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warren buffett's highly anticipated letter to shareholders is out now so let's go through what the oracle of omaha had to say hey everyone in this video we're going to look at berkshire hathaway's 2020 annual report along with a 14 14-page letter from warren buffett to his investors his letter was jam-packed with details about berkshire's earnings their strategies details about some of their holdings and some of the success stories in their past just quickly before we kick off i just wanted to say a big thank you to everyone who subscribed because it really does mean a lot to me if you're new here and you want to hear about all things finance just click the subscribe button below but now let's jump into it so let's start with berkshire hathaway's key numbers from 2020. it earned 42.5 billion in 2020 even when taking into account an 11 billion loss from a write down in the value of businesses they own however this was well down from 2019's earnings of 81.4 billion the disappointing result was reflected in its returns with the per share market value of berkshire only increasing 2.4 percent in 2020 compared to returns of 18.4 percent on the s p 500. there were no large acquisitions in 2020 and operating earnings fell nine percent however the company did repurchase 5.2 percent of its shares for 24.7 billion dollars now this was up 4.9 billion dollars from last year's repurchasing of shares now the strategy remains to acquire large and favorably situated businesses and also to grow operating earnings however they didn't meet either of these goals during 2020. now in his letter buffer did write about the power of retained earnings and how this does not get reflected in berkshire's income as they only record the dividends that are paid out by the companies they invest in but it does accept responsibility for the 11 billion dollar write down which was almost entirely due to a mistake he made in 2016 when purchasing precision cast parts now he said no one misled me in any way i was simply too optimistic about pcc's normalized profit potential last year my miscalculation was laid bare by adverse developments throughout the aerospace industry pcc's most important source of customers however buffett still expects pcc to over time earn good returns but he takes responsibility for overestimating the average amount of future earnings and he said pcc is far from my first error of that sort but it is a big one now in buffett's letter it's quite clear that he doesn't like berkshire being described as a conglomerate because he describes conglomerates as being holding companies that just own a hodgepodge of different unrelated businesses and whilst he accepts that describes berkshire in part he differentiates berkshire from other conglomerates that only buy businesses in their entirety and this can cause two problems which buffett briefly talks about the first is that great businesses really have no interest in being taken over which leads to deal-hungry conglomerates focusing on so-so companies which buffett caused not a great pond to fish in the second is that conglomerates need to pay a premium to take over mediocre businesses and they use their overvalued stock for these expensive acquisitions buffett fundamentally disagrees with their methods saying that often the tools for fostering the overvaluation of a conglomerate stock involved promotional techniques and imaginative accounting manoeuvres that were at best deceptive and that sometimes crossed the line into fraud and buffett also writes about how wall street loves the fees that come with deal making and the hype can push the stock price up whereas it's just an illusion and many conglomerates were found out as business junkyards buffer then goes on to differentiate berkshire's strategy saying that over time he and charlie munger realized that it was more profitable and more enjoyable to own a part of a very successful company than to own a hundred percent of a marginal enterprise now the strategy remains to have a mix of controlled and non-controlled businesses and when they're looking at doing a deal they'll look at things such as price their competitive advantage and the character and the capability of management instead he sets out berkshire's broad strategy he says charlie and i want our conglomerate to own all or part of a diverse group of businesses with good economic characteristics and good managers whether berkshire controls these businesses however is unimportant to us and buffett also goes on to state his opinion that equities will outperform bonds citing negative returns in sovereign debt in germany and japan and saying that fixed income investors really face a bleak future and he doesn't believe that berkshire should repurchase its shares at any price but it is likely that it will reduce its share count in the future as it rewards existing shareholders by having each share worth a larger stake in the company however analysts suggest that the company has already started strong share repurchasing in 2021 with more than four billion dollars worth of shares repurchased through to 16th of feb next buffett runs through the big four holdings of berkshire where most of its value comes from so let's have a look at these first there's berkshire property casualty insurance buffett highlights the company can generate strong returns and deploy an equity heavy strategy where other insurers just can't because they have more capital than its competitors and they can use cash flow from berkshire's non-insurance businesses and meanwhile their competitors need to invest in bonds for regulatory and credit ratings purposes and this is their competitive advantage now berkshire also has a 5.4 ownership stake of apple and berkshire started buying apple stock back in late 2016 and by july 2018 they owned more than one billion apple shares and this came at a total cost of 36 billion and by mid 2018 they owned 5.2 percent of apple and from that they received about 775 million dollars in dividends every year and despite selling a stake of their shares worth about 11 billion dollars they now hold 5.4 of apple due to apple repurchasing its shares and buffett also writes about the two other members of its big four that own substantial american-based property plant and equipment and the combined value of the u.s fixed assets of these two companies is more than any other us company being worth 154 billion dollars and in 2020 these two companies had a combined earnings of 8.3 billion the first is bnsf railway and berkshire acquired the railway business in 2010 and since then has invested 41 billion dollars in fixed assets but notwithstanding that it has paid 41.8 billion dollars in dividends since its acquisition while still retaining about two billion dollars in cash to allow it to