© Reuters. Berkshire Hathaway Chairman Warren Buffett walks through the exhibit hall as shareholders gather to hear from the billionaire investor at Berkshire Hathaway Inc’s annual shareholder meeting in Omaha

By Jonathan Stempel and David Randall

NEW YORK (Reuters) – Warren Buffett on Saturday forcefully defended Berkshire Hathaway (NYSE:) Inc’s decision to invest heavily in stocks of companies such as Apple Inc (NASDAQ:) as he labors through a four-year drought since his last major acquisition of a company.

In his widely-read annual letter to Berkshire shareholders, the 89-year-old Buffett also assured that his conglomerate is “100% prepared” for the eventual departures of him and Charlie Munger, his 96-year-old vice chairman.

Berkshire also posted record full-year earnings of $81.42 billion, boosted by unrealized gains from its stock investments, though operating profit fell 3% to $23.97 billion.

The Omaha, Nebraska-based conglomerate has more than 90 operating units employing 391,539 people, including the BNSF railroad, Geico car insurer, Dairy Queen ice cream and See’s candies; several clothing and jewelry companies, and namesake utility and real estate brokerage businesses.

It also invests in such companies as American Express Co (NYSE:), Bank of America Corp (NYSE:), Coca-Cola (NYSE:) Co and Wells Fargo (NYSE:) & Co, though the latter stake is shrinking.

Berkshire ended the year with a $128 billion cash hoard, having had no major acquisitions since paying $32.1 billion in January 2016 for aircraft parts maker Precision Castparts. It repurchased $5 billion of its own stock in 2019, the most ever.

AMERICAN TAILWIND REDUX

The record profit is largely the result of an accounting rule requiring Berkshire to report paper gains and losses from its stock holdings with net income.

Buffett urges investors to ignore this and focus on operating results.

Nonetheless, Buffett, whose $90.2 billion net worth ranks him fourth on Forbes’ list of the world’s richest people, called stocks a far better bet than low-yielding bonds.

He attributed that in part to the “American Tailwind,” which in his shareholder letter last year he described as the economy’s ability to grow despite roadblocks such as war, high inflation and financial panic.

“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,” he wrote.

Buffett said he would still prefer buying whole companies, but that “far more often, a fickle stock market” makes stocks the better bet.

“I was expecting him to say the market was expensive,” said Stephen Dodson, who manages the Bretton Fund, which owns Berkshire shares. “He didn’t even hint that.”

The cash stake has nonetheless weighed down Berkshire’s stock price, which has trailed the Standard & Poor’s 500 over the last decade.

In 2019, Berkshire’s stock rose 11% while the including dividends rose 31.5%, the biggest shortfall in a decade.

SUCCESSION

Buffett also used his letter to comfort investors that Berkshire will be in good hands after he leaves.

In 2018, Berkshire promoted Greg Abel, 57, and Ajit Jain, 68, to vice chairmen, giving them oversight of Berkshire’s non-insurance and insurance operations, respectively, and freeing Buffett and Munger to focus on deploying capital.

Buffett also has portfolio managers Todd Combs and Ted Weschler helping him invest in stocks.

Combs, 49, also became chief executive of its Geico car insurer unit on Jan. 1, and helped launch Haven to reduce employee healthcare costs at Berkshire, Amazon.com Inc (NASDAQ:) and JPMorgan Chase & Co (NYSE:), where he is a director.

“Charlie and I long ago entered the urgent zone,” Buffett wrote. “That’s not exactly great news for us. But Berkshire shareholders need not worry: Your company is 100% prepared for our departure.”

He also said Abel and Jain will have “more exposure” at Berkshire’s annual meeting on May 2, where Buffett and Munger field about five hours of shareholder questions.

“I’m comfortable with how Berkshire is moving up the next generation,” said Thomas Russo, a partner at Gardner, Russo & Gardner in Lancaster, Pennsylvania, a longtime Berkshire shareholder.

Buffett said his estate may need 12 to 15 years to dispose of his Berkshire stock, which is going to charities including the Bill & Melinda Gates Foundation, and Berkshire stock will be “a safe and rewarding investment” during that time.

The disposal plan “gives investors the ability to focus on everything else,” said David Marcus, chief investment officer at Evermore Global Advisors, who personally owns Berkshire shares. “If Buffett weren’t the age that he is, it wouldn’t matter.”

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2020-02-22