Warren Buffett's Shareholder Letter (2020)

iDiMi-Although our form is corporate, our attitude is partnership

Weekly Reflection

Learning from Buffett’s Shareholder Letter (2020)

Weekly Event

Warren Buffett’s Shareholder Letter (2020)

According to Generally Accepted Accounting Principles (GAAP), Berkshire earned $42.5 billion in 2020. The four components of that figure are $21.9 billion of operating earnings, $4.9 billion of realized capital gains, a $26.7 billion gain from an increase in the amount of net unrealized capital gains that exist in the stocks we hold, and an $11 billion loss from a write-down in the value of a few subsidiary and affiliated businesses. All figures are after-tax.

Operating earnings are what count most, even during periods when they are not the largest item in our GAAP total. Our focus at Berkshire is both to increase this segment of our income and to acquire large and favorably-situated businesses. Last year, however, we met neither goal: Berkshire made no sizable acquisitions and operating earnings fell 9%. We did, though, increase Berkshire’s per-share intrinsic value by both retaining earnings and repurchasing about 5% of our shares.

The two GAAP components pertaining to capital gains or losses (whether realized or unrealized) fluctuate capriciously from year to year, reflecting the vagaries of the stock market. Whatever today’s figures, Charlie Munger, my long-time partner, and I firmly believe that, over time, Berkshire’s capital gains from its investment holdings will be substantial.

As I’ve emphasized many times, Charlie and I view Berkshire’s holdings of marketable stocks – at yearend worth $281 billion – as a collection of businesses. We don’t control the operations of those companies, but we do share proportionately in their long-term prosperity. From an accounting standpoint, however, 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.

But what is out of sight, however, should not be out of mind: Those unrecorded retained earnings are usually building value – lots of value – for Berkshire. Investees use the withheld funds to expand their business, make acquisitions, pay off debt and, often, to repurchase their stock (an act that increases our share of their future earnings). As we pointed out in these pages last year, retained earnings have propelled American business throughout our country’s history. What worked for Carnegie and Rockefeller has, over the years, worked its magic for millions of shareholders as well.

Of course, some of our investees will disappoint, adding little, if anything, to the value of their company by retaining earnings. But others will over-deliver, a few spectacularly so. In aggregate, we expect our share of the huge pile of earnings retained by Berkshire’s non-controlled businesses (what others would label our equity portfolio) to eventually deliver us an equal or greater amount of capital gains. Over our 56-year tenure, that expectation has been met.

The final component in our GAAP figure – that ugly $11 billion write-down – is almost entirely the quantification of a mistake I made in 2016. That year, Berkshire purchased Precision Castparts (“PCC”), and I paid too much for the company.

No one misled me in any way – I was simply too optimistic about PCC’s normalized profit potential. Last year, my miscalculation was laid bare by adverse developments throughout the aerospace industry, PCC’s most important source of customers.

In purchasing PCC, Berkshire bought a fine company – the best in its business. Mark Donegan, PCC’s CEO, is a passionate manager who consistently pours the same energy into the business that he did before we purchased it. We are lucky to have him running things.

I believe I was right in concluding that PCC would, over time, earn good returns on the net tangible assets deployed in its operations. I was wrong, however, in judging the average amount of future earnings and, consequently, wrong in my calculation of the proper price to pay for the business.

PCC is far from my first error of that sort. But it’s a big one.

01 Two Strings to Our Bow

Berkshire is often labeled a conglomerate, a negative term applied to holding companies that own a hodge-podge of unrelated businesses. To explain how we differ from that prototype, let me review a little history.

Over time, conglomerates have generally limited themselves to buying businesses in their entirety. That strategy, however, came with two major problems.

First, most truly great businesses had no interest in having anyone take them over. Consequently, deal-hungry conglomerates had to focus on companies that lacked important and durable competitive strengths. That was not a great pond in which to fish.

Beyond that, as conglomerates junked up their portfolios, they found themselves required to pay staggering “control” premiums to snare their prey. Aspiring conglomerates knew the answer to that “overpayment” problem: They simply manufactured a vastly overvalued stock of their own that they used as a “currency” for expensive acquisitions. (“I’ll buy your $10,000 dog by giving you two of my $5,000 cats.”)

Often, the tools for fostering the overvaluation of a conglomerate’s stock involved promotional techniques and “imaginative” accounting maneuvers that were, at best, deceptive and, at worst, fraudulent.

When these tricks were successful, the conglomerate pushed its own stock to, say, 3x its business value in order to offer the target company 2x its value.

