13 Money Lessons From Warren Buffett’s 2020 Letter to Shareholders

13 Money Lessons From Warren Buffett’s 2020 Letter to Shareholders

Each year I read Chairman and CEO Warren Buffett’s annual letter to Berkshire Hathaway’s shareholders upon its release. For many reasons, I do so as a shareholder, an investor, a former equity analyst, and a professor. Teaching finance to college students the letters are a treasure trove and better than many textbooks.  They are enjoyable to read, and I learn a ton from them.

The 2020 letter provides insights into the company’s diverse businesses. These businesses represent a proxy for our economy. What makes the letter so special is that Buffett writes it himself, sharing money and investing lessons with his memorable wit and humor. Each year, Buffet aims his words at investors at every level.  He pretends he is writing to his two sisters, Doris and Bertie. They have a significant amount of shares.

This year’s letter had several new aspects, which contained some soul searching but no major surprises. Buffett and his partner in crime, Charlie Munger, are the oldest leadership team of Fortune 500 companies at ages 90 and 96, respectively. They recognize the need to be candid with shareholders about the company’s future without them.

13 Key Takeaways:


1. 2019 Was Not A Stellar Year For Berkshire’s Stock Performance

Berkshire’s stock underperformed the S& P 500 index, the market’s proxy, by 20.5 percentage points in a strong year for equities. This year’s performance was its biggest disappointment since 2009. Looking at its 55 years history, Berkshire compound annual return of 20.3% exceeded the S&P 500’s not too shabby 10%. While this is an excellent performance for any company, Wall Street’s “what have you done for me lately?” mentality raised many questions for Buffett. The company has been hurt by its lack of acquisitions, particularly in fast-growth areas like the technology sector.

The company’s operating earnings in 2019 were slightly down compared to a year ago. Berkshire Hathaway does not pay a dividend to shareholders who would have boosted returns to shareholders.

2. A Disciplined Acquisition Strategy

Acquisitions are a signature priority for the company. However, Buffett has had trouble finding an “elephant-sized” one. Buffett tried buying Tech Data, a technology distributor, but  Apollo Management bid higher and acquired the tech company.

Buffett uses three criteria for buying new businesses:

  • The business must earn good returns on the net tangible capital required for its operations.
  •  Berkshire’s unique acquisition strategy prefers to inherit strong and honest managers.
  • Buffett wants to pay a sensible price and will not enter into bidding wars.

Although they prefer to own 100% of the acquired company or at least a controlling interest, they have valuable non-controlling interests in many businesses. Those holdings are worth $248 billion based on the year-end 2019 market price. They represent long-term holdings of reliable companies include American Express, Apple, and Delta Airlines.

However, the accounting isn’t as favorable a contributor for their non-controlling stakes. Berkshire can only realize the dividends that Berkshire receives in operating earnings they report. However, they cannot include the proportionate retained earnings reported by these holdings. Dividend income from the ten largest holdings in 2019 amounted to $3.8 billion compared to its share of $8.3 billion for retained earnings.


3. Reinvestment In Diverse Productive Operational Assets Remains Top Priority

Berkshire Hathaway splits their controlling businesses into insurance and non-insurance operations. Together, they reflect diverse companies representing a tapestry of our economy. Buffett has acquired dozens of companies over the years. In the current letter, he analogizes acquisitions to marriages: “Joyful weddings — but then reality tends to diverge from prenuptial expectations. Sometimes, wonderfully, the new union delivers bliss beyond either party’s hopes. In other cases, disillusionment is swift.” Almost poetic!

Although Buffett does not explicitly cite the significant disappointments, his commentary pointed to the original one. That dates back to early 1965 when he acquired Berkshire’s textile business, which received most of the capital. Buffett began acquiring companies, which received more of the company’s money. The textile’s losses became a drag on growth and eventually lost financial support. Of course, without that business, there may not have been a Berkshire Hathaway today. Today, Berkshire designates most of its capital to their companies that achieve good-to-excellent returns and less for those that perform poorly.

