Applying Berkshire Hathaway techniques to your own investing life.

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Warren Buffett had his annual "Woodstock of Capitalism" shareholders meeting last weekend. Today I want to look at four concepts from Berkshire Hathaway, and how they are applicable to you.

1. Performance. The annual meeting is fun to listen to, but the performance of Berkshire over the past 20 years has been average. Exactly average, to be precise. Like to the hundredths of a percent average. This is something Warren predicted 20 years ago when I attended some of the annual meetings, and it came true. From 1/1/2002 to 12/31/2022, the S&P 500 returned 9.70% annually. Berkshire Hathaway returned 9.70% annually. Berkshire is so big it essentially is an index at this point. (Credit to Frank Koster for pointing this out.).

You're likely better off to own the index than Berkshire. One reason is Buffett is 92 years old, and it's a big risk that successor Greg Abel is going to be able to run the firm at the same level. With the S&P 500 you have 500 CEOs working for you to mitigate this risk. In other words, if Buffett couldn't beat the index, it's likely that Abel is at best going to match, and there's no reason to take that risk. Should a shareholder of Berkshire tire of an underperformance situation, he or she could then face a tax bill in a brokerage account.

2. Share ownership. At one point in the meeting, and it got a little unclear so I want to explain it, Warren was talking about how he was organically owning more and more of Apple. One Day In July clients here do too, via an index. We often talk to clients about the importance of increasing share ownership. The flip side of that coin is you can own the same number of shares, and if the corporation reduces its share count, your claim on the overall earnings of the corporation goes up. But either way, this is the objective as the investor: to acquire more claims on larger amounts of future earnings.

Often business will announce share buybacks, and then quietly they will issue excessive stock to executives and employees. This does not help the shareholder. In Apple's case, while they may be doing this to some degree, they are reducing their share count overall. Here, in billions, is the number of outstanding shares from January 2010 to today:

3. Taxes. Berkshire is not particularly efficient from an internal tax perspective. Berkshire alone paid 1.5% of all U.S. corporate taxes in 2019 and 2020 (this figure was once higher than 3%). Beyond its businesses being largely U.S.-based, two effects drive this. 1. The subsidiaries are expected to be profitable and send significant, and taxable, cash to Omaha. This arguably Warren has pushed too hard, as long-term it may have starved his own subsidiaries of capital. 2. This one relates a lot to you: he recognizes capital gains fairly regularly, to keep assets optimized.

While we try hard to reduce or zero capital gains taxes for clients, often when people arrive they are in sub-optimal investments, like annuities, that require a tax to liquidate. If you are in this situation, remember that Warren doesn't mind paying some taxes to make things optimal in the future.

4. Treasuries. This one is straightforward. You don't see Berkshire holding money in cash or CDs. You don't see him sweating because Silicon Valley Bank is failing. Berkshire holds its cash-related obligations in U.S. Treasuries. Over 95% of the bond obligations of One Day In July clients are in U.S. Treasuries.

Dan Cunningham

1. Graph source: Macrotrends.com, Berkshire Tax Rate: Yahoo Finance 2/22/20.

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