Investing illusions can continue for a surprisingly long time. Wall Street loves the fees that deal-making generates, and the press loves the stories that colorful promoters provide. At a point, also, the soaring price of a promoted stock can itself become the “proof” that an illusion is reality.

Eventually, of course, the party ends, and many business “emperors” are found to have no clothes. Financial history is replete with the names of famous conglomerates that were initially lionized by journalists, analysts and investment bankers, but whose creations ended up as business junkyards. Conglomerates earned their terrible reputation.

Charlie and I want Berkshire to be a conglomerate – i.e., a holding company that owns a multitude of diverse businesses. We do not, however, care if we control these businesses.

It took me a while to wise up. But I eventually realized that owning a non-controlling portion of a wonderful business is more profitable, more enjoyable and far less work than owning 100% of a marginal enterprise.

For those reasons, our conglomerate will remain a collection of controlled and non-controlled businesses.

Charlie and I will simply deploy your capital into whatever we believe makes the most sense, based on a company’s durable competitive strengths, the capabilities and character of its management, and price.

If that strategy requires little or no effort on our part, so much the better. In contrast to the scoring system used in diving competitions, you are awarded no points in business endeavors for “degree of difficulty.”

Furthermore, as Ronald Reagan cautioned: “It’s said that hard work never killed anyone, but I say why take the chance?“

On page A-1, we list Berkshire’s subsidiaries, a lineup of businesses that in aggregate employ 360,000 people at yearend. You can read much more about these controlled operations in the 10-K that fills the back part of this report. Our major non-controlled positions are listed on page 7. That portfolio of businesses is also large and diverse.

However, most of Berkshire’s value, however, resides in four businesses, three controlled and one in which we have only a 5.4% interest. All four are jewels.

The largest in value is our property/casualty insurance operation, which for 53 years has been the core of Berkshire. Our family of insurers is unique in the insurance field. So, too, is its manager, Ajit Jain, who joined Berkshire in 1986.

Overall, the insurance fleet operates with far more capital than is deployed by any of its competitors worldwide. That financial strength, coupled with the huge flow of cash Berkshire annually receives from its non-insurance businesses, allows our insurance companies to safely follow an equity-heavy investment strategy that would be foolhardy for the overwhelming majority of insurers. For regulatory and credit-rating reasons, our competitors must focus on bonds.

But bonds are not the place to be these days. Can you believe that the income recently available from a 10-year U.S. Treasury bond – the yield was 0.93% at yearend – had fallen 94% from the 15.8% yield available in September 1981? In certain large and important countries, such as Germany and Japan, investors earn a negative return on trillions of dollars of sovereign debt. Fixed-income investors worldwide – whether pension funds, insurance companies or retirees – face a bleak future.

Some insurers, as well as other bond investors, may try to juice the pathetic returns now available by shifting their purchases to obligations backed by shaky borrowers. Risky loans, however, are not the answer to inadequate interest rates. Three decades ago, the once-mighty savings and loan industry destroyed itself, partly by ignoring that maxim.

Berkshire now enjoys $138 billion of insurance “float” – funds that do not belong to us, but are nevertheless ours to deploy, whether in bonds, stocks or cash equivalents such as U.S. Treasury bills. Float has some similarities to bank deposits: cash flows in and out daily to insurers, with the total they hold changing very little. The massive sum held by Berkshire is likely to remain near its present level for many years and, on a cumulative basis, has been cost-free to us. That happy result, of course, could change – but, over time, I like our odds.

I have repeatedly – some might say endlessly – explained our insurance operation in my annual letters to you. This year, however, I would like new shareholders to read the section on our insurance business and float that appeared in the 2019 report. It is reprinted on page A-2. It is important that you understand the risks, as well as the opportunities, existing in our insurance activities.

Our second and third most valuable assets – it’s pretty much a toss-up at this point – are Berkshire’s 100% ownership of BNSF, America’s largest railroad by freight volume, and our 5.4% ownership of Apple. In the fourth spot is our 91% ownership of Berkshire Hathaway Energy (“BHE”). What we have here is a very unusual utility business, whose annual earnings have grown from $122 million to $3.4 billion during our 21 years of ownership.

I’ll have more to say about BNSF and BHE later in this letter. For now, however, I would like to focus on a practice Berkshire will periodically use to enhance your interest in both its “Big Four” as well as the many other assets Berkshire owns.

Last year, we demonstrated our enthusiasm for Berkshire’s spread of properties by repurchasing the equivalent of 80,998 “A” shares, spending $24.7 billion in the process. That action increased your ownership in all of Berkshire’s businesses by 5.2% without requiring you to touch your wallet.

