Berkshire Hathaway Letter 2019
Buffett's famous retained earnings essay and insurance strength
Berkshire Hathaway Letter 2019
Author: Warren E. Buffett Date: February 22, 2020
Overview
The 2019 letter contains Buffett's famous essay on retained earnings and compounding, explaining why he ignores GAAP accounting volatility and focuses on operating earnings. The letter also details Berkshire's insurance "float" and its unique competitive advantage.
Key Performance Data
| Metric | Value |
|---|---|
| GAAP Earnings | $81.4 billion |
| Operating Earnings | $24 billion |
| Realized Capital Gains | $3.7 billion |
| Unrealized Gains (new GAAP rule) | $53.7 billion |
Buffett criticizes the new GAAP rule requiring unrealized gains in earnings:
"In 2018... our net unrealized gains decreased by $20.6 billion, and we therefore reported GAAP earnings of only $4 billion. In 2019... GAAP earnings to the $81.4 billion... a crazy 1,900% increase in GAAP earnings!"
The Power of Retained Earnings
Buffett retells Edgar Lawrence Smith's 1924 insight that transformed investing:
"Well-managed industrial companies do not, as a rule, distribute to the shareholders the whole of their earned profits... Thus there is an element of compound interest operating in favour of a sound industrial investment."
Retained Earnings vs. Reported Dividends
| Company | Berkshire's Share of Dividends | Berkshire's Share of Retained Earnings |
|---|---|---|
| American Express | $261M | $998M |
| Apple | $773M | $2,519M |
| Bank of America | $682M | $2,167M |
| Coca-Cola | $640M | $194M |
| Total | $3,798M | $8,332M |
"The retained earnings of our investees are certain to be of major importance in the growth of Berkshire's value."
Insurance: The Star
Float Growth
| Year | Float |
|---|---|
| 1970 | $39M |
| 1980 | $237M |
| 1990 | $1,632M |
| 2000 | $27,871M |
| 2010 | $65,832M |
| 2019 | $129,423M |
"If our premiums exceed the total of our expenses and eventual losses, our insurance operation registers an underwriting profit that adds to the investment income the float produces. When such a profit is earned, we enjoy the use of free money - and, better yet, get paid for holding it."
17-Year Record
16 of 17 years at underwriting profit; only 2017 had a loss ($3.2 billion pre-tax).
Key Themes
On Speculative Thinking
"Charlie and I do not view the $248 billion... as a collection of stock market wagers."
On Interest Rates
"The pundits who opine on these subjects reveal, by that very behavior, far more about themselves than they reveal about the future."
Source
Warren E. Buffett, February 22, 2020.