Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) is scheduled to report its annual results over the weekend. Alongside the report, we will also get Warren Buffett (Trades, Portfolio)'s annual letter to investors.
The publication of the report has become a significant event in the calendar for value investors all over the world. Buffett's letters have become known for their wisdom and the comments he provides on the market, investing landscape and other financial matters.
After what has been an incredibly volatile year for stocks and financial assets in general, Buffett's comments this year may be more informative than usual. With that in mind, I've outlined three things below that I believe investors should be on the lookout for in the Oracle of Omaha's annual letter to shareholders.
Ever since Berkshire changed its share repurchase policy in 2018, the market has been paying close attention to its buyback activity.
Until the second half of last year, Buffett only repurchased modest amounts of stock. However, he put the hammer down in the third quarter, using around $9 billion of the group's cash mountain for share repurchases. In addition to this spending, Berkshire deployed $6 billion to buy back stock in the first half of the year. These two figures mean Berkshire spent a total of $15.7 billion in the first three quarters of 2020. I think it is likely the Oracle of Omaha used additional capital to repurchase shares in the fourth quarter.
Throughout the third quarter, the stock's A shares traded between $260,000 and $330,000. The high in the fourth quarter was around $345,000. If Buffett liked the stock at $330,000, it seems reasonable to suggest that he may have been willing to pay up to $345,000, especially when the value of the conglomerate's underlying portfolio was also increasing.
Insurance is the beating heart of Berkshire. Over the past few decades, the group's insurance business has provided tens of billions of dollars of capital for the Oracle of Omaha to invest.
Insurance can be an unpredictable business. Most insurance businesses don't make money on the underwriting side. Instead, they rely on gains in the investment portfolio to generate profit.
Berkshire's insurance business is a little different because it has a good underwriting process. This means profits are usually higher than the industry average. However, in 2020, the combination of large catastrophe events and the pandemic have wreaked havoc across the global insurance industry.
According to the firm's third-quarter SEC filing, for the first nine months of 2020, Berkshire's two core insurance businesses, Berkshire Hathaway Primary Group and Berkshire Hathaway Reinsurance Group, saw total underwriting losses of around $2.1 billion. For some comparison, during the first nine months of 2019, these two divisions reported a loss of only $10 million.
It will be interesting to see if losses have increased or decreased in the final quarter of the year and what, if anything, Buffett has to say about rising losses.
Comments on stocks
Finally, Buffett's comments on stocks will almost certainly be worth reviewing. The S&P 500 has been incredibly buoyant over the past 12 months, despite the pandemic. Even Buffett himself has been buying.
He recently initiated two large positions in the portfolio that do not seem to be traditional "Buffett-style" investments. These were Verizon (VZ, Financial) and Chevron (CVX, Financial). It will be interesting to see what he has to say about these new holdings (if anything) and if he has any other comments on the general level of the market.
Disclosure: The author owns no share mentioned.
Read more here:
- Charlie Munger's Thoughts From the Daily Journal Annual Meeting
- Charlie Munger on Why He Still Holds Wells Fargo
- Warren Buffett on the Difference Between Price and Value
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