our financial statements, this float has been an extraordinary asset for Berkshire. Since purchasing our first property-casualty insurer in 1967, Berkshire’s float has increased 8,000-fold through acquisitions, operations and innovations.”
To explain this point, whenever premiums exceed the total expenses and eventual losses, Berkshire registers an underwriting profit that adds to the investment income produced from the float.
Over the years, this combination has allowed the company to enjoy the use of “free money” – and, better yet, getting paid for holding it. Admittedly, not so many businesses have such an advantage.
Perhaps, the best advice is on capitalism in which he says, “Capitalism has two sides: The system creates an ever-growing pile of losers while concurrently delivering a gusher of improved goods and services.”
Someone in the investments, trade and industry ministry needs to understand this. Furthermore, Warren’s point on what he calls “creative destruction” hints at the value of diversification. His admission of past mistakes being muted by the extensive investments is golden.
He accepts, “Over the years, I have made many mistakes. Consequently, our extensive collection of businesses currently consists of a few enterprises that have truly extraordinary economics, many that enjoy very good economic characteristics, and a large group that are marginal.
Along the way, other businesses in which I have invested have died, their products unwanted by the public.”
On trading vs investing, he makes his point about why he favours the latter. “Charlie and I are not stock-pickers; we are business pickers. Our goal is to make meaningful investments in businesses with both long-lasting favourable economic characteristics and trustworthy managers. We own publicly-traded stocks based on our expectations about their long-term business performance, not because we view them as vehicles for adroit purchases and sales."
He summarises this view by saying, “Day to day, the stock market is a voting machine; in the long term it’s a weighing machine.”
With 58 years spent on capital-allocation decisions, it doesn’t hurt to pay attention to the sage of Omaha.
Mwanyasi is MD Canaan Capital.
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