Warren Buffett warned that debt investors were facing a “bleak future” days after a sell-off that hit government bonds and sent reflections to global stock markets.
Berkshire Hathaway’s 90-year-old CEO told shareholders in his closely followed annual letter that it was best to avoid the fixed income market, in which the company itself is a major player.
“Fixed income investors around the world – be it pension funds, insurance companies or retirees – face a bleak future,” he wrote. “Competitors need to focus on bonds for both regulatory and credit rating reasons. And bonds are not the place to be these days. “
Treasury bill prices fell dramatically last week, driven by shifts from investors seeing faster economic growth take hold. Optimism surrounding global expansion has also sparked concerns about an inflation spike, however burgeoning, and the prospect that central banks may need to adjust their stimulus policies.
Many investors had switched to adjust their portfolios before the sell-off of government bonds this week, buying lower quality debt that delivered higher returns. Buffett warned Saturday that the move by insurers and bond buyers to “mitigate the pathetic returns now available by shifting their purchases to liabilities backed by shaky borrowers” was a concern.
“Risky loans, however, are not the answer to insufficient interest rates,” he said. “Three decades ago, the once-powerful savings and credit industry destroyed itself, in part by ignoring that maxim.”
Berkshire slightly reduced its corporate debt holdings in the quarter, and the bulk of its cash – about $ 113 billion – was held in short-term Treasury bonds at year-end. The company owns $ 3.4 billion in long-term US government debt.
The gloomy sovereign debt market assessment was accompanied by Berkshire’s fourth-quarter results, which showed that the company’s net profit increased nearly 23 percent from the year before to $ 35.8 billion, or $ 23,015 per Class A -part.
The increase was driven by gains on investments and derivatives bets as the broader US stock market moved forward in the last three months of 2020. Accounting rules require Berkshire to report changes in the value of its equity investments in companies such as Apple and Coca-Cola. and Verizon as part of the quarterly results, resulting in wide fluctuations depending on the direction of the market.
Berkshire’s underlying businesses showed some resilience towards the end of last year, with operating income up just under 14 percent. For the full year, including the impact of the coronavirus crisis, corporate earnings fell 9 percent from a year earlier to $ 21.9 billion.
Buffett focused much of the company’s fourth-quarter firepower on buybacks of Berkshire stock and spent $ 8.8 billion on treasury shares. For the full year, it bought back $ 24.7 billion worth of stock. Share buybacks put a dent in Berkshire’s massive cash stack, reducing it from $ 145.7 billion at the end of September to $ 138.3 billion at the end of the year.
Buffett justified the purchases in his letter, saying that he and Berkshire Vice Chairman Charlie Munger “made those purchases because we believed they would both increase intrinsic value. problems it might encounter. “
Investors have been pushing Buffett for years as it struggled to find a major acquisition target to expand his empire, allowing his money stack to grow. The company’s stock price has lagged the benchmark S&P 500 for two consecutive years.
“The buybacks stole the show and were very strong,” said Jim Shanahan, an analyst at Edward Jones. Shanahan estimates that Berkshire will have spent an additional $ 4.5 billion on share buybacks as early as 2021, continuing last year’s pace.
Buffett admitted that he had failed to fulfill his deal mandate and also admitted that the $ 36.8 billion purchase price he paid in 2016 for Precision Castparts, the largest acquisition Berkshire has ever committed, “was a mistake. was that I had made ”. The company recorded a $ 9.8 billion write-off on the division in the second quarter.
The unit, which makes aircraft parts for companies like Boeing and Airbus, laid off more than 13,000 people last year, accounting for 43 percent of Berkshire’s workforce reductions last year.
Precision Castparts ”is far from my first such mistake. But it’s a big one, ” Buffett added.
Berkshire, who owns utility companies across the country, has moved to devote some of its war cash to renewable energy projects and is working on a multi-million dollar project to upgrade electricity transmission lines.
“Our country’s electric utilities are in need of a massive makeover, with the ultimate cost going to be huge,” he wrote. “The effort will absorb all of Berkshire Hathaway Energy’s revenues for the coming decades. We welcome the challenge and believe the additional investment will be appropriately rewarded.”
Mr. Buffett said he was looking for similar sized projects.
Rising stock markets are likely to limit Berkshire’s acquisition prospects for the foreseeable future. Buffett and Munger instead paid close attention to the company’s growing equity portfolio, which reached $ 281 billion in 2020.
“Most of the really great companies had no interest in anyone taking them over,” he said. The company took stakes in Verizon and Chevron last year and downsized its biggest stake: Apple.
“He was stubborn about the award and really stuck to his valuation discipline,” said Shanahan. “The result is that he missed opportunities.”
The investment world’s doyen also used his annual letter to affirm his belief in the US economy and to tell shareholders that the country had “moved forward” and that they should “never bet against America.”
“In its short 232-year history, however, there has been no incubator for unleashing human potential like America,” he wrote. “Despite some serious interruptions, our country’s economic progress has been breathtaking.”