Warren Buffett Shares His Thoughts About Shareholders
by Charles Rotblut | March 04, 2021
Among the small collection of things I consider must-reads for investors is Warren Buffett’s annual letter to shareholders. Even if you are not a Berkshire Hathaway shareholder, like I am, there are more than enough good insights to learn from.
In this year’s letter, Buffett brought up the subject of shareholders being owners. In referencing the many companies Berkshire Hathaway invests in, the CEO said he and vice chairman Charlie Munger view them “as a collection of businesses.” It’s a concept that is often overlooked. Stocks represent an equity stake in a company. When you buy a share, you become an owner. Owners prosper when their collection of businesses grow profits and are rewarded by Mr. Market for doing so.
Buffett used five buckets to categorize Berkshire Hathaway shareholders, but classifications apply to other corporations as well. I’m sharing them because they provide a good overview of the market’s participants:
- Founder—This is Buffett, who has been donating his shares to charity;
- Index Funds—These passively managed funds “own Berkshire shares simply because they are required to do so” by their mandate to follow a certain index such as the S&P 500;
- Active Institutional Investors—These managers move from one investment to another “based on their judgment as to valuation and prospects;”
- Active Individual Investors—They are willing to part with a current holding upon finding another one that excites them. Buffett said he has “no quarrel with that attitude;”
- Long-Term Individual Investors—These shareholders have no intention of selling their shares.
There will be changes in who occupies each of the five buckets. Buffett, echoing his long-term view, expressed his hopes that such changes will be small. “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.’”
He followed up by saying that most owners of productive assets 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,” wrote Buffett.
Investors are not the only ones who change up their collection of businesses. CEOs do as well by acquiring other companies. Acquisitions that open up new markets, expand the lineup of products and services or increase market share can all make sense. The problem is when CEOs make acquisitions to build their empires or are otherwise overconfident in their abilities to run somebody’s company.
To compound matters, CEOs frequently pay premiums to control what are too often mediocre businesses. As Buffett put it, aspiring conglomerateurs solve this problem by manufacturing “a vastly overvalued stock of their own that could be used as a ‘currency’ for pricey acquisitions. (‘I’ll pay you $10,000 for your dog by giving you two of my $5,000 cats.’) … 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 conglomerateurs who were initially lionized as business geniuses by journalists, analysts and investment bankers, but whose creations ended up as business junkyards.”
Of course, Buffett himself has made several mistakes alongside his successes. A more recent mistake was Berkshire Hathaway’s 2016 acquisition of Precision Castparts (PCC). Buffett admitted to being “simply too optimistic about PCC’s normalized profit potential.” Last year’s coronavirus-induced drop in travel caused his miscalculation to be “laid bare.” Berkshire Hathaway took an $11 billion write-down on the purchase last year.
I’m going to end by sharing a tidbit about what being a long-term investor can be. In this year’s letter, Buffett mentioned ophthalmologist Stan Truhlsen. Truhlsen was an investor in Buffett’s former partnership. When the partnership distributed its shares of Berkshire Hathaway in 1969, Truhlsen and the other doctors in the partnership held onto the stock. Last year, Truhlsen turned 100 and continues to be a shareholder. So do two of his “comrades,” who are each in their “high-90s.” Noting his own age of 90 and Munger’s age of 97, Buffett pondered: “Could it be that Berkshire ownership fosters longevity?”
We hope that AAII membership may foster longevity as well …
- Retired Fortune editor Carol Loomis has edited Buffett’s shareholder letters for many years. In this AAII Journal interview, she shared her insights about the letters and Buffett’s approach to investing.
- Buffett discussed both dividends and share buybacks in this year’s letter. Combined, they add up to shareholder yield, a measure of shareholder friendliness and valuation.
- Looking for dividend growers? In the new March AAII Journal, Derek Hageman lists the 20 Dividend Aristocrats with the most consecutive dividend increases.
- Also in the new issue, AAII contributing editor Brian Haughey takes a close look at the types of stocks comprising the Dividend Aristocrats.
- Be sure to tune in next Wednesday to learn how to take full advantage of My Portfolio, a portfolio tracker built for AAII members.
AAII Sentiment Survey
The percentage of individual investors describing their short-term outlook as “neutral” reached a nine-week high in the latest AAII Sentiment Survey. Meanwhile, pessimism rose while optimism fell.
Bullish sentiment, expectations that stock prices will rise over the next six months, fell 5.7 percentage points to 40.3%. Optimism is above its historical average of 38.0% for the 14th week out of the past 16 weeks.
Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, rose 4.1 percentage points to 34.4%. Neutral sentiment was last at this level on December 23, 2020 (34.4%). Nonetheless, neutral sentiment is above its historical average of 31.5% for the first time in nine weeks.
Bearish sentiment, expectations that stock prices will fall over the next six months, rose 1.5 percentage points to 25.3%. Bearish sentiment is below its historical average of 30.5% for the fourth time this year.
This is just the fourth time over the past 14 months that neutral sentiment is above its historical average. At current levels, all three sentiment readings are within their typical historical ranges.
The ongoing coronavirus pandemic, including the distribution of vaccines, continues to have a big influence on individual investors’ outlook for the stock market. Other factors include the new administration’s policies, economic trends, the current level of valuations and economic stimulus.
In this week’s special question we asked AAII members to share their thoughts about GameStop Corp. (GME) and the stock’s big moves attributed to Reddit’s WallStreetBets discussion board.
Two out of five respondents (40%) say that the recent stock market volatility after the fight with GameStop short-sellers shows how a large number of investors can contribute to irrational exuberance and speculation. Many within this group also say that the WallStreetBets board allowed some individual investors to engage in collusion. This compares to 27% of respondents who say that the stock market has turned into a casino and that their outlook for the market is not impacted by the crazy movement of one stock. In addition, about 11% of respondents say that this proves that more regulation is needed for both hedge funds and individual investors. About 22% of responses are classified as “other” since they were too varied to be categorized in one or more groups.
Here is a sampling of the responses:
- “It was a surprise and introduced another way for investors to participate. In time, it will be regulated and challenged by many large firms. It also brought to light some significant abuses of the system on many fronts.”
- “Players looking for a free ride. Some win, some lose and some get slaughtered. It will end badly. The market gives you no free lunch and is a self-correcting mechanism. This too shall pass. Let the bleeding begin.”
- “Pure speculation and greed, type of stock I would stay away from, a few people made a huge amount of money to the detriment of lots of investors. And it is about to repeat itself, as the stock somehow is going back up with no real valid data/information.”
- “I owned GameStop shares several years ago and sold it when I realized that game producers were moving to a subscription/download model. I believe that to still be true. The WallStreetBets board prompted individual investors to engage in a pump-and-dump scheme in my opinion. Individual investors can participate in these types of events, but it is a buyer beware situation. In this case, GameStop is still a bad investment.”
Bullish: 40.3%, down 5.7 points
Neutral: 34.4%, up 4.1 points
Bearish: 25.3%, up 1.5 points
Bullish: 38.0%
Neutral: 31.5%
Bearish: 30.5%
See more Sentiment Survey results.
AAII Asset Allocation Survey
Individual investors’ exposure to equities reached a 22-month high in February according to the latest AAII Asset Allocation Survey. Fixed-income allocations, meanwhile, declined to a 24-month low.
Stock and stock fund allocations increased by 0.3 percentage points to 67.7%. Equity allocations were last higher in April 2019 (67.8%). The historical average is 61.0%.
Bond and bond fund allocations pulled back by 1.0 percentage points to 16.0%. The last time fixed-income allocations were near this level was in February 2019 (15.8%). Even with the decrease, bond and bond fund allocations are in line with their historical average of 16.0%. Fixed-income allocations have not fallen under their historical average for 24 consecutive months.
Cash allocations increased 0.7 percentage points to 16.3%. Despite this increase, February marks the 10th consecutive month that cash allocations have been below their historical average of 23.0%.
The decline in fixed-income exposure occurred as bond yields rose. Differences in which AAII members participated in the survey last month relative to January may have also played a role. As far as the increase in equity exposure, stocks of all market sizes rose throughout February. At the same time, optimism in our weekly AAII Sentiment Survey was above 45% for most of the month.
- Stocks and Stock Funds: 67.7%, up 0.3 percentage points
- Bonds and Bond Funds: 16.0%, down 1.0 percentage points
- Cash: 16.3%, up 0.7 percentage points
- Stocks: 29.0%, up 0.6 percentage points
- Stocks Funds: 38.8%, down 0.4 percentage points
- Bonds: 2.1%, down 0.3 percentage points
- Bond Funds: 13.9%, down 0.7 percentage points
- Stocks/Stock Funds: 61.5%
- Bonds/Bond Funds: 16.0%
- Cash: 22.5%
Take the Asset Allocation Survey.
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