Following criteria Charlie and I have long recommended, we made those purchases because we believed they would both enhance the per-share intrinsic value for continuing shareholders and would leave Berkshire with more than ample funds for any opportunities or problems it might encounter.

In no way do we think that Berkshire shares should be repurchased at simply any price. I emphasize that point because 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.

Berkshire’s investment in Apple vividly illustrates the power of repurchases. We began buying Apple stock late in 2016 and by early July 2018, owned slightly more than one billion Apple shares (split-adjusted). By that I mean investments held in Berkshire’s general account and exclude a very small and separately-managed holding of Apple shares that was subsequently sold. When we finished our purchases in mid-2018, Berkshire’s general account owned 5.2% of Apple.

Our cost for that stake was $36 billion. Since then, we have both enjoyed regular dividends, averaging about $775 million annually, and have also – in 2020 – pocketed an additional $11 billion by selling a small portion of our position.

Despite that sale – voila! – Berkshire now owns 5.4% of Apple. That increase was costless to us, coming about because Apple has continuously repurchased its shares, thereby substantially shrinking the number it now has outstanding.

But that’s not all the good news. Because we also repurchased Berkshire shares during the 21/2 years, you now indirectly own a full 10% more of Apple’s assets and future earnings than you did in July 2018.

This agreeable dynamic continues. Berkshire has repurchased more shares since yearend and is likely to further reduce its share count in the future. Apple has publicly stated an intention to repurchase its shares as well. As these reductions occur, Berkshire shareholders will not only own a greater interest in our insurance group and in BNSF and BHE, but will also find their indirect ownership of Apple increasing as well.

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.

And as a sultry Mae West assured us: “Too much of a good thing can be wonderful.”

03 A Tale of Two Cities

Success stories abound throughout America. 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.

Charlie and I have traveled across the nation to join with many of these individuals or their families. On the West Coast, we began that routine in 1972 by purchasing See’s Candies. A century ago, Mary See set out to deliver an age-old product that she had reinvented with special recipes. Added to her plan were quaint stores with friendly saleswomen. Her first small outlet in Los Angeles eventually led to several hundred shops spread throughout the West.

Today, Mrs. See’s creations continue to delight customers while providing life-long employment for thousands of men and women. Berkshire’s job is simply not to mess with the company’s success. When a business produces and distributes a non-essential consumer product, the customer is the boss. And, after 100 years, the customer’s message to Berkshire remains clear: “Don’t mess with my candy.” (The website is https://www.sees.com/; try the peanut brittle.)

Let’s move across the continent to Washington, D.C. In 1936, Leo Goodwin and his wife, Lillian, became convinced that auto insurance – a standardized product customarily purchased from agents – could be sold directly at a much lower price. Armed with $100,000, the pair took on large insurers possessing 1,000 times or more their capital. Government Employees Insurance Company (later shortened to GEICO) was on its way.

Luck, I’ll admit, played a part: I stumbled into the company exactly 70 years ago. It instantly became my “first love” (of an investment sort). The rest of the story is well-known: Berkshire eventually became the 100% owner of GEICO, which at 84 years of age is constantly tweaking – but not changing – the vision of Leo and Lillian.

There has been, however, a change in the company’s size. In 1937, its first full year of operation, GEICO did $238,288 of business. Last year the figure was $35 billion.

Today, with much of finance, media, government and tech located in coastal areas, it’s easy to overlook the many miracles occurring in middle America. Let’s focus on two communities that provide stunning illustrations of the talent and ambition found across our country.

You will not be surprised that I begin with Omaha. In 1940, Jack Ringwalt, a graduate of Omaha Central High School (the alma mater as well of Charlie, my dad, my first wife, our three children and two grandchildren), decided to start a property/casualty insurance company with $125,000 in capital.

Jack’s dream was preposterous, requiring his tiny operation – named National Indemnity – to compete with giant insurers, all of which possessed abundant capital. In addition, these competitors were solidly entrenched with nationwide networks of well-funded and long-established local agents.

Under Jack’s plan, unlike GEICO’s, National Indemnity would itself use any agency designated to accept it and therefore enjoyed no cost advantage in acquiring business. To overcome those formidable handicaps, National Indemnity focused on “odd-ball” risks, which were deemed unimportant by the “big boys.” And, improbably, the strategy succeeded.

Jack was honest, shrewd, likable and a bit quirky. In particular, he disliked regulators. When he became annoyed with their supervision, he felt an urge to sell his company.

Fortunately, I was nearby on one of those occasions. Jack liked the idea of joining Berkshire, and we made a deal in 1967, taking only 15 minutes to reach a handshake. I never asked for an audit.

