2019 (I): Retain the power of the surplus

In 2019, Buffett was 89 years old.

Digression

Will be grateful, often grateful, in fact, objectively it is like throwing a "come, continue to help me, help me have benefits" bait to everyone around me.

This is not how high your realm is, it is actually "stimulating" more people from the margin to help themselves.

People who are always content to take advantage of others are constantly sending a mysterious signal to the surroundings: "Go away, don't deal with me." Deal with me, you will definitely suffer."

The former kind of person, destined to be found, seems to always encounter opportunities. The latter kind of people always struggle on their own. After a long time, the gap in life will come out.

——Originated from the Tang Dynasty Tang Dynasty's Tang Dynasty Study Room", "Study Collection No. 37", October 20, 2021

2019 Learning Excerpt (1)

1, no matter what, the rules must still be observed.

2) Investors are a fortunate thing, because you fail, forcing you to think deeply about how to evaluate the value of a stock. We often live as if victory certainly leads to the conclusion of victory, which is attribution. But more often than not, deep thinking about failure forced or compulsive can lead to many great and extraordinary conclusions, even works.

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Letter to all berkshire shareholders.

Berkshire's gaAP earnings in 2019 hit a new high of $81.4 billion based on gaAP.

Specifically, he said, the figure contained $24 billion in operating profits, including $53.7 billion in unrealized capital gains, all after tax.

Buffett went on to write about the $53.7 billion in capital gains that must be added to the fact that it was unrealized. However, according to the new version of GAAP that came into effect in 2018, his shareholding must be calculated even if it is unrealized.

So he said that last year we had clarified in the shareholder letter that Munger and I had reservations about this practice, that is, not agree, and did not agree.

Buffett went on to write about this new accounting standard, which essentially marked a major change in the concept of the accounting profession. Before 2018, as long as it is a security held by a company and it has not been realized, it will not be counted as a profit. Now 18 years is not good, it has to be counted, so this is very interesting.

That is, everyone knows that 2018 was a year of stock market plunge, because this unrealized stock that was not sold also had to be reduced, resulting in Berkshire's net profit in 2018 was only $4 billion. 2019 was a big bull market, and as a result, although the stock was not sold, the floating profit on the book reached $53.7 billion.

He said this led us to calculate according to the new rules, earnings increased by a staggering 1900%, an increase of 20 times. That's from $4 billion to $81.4 billion.

Buffett made a note that he said that no matter what, the rules should be followed.

He said we now hold stocks in the secondary market, which total in size to around $200 billion, and the intrinsic value of these stocks is steadily and solidly rising.

Munger and I call on everyone to focus on the profitability of the operation and not to care about the rise and fall of stock prices. The operator is called operating earnings.

He said that our advice is certainly not to say that these stock investments in Our Berkshire are not important, it is not so, we think stock investments are very important. But they take on a specific pattern that indicates a high degree of irregularity over a certain period of time. But in the long run, it is destined to create huge gains for us.

The next paragraph is also wonderful. Buffett has a theme, that is, to retain the power of surplus. The Power of Retained Earnings, this is important. Retained Earnings, Earnings is what we call net profit, usually our corresponding word for net profit, Retained is reserved.

As we all know, a company makes money, and the listed company can choose not to pay dividends or share parts, and take out part of the profit dividends. Of course, there are also companies that are 100% dividends, but they are relatively rare. I have also met it, and I will have the opportunity to tell you stories about this in the future.

He said 1924, almost 100 years ago, because when he wrote it, 2019 had passed.

He said that in 1924, there was an economist and financial advisor who was not very well-known, and it was the architect named Edgar Lawrence Smith, who wrote a book, a pamphlet, and it wasn't really too thick. The title of the book is "Long-Term Investments in Common Stocks," Common Stocks as Long Term Investments. Common Stocks is what we call common stocks, common stocks are what we call stocks every day, stocks that are bought and sold, and there are also preferred stocks, which are much rarer than common stocks.

He said that although the book was small and not thick, he changed the face of the entire investment world, and in fact the process of writing the book itself was an experience itself that changed the author, Mr. Smith himself. Forced him to revisit and evaluate his investment credo.

He said that when he first started writing this book, he was just starting to work on his original intention, and the author's original intention was to prove a point.