Top businesses that get superstar status in Berkshire’s portfolio are insurance operations,  followed by BNSF railroad and BH Energy acquisitions. The rest are Clayton Homes, International Metalworking, Lubrizol, Marmon, Precision Castparts, Forest River, Johns Manville, MiTek, Shaw, and TTI. They also own many smaller businesses.

4. Wind As A Major Energy Accomplishment

Berkshire Hathaway Energy has been very successful in charging lower energy rates. They realized efficiencies from converting wind into electricity. The company expects to be wind self-sufficient for its Iowa customers in 2021, far ahead of the other Iowa utility. Berkshire’s move to the wind is potentially well ahead of other utilities in the US. Positively, Berkshire’s energy business may take on more utility projects.

5. Valuable Insurance Businesses With Conservative Risk Approach

Berkshire’s property/casualty insurance businesses provide a lot of capital by “float” or “free money.” Float is an attractive aspect of the insurance business. The insurers receive premiums upfront from the sale of insurance policies. They make payment of claims which can stretch out over decades. In the meantime, the company invests the float money in conservative high-grade bonds. Given our low-interest-rate environment, the returns have been low for these financial instruments in recent years. Had the float been invested in lower-quality bonds or stocks with higher returns, Berkshire and its shareholders would have been bigger beneficiaries but at far greater risk.

Instead, Berkshire is sticking with a conservative investment policy for the float. Insurance can be a risky business. There have been significant catastrophes in the past, such as asbestos, Katrina, earthquakes, and tsunami in Japan. When they occur, it can be tragically devastating for human lives and significantly impact businesses unexpectedly.

6. The Compounding Power Of Retained Earnings

Buffett discussed an economist, Edgar Lawrence Smith, who had written Common Stocks As Long Term Investments in 1924 in his letter. Smith argued that stocks would perform better than bonds when prices rise, and bonds would deliver better returns when prices decline. However, the author himself admitted that the studies he was using did not prove his theory.

Giving support to Smith’s insights, John Maynard Keynes wrote in his review of Smith’s book: “I have kept until last what is perhaps Mr. Smith’s most important, and is certainly his most novel, point. Well-managed industrial companies do not, as a rule, distribute to shareholders the whole of their earned profits. In good years, if not in all years, they retain a part of their profits and put them back into the business. Thus there is an element of compound interest (Keynes italics) operating in favour of a sound industrial investment. Over a period of years, the real value of the property of a sound industrial is increasing at compound interest, quite apart from dividends paid out to shareholders.”

Before Smith’s book, stocks were considered speculative compared to bonds. Reading The Beautiful And Damned classic by F. Scott Fitzgerald written in 1922, the protagonist Anthony Patch had lived off his bonds, selling them off as his emergency fund as he had no other income. Stocks were not what gentlemen buy.

Think of the company’s retained earnings as its savings account compounding growth. This growth can be invested in new opportunities, whether to buy new companies or expand their holdings.

7. “If”

Buffett is a big fan of Rudyard Kipling’s poem “If and uses “If” when asked about predictions. When making forecasts, Buffett Cannot predict future interest rates, tax rates, or economic growth. Changes in these rates can cause stocks to have significant drops in the market of 50% or greater. That said, he remains an unflappable optimist about our country and the future of stocks for the long term. Equities are the better choice over fixed-rate debt securities assuming interest rates and corporate rates remain as they are now. Hard to predict significant “ ifs.

That said, equities perform better over the long term benefiting from compound growth. However,  you can do things to reduce your risk by not using borrowed money (e.g. buying on margin) to buy stocks. Control your emotions when the markets get rocky so that you don’t sell good stocks recklessly. Volatility in the markets happen regularly but weather the dips for the long term rather than sell out of nervousness. An emergency fund helps you maintain liquidity when the unexpected happens, such as a job loss.

8. Use Of Conservative Accounting Standards

Buffett and Munger refer to earnings as bottom-line net earnings, meaning after considering all income taxes, interest payments, management compensation, restructuring costs, depreciation and amortization, and home office overhead costs. Net earnings contrast to the often practiced adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization). EBITDA is a much higher number than net earnings. However, Berkshire prefers net earnings, which is more conservative. Munger has often referred to the EBITDA profit metric as “BS earnings.”