Today National Indemnity is the only company in the world prepared to insure certain giant risks. And, yes, it remains based in Omaha, a few miles from Berkshire’s home office.

Over the years, we purchased four other businesses from Omaha families, the best known being Nebraska Furniture Mart (“NFM”). The company’s founder, Rose Blumkin (“Mrs. B”), arrived in Seattle in 1915 as a Russian emigrant, unable to read or speak English. She settled in Omaha several years later and by 1936 had saved $2,500 with which to start a furniture store.

Competitors and suppliers ignored her, and for a time their judgment seemed correct: World War II stalled her business, and at yearend 1946, the company’s net worth had grown to only $72,264. Cash, both in the till and on deposit, totaled $50 (that’s not a typo).

One priceless asset, however, was not recorded in the 1946 figures: Louie Blumkin, Mrs. B’s only son, had rejoined the store after four years in the U.S. Army. Louie fought at Normandy’s Omaha Beach following the D-Day invasion, earned a Purple Heart for injuries sustained in the Battle of the Bulge, and finally sailed home in November 1945.

Once Mrs. B and Louie were reunited, there was no stopping NFM. Driven by their dream, mother and son worked days, nights and weekends. The result was a retailing miracle.

By 1983, the pair had created a business worth $60 million. That year, on my birthday, Berkshire purchased 80% of NFM, again without an audit. I counted on the Blumkin family members to run the business; the third and fourth generations do so today. Mrs. B, it should be noted, worked daily until she was 103 – a ridiculously premature retirement age as judged by Charlie and me.

NFM now owns the three largest home-furnishings stores in the U.S. Each set a sales record in 2020, a feat achieved despite NFM’s stores being closed for more than six weeks because of COVID-19.

A postscript to this story says it all: When Mrs. B’s large family gathered for holiday meals, she always asked that they sing a song before eating. Her selection never varied: Irving Berlin’s “God Bless America.”

Let’s move east to Knoxville, the third largest city in Tennessee. There, Berkshire has ownership in two remarkable companies – Clayton Homes (100% owned) and Pilot Travel Centers (38% owned now, but headed for 80% in 2023).

Each company was started by a young man who had graduated from the University of Tennessee and stayed in Knoxville. Neither had a meaningful amount of capital nor wealthy parents.

But, so what? Today, Clayton and Pilot each have annual pre-tax earnings of more than $1 billion. Together they employ about 47,000 men and women.

Jim Clayton, after several other business ventures, founded Clayton Homes on a shoestring in 1956. “Big Jim” Haslam started what became Pilot Travel Centers in 1958 by purchasing a service station for $6,000. Each of the founders later brought a son into the business who had the same passion, values and brains as his father. Sometimes there is magic in the genes.

“Big Jim” Haslam, now 90, has recently written an inspirational book in which he relates how Jim Clayton’s son, Kevin, encouraged the Haslams to sell a large portion of Pilot to Berkshire. Every retailer knows that satisfied customers are a store’s best salespeople. That’s true when businesses change hands as well.

When you next fly over Knoxville or Omaha, tip your hat to the Claytons, Haslams and Blumkins as well as to the army of successful entrepreneurs who populate every part of our country. These builders needed America’s framework for prosperity – a unique experiment when it was crafted in 1789 – to achieve their potential. In turn, America needed citizens like Jim C., Jim H., Mrs. B and Louie to accomplish the miracles our Founding Fathers sought.

Today, many people forge similar miracles throughout the world, creating a spread of prosperity that benefits all of humanity. In its brief 232 years of existence, however, there has been no incubator for unleashing human potential like America. Despite some severe interruptions, our country’s economic progress has been breathtaking.

Beyond that, we retain our constitutional aspiration of becoming “a more perfect union.” Progress on that front has been slow, uneven and often discouraging. We have, however, moved forward and will continue to do so.

Our unwavering conclusion: Never bet against America.

04 The Berkshire Partnership

Berkshire is a Delaware corporation, and our directors must follow the state’s laws. Among them is the requirement that board members must act in the best interest of the corporation and its stockholders. Our directors embrace that doctrine.

In addition, of course, Berkshire directors want the company to delight its customers, to develop and reward the talents of its 360,000 associates, to behave honorably with lenders and to be regarded as a good citizen in the many cities and states where we operate. We value these four important constituencies.

None of these groups, however, have a vote in determining dividends, strategic direction, CEO selection, or acquisitions and divestitures. Responsibilities like those fall solely on Berkshire’s directors, who must faithfully represent the long-term interests of the corporation and its owners.