What's the point of view? That is, during the inflation cycle, stocks perform better than bonds, and bonds return better than stocks during deflation cycles. It is that he has a presupposed conclusion. Then he tried to prove that his conclusions were correct by writing books and collecting materials. When inflation is the time of inflation, stocks perform better than bonds. The reverse deflation is the other way around.

He said it seemed reasonable, but then Smith was taken aback.

In fact, he says, at the very beginning of the book, Smith admits that the studies themselves are records of failure and do not in fact support presuppositions. This was unexpected.

But it's a blessing for investors, he says, because you fail, forcing you to think deeply about how to value a stock.

We often live as if victory certainly leads to the conclusion of victory, which is attribution. But more often than not, deep thinking about failure forced or compulsive can lead to many great and extraordinary conclusions, even works.

For example, we all know that Buffett's teacher Graham's work is called "Securities Analysis". If Graham hadn't gone through the major Great Depressions of 1929 and 1930, it's likely that he didn't write so deeply, which is very interesting, maybe life was spent like this.

Like my own experience is the same, that is, I wrote that column, to be honest, either suffered a major blow in 2008, or it may be written for a year to end, it is very comfortable to write, and then it is quite profitable, and then in the stock market bull market, everyone buys and buys to make money, and then it is gone. Then hello I good he good, and then it's over. It is precisely because of the major blow suffered in 2008 that I have been forced to grit my teeth and persist until now, that I have the opportunity to meet with everyone and have the opportunity to meet in this place.

Then Graham is the same, if Graham had not been that major blow, caused by the birth of this masterpiece, I am afraid that Buffett would not have come to know him and get to know him.

If we don't have this passage today, we wouldn't have known about the existence of this person at all. So Buffett went on to write about what Smith had insight into?

He said I tell you, he came from a famous economist, keynes, and Keynes wrote a passage, which is unbelievable. Keynes was already a well-known economist at the time, a titan, and Keynes said that I had been reading the whole book to get a rough idea of Mr. Smith's latest strange point of view, that is, what was his most important point of view?

That is a really good enterprise, the management of the enterprise will not be all the profits he gets every year to the shareholders, as dividends, all the profits will not be all distributed to the shareholders as dividends, this basic principle, then good years and bad years, whether good or bad, they will leave a part of the profits. Put it back into the business itself. In this way, a compound interest business model is created. Because you start again next year, your principal increases. Over time, over time, the value of the entire company is compounding. With the aura of a great and famous economist, Keynes, Mr. Smith became famous in one fell swoop.

He said that before the publication of the book, all the practices of retaining surpluses, shareholders will feel generally dissatisfied, why not make money? Is it fake money earned? We still have this voice in China's stock market today.

He said that we all know that the reason why a large family like Carnegie Rockefeller Ford was able to accumulate amazingly large wealth was to retain most of the corporate profits, put them back into reproduction, and then create more and bigger profits. That is, profit is reinvested, profit is reinvested, rather than all the profits are consumed, divided, eaten and drunk, not like this.

So he says that in fact, it was a time to look back in 1924, and before Smith wrote this book, people treated stocks as countless small pieces of paper.

In fact, many so-called investors regard the changes in the stock market as short-term gambling, that is, to say that in the good sense, that is, to speculate, speculation is to speculate in the good sound.

The real gentlemen favor bonds, they think that bonds are investment, buying stocks is speculation, it is gambling, you know?

He said that it has become common sense to look at this today, and it was once rated as a novel and fresh idea by Keynes's time. Today's high school students already know that they can create a retained surplus, that is, they can create miracles.

Buffett went on to write in Berkshire, and Munger and I have always attached great importance to the effective use of retaining surpluses, because Berkshire is to keep all the profits and not give a penny. I once shared a dime in six years and regretted it for many years. So after that, Buffett didn't share a dime in cash, because he believed that staying in the enterprise, the surplus could play a greater role in compounding interest. So why divide it? That's not necessary.

So he said that this job can actually be very easy, but sometimes it is easy, some times it is not easy, and now because it is huge and getting bigger, it is no longer a difficult problem, it is more difficult than difficult. More than difficult is more difficult than difficult, because the size is getting bigger and bigger.

Buffett went on to write that we put these retained surplus funds into use, and the preferred goal is where do you put this money in the first place? The preferred target is the large number of various types of businesses we already have. Because we have so much business, some of them can make more money by expanding reproduction, of course.

