Three things we learned from Berkshire Hathaway’s (Warren Buffet’s) 2020 letter to shareholders.
Warren Buffet (Sage of Omaha) recently released his annual letter to Berkshire Hathaway’s shareholders providing a recap of 2020 performance, as well as, giving his general perspective of his company’s journey.
Investors all around the globe fall over themselves to pay attention to what Mr. Buffet says, as well as how his portfolio of companies are performing. Just to learn as much as possible from one of the world’s most successful investors to date.
We at Nairametrics are no different and in this article, we will share some key business takeaways from the 2020 letter.
1. Compounding still makes you rich
Just in case some investors momentarily forget about the power of compounding and consistency in investments, the very first page of Mr. Buffet’s letter serves up a timely reminder.
Specifically, since 1965 to 2020, the market value of Berkshire Hathaway’s stock has grown at a compounded rate of 20%. This is remarkable given that very few companies last that long (55 years) let alone provide such returns in US dollars over such a period of time. Even the S&P 500 with dividends included compounded at 10% (which is no small feat in of itself).
This lesson here is that for Retail investors, SMEs, startups, the power of compounding doesn’t need to be continually reminded, it needs to be a primary focus as you seek to deploy capital.
For context, in 1965 our dear country Nigeria had approximately $240million in external reserves.
- If only 1% (i.e. $2.4million) had been invested in the S&P500 index and kept in a fund, the value of that fund today will be $56.3billion.
- Alternatively, if only 0.05% ($1.2million) had been invested in Berkshire Hathaway stock and kept in a fund, the value of that fund today will be worth $67.45billion.
2. Always focus on your CORE objectives and Key results
In 2020, Berkshire Hathaway earned USD$45billion of which $21.9b was operating income, $4.9b was unrealized gain, $26.7b was unrealized gain partially offset by $11b loss write-down.
Despite the huge unrealized gain of $26.7b, Mr. Buffet in his typical style was dismissive of unrealized gains but rather was quick to point out that his core objectives of growing operating income and acquiring good companies were not met in 2020!!!.
- “Operating earnings are what count most, even during periods when they are not the largest item in our GAAP total. Our focus at Berkshire is both to increase this segment of our income and to acquire large and favorably-situated businesses. Last year, however, we met neither goal: Berkshire made no sizable acquisitions and operating earnings fell 9%. We did, though, increase Berkshire’s per-share intrinsic value by both retaining earnings and repurchasing about 5% of our shares.”
Furthermore, Mr. Buffet points out that Berkshire Hathaway’s earnings do NOT factor any portion of the operating earnings of companies which they have stakes in, such that only the dividends due to Berkshire are included in the results.
In other words, he is keen to avoid clouding actual performance of his CORE investment vehicle by avoiding accounting gimmicks which gross-up earnings.
For Nigerian startups, SMEs, retail investors, the lesson here is that a laser-focused approach to tracking CORE business earnings helps provide business owners with clarity about actual business performance. This persistent clarity keeps owners grounded on what are the key areas of focus for improved business performance whilst avoiding reporting superficial income.
3. Avoid business complexities AND always choose the most profitable business path which offers the least resistance.
We previously mentioned, Mr. Buffet’s preference to tracking income from CORE businesses. In his letter to shareholders, he goes further to discuss his apathy to the traditional Conglomerate.
Specifically, most businesses that are acquired are seldom leaders in their sector and often are underperforming hence the need to be acquired. Consequently “Conglomerates” who focus on fully acquiring other businesses will likely end up with a portfolio of “Sub-optimal” businesses.
Turning around the fortunes of these “acquired’ businesses will require management time and effort whilst distracting from CORE operations and creating business complexities.
Mr. Buffet notes that going forward Berkshire Hathaway’s approach will seek to avoid this option of undue business complexity and focus on path of least resistance to profitability. This will be achieved by continuing to find very good businesses and taking a stake in these well run businesses.
- “It took me a while to wise up. But Charlie – and also my 20-year struggle with the textile operation I inherited at Berkshire – finally convinced me that owning a non-controlling portion of a wonderful business is more profitable, more enjoyable and far less work than struggling with 100% of a marginal enterprise.
- “For those reasons, our conglomerate will remain a collection of controlled and non-controlled businesses. Charlie and I will simply deploy your capital into whatever we believe makes the most sense, based on a company’s durable competitive strengths, the capabilities and character of its management, and price.
- “If that strategy requires little or no effort on our part, so much the better. In contrast to the scoring system utilized in diving competitions, you are awarded no points in business endeavors for “degree of difficulty.” Furthermore, as Ronald Reagan cautioned: “It’s said that hard work never killed anyone, but I say why take the chance?”
The lesson here for Nigerian startups, SMEs, retail investors is that rather than always wanting to go alone into new ventures, sometimes you need to seek competent partners to collaborate and execute ventures with. (i.e., successful business isn’t always about who struggled the most).