Beyond legal requirements, Charlie and I feel a special obligation to the many individuals who are long-time shareholders of Berkshire. A little personal history may help you understand our unusual attachment and how it shapes our behavior.

Before my years at Berkshire, I managed money for many individuals through a series of partnerships, the first three of which were formed in 1956. As time passed, the multiple partnerships became unwieldy. In 1962, we amalgamated 12 partnerships into a single unit, Buffett Partnership Ltd. (“BPL”).

By that year, virtually all of my own money, and that of my wife as well, was invested alongside the funds of my many limited partners. I took no salary or fees. Instead, as the general partner, I was compensated by my limited partners only after they had secured returns above an annual threshold of 6%. If returns failed to meet that level, the shortfall was carried forward against my share of future profits. (Fortunately, that never happened: Partnership returns always exceeded the 6% “hurdle.”) Over time, a large part of the resources of my parents, siblings, aunts, uncles, cousins and in-laws was invested in the partnership.

Charlie formed his partnership in 1962 and operated much as I did. Neither of us had any institutional investors and very few of our partners were financially sophisticated. The people who joined our ventures simply trusted us to treat their money as we treated our own. These individuals – either intuitively or by relying on the advice of friends – correctly concluded that Charlie and I had an extreme aversion to permanent loss of capital and that we would not have accepted their money unless we expected to do reasonably well with it.

I stumbled into business management after BPL acquired control of Berkshire in 1965. Later, in 1969, we decided to dissolve BPL. After yearend, the partnership distributed, pro-rata, all of its cash along with three stocks, the largest by value being BPL’s 70.5% interest in Berkshire.

Charlie, meanwhile, wound up his operation in 1977. Among the assets he distributed to partners was a major interest in Blue Chip Stamps, a company his partnership controlled jointly with Berkshire and me. Blue Chip was also one of the three stocks my partnership had distributed upon its dissolution.

In 1983, Berkshire and Blue Chip merged, thereby expanding Berkshire’s base of registered shareholders from 1,900 to 2,900. Charlie and I wanted everyone – old, new and prospective shareholders – to be on the same page.

Therefore, in the 1983 Annual Report, we set forth Berkshire’s “Major Business Principles.”

The first principle: “Although our form is corporate, our attitude is partnership.” That defined our relationship in 1983; it defines it today. Charlie and I – and our directors as well – believe this maxim will serve Berkshire well for decades to come.

Ownership of Berkshire is now distributed among five large “buckets,” one of which is occupied by me as the “founder.” That bucket is virtually certain to empty as the shares I own are annually distributed to various philanthropies.

Two of the remaining four buckets are filled by institutional investors, each handling other people’s money. That, however, is where the similarity between those buckets ends: Their investing procedures are worlds apart.

One institutional bucket is the index funds, a large and booming segment of the investment world. These funds simply mimic the index they track. The favorite of index investors is the S&P 500, of which Berkshire is a component. It should be emphasized that index funds own Berkshire shares simply because they are required to do so. They are on “autopilot,” buying and selling only to adjust “weightings.”

The other institutional bucket is managed by professionals, whether the funds belong to the wealthy, universities, pensioners or whomever. These professional managers have a mandate to move funds from one investment to another based on their judgment as to valuation and prospects. That is an honorable, though difficult, occupation.

We are happy to work for this “active” group, while they, in turn, look for a better place to deploy their clientele’s funds. Some managers, to be sure, look to the long term and trade infrequently. Others use computer algorithms to direct the purchase and sale of shares in a nanosecond. Some professional investors will adjust their positions based on their judgment of the macro-economy.

Our fourth bucket consists of individual shareholders, who operate in a manner similar to the active institutional managers I’ve just described. Understandably, when these shareholders see another investment that excites them, they will view their Berkshire holdings as a possible source of funds. We have no quarrel with that attitude, which is similar to the way we view some of the equities we own at Berkshire.

All that said, Charlie and I would be less than human if we did not feel a special kinship with our fifth bucket: the million-plus individual investors who simply trust us to represent their interests, whatever the future may bring. They have joined us with no intent to leave, adopting a mindset similar to that held by our original partners. Indeed, many investors from our partnership years, and/or their descendants, remain major owners of Berkshire.

A prototype of those veterans is Stan Truhlsen, a cheerful and generous Omaha ophthalmologist as well as a personal friend, who turned 100 on November 13, 2020. In 1959, Stan, along with 10 other young Omaha doctors, formed a partnership with me. They creatively named their venture Emdee, Ltd. Annually, they joined my wife and me for a celebratory dinner at our home.