So if you look at our depreciation expenses over the past few years, the cumulative investment in plant equipment has reached $121 billion, that is, reinvesting in operating assets, which is always our primary consideration first.

Other than that, where else is the money spent? In addition, we continue to buy new companies, as long as there is a chance, we buy new companies, of course, not random buying.

Buffett has three criteria. First of all, their return on assets should be high enough, you are invalid assets, buying them is not profitable, why should I buy you? The return on assets should be high. Second, managers must be managers, and corporate executives must have both ability and integrity, both capable and honest. Third, the price should be reasonable. So if you look at the three points of his buying a company, to be honest, it's actually the same as when we buy stocks.

He said that once we find a company that meets these three criteria, as long as the conditions permit, we hope to buy 100% of the equity, not to buy 12%, 10%, which is not addictive. Our biggest advantage is that we have money and hope to buy 100%.

In this case, but such an excellent enterprise that is 100% bought, an enterprise that meets the three criteria, is really not too many opportunities, very rare, so what to do more often? More often than not, we have to find shares in listed companies that meet the standards, that is, we can't buy 100%. But it's on the market, and we can buy 1%, 3%, 5%, 10%, 20%, and that's all right. So whichever way you invest, whether it's 100% buying or partial equity, Berkshire's financial performance will largely depend on the future profitability of our investments in these businesses.

However, it is also important to understand that there is a huge difference between these two investment methods in terms of accounting and bookkeeping.

Buffett talks about getting back to this GAP issue. He said that if it is a company controlled by us, that means that you hold more than 50%, 60%, 70%, 80%, 100%. If it is a holding enterprise, you can directly consolidate the statements, and you will see the actual operating profits.

But for those who are not controlling, such as buying Coca-Cola, only buying 7%, 8%, and ten percent, it is not 100%. For example, it holds 5.7% of Apple and 18.7% of American Express. Coca-Cola holds a 9.3% stake, which is not an absolute holding, so what to do?

According to accounting rules, he can only record the dividends he receives in the financial report, and their retention is not included in the financial report for the retained surplus of the other party, the investee. That is, from this point of view, Berkshire's value is actually a conservative response to the book value net worth. Buffett actually means that, which is that you see it unallocated. Proportionally, it also belongs to us. Because we are talking about shareholders, but they do not show up in our financial reports.

He said I'll list the ten most important stocks we hold, which ones? Everyone knows American Express, Apple, Bank of America, New York Mellon Bank, Coca-Cola, delta air, GP Morgan, Moody's, Wells Fargo.

After listing these ten, you will find that the dividends paid by these ten companies to Berkshire in the recent year reached nearly $3.8 billion, that is, 3.79800, or nearly $3.8 billion. But it kept the surplus, retained $8.3 billion, and $8.3 billion remained within the company without being split, but it also belonged to Berkshire.

Buffett gave this example, saying that of course we know that while it's a pity, we have to admit that keeping the surplus sometimes creates more value as we think. But sometimes it will be fruitless. That is to say, the company may have collapsed, and he has retained the surplus and he has not done a good job. But either way, based on our past experience, we are all more inclined to believe that these companies will eventually perform better and make our wishes come true. Because he picks companies that fit his principles.

He said that when it needs to be replenished, eventually maybe ten or twenty years, maybe a long time later, we may eventually sell these stocks, and in fact, in the end, these profits on our books may not be 100% realized. Because the federal income tax rate is 21 percent.

If you make $10 billion, you have 21 billion to pay taxes, pay federal income taxes.

He said it was certain that the returns Berkshire would receive at these ten companies in the future should be substantial, but that returns would likely continue to take place in a very irregular pattern.

Sometimes it is the problem of the enterprise itself, this year the two years of business operation is good, and then a change of CEO may not be very good, or the reverse situation. Other times it has to do with the general trend of stocks, and the management of companies is also very good, but this year is a big bear market, so you may also lose money. So this situation causes your return to take on an irregular pattern.

He said last year was an example. You see 2018 as an example, a bear market, and 19 years in turn a big bull market, but overall, our investment cash and unrealized retained surpluses are undoubtedly significant for the long-term growth of Berkshire's intrinsic value.

The last sentence of this passage is that Mr. Smith was absolutely right. Buffett's paragraph is actually through this small book to explain his consistent policy.

Why don't we pay dividends? Why we buy some companies and they keep surpluses makes sense to us as well.