Warren Buffett's 2019 letter to Berkshire Hathaway shareholders blows the whistle on corporate corruption and spells stock market doom.
Warren Buffett’s 2019 Berkshire Hathaway (NYSE:BRK.A) report and letter to shareholders is a savagely bearish document. While the stock market benchmarks edge out new record highs week after week, Buffett’s incendiary letter drops napalm all over the euphoria.
He calls out a number of wasteful, misleading, and downright greedy corporate practices in the 2019 letter. At times he sounds like Bernie Sanders. While finance analysts are spinning Berkshire’s recent moves as bullish, Buffett continues to prefer letting a fortune slowly evaporate to inflation than invest in the stock market.
Wall Street bulls have found plenty of plausible reasons to remain bullish as market capitalization expands into uncharted territory. Americans are about the most optimistic they’ve been since 9/11. They’re also working harder than they have in half a century.
Information technology continues to spawn titanic digital platforms that unlock vast stores of value by fueling increased productive possibilities, and saving money in all kinds of ways we could not have expected even just years ago.
But leave it to corporate America to take good opportunities and push them beyond their limits. Warren Buffett points out a number of ways corporate greed is killing the goose that lays the golden eggs. He paints a bleak picture of corporate corruption…
Buffett’s 2019 letter is soaked through with his conviction that much of corporate America’s numbers are fake. He begins with the same admonition in his 2018 letter against the new Generally Accepted Accounting Principles (GAAP) rule for reporting unrealized capital gains and losses. He thinks this causes companies to report faulty numbers:
The adoption of the rule by the accounting profession, in fact, was a monumental shift in its own thinking… Now, Berkshire must enshrine in each quarter’s bottom line… every up and down movement of the stocks it owns, however capricious those fluctuations may be.
Buffett is saying here that the corruption of corporate boardroom self-deception has now infected the accounting profession. This was the focus of his introductory remarks at the most recent Berkshire Hathaway Annual Shareholder meeting.
Further, Buffett goes on to say many CEOs fudge their company’s numbers, and that audit committees are powerless to stop them:
Audit committees now work much harder than they once did and almost always view the job with appropriate seriousness. Nevertheless, these committees remain no match for managers who wish to game numbers, an offense that has been encouraged by the scourge of earnings ‘guidance’ and the desire of CEOs to ‘hit the number.’
Remember Warren Buffett’s classic advice to be fearful when others are greedy.
He goes on to state that executive compensation is shrouded in complicated payment schemes. And that corporate communications to shareholders are “mind-numbing” to read. To add insult to injury, companies shell out massive consultant fees to weave these webs of opacity and concealment:
Compensation committees now rely much more heavily on consultants than they used to. Consequently, compensation arrangements have become more complicated – what committee member wants to explain paying large fees year after year for a simple plan? – and the reading of proxy material has become a mind-numbing experience.
Buffett also says corporate mergers often enrich executives at the expense of shareholders. He says “don’t hold your breath” waiting for this to change:
But I have yet to see a CEO who craves an acquisition bring in an informed and articulate critic to argue against it… Overall, the deck is stacked in favor of the deal that’s coveted by the CEO and his/her obliging staff… The current system, whatever its shortcomings for shareholders, works magnificently for CEOs and the many advisors and other professionals who feast on deals.
Finally, Buffett outlines how CEOs select corporate board directors who won’t challenge their compensation plan. They essentially bribe directors with exorbitant pay to keep them docile:
Think, for a moment, of the director earning $250,000-300,000 for board meetings consuming a pleasant couple of days six or so times a year. Frequently, the possession of one such directorship bestows on its holder three to four times the annual median income of U.S. households.
Buffett says a CEO looking for a director will ask the director’s current CEO if they’re a “good” director. And “good” is “a code word” for someone who has not “seriously challenged his/her present CEO’s compensation or acquisition dreams.”
Some analysts are spinning Berkshire Hathaway’s position and Warren Buffett’s letter as bullish on the American economy. This couldn’t be further from the truth.
For example, Yahoo Finance published an analysis by GuruFocus claiming “Buffett Bets on America Again.” This article interprets Berkshire’s unprecedented decision to purchase ETFs that track the S&P 500 as “still bullish on the American economy.” But Berkshire has hardly taken a big bite out of index funds.
Nowhere in the analysis does it mention how much of Vanguard S&P 500 ETF (VOO) and SPDR S&P 500 ETF (SPY) Berkshire actually bought.
The reality is Warren Buffett stuck one toe in the water. His 2019 report shows the $128 billion cash pile hasn’t moved. Berkshire is still clutching its cash pile, cash equivalents and short term Treasury bills. (See page 86 of the report.)
Warren Buffett remains terrifyingly bearish on the stock market. He’d rather keep $128 billion in cash that nets zero long-term returns than invest in the stock market. That’s a fortune slowly rotting away to inflation like so much cabbage on the shelf. Buffett would rather hold $128 billion in rotting leafy green back cabbage than go for a swim in the stock market. “The Oracle” clearly predicts the tide is about to go out.