High growth companies who are not year generating bottom-line earnings use EBITDA as a measurement. Wall Street bankers and analysts have endorsed EBITDA as alternative valuations for growth companies. Buffett is critical of companies that report earnings before “one-time events” such as restructuring and stock-based compensation costs. What he means is that these costs still need to be deducted from gross earnings. Some management doesn’t want to include these items as an expense, but as Buffett quips: “What else could it be–  a gift from shareholders?”

9. Buy-Hold Investment Strategy is A Longstanding Trademark

Berkshire has a significant collection of equity holdings. This portfolio is separate from the companies Berkshire controls. Here, Berkshire has ownership typically about 5%-10%+ stakes in substantial companies that deliver dividends and stock appreciation. Berkshire holds about fifteen positions thoughtfully bought and intended for long term. At the end of the year, Berkshire’s portfolio of $248.0 billion market value, well over its $110.3 billion costs.

This portfolio does not include Berkshire’s more significant holding in Kraft Heinz because it is in a control group. Kraft Heinz is one of his acquisitions that Buffett believes the company overpaid. One of his few mistakes. Overall, Buffett often is praised for his buy-hold portfolio diversification.

10. Berkshire Share Repurchases

Buffett and Munger will buy back shares if they sell at prices below their intrinsic value estimate and have sufficient cash. Berkshire bought back $5 billion in shares for about 1% of the company. They are reluctant to buy back shares solely for the appearance of propping up the stock. They have been critical of other companies doing that.

The management of their constituent companies has also repurchased shares, using their retained earnings. Repurchased shares boost Berkshire’s ownership percentage from the lower outstanding share count.

11. Has An Ample Emergency Fund

Berkshire maintains a high level of cash-equivalent securities, invested in US Treasury bills of $125 billion at yearend. They use debt sparingly with $19.9 billion.  Buffett admits to making expensive mistakes along with missed opportunities. The company always maintains a minimum of $20 billion to guard against any potential calamities. Holding this money is like an emergency fund for the company so they can have liquidity readily accessible. Berkshire would never want to sell any of their businesses to raise capital.

12. Planned Exits For Buffett And Munger

Neither management is going anywhere in the immediate future. They remain energetic and optimistic about the company’s future. The company is well known for its strong corporate culture throughout its many companies. That said, in preparation for Buffett’s eventual exit, he discussed the details of his will’s directives. According to Buffett’s directions, fiduciaries–executors and trustees–cannot sell any Berkshire shares right away. Both the Mungers and Buffett have most of their wealth concentrated in Berkshire shares.

Over time, the trustees will convert A shares into B shares annually and distribute them to various foundations. The higher-priced B shares are the original Berkshire Hathaway stock and have never gone through a stock split. A recent stock price for Berkshire A (BRK.A) was $343,449.00, while the B shares (BRK.B) are $229.33, a more accessible price for the average investor.  It will likely take 12-15 years to distribute after Buffett’s passing.

Buffett feels confident in his strategy despite the concentration of that much wealth in one stock. His faith in the company outweighs his need for diversification. That is not good advice for the regular investor, but hey, he is Warren Buffett. Buffett is aware that Investment banks may approach the Berkshire Board of Directors to change Buffett’s strategy. However, Buffett has a strong belief in his board. He has been critical of overpaid directors at other companies who do not buy shares with their savings except through grants. The need for board independence for Buffett has been a constant topic well before Sarbanes-Oxley law’s requirements.

13. “We Are All Duds At One Thing Or Another”

In a jab at directors he met through the years, Buffett said he would not have chosen them to handle his money or business matters. Adding, “They, in turn would never have asked me for help in removing a tooth or improving their golf swing. Moreover, if I were ever scheduled to appear on Dancing With The Stars, I would immediately seek refuge in the Witness Protection Program. We are all duds at one thing or another.”

Ajit Jain And Greg Abel Will Have More Exposure At This Year’s Shareholders Meeting

Jain and Abel –two prominent operating managers–have been touted by Buffett in recent years. Jain heads the insurance business, while Abel is part of the Berkshire Hathaway energy business. Buffett and Munger have not named Abel and Jain as successors. Buffett turned 90 on his last birthday (August 30), so it is only reasonable that investors encourage the company to make their decision official soon.

