Warren Buffett's Annual Letter: Buying Stocks and Buying Businesses

Reviewing the guru's comments on businesses and stocks

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Rupert Hargreaves
Mar 04, 2021
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Warren Buffett (Trades, Portfolio)'s 2020 annual letter to Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) shareholders, the billionaire tries to make it clear how much he believes in American business. He does this with case studies of Berkshire's subsidiaries.

For example, he highlighted the success of Clayton Homes and Pilot Travel Centers:

"Let's move somewhat 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 put 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."

These case studies draw attention to the fact that Berkshire is a collection of businesses and not just a stock to be traded on an exchange.

The same is true of the company's equity holdings. This is a fact Buffett also tried to make clear in his annual letter:

"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... what's out of sight, however, should not be out of mind: Those unrecorded retained earnings are usually building value lots of value for Berkshire."

This principle can be challenging to get your head around at first, but it's a policy that has not changed in the past 100 years or so. In fact, Buffett has said that he first learned a business and a stock were the same from Benjamin Graham.

Buying the business

Even though I've been covering Buffett and writing about value investing for over a decade, I still find it challenging to get around this concept.

The thing is, the whole investment world is geared to taking one's attention away from that fact. It can be as simple as the terminology used.

Articles will often refer to investments as "the stock," saying "it's time to buy the stock." Instead, the real terminology should be something along the lines of: "It could be a good idea to buy part of this business."

The terminology is just part of the equation, but it can significantly impact one's way of thinking. If I read 10 articles every day that refer to "stocks" rather than "businesses," the mentality will quickly change.

So keeping the principal in mind that stocks are actually pieces of a business is vitally important.

Buffett mentioned in his letter that there are many different ways to make money. Buying property, pieces of businesses, whole businesses and other productive assets such as farmland.

All of these assets can grow wealth, but they won't grow wealth overnight. It takes time and patience. That's the hard part, and it is why all investors need to have a different mentality when approaching the stock market.

Rather than viewing equities as "stocks," it makes more sense to consider the assets as pieces of businesses and review them as if one was buying the whole company.

This is the approach Buffett has used for decades, and it has served him well. By following this mentality, I have also found that I complete more research, and research is one of the best ways to reduce the risk of an investment.

Buffett's approach may not be perfect, but it may help swing the odds of success in my favor.

Disclosure: The author owns no stocks mentioned.

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Rupert is a committed value investor and regularly writes and invests following the principles set out by Benjamin Graham. He is the editor and co-owner of Hidden Value Stocks, a quarterly investment newsletter aimed at institutional investors. Rupert holds qualifications from the Chartered Institute for Securities & Investment and the CFA Society of the UK. He covers everything value investing for ValueWalk and other sites on a freelance basis.