When our partnership distributed its Berkshire shares in 1969, all of the doctors kept the stock they received. They may not have known the ins and outs of investing or accounting, but they did know that at Berkshire they would be treated as partners.

Two of Stan’s partners from Emdee are now in their 90s and continue to hold Berkshire shares. This group’s startling durability – along with the fact that Charlie and I are 97 and 90, respectively – raises an interesting question: Does owning Berkshire make you live longer?

Berkshire’s unusual and valued family of individual shareholders may add to your understanding of our reluctance to court Wall Street analysts and institutional investors. We already have the investors we want and, by and large, don’t believe they will be replaced by better ones.

There are only so many seats at Berkshire – i.e., outstanding shares. We like the people who occupy them.

Of course, some turnover in “partners” will occur. Charlie and I hope, however, that it will be minimal. Who, after all, seeks a rapid turnover in friends, neighbors or marriage?

In 1958, Phil Fisher wrote a superb book on investing. In it, he analogized running a public company to managing a restaurant. If you are seeking diners, he said, you can attract a clientele and prosper featuring hamburgers served with a Coke or a French cuisine accompanied by exotic wines. But you must not, Fisher warned, capriciously switch from one to the other: Your message to potential customers must be consistent with what they will find upon entering your premises.

At Berkshire, we have been serving hamburgers and Coke for 56 years. We cherish the clientele this fare has attracted.

Tens of millions of other investors and speculators in the United States and elsewhere have a wide variety of equity choices to fit their tastes. They will find CEOs and market gurus with enticing ideas. If they want price targets, managed earnings and “stories,” they will not lack suitors. “Technicians” will confidently instruct them as to what some wiggle on a chart portends for a stock’s next move. The calls for action will never stop.

Many of those investors, I should add, will do quite well. After all, ownership of stocks is very much a “positive-sum” game. Indeed, a patient and level-headed monkey, who constructs a portfolio by throwing 50 darts at a board listing all of the S&P 500, will – over time – enjoy dividends and capital gains, just as long as it never gets tempted to make changes in its original “selections.”

Productive assets such as farms, real estate and, yes, business ownership produce wealth – lots of it. Most owners of such properties will be rewarded. All that’s required is the passage of time, an inner calm, ample diversification and a minimization of transactions and fees. Still, investors must never forget that their expenses are Wall Street’s income. And, unlike my monkey, Wall Streeters do not work for peanuts.

When seats open up at Berkshire – and we hope they are few – we want them to be occupied by newcomers who understand and desire what we offer. After decades of management, Charlie and I remain unable to promise results. We can and do, however, pledge to treat you as partners.

And so, too, will our successors.

05 A Berkshire Number That May Surprise You

Recently, I learned that Berkshire’s property, plant and equipment (i.e., “business infrastructure”) in the U.S. is valued at more than any other American company under GAAP. The depreciated cost of Berkshire’s domestic “fixed assets” is $154 billion. Next in line is AT&T, with property, plant and equipment of $127 billion.

Our leadership in fixed-asset ownership, I should add, does not, in itself, signal an investment triumph. The best results occur at companies that require minimal assets to conduct high-margin businesses – and offer goods or services that will expand their sales volume with only minor needs for additional capital. We, indeed, own a few of these exceptional businesses, but they are relatively small and grow slowly. Asset-heavy companies, however, can be good investments.

In fact, we are very happy to own BNSF and BHE: In 2011, Berkshire’s first full year of BNSF ownership, the two companies had combined earnings of $4.2 billion. In 2020, a tough year for many businesses, the pair earned $8.3 billion.

BNSF and BHE will require major capital expenditures for decades to come. The good news is that both are likely to deliver appropriate returns on the incremental investment.

Let’s look first at BNSF. Your railroad carries about 15% of all non-local ton-miles (including truck, pipeline, barge and aircraft) of freight that moves in the United States. By a wide margin, BNSF’s loads exceed those of any other carrier.

The history of American railroads is fascinating. For 150 years or so, the industry consisted of huge construction, overbuilding, bankruptcies, reorganizations and mergers. The industry finally matured and rationalized a few decades ago.

BNSF began operations in 1850 with a 12-mile line in northeastern Illinois. Today, it has 390 lines, the result of a series of acquisitions and mergers. Berkshire purchased BNSF early in 2010. Since then, the railroad has invested $41 billion in fixed assets, $20 billion more than its depreciation charge.

Railroading is an outdoor sport, featuring mile-long trains obliged to operate reliably in both extreme cold and heat, as they encounter all sorts of terrain from deserts to mountains. Massive flooding periodically occurs. BNSF owns 23,000 miles of track, spread throughout 28 states, and we must spend whatever it takes to maximize safety and service throughout our vast system.