Final Thoughts

Warren Buffett has long been an investment icon, teacher, and generous philanthropist. His folksy letters to shareholders provide personal finance lessons in a manner of common sense. They are informative about the company’s businesses.  Buffett’s refreshing optimism about the future can be contagious. He owns up to mistakes and is self-deprecating with his wonderful sense of humor.

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There are so many enjoyable stories about Warren Buffett. Do you have one you might want to share? We would love to hear from you!










Unique Challenges Faced By Black Women Entrepreneurs

Unique Challenges Faced By Black Women Entrepreneurs

I am a woman who came from the cotton fields of the South. From there I was promoted to the washtub. From there I was promoted to the cook kitchen. And from there I promoted myself into the business of manufacturing hair goods and preparations….I have built my own factory on my own ground.

-Madam C.J. Walker

I have crossed over on the backs of Sojourner Truth, Harriet Tubman, Fannie Lou Hamer, and Madame C.J. Walker. Because of them I can now live the dream. I am the seed of the free, and I know it. I intend to bear great fruit.

-Oprah Winfrey.


White women became business owners as early as the 17th century. They often inherited these businesses from their husbands who died. However, there are examples, notably Margaret Hardenbroeck and Rebecca Lukens led and sustained companies through difficult economic times. Female entrepreneurs, then as now, encountered enormous pressures through gender discrimination and bias.

Without minimizing the heroic accomplishments of these white pioneers, I can only imagine the hardship of black female entrepreneurs that faced the dual challenges of racial and gender discrimination. Our praise and recognition is long overdue. They serve as an inspiration and role model for all women, especially black women starting up their businesses today.  We will take a look at the incredible growth of black women business ownership which is outpacing all business start-ups in recent years.

First, A Historical Context

Before there were Oprah Winfrey, Sheila Johnson, and Janice Bryant Howroyd, there were earlier role models  to pay honor to. There is a rich history of successful black women entrepreneurs such as Madam C.J. Walker we should  celebrate not just during Black History month but for all time. Establishment of black-owned businesses originated before 1865. It is estimated that there were about 1.5 million free blacks at the time of the Civil War in the southern states. They either bought their freedom from their owners or outlived their usefulness.

Late in the 19th century, formation of black-owned businesses rose in response to racial discrimination associated with Jim Crow laws. These restrictive laws created segregated communities of whites and blacks. As a result, black-owned businesses grew and flourished to better serve their own communities with a sense of pride and achievement. Oklahoma’s “Black Wall Street” was among the most vibrant of these communities where numerous businesses blossomed before race riots took their toll.

Black Women Entrepreneurs

For many blacks in the mid-19th into the 20th century, self-employment was their only way to have a job to meet their basic living needs. Before celebrating today’s black women entrepreneurs, there are several  black female pioneers that have earned their place in our American history. They are:

Sarah E. Goode

Born into slavery, Goode was the first African American woman to be granted a patent in 1885 by the US Patent and Trademark Office. After gaining her freedom, she opened a furniture store in Chicago. Goode’s customers complained about not having enough space for full sized beds. As a solution, she invented a a folding cabinet bed designed for those who lived in tight living quarters. Her bed was a precursor to today’s Murphy bed.

Elizabeth Hobbs Keckley

Keckley was able to buy her freedom and that of her son. As a successful seamstress, she created an independent business in Washington DC in 1860 based on clients who were wives of the Capitol’s elite, including Mrs. Robert E. Lee and Varina Davis, wife of Jefferson Davis. After meeting Mary Todd Lincoln at the President’s inauguration, Keckley was hired to  be her dressmaker. She also assisted her with official and social events for six years.

As personal confidante and friend to Mary Todd Lincoln, Keckley received donations from the Lincolns for aid to the black community. Later, relations between the two women were strained. Keckley authored a book, “Behind The Scenes, or Thirty Years a Slave, and Four Years in the White House.”  The book disclosed the nature of Mrs. Lincoln’s financial woes, something Mrs. Lincoln did not want to make public.

