What Warren Buffett’s 2021 letter reveals about Berkshire’s key holdings

Berkshire Hathaway remained cash-heavy in 2021, but Warren Buffett appeared optimistic about the firm’s focus on long-term returns, with particular emphasis on Apple as a driver of growth.

In Warren Buffett’s (pictured) annual letter to Berkshire Hathaway [BRK] shareholders, released on 26 February, the legendary investor highlighted the importance of long-term investments and named Apple [AAPL] as one of the four “giants” driving the company’s growth. 

Berkshire Hathaway outperformed Wall Street in 2021. Class A shares of the multinational holding company ended last year up 29.6%, narrowly outperforming the S&P 500’s 28.7% growth in the same period.

However, when discussing “what [vice chairman Charlie Munger] and I believe is new or interesting at Berkshire”, Buffett commented that “there was little action of that sort in 2021”. “We did, though, make reasonable progress in increasing the intrinsic value of your shares,” he added in the letter.

The company maintained a cash-heavy position and turned to share repurchases to increase the value of Berkshire shares, though Buffett reminded stakeholders that this is not the firm’s preferred long-term position.

The letter also outlined the company’s key holdings and investments over the course of the year, with a positive outlook for both its fully owned businesses and equity holdings.

Apple is one of Berkshire’s “giants”

Buffett highlighted Apple as one of the company’s key pillars, naming it as the second “giant” after Berkshire’s own insurance business. He pointed out that Berkshire’s 5.55% — up from 5.39% in 2020 — share of Apple’s earnings totalled $5.6bn in 2021. He praised the managerial approach of Tim Cook, CEO at Apple, and his decision to use the company’s earnings to repurchase Apple stocks.

“Apple — our runner-up Giant as measured by its year-end market value — is a different sort of holding. Here, our ownership is a mere 5.55%, up from 5.39% a year earlier. That increase sounds like small potatoes. But consider that each 0.1% of Apple’s 2021 earnings amounted to $100m. We spent no Berkshire funds to gain our accretion. Apple’s repurchases did the job,” he wrote in the letter.

Apple was also named in Buffett’s list of his company’s top 15 investments, alongside American Express [AXP], Bank of America [BAC], Coca-Cola [KO] and Verizon [VZ]. Berkshire’s stake in Apple was worth $161.2bn, making it by far the largest holding in the company’s portfolio in terms of value. Berkshire had started buying shares in Apple in late 2016 and had amassed more than 1 billion shares by early July 2018.

 

Buffett bets on international stocks

As international holdings are not included in 13F filings, the annual letter was an opportunity for shareholders to find out how Berkshire’s key international holdings fared last year.

While the majority of Berkshire’s largest equity holdings are in US companies, new entrants to the firm’s top 15 holdings included Mitsubishi [8058.T] and Mitsui & Co [8031.T], which Buffett bought shares in back in August 2020, alongside three other Japanese trading companies.

Berkshire holds a roughly 6% stake in each of the companies. However, in line with his investment philosophy, Buffett sees the purchase as a long-term move and could increase the stake to 9.9%, CNBC reported at the time.

The top 15 holdings in Berkshire Hathaway’s portfolio also included Chinese EV maker BYD [1211.HK], which Buffett has backed since 2008, when it was still relatively unknown.

At the end of 2021, Berkshire’s stake in the four international companies in the top 15, BYD, Mitsubishi, Mitsui and Itochu [8001.T], was worth a total of more than $15.2bn. While this pales in comparison to Apple’s $161.2bn, it represents a change from 2020, when BYD and Itochu were the only non-US investments in Berkshire’s top 15, worth an overall $8.2bn.

Short-term shift in investment strategy

With a $144bn balance sheet, $120bn of which is in US Treasury bills, Berkshire’s cash-heavy position could seem alarming to some, Buffett pointed out.

“Charlie and I have pledged that Berkshire (along with our subsidiaries other than BNSF and BHE) will always hold more than $30bn of cash and equivalents… But $144bn? That imposing sum, I assure you, is not some deranged expression of patriotism. Nor have Charlie and I lost our overwhelming preference for business ownership,” he said.

“Charlie and I have endured similar cash-heavy positions from time to time in the past. These periods are never pleasant; they are also never permanent” – Warren Buffett

 

Instead, Buffett explained that the firm’s move reflects its failure to “find entire companies or small portions thereof which meet our criteria for long-term holding”, as well as the fact that interest rates have pushed up prices.

However, this is likely to be a short-term choice. “Charlie and I have endured similar cash-heavy positions from time to time in the past. These periods are never pleasant; they are also never permanent. And, fortunately, we have had a mildly attractive alternative during 2020 and 2021 for deploying capital,” he said.

Buffett reminded shareholders that, before opting for share buybacks, the company’s two preferred methods of increasing value are internal growth and acquisitions and buying non-controlling stakes in publicly listed companies. With this in mind, Berkshire Hathaway shareholders will be waiting to find out what Buffett’s next move will be.