Nevertheless, BNSF has paid substantial dividends to Berkshire – $41.8 billion in total. The railroad pays us, however, only what remains after it both fulfills the needs of its business and maintains a cash balance of about $2 billion. This conservative policy allows BNSF to borrow at low rates, independent of any guarantee of its debt by Berkshire.

One more word about BNSF: Last year, Carl Ice, its CEO, and his number two, Katie Farmer, did an extraordinary job in controlling expenses while riding out a severe downturn in business. Despite a 7% decline in the volume of goods carried, the two actually increased BNSF’s profit margin by 2.9 percentage points. Carl retired at yearend, as planned, and Katie took over as CEO. Your railroad is in good hands.

Unlike BNSF, BHE pays no dividends on its common stock, a highly unusual practice in the electric-utility industry. That shunning of dividends has been the case throughout our 21 years of ownership. Unlike railroads, our country’s electric utilities need a massive makeover in which the ultimate costs will be staggering. 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.

Let me tell you about one of BHE’s endeavors – its $18 billion commitment to rework and expand a substantial portion of the outdated grid that now transmits electricity throughout the West. BHE began this project in 2006 and expects it to be completed by 2030 – yes, 2030.

The advent of renewable energy made our project a societal necessity. Historically, the coal-based generation of electricity that prevailed for a long time was located close to huge population centers. The best sites for the new world of wind and solar generation, however, are often in remote areas. When BHE assessed the situation in 2006, it was no secret that a huge investment in western transmission lines was required. Very few companies or governmental entities, however, were in a financial position to raise their hand after they tallied the project’s cost.

It should be noted that BHE’s decision to proceed was based upon its trust in America’s political, economic and judicial systems. Billions of dollars needed to be invested before meaningful revenue would flow. Transmission lines had to cross the borders of states and other jurisdictions, each with its own rules and constituencies. BHE would also need to deal with hundreds of landowners and execute complicated contracts with both the suppliers that generated renewable power and the far-away utilities that would distribute the electricity to their customers. Competing interests and defenders of the old order, along with unrealistic visionaries desiring an instantly-new world, had to be brought on board.

Surprises and delays were certain. Equally certain, however, was that BHE had the managerial talent, the institutional commitment and the financial wherewithal to fulfill its promises. Though it will be many years before our western transmission project is completed, we are today searching for other projects of similar size to take on.

Whatever the obstacles, BHE will be a leader in delivering ever-cleaner energy.

06 The Annual Meeting

Last year, on February 22, I wrote you that we planned a gala annual meeting. Within a month, the schedule was scrapped.

Our HQ group, led by Melissa Shapiro and Berkshire’s CFO, Marc Hamburg, quickly regrouped. Their improvisation worked miracles. Greg Abel, one of Berkshire’s Vice Chairmen, joined me on stage facing a dark arena, 18,000 empty seats and one camera. We were in place 45 minutes before “showtime,” without a rehearsal.

Debbie Bosanek, my incredible assistant who joined Berkshire 47 years ago at age 17, had put together 25 slides displaying various facts and figures that I had assembled at home. A capable computer and camera team operated behind the scenes to project the slides onto the screen in proper order.

Yahoo streamed the proceedings to a record-sized international audience. Becky Quick of CNBC, operating from her home in New Jersey, selected questions from thousands that shareholders had earlier submitted, as well as from those the audience emailed to her during the four hours Greg and I were on stage. We munched on See’s peanut brittle and fudge and drank Coke.

This year, on May 1, we are planning to go one better. We will again rely on Yahoo and CNBC to perform flawlessly. Yahoo will go live at 1 p.m. Eastern Daylight Time (EDT). Simply go to https://finance.yahoo.com/brklivestream.

And now – drum roll, please – a surprise. This year our meeting will be held in Los Angeles… and Charlie will be on stage with me offering answers and observations throughout the 31/2-hour question-and-answer period. I missed him last year and, more important, you clearly missed him. Our other two vice chairmen, Ajit Jain and Greg Abel, will be with us to answer questions relating to their domains.

Join us via Yahoo. Direct your tough questions to Charlie! We will have fun, and we hope you will as well.

Better yet, of course, will be the day when we see you face to face. I hope and expect that will be in 2022. The citizens of Omaha, our exhibiting subsidiaries and all of us at the home office can’t wait to get you back for an honest-to-God Berkshire meeting.