Clara Brown

A former slave, Clara Brown was granted her freedom through the will of a plantation owner. She left for Denver, Colorado and  earned  money from her own laundry business. Brown invested her earnings into mine claims and land. With these Colorado gold rush-related investments, she accumulated $10,000 in savings. Brown became prosperous and is often known as Colorado’s first black settler and entrepreneur. She used her small fortune to educate former slaves and give them a new start.

Madame CJ Walker

Formerly known as Sarah Breedlove Davis, Madame CJ Walker was born to slaves then orphaned at age 7. She became a single mother, earning $1.50 as a washerwoman. She began losing her hair, having scalp issues. As a result of her interest in hair products, Walker began as a sales agent for Annie Turnbo Malone’s hair care company.

Walker surpassed Malone, aggressively promoting her manufactured hair products in black newspapers in order to target black communities. Her products were designed for kinky textured hair. She built her own hair-care business from the ground up, earning $500,000 a year.

According to Guiness World Records, Walker became the first woman to earn a personal fortune of more than $1,000,000. She employed 20,000 agents or hair culturists across the country. Her net worth at the time of her death in 1919, consisted of her substantial NY real estate holdings and her controlling interest in her hair firm, putting her over $1 million at the time of her death in 1919. She was a notable philantropist, pledging $5,000 to the NAACP, the largest gift ever received at the time. Her will bequeathed two-thirds of future net profits of her estate to charity.

Annie Malone

Malone was no slouch in the hair business and gave Walker her start as an agent.  It was Malone who originated hair straighteners, special oils and hair stimulants for African-American women, using her own Poro formula. There certainly was a business rivalry between Walker and Malone but the latter is lesser known. Malone has her own rich legacy, having lived a longer life and earned millions. She trained 40,000 black men and women, advocated for economic independence for black people, built Poro College and provided students with financial support.

Gender Gaps Pose Challenges

The gender gap remains in the usual places for all women. Women get less pay than men, experience longer career pauses with time out for children and other dependents. In essence, women save less for retirement than men. Despite facing challenges, women are gaining ground. Slowly, women are reaching higher corporate levels and increasingly starting their own businesses.

Challenges Women Entrepreneurs Face And Overcome

Black Women Face Experience Racial Discrimination As Well

While non-minority women starting up their own businesses have their share of difficulties, black women entrepreneurs are further impacted by racial discrimination. This adds more pressures to developing their businesses. On the positive side, black women-owned business have been growing significantly faster.

According to American Express 2019 State of  Women-Owned Businesses, the number of women-owned businesses grew 21% from 2014-2019. That rate compares to 9% growth for all businesses. There are nearly 13 million women-owned businesses. Employment grew by 8% to 9.4 million. Revenue grew 21% to over $1.7 trillion.

Related Post: Better Financial Literacy May Help The Racial Wealth Gap

Minority women-owned businesses

  • Black women-owned businesses grew 50%, significantly faster than any other minority.
  • Women of color, including black women, account for 50% of all women-owned businesses in 2019.
  • There are 2,681,200 businesses owned by black women who are the largest subsegment of minority women.They account 21% of all women-owned businesses.

Though the growth of black-owned women businesses are surging, they tend to have smaller, younger companies. As a result, the average revenues of $24,000 per firm for black-owned women businesses are well below the average of $142,900 for all women. That means that black women are experiencing the highest growth  but generating the lowest average revenue compared to any subsegment.

Separately, a report for Federal Reserve Bank of Kansas City written by Dell Gines studied 34 black women business owners. Through focus groups, they found that black women who owned their businesses  started at ages 35-54 years, had at least bachelor’s degree, and ran smaller businesses called microbusinesses.

These women made their moves to start their own businesses because of poor treatment and feeling undervalued in the workplace. The women in the focus groups expressed determination, passion and faith in themselves as self-learners.

Although they had less formal training, they were motivated to serve their communities. While they had friends for moral support, some women indicated that family withheld support initially until there was some demonstration of success.

With Growing Success, Black Women Entrepreneurs Need:


1. To Secure Capital For Their Growing Businesses

Black women are the fastest growing group of entrepreneurs. The number of startups founded by black women have more than doubled. However, they need funding to feed their growing businesses. According to Project Diane 2018, a biennial study on the state of Black Women Founders, the average funding raised by black women in the “less than $1 million” category was $42,000 compared to $1.14 million for the average seed round for all startups per Crunchbase.