borrow at low rates now the last member of the big four is berkshire hathaway energy of which berkshire has a 91 ownership stake of it has grown its annual earnings from 122 million to 3.4 billion dollars in the 21 years that berkshire has owned it however it pays no dividends as america's electric utilities need a massive makeover which will cost a significant amount of money and this will absorb all of bhe's earnings for decades to come and bhe's 18 billion commitment to rework a portion of the outdated grid started back in 2006 but it's still not expected to be completed until 2030. the requirement for renewable energy made this project necessary because previously coal-based generation of electricity was what prevailed now buffer does remain confident in bhe's management to deliver cleaner energy now here's a list of berkshires investments where they do not have a controlling stake and it shows a strong track record of performance with a combined acquisition cost of 108.62 billion compared to a current market value of 281.17 billion buffett then takes us on a trip down memory lane as he goes through some of the success stories where humble entrepreneurs have built multi-million businesses and where berkshire hathaway has invested in them so let's go through some of these stories the first is government employees insurance company which was founded back in 1936 by leo goodwin he started with a hundred thousand dollars in capital wanting to take on large insurers in the auto industry and now they've grown their revenue from 238 000 in that first year to 35 billion last year and berkshire have a 100 stake in this business another one is national indemnity which was founded by jack ringwald in 1940 with 125 000 in capital now jack wanted to take on large insurers by focusing on oddball risks now jack quite disliked regulators so on occasion when he would cop heat from them he'd want to sell the business and it was for this reason in 1967 that jack agreed to join berkshire after having a 15-minute discussion with buffett where they made a handshake agreement one of the stories that is quite heartwarming is that of nebraska furniture mart and its founder rose blumkin now rose arrived in seattle in 1915 as a russian immigrant unable to speak or read english and by 1936 she saved two thousand five hundred dollars to start her own furniture store but she faced great difficulty with suppliers and competitors ignoring her and 10 years later the business was still only worth 72 and 264 dollars and they only had 50 dollars cash on hand however things started to turn for the business in november 1945 when her only son louis returned to work for the store after four years in the us army where he earned a purple heart for injuries he sustained in the battle of the bulge and by 1983 their business was worth 60 million dollars and it was that year that berkshire bought 80 of the business and again they did it without an audit and they relied on the bumpkin family to run the business and this still continues with the third and fourth generation blumkins continuing to run the business now dear old mrs blumkin she worked until she was 103 and buffett made a cheeky comment in his letter saying that it was a ridiculously premature retirement age now just last year nebraska furniture mart set a sales record to spy covert where their stores would close more than six weeks and after these heartwarming stories of success buffett says that today many people forged similar miracles throughout the world creating a spread of prosperity that benefits all of humanity and in its brief 232 years of existence however there has been no incubator for unleashing human potential like america despite some severe interruptions our country's economic progress has been breathtaking and beyond that we retain our constitutional aspiration of becoming a more perfect union progress on that front has been slow and even and often discouraging we have however moved forward and will continue to do so our unwavering conclusion never bet against america finally buffett writes about his and charlie munge's special obligation to its shareholders and it puts a bit of history in his letter so before berkshire buffett managed money for individuals through partnerships which he amalgamated in 1962 to buffett partnership and all his money along with his wives were invested in the partnership and he received no salary or fees until annual returns of over six percent were achieved but being the greatest investor in history he never dipped below six percent in returns per year and over the years his family's resources including his parents siblings aunts uncles cousins and in-laws were all invested in the partnership charlie munger started his partnership in 1962 and operated the same way as buffett as there were no institutional investors and individual investors trusted them to treat their money as they treated their own and in 1983 after buffett and munger merged their businesses in their first report they stated that their first principle was although our form is corporate our attitude is partnership and buffett reiterates it saying that it still defines their relationship with investors today buffett writes about the special relationship that both he and manga feel with their individual investors particularly those that have invested in the company with no intent to leave it talks about an example of 10 young doctors from omaha who started investing in buffett's partnership in 1959 and they continue to invest with berkshire for decades after that with one of those doctors in their late 90s now still holding berkshire shares and he makes this one firm commitment to his investors he says after decades of management charlie and i remain unable to promise results we can and do however pledge to treat you as partners and so too will our successes now what was disappointing was that buffett didn't address some of the elephants in the room he didn't talk about a succession plan nor the poor performance in 2020 or the missed opportunities in 2020. personally i would have liked for him to have addressed these things and to also talk about what opportunities might be in 2021 and what the strategy is outside of just repurchasing their shares finally buffett announced that the berkshire annual meeting will be held on the 1st of may this year and will be streamed on yahoo now the meeting is going to be live streamed on yahoo starting from 1pm with questions and answers from 1 30 to 5 and the official meeting from 5 to 5 30. and if you have any questions for the meeting you can email them to this email address but i'll put the live stream link in the description along with the email address i want to know whether you guys think that berkshire will outperform the s p 500 leave a comment below and i hope to see you all next time