Weekly Market

Period: 2021-02-22 ——— 2021-02-28

4-Week Review: All major global indices fell this week. The main reason for A-shares was that the central bank started “mini” reverse repos and withdrew funds, and market liquidity suddenly appeared tight. US stocks were mainly due to WSB chasing and beating Wall Street. For the first time in 4 weeks, Stock Connect showed a net outflow, and Hong Kong Stock Connect net inflow this month exceeded 250 billion RMB. Wind industry sector top 3 gainers were airports, catering and tourism, and alcohol; top 3 losers were motorcycles, shipping, and aerospace. Wind concept sector top 3 gainers were air transport, HNA series, and rare earths; top 3 losers were aero engines, third-generation semiconductors, and aviation equipment.

3-Week Review: All global indices rose this week, gains: US > Hong Kong > China, Stock Connect resumed net inflows, and Hong Kong Stock Connect continued large net inflows. Wind industry sector top 3 gainers were catering and tourism, banking, and office supplies; top 3 losers were airports, shipping, and leisure goods. Wind concept sector top 3 gainers were medical, CRO, mining services, top 3 losers were ETC, HNA series, and semiconductors, and the local Chinese New Year effect was obvious.

2-Week Review: All global indices rose this week, gains: A-shares > H-shares > US stocks, Stock Connect showed net inflows for two consecutive weeks, and Hong Kong Stock Connect continued large net inflows. Wind industry sector top 3 gainers were alcohol, catering, and daily chemicals; top 3 losers were shipping, Internet, and gas. Wind concept sector top 3 gainers were medical beauty, PTA, and vaccines, top 3 losers were online games, rare earth permanent magnets, lithium battery electrolyte. The local Chinese New Year effect is still obvious. Chips and chemicals are expected to continue booming after the new year, and vaccines and testing will go down.

1-Week Review: The A-share market differentiated obviously after the Spring Festival holiday. Although market trading is still active, the leading stocks where funds huddled continued to correct, and small and medium-cap stocks rose generally. Wind industry sector top 3 gainers were precious metals, coal, petrochemicals; top 3 losers were office supplies, education index, home furnishings. Wind concept sector top 3 gainers were financial participation, Chengdu-Chongqing economic zone, smart grid, top 3 losers were tungsten ore, rare earths, industrial metal electrolyte.

This Week’s Review: Major global indices generally fell this week, the huddle disintegrated, and the main forces fought on their own. Wind industry sector top 3 gainers were environmental protection, real estate, motorcycles; top 3 losers were alcohol, automobiles, catering. Wind concept sector top 3 gainers were backdoor listing, limit-up board, low-priced stocks, top 3 losers were high-priced stocks, beverage manufacturing, medical.

Market (%)	Index	This Week	1 Week Ago	2 Weeks Ago	3 Weeks Ago
Shanghai Composite	3509.08	-5.06	5.72	3.92	0.38
Shenzhen Component	14507.45	-8.31	5.44	4.79	1.25
ChiNext Index	2914.11	-11.3	2.88	5.89	2.07
Hang Seng Index	28980.21	-5.43	2.02	3.64	3.55
HSCEI	1084.75	-1.75	5.13	3.15	1.48
Hang Seng HK Chinese Enterprises	4074.59	-3.54	4.94	1.24	2.40
Dow Jones	30932.37	-1.78	0.2	1	3.89
Nasdaq	13192.35	-4.92	-1.08	1.73	6.01
S&P 500	3811.15	-2.45	-0.28	1.24	4.65

Market (CNY, Billions)	This Week	Previous Week	2 Weeks Ago	3 Weeks Ago
Shanghai Connect	-21.75	44.72	16.84	74.97
Shenzhen Connect	-53.206	101.54	70.89	74.97
Hong Kong Connect	-105.52	149.07	96.56	485.13

Table data is actually the 5-day change, not the change for this week. On Feb 18-19, Shanghai Composite Index rose 1.12% cumulatively, Shenzhen Component Index fell 0.87% cumulatively, and ChiNext fell 37.6 cumulatively

Positions

Code	Name	Current Period Dynamics
SZ000889	Zhongjia Bochuang	Cleared
SZ002625	Guangqi Technology	Cleared
SZ300766	Merit Interactive	New
LKCO	Luokung Technology	Flat
F260104	Invesco Great Wall Domestic Demand Growth Mixed	Cleared
F163406	Xingquan Herun Graded	Cleared
F166301	Huashang Trend Flexible	Cleared
F002083	Xinhua Xin Dongli Flexible Allocation Mixed	Cleared
F004851	GF Medical Health A	Cleared
F010013	E Fund Information Industry Selected Stocks	Cleared
F005534	Huaxia New Era Mixed	Cleared
F001475	E Fund National Defense Military Industry Mixed	Cleared