Finally, (Yeah, I know I said three things, but this is also an important takeaway), one additional point is that consistency pays. We previously stated that Berkshire Hathaway stock has returned 2,810,526% between 1965 to 2020. One way that Mr. Buffet has accomplished this is by being very consistent in his portfolio. Consistency can be seen in the duration of holdings, as well as the general mix of the sectors of interest.
With regards to duration, the three most valuable assets in his portfolio have been held for at least 15years plus.
|GEICO||1951 to date||Financial Services – Insurance|
|BHE (Berkshire Hathaway Energy)||1999 to date||Utilities – Energy|
|BNSF (Burlington Northern Santa Fe, LLC)||2006 to date||Utilities – Freight/Transport|
Even if you then look at the top 15 investments in Berkshire’s portfolio, you notice it is comprised largely of Financial Services, Utilities stocks and Large Tech firms.
The lesson here for Nigerian startups, SMEs, retail investors is that if you find something that you are good at, keep doing it and producing consistent results, stay within your area of competence and aim to maximize value.
Corporate Nigeria spends N31.22 billion on travel expenses in 2020
According to data obtained by Nairametrics Research, travel expenses of major corporations in Nigeria dipped by 36.97% in 2020.
Corporate Nigeria represented by the largest listed companies on the Nigerian Stock Exchange experienced a reduction in business travel expenses in the year 2020.
According to data obtained from the audited financial statements of the top 30 companies listed on the Nigerian Stock Exchange (NSE) known as the NSE-30 and verified by Nairametrics Research, travel expenses dipped by 36.97% from N49.54 billion recorded in 2019 to N31.22 billion in 2020.
Travel expenses include flight tickers, hotel expenses, cost of renting and maintaining private jets, local interstate and intrastate transportation etc.
- Of the 30 companies considered, only 3 of them increased their travel expenses in 2020. Notably, Guinness increased its travel expenses by 283.1% from N261.4 million to N1 billion in the review period.
- Nascon Allied Industries and Presco Plc incurred a sum of N91.8 million and N2.02 billion in travel expenses, representing a 125.2% and 33.7% increase respectively.
- On the other hand, MTN Nigeria recorded the highest decline in travel expenses, reduced by 79.9% to stand at N964 million as against N4.79 billion recorded in 2019. Stanbic IBTC followed with a decline of 60.95% to stand at N676 million.
- It is worth noting, that some companies were not included in this study as they did not disclose their travel expenses during the period under review.
Why the drop?
The drop in travel expenses was expected as the entire private sector experienced a lockdown for most parts of the year due to Covid-19. The Federal Government introduced movement restrictions on land, sea, and air commute in response to the spread of the Covid-19 virus.
- This resulted in the cancellation of business travel expenses across the commercial and political nerve centres of the country. Bearing the brunt of this cut in expenses were airlines, hotels, and the entire travel industry who suffered massive revenue losses.
- The travel industry has been one of the worst-hit sectors due to the COVID-19 outbreak with lockdowns, travel bans, restrictions, and quarantines, which have had a severe impact on business travel for corporate entities in Nigeria.
- High travel cost implications, hotel rates, and reduction of airline services also made companies resort to phasing out in-person meetings and business travel, as it is more affordable and productive to go digital.
- The deployment of technology has helped companies cut their travel expenses since part of the key reasons for business travel is for conferences, meeting suppliers and customers. Going forward, video calls show strong potential to replace in-person meetings, resulting in fewer business travels.
- Additionally, business travels that are meant for training and other learning activities can be done through e-learning.
- The consistency of corporate entities in adopting technology by going digital will likely continue to reduce business travel expenses of corporations in the country.
Gains and losses
On the flip side, online virtual work from home tools such as Microsoft Teams and Zoom recorded massive revenue boost as the private sector and even government relied on them to connect with clients, employees and other stakeholders.
- Unfortunately, Nigerian businesses, particularly the tech sector failed to take advantage of the travails of the hospitality sector losing much of this revenue to the likes of Microsoft, Google, Netflix, and Zoom. Nevertheless, other Nigerian tech companies, especially in the entertainment, payment, savings and loans space all recorded a significant boost in topline revenues.
The top 5 spenders
The increase or drop in travel expenses for some of the companies under review suggests the approach management took in response to the Covid-19 lockdown. While some reacted by going completely remote as indicative of their numbers, others continued spending, perhaps due to an inefficient cost structure that could not be scaled down despite the imposed lockdown.
Access Bank (N7.15 billion)
Access Bank Plc spent a total of N7.15 billion on business travel expenses in 2020, representing a reduction of 31.9% compared to N10.5 billion recorded in the previous year.
- The tier-1 bank accounted for 22.9% of the total travel expenses incurred by the top 30 companies on the NSE.
- The bank’s total asset as of December 2020, stood at N8.67 trillion, representing the highest on the NSE.