Generally, women face greater difficulties than men when raising capital to fund their growing concerns. Securing capital for start-ups is still a largely male-dominated investor pool.

 As a result of gender bias, women are disadvantaged in attaining credit in comparison to men:

  • have slightly lower credit scores;
  • less likely to incorporate their businesses;
  • fewer years of industry or start-up experience;
  • have difficulty accessing private capital like angel or VC  funds;
  • experience lower approval rates; and
  • operate with lower loan approval rates.

Only 2.7% of all venture funding goes to women CEOs, usually at later funding rounds. They only get get 25% of what they ask for compared to 50% of the funds requested by men. Black women face even greater challenges, getting a paltry 0.2% of total venture capital funding. Gender and diversity gaps impede the potential for black women entrepreneurships.

To counter those obstacles in recent years, there are rising number of firms in recent years that are devoted to helping minority women to raise capital. Some organizations provide grants, pitch competitions and crowdfunding. Shelly Bell founded Black Girl Ventures in 2016. Her organization provides comprehensive education and advisory services. They host crowdfunded pitch competitions and coaching. This list contains a number of organizations that may provide funding for black women entrepreneurs, especially in the tech area.

2. A Strong Support System

Having a supportive network and mentoring are critical at all stages. Finding a network and a mentor is important. According to a UPS survey of small business owners, 70% of those receiving some form of mentoring survived five or more years. That is double the rate of those who did not receive that support.

The truth is fewer women have the management experience to lead when starting their own company. According to a Leanin.org and McKinsey report, just 19% of top executives are women. Fewer than 10% of startups are owned by women. Financing groups remain predominately male-oriented.

Networks are important for emotional support. Starting your own company is fraught with stress from constant decision-making. It could be a lonely undertaking. Reach out to someone you believe has the ability to help you, especially if they have launched their own company. Don’t wait for someone to come to you.

Increasingly, there are more groups for black women entrepreneurs to turn to for financing, counseling, skills training, one-to-one mentorship, networking, local assistance and resources. Black Career Women’s Network is a national organzation that provides professional growth opportunities for African American  women. You can find mentors, peers and supportive women. All kinds of resources–capital, training, networks, mentoring–can be found in this exhaustive list.

Here are other organizations you can turn to:

Small Business Administration (SBA), through its Office of Women’s Business Ownership (OWBO) and  SCORE  have workshops for women;

Women Igniting the Spirit of Entrepreneur or WISE center is an Entrepreneurship project of the Whitman School of Management at Syracuse;

The Female Founders Alliance is an accelerator for pre-seed companies for women seeking early funding; and

American Express CEO Bootcamp receives high marks for its support program and insightful articles.

Related Post: Pros And Cons of Self Employment


3. A Greater Work/Life Balance

Working women executives who suffer from work/life balance issues often consider starting up their own businesses as an antidote. Women still tend to shoulder more work-related to the household and child-rearing, even among couples who set out to share the workload equally. In the various studies of black women start-ups, many expressed their desire for more flexibility. They often seek to work less than 40 hours per week so they can spend more time with their children and family.

Part-time entrepreneurship called sidepreneurship in which adults can earn money on the side has been increasing in recent years. By far the highest rate of growth in the number of sidepreneur ventures is among African American/Black women. According to the 2019 American Express report, it is triple that for all businesses over the past five years: 99% compared to 32%, respectively.

Final Thoughts

Black women entrepreneurs have made significant strides in owning their businesses. They represent the fastest growing subsegment of entrepreneurs. They also face double discrimination with real gender and diversity gaps when raising funds and need support. There is a rich history of inspiring black women who successfully started and managed their own businesses.   They have several challenges to overcome before the playing field is fully level.  What is most needed is determination, passion and courage besides funding opportunities.

Related Posts:

10 Ways For Women To Achieve Financial Independence

Women And Money: 7 Steps To Control Your Finances 

How Women Enrepreneurs Face Challenges And Can Overcome Them

Have you started your own business or thinking of doing so? What challenges have concerned you? Share your comments with us. We would like hear from you!