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Warren Buffett warned that debt investors faced a “bleak future” days after a sell-off hit government bonds and sent repercussions through global stock markets.
The 90-year-old Berkshire Hathaway chief executive told shareholders in his annual letter that he was closely monitoring that it was best to avoid the bond market, in which the company is itself a major player.
“Fixed income investors around the world, whether they are pension funds, insurance companies or retirees, face a bleak future,” he wrote. “Competitors, for both regulatory and credit rating reasons, need to focus on bonds. And bonds are not the place to be these days. “
Treasury prices fell sharply last week, driven by changes from investors who see faster economic growth. Optimism about a global expansion has also rekindled concerns about a pick-up in inflation, however incipient, and the prospect that central banks may have to adjust their stimulus policies.
Many investors had moved to tighten their portfolios ahead of the Treasury sell-off this week, buying lower-quality debt that offered higher yields. Buffett warned Saturday that the move by insurers and bond buyers to “capitalize on the pathetic returns now available by shifting their purchases to bonds backed by unstable borrowers” was a concern.
“However, risky loans are not the answer to inadequate interest rates,” he said. “Three decades ago, the once powerful savings and loan industry destroyed itself, in part by ignoring that maxim.”
Berkshire reduced its corporate debt holdings slightly in the quarter, and the vast majority of its cash, about $ 113 billion, was held in short-term Treasury bills at the end of the year. The company owns longer-term US government debt of $ 3.4 billion.
The pessimistic assessment of the sovereign debt market accompanied Berkshire’s fourth-quarter results, which showed the company’s net earnings rose nearly 23% from a year earlier to $ 35.8 billion, or $ 23.015 per class A share. .
The increase was driven by gains on investments and derivatives bets, as the overall US stock market advanced in the last three months of 2020. Accounting rules require Berkshire to report changes in the value of its equity investments in companies. like Apple, Coca-Cola. and Verizon as part of its quarterly earnings, resulting in big swings depending on the direction of the market.
Berkshire’s underlying businesses showed some resilience late last year, with its operating profit rising just under 14 percent. For the full year, which included the fallout from the coronavirus crisis, operating profit fell 9 percent from the prior year to $ 21.9 billion.
Buffett directed much of the company’s firepower in the fourth quarter into buying back Berkshire stock, spending $ 8.8 billion on his own stock. Throughout the year, it repurchased $ 24.7 billion worth of shares. The share buybacks helped take a toll on Berkshire’s massive cash pool, reducing it from $ 145.7 billion at the end of September to $ 138.3 billion by the end of the year.
Buffett justified the purchases in his letter, saying that he and Berkshire Vice President Charlie Munger “made those purchases because we believed they would both enhance intrinsic value. . . and it would leave Berkshire with more than enough funds for any opportunity or problem it might encounter. “
Investors have pushed Buffett for years as he struggled to find a big takeover target to expand his empire, growing his pile of cash. The company’s stock price has lagged the benchmark S&P 500 for two years in a row.
“The buybacks took the show and they were really strong,” said Jim Shanahan, an analyst at Edward Jones. Shanahan estimated that Berkshire has spent another $ 4.5 billion on share buybacks as early as 2021, continuing the pace set last year.
Buffett admitted that he had not fulfilled his negotiating mandate and also admitted that the purchase price of $ 36.8 billion he reached in 2016 for Precision Castparts, the largest acquisition Berkshire has ever agreed to, was “a mistake I made.” The company took a $ 9.8 billion write-off on the split 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% of the staff cuts Berkshire made last year.
Precision Castparts “is far from my first such mistake. But it’s a big one, ”Buffett added.
Berkshire, which owns utilities across the country, has moved to spend part of its war chest on renewable energy projects and is working on a multi-million dollar project to upgrade electricity transmission lines.
“Our nation’s power companies need a massive makeover where the bottom line costs will be staggering,” he wrote. “The effort will absorb all of Berkshire Hathaway Energy’s profits for decades to come. We welcome the challenge and believe that the additional investment will be adequately rewarded. “
Buffett said he was looking for projects of a similar scale.
Rising equity markets will likely limit Berkshire’s acquisition prospects for the foreseeable future. Instead, Buffett and Munger have focused much of their attention on the company’s growing portfolio of stocks, which reached $ 281 billion in 2020.
“Most of the big companies had no interest in anyone taking over,” he said. The company took stakes in Verizon and Chevron last year and slightly trimmed its largest stake, Apple.
“He has been stubborn with the price and has really stuck to his valuation discipline,” Shanahan said. “As a result, he has missed opportunities.”
The dean of the investment world also used his annual letter to reaffirm his faith in the American economy, telling shareholders that the country had “moved on” and that they “should never bet against the United States.”
“In its brief 232 years of existence, however, there has not been an incubator to unleash human potential like the United States,” he wrote. “Despite some serious disruptions, our country’s economic progress has been impressive.”