UBA (N4.94 billion)
United Bank for Africa incurred a sum of N4.94 billion on business travels in the year 2020. Its travel expenses reduced by 30.1% compared to N7.06 billion recorded in 2019.
- Its expenses accounted for 15.8% of the total recorded by companies under consideration.
- UBA recorded a growth of 27.7% in profit after tax from N89.1 billion recorded in 2019 to N113.8 billion in 2020.
FBN Holdings (N3.51 billion)
FBN Holdings the parent company of First Bank of Nigeria, one of the major financial institutions in the country, spent a total of N3.51 billion on travel expenses in the year under review.
- The tier-1 bank reduced its business travel expenses by 48.24% from N6.78 billion recorded in 2019 to N3.51 billion.
- Also, FBN Holdings accounted for 11.2% of the total business travel expense of the companies under consideration.
- It is worth noting that FBN Holdings classified its travel expenses as passages and travels.
Dangote Cement (N2.11 billion)
The most capitalized company on the Nigerian Stock Exchange, valued at N3.7 trillion spent a total of N2.11 billion on business travel expenses in 2020.
- The foremost cement manufacturer in Nigeria recorded a 13.8% decline in travel expenses from N2.45 billion recorded in 2019 to stand at N2.11 billion in 2020.
Presco Plc (N2.02 billion)
Presco Plc, a fully-integrated agro-industrial establishment specializing in the cultivation, extraction, refining, and fractionation of crude palm oil into finished products, spent a total of N2.02 billion on travel expenses in 2020.
Its travel expenses in 2020, represent a 33.71% increase compared to N1.51 billion recorded in the previous year.
- It also accounted for 6.5% of the total travel expenses recorded by the companies under consideration.
- Zenith Bank – N1.88 billion
- Seplat – N1.26 billion
- Guinness – N1 billion
- MTN Nigeria – N964 million
- Fidelity Bank – N964 million
Note: Fidelity Bank classified its expenses as travelling and accommodation, while MTN Nigeria as Trainings, travels and entertainment cost.
New Management set to take charge at GT Bank as list of appointment and exit leaks
A major Management restructuring is at the final stages of completion at GTB, one of Nigeria’s most respected commercial banks.
A major Management restructuring is at the final stages of completion at Guaranty Trust Bank, one of Nigeria’s most respected commercial banks.
Sources with knowledge of the matter informed Nairametrics that a clean sweep of top management staff above the age of 45 has been effected as current maverick MD/CEO Segun Agbaje prepares to retire as MD/CEO of the bank and proceed as MD/CEO of the bank’s Holding Company.
Segun Agbaje is expected to leave following the end of his 10-year tenure as Managing Director of the bank.
According to multiple sources, the bank is set to announce Miriam Olusanya as its new Managing Director. We understand the Central Bank has already been notified and a formal announcement could be made anytime soon.
In an internal memo dated April 28, 2021, and seen by Nairametrics, Thomas John has been appointed Managing Director of GTB West Africa while Bayo Veracruz was appointed Managing Director of GTB East Africa.
Others are Olayinka Odusote as Divisional Head, Digital Banking, an important position considering the bank’s ambition to transform into a full-fledged digital bank. Ijeoma Esemudje is appointed Divisional Head Corporate Bank Mainland & Agric.
As part of the management restructuring already in effect, two of the oldest and revered Executive Directors of the bank have already been asked to retire after illustrious years of service to the bank. Nairametrics also understands 4 General Managers out of 9 have also been asked to exit the bank paving the way for younger executives mostly under the age of 45 to take charge.
A list of appointments and exits purportedly approved by the board is already being circulated across several social media groups on WhatsApp and Telegram. Nairametrics cannot confirm the authenticity of the list and although officials at the bank did not confirm the list, they stated that a press release would soon be made to announce the appointments.
Recruitment vs Selection Process?
In September 2020, Agbaje disclosed during the bank’s investor earnings call that GTBank was already looking for its next Managing Director. According to him, five of the bank’s Executive Directors were in line for the top job and were at the concluding stages of the recruitment process.
“What we are looking for now is a Managing Director for Guaranty Trust Bank Nigeria. The process has started; we have 5 Executive Directors and so all of them are going through the process at the moment.
We are working with a consulting firm in the UK ….. at the end of this process which will end at the beginning of the fourth quarter, we will have a Managing Director for GT Bank Nigeria.”
Nairametrics | Company Earnings
Access our Live Feed portal for the latest company earnings as they drop.
- 2021 Q1 Results: FTN Cocoa Processor Plc reports loss after tax of N162.21 million
- Tantalizers Plc reports a loss after tax of N97.75 million in FY 2020 in Q1 2021.
- Courteville Business Solutions Plc proposes final dividend of 3 kobo per share for FY 2020.
- 2020 FY Results: UPDC Real Estate Investment Trust records over 500% growth in Profit after tax.
- Sovereign Trust Insurance records a 43% surge in profit after tax to N392.1 million in Q1 2021.