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Asset Management: Warren Buffett defends buybacks


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‘Efficient markets exist only in textbooks’

Warren Buffett offered a full-throated defence of share buybacks in his annual letter to Berkshire Hathaway shareholders on Saturday, saying stock purchases by Berkshire and the dozens of publicly traded companies it owns are a boon to investors. 

The comments from the 92-year-old investor came in the shortest annual letter he has published in decades and accompanied results that showed Berkshire suffered a $22.8bn loss last year, driven by a slide in the value of its stock portfolio, writes Eric Platt in New York. 

Buffett’s defence comes weeks after a new tax on stock buybacks went into effect in the US. The tax was one of the few revenue raising measures that found unanimous support among Democrats in the Senate when they passed the Inflation Reduction Act, president Joe Biden’s sweeping climate and tax law. 

Supporters of the tax have argued that buybacks do little to bolster the underlying economy and could be spent on capital expenditures or returned to workers in the form of better pay. Others, including Buffett, contend buybacks can offer a prudent way to deploy capital. 

“When you are told that all repurchases are harmful to shareholders or to the country, or particularly beneficial to CEOs, you are listening to either an economic illiterate or a silver-tongued demagogue (characters that are not mutually exclusive),” Buffett wrote. 

The Berkshire chief executive said that when repurchases were “made at value-accretive prices” it benefited all shareholders, pointing to investments his company made in American Express and Coca-Cola in the 1990s. 

Berkshire has ramped up purchases of its own stock in recent years, particularly at times when Buffett was finding few appealing investment alternatives. The company spent $7.9bn in 2022 buying up its own shares. 

The letter was a brief 10 pages, about half the length of his letters since 2000, and included almost a page of quotes from his longtime partner Charlie Munger

Buffett struck an upbeat tone as he delivered some of his greatest hits: “Efficient markets exist only in textbooks”, the critical importance of “the power of compounding”, and “avoid behaviour that could result in any uncomfortable cash needs at inconvenient times”. 

“The lesson for investors: The weeds wither away in significance as the flowers bloom. Over time, it takes just a few winners to work wonders. And, yes, it helps to start early and live into your 90s as well,” he wrote. 

Read Eric’s full report here, in which Berkshire’s vast business empire with more than 380,000 employees offers further signs of the unevenness in the US economy.

Is it time to buy Europe?

“Time to buy Europe” is one of the hardiest perennial trade ideas that somehow never properly takes off, writes markets editor Katie Martin

It is a nailed-on certainty that every few months, strategy notes or articles will appear outlining why investors think now is the time to invest in Europe, and not long after that, European stocks will tank. 

In a July 2021 example, fund managers spoke warmly of the euro area’s positive corporate earnings revisions, its recovery from the shock of Covid, and a tamer outlook for interest rates than on the other side of the Atlantic. Among other things, these were cited as reasons to add to the already substantial rally that had been running since the initial outbreak of the pandemic. 

They were not wrong. By the start of 2022, the Stoxx 600 was about 8 per cent higher. The problem was: no one saw Russia’s invasion of Ukraine coming to knock it off course. By the end of last year, stocks were some 6 per cent below the starting point. 

The outbreak of war is, to put it mildly, an exogenous shock. No sensible fund manager could have anticipated it in the previous summer. But global investors can be forgiven for thinking Europe is just not worth the bother. 

The US S&P 500 had a rough 2022, for sure. But it is still up by more than 50 per cent in the past five years. No major European index can come close to that. Looking at dollar-based MSCI indices to strip currency effects out of comparisons, MSCI Europe is up a paltry 5 per cent, while Germany is down 13 per cent. France’s 17 per cent gain is decent, but not on the same scale as the US. 

Still, no doubt you can see where this is going, and you are already asking yourself: is it time to buy Europe? Read Katie’s column in its entirety here, in which she outlines why, at the risk of tempting fate, a lot of investors think it is.

Chart of the week

Column chart of annualised real returns (%) showing real bond returns, 1900 to 2022

Last year was the worst for bond markets in more than a century and marked the end of a four-decade long “golden age” for the asset class which is unlikely to be repeated, according to a trio of academics.

Global bonds lost 31 per cent in 2022, the worst annual performance for fixed income in data stretching back to 1900, Dr Mike Staunton and professors Elroy Dimson and Paul Marsh wrote in Credit Suisse’s latest Global Investment Returns Yearbook.

UK bonds fared even worse, returning minus 39 per cent, writes George Steer in London.

Those declines stand in stark contrast to the reliable returns that bonds recorded between 1982 and 2021, when the world bond index provided an annualised real return of 6.3 per cent, the authors said. Global equities returned 7.4 per cent per year over the same period.

But extrapolating the “astonishingly” high bond returns provided in the 40 years to 2021 into the future was “inappropriate” and “foolish”, the authors said, noting that since 1900 the average annualised real return for bonds across the 21 countries with continuous data was just 0.6 per cent. “For investors who had grown used to high bond returns and who saw bonds as a safe asset, [2022] returns were truly shocking.”

Five unmissable stories this week

Tim Buckley, the chief executive of Vanguard, has defended his decision to pull the world’s second-largest asset manager out of an industry-wide alliance to tackle climate change, saying the group’s “voice was being drowned out”. 

Vivek Ramaswamy, the crusader against “woke capitalism”, announced a run for president and resigned from active involvement in Strive, the anti-ESG fund manager he founded. His investors and co-workers are nevertheless pressing ahead with an “anti-woke” mission. 

Regulating investment consultants like Willis Towers Watson, Mercer and Aon would not have prevented the liability-driven investing crisis. It is more important to increase competition and help investors to compare performance and fees.

Billionaire hedge fund manager Chris Hohn has demanded that the world’s largest plane maker Airbus abandon its bid for a stake in the cyber security arm of French IT company Atos, suggesting the deal is politically motivated.

Thomas H Lee, a billionaire financier who led some of the private equity industry’s most successful deals during its early rise in the 1980s and 1990s, has died at the age of 78.

And finally

David Hockney at Lightroom in King’s Cross, London © Justin Sutcliffe

David Hockney’s new exhibition, Bigger & Closer (not smaller & further away), is a total joy. Lie on the floor and immerse yourself into the hypnotic world of Hockey at Lightroom, London’s new venue for artist installations, through vast digital projections of his most famous images.


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