This past weekend, on Saturday, Feb. 22, Warren Buffett kept a long-running tradition alive by releasing Berkshire Hathaway's (NYSE:BRK.A)(NYSE:BRK.B) annual shareholder letter. These letters, penned by the Oracle of Omaha himself, have been a source of inspiration to long-term investors for decades, and provide insight into the "how" and "why" regarding Buffett's success as an investor.
No surprise here: Buffett prefers stocks over bonds
The latest iteration in Buffett's long line of shareholder letters didn't disappoint, with Berkshire's leader discussing the importance of retained earnings (i.e., no, you're not getting a dividend out of Berkshire Hathaway), what would happen to his Berkshire stock upon his passing, and, of course, discussing how the company's various insurance and non-insurance operating segments performed in 2019.
But the most quotable nugget of wisdom that investors are likely to take from the 2019 shareholder letter is the following snippet under the "Investments" section:
Forecasting interest rates has never been our game, and Charlie and I have no idea what rates will average over the next year, or ten or thirty years. Our perhaps jaundiced view is that the pundits who opine on these subjects reveal, by that very behavior, far more about themselves than they reveal about the future.
What we can say is that if something close to current rates should prevail over the coming decades and if corporate tax rates also remain near the low level businesses now enjoy, it is almost certain that equities will over time perform far better than long-term, fixed-rate debt instruments.
This may sound like a "bet" on the future performance of the stock market over other investment instruments, such as bonds, but it's a near-guaranteed fact that high-quality stocks will outperform bonds, commodities, housing, and pretty much every other asset, over the long run. The stock market has historically returned about 7% annually, when factoring in dividend reinvestment, which runs circles around the historic return for bonds.
Furthermore, we've witnessed firsthand just how powerful a low-interest rate environment can be for equities. Being able to reinvest retained earnings and borrow cheaply have been the key to growth stocks outperforming value stocks over the past decade.
Buffett can dish it, but following his own advice is a different story of late
While Berkshire Hathaway's shareholder letter is blatantly clear that Buffett and his team remain committed to putting the company's capital to work on the investment front, Buffett hasn't exactly done a good job of following his own advice of late.
Although the shareholder letter notes that $5 billion was spent on buying back Berkshire's stock in 2019, what stands out even more is the company's recently filed 13F with the Securities and Exchange Commission. Form 13F is a required quarterly filing for any investment company or individual with more than $100 million in assets under management, and it essentially details what purchases or sales were made during the previous quarter.
During the fourth quarter, Berkshire Hathaway added to or opened a position in eight equities (six stocks and two exchange-traded funds), while also paring down positions in eight stocks. However, just $1.6 billion in aggregate capital went toward purchasing stocks, whereas approximately $7 billion worth of stock was sold in the fourth quarter. This continued a recent trend for Buffett and his team of being a net seller of equities.
What's more, Berkshire Hathaway ended 2019 with $128 billion in cash, which is down slightly from the all-time record $128.2 billion in cash held at the end of the sequential third quarter. Buffett has previously stated that roughly $30 billion is an appropriate level of cash for Berkshire to be holding, but it has seen the company's cash hoard grow for four years, since it last made a needle-moving acquisition (Precision CastParts). This rising cash level stands in stark contrast to Buffett's own thoughts that equities will outperform over the long run.
For those who might recall, Buffett said the following in last year's shareholder letter:
In the years ahead, we hope to move much of our excess liquidity into businesses that Berkshire will permanently own. The immediate prospects for that, however, are not good: Prices are sky-high for businesses possessing decent long-term prospects.
Despite not specifically digging into stock valuations in the 2019 shareholder letter, it's pretty safe to assume that he remains skeptical of valuations and has been hesitant to put Berkshire's money to work.
History is on Warren Buffett's side
But if there is a silver lining for Buffett, it's that stock market corrections are a relatively common occurrence, suggesting that he'll be able to put some of his capital to work sooner than later.
Over the past 70 years, the benchmark S&P 500 has undergone 37 corrections of at least 10%, not including rounding. That's a downside correction every 1.89 years, on average. History has shown that bull market rallies eventually put stock market corrections, and even the steepest bear markets, firmly in the rearview mirror over the long haul. This makes any notable correction an opportunity to "buy wonderful companies at a fair price."
Though it's evident Warren Buffett remains skeptical of stocks right now, this isn't likely to be the case for too long.