Takeaways from Warren Buffett's annual letter

Yahoo Finance’s Akiko Fujita and Zack Guzman speak with George Washington University Professor, Larry Cunningham, about Warren Buffett’s investment track record.

Video Transcript

ZACK GUZMAN: Of course, over the weekend, we got that annual update from the oracle of Omaha, Warren Buffett, in his shareholders letter, his annual letter, talking about what he sees ahead in this recovery, why he doesn't think bonds are the spot to be, and if those aren't the spots to be, where he was putting money to work. And increasingly, we have seen share buybacks be part of the strategy at Berkshire. The company bought back around $9 billion worth of shares in Q4. That brought the total in 2020 up to a record $24.7 billion. That number dwarfs just the $5 billion, the total spent on buybacks in 2019.

So joining us now to break down that move and more from Warren Buffett is Larry Cunningham, professor at George Washington University, as well as an author of several books on not just Warren Buffett, but also Berkshire Hathaway. And Professor, appreciate you coming on here. What do you make of maybe why Warren might be putting that money to work in share buybacks, because we know he generally doesn't really like it when other companies do it. But for him, he sees value in terms of where Berkshire is at now.

LARRY CUNNINGHAM: Well, thanks. Berkshire is now the elephant in the room, or the elephant at Berkshire. $24 billion is a lot of capital to deploy in any Berkshire investment, so it's particularly notable when he decides to buy Berkshire himself.

His criticism is only against those CEOs or boards who repurchase their own stock at prices that are higher than value, because doing that destroys shareholder wealth. He's doing it at a price that he considers below value, considers Berkshire to be a good investment for the continuing stockholder.

So it's a wise deployment of capital from that analytical perspective. I think it has the incidental advantage of providing liquidity for those Berkshire shareholders who aren't long term, who would rather take cash today and leave, and it has a corresponding benefit for the shareholders who want to continue.

AKIKO FUJITA: Let me follow up on that. What is the message that this sends, then, to those who are in fact shareholders? Warren Buffett certainly not going against his criticism in the past. To your point, he sort of justified it in a different way for these buybacks, but what's the message that that signals to shareholders right now?

LARRY CUNNINGHAM: Berkshire is a good buy. It's a good investment. And indeed, to that same point, later in the letter, he talks about the different kinds of shareholders at Berkshire, he distinguishes between the short term owners, who are happy to try to find better uses of their capital, and the long term, permanent holders, who are happy just to ride it out. And I think part of the message is that for those who would like to leave, here's a payday. Those who would like to stay, this is a good investment for you.

ZACK GUZMAN: And Larry, when we look at it, as a guy who's tracked Warren over the years and really gotten to study kind of his thinking here, what do you make of maybe some of the criticisms of him stepping down in terms of chasing some of those bigger deals? We saw him look back on one of those deals and talk about maybe in his own words how he may have overpaid, specifically when it comes to Precision Castparts, but when you think about maybe why he might not be wanting to make some of those bigger bets now, how much of that maybe in your eyes stems from just where he's at in his life stage and career?

LARRY CUNNINGHAM: Well, I don't think it's so much about where he is in his career. He always jokes that he's going to live as long as Methuselah, the Biblical character who lived for 800 years. I don't really think he thinks that way. He thinks of Berkshire as being a permanent investment vehicle, so even after he leaves the scene, they'll be hunting for elephants if they can find them.

I think the big problem is elevated valuations, which are due to many reasons. There's oceans of capital out there, bidding prices up, private equity has platoons of people out scouring the marketplace, so those opportunities are just exceedingly scarce. That said, if they find one, you can expect them to pull the trigger.

AKIKO FUJITA: Yeah, Larry, considering how amazing Warren Buffett looks at his age, I don't think it's a stretch to think he's going to live much longer than we anticipate. What do you make of his comments on bonds specifically? Because you mentioned that valuations are stretched so far when we're talking about the equity space, but that doesn't necessarily come with the argument of now you run to bond yields, even if they have pushed higher over the last week. He says, look, risky loans are not the answer to inadequate interest rates.

LARRY CUNNINGHAM: That was an insurance man's perspective if I've ever seen one. It's common for insurance companies to have a portfolio that's meaningfully diversified into bonds, and what he's saying is at least at the Berkshire insurance companies, that's not a prudent allocation of capital these days. And he put the numbers on there to back it up, and I think it's not a surprise that that's something people-- in general, investments know. But I think it was a message to his insurance community that that's not how Berkshire is likely to allocate its capital.

ZACK GUZMAN: And lastly, for me, we've seen him increasingly move into tech, if you look at Apple being the largest holding there in common stock, and people were maybe surprised when that first happened. But you look at that, $31 billion, and he turned that into $120 by the end of the year. So talk to me about maybe the broadening out of what he looks at, and maybe how he's changed as an investor over the years.

LARRY CUNNINGHAM: I think his circle of competence, he defines what he knows well, has stayed the same. But what is in it has changed. Apple used to be a novel tech company whose economic future was hard to predict. That's just no longer true. There's an ample track record, there's clear moats or competitive advantages that can be measured. You can come up with a meaningful valuation, and then make a prudent investment decision.

So I think it's not so much that Warren has changed his approach, but that the characteristics of a company like Apple are much easier to analyze.

AKIKO FUJITA: Larry Cunningham, professor at George Washington University, it's good to talk to you today. Appreciate you stopping by.

LARRY CUNNINGHAM: Thank you.