Warren Buffett's letter, Berkshire earnings: What to watch

Shares of Berkshire Hathaway (BRK-B, BRK-A) closed at record highs on Friday. The Warren Buffett-led company will release its annual report on Saturday February 24. The release will also include Buffett's closely-watched annual letter, the first since his longtime business partner Charlie Munger passed away in November.

Smead Capital Management CIO Bill Smead says what one of the things that Buffett does is "patiently wait for things to come to him." When it comes to the holding that Berkshire has requested to keep confidential, Smead thinks it may be a financial institution, saying "banks are the cheapest relative to the S&P going back to, like, 1941. So if he is buying into a bank or an insurance company, he's doing what he always does which is taking advantage of a deeply out of favor sector in comparison to the rest of the stocks."

Watch the video above to hear how Smead thinks Buffett will honor Munger in his letter.

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Stephanie Mikulich.

Video Transcript

JULIE HYMAN: Berkshire Hathaway is set to report earnings on Saturday. And Warren Buffett will issue his annual letter alongside the results. For a look at what to expect back with us is Bill Smead, Smead Capital Management CIO.

Bill, one of the things that strikes me is we were just talking about the enthusiasm for things like the Magnificent Seven and AI. Berkshire Hathaway touched a record high today. So it has also been a favorite among investors during this period of time. What is your biggest expectation, or what do you want to hear from Warren Buffett right now?

BILL SMEAD: Well, we'd love to hear him expound on what Charlie Munger said a couple of years ago, that this was the biggest financial euphoria episode of Charlie's career because of what he called the totality of it. And this Magnificent Seven being tacked on to Fang, being tacked on to the Beyond Meat market, and Peloton market, and meme trades, and IPOs, and SPACs, and crypto. And God knows whatever else they've thrown in there. That is the totality of it.

So here's an interesting thought for you. Berkshire Hathaway is a very large cap stock. If you're a chicken, and you want to own the Magnificent Seven, what's a chicken's way to own the Magnificent Seven? To buy the index. To buy the S&P 500 index.

So massive amounts of passive money is going into the S&P 500 index, which is now just a glamorized growth fund because having 45% in tech. So, Berkshire Hathaway is probably getting net investment from passive money. And, of course, Munger said he didn't like the passive money because he said, you know, Larry Fink might be a nice guy. But he didn't want Fink to be his emperor. Meaning voting all the shares.

JOSH LIPTON: Bill, a different question for you. The fact that Warren Buffett greatest value investor of all time is willing, Bill, to sit here right now on this just mountain of cash, $150 billion and counting. Are there lessons there, Bill, for the rest of us, for investors about the markets, about valuations here?

BILL SMEAD: Yeah, it's a really good question. And I wish people would ask me questions like this more often. What we do as a company and what Buffett does with much larger amounts of money is patiently wait for things to come to him.

It reminds me in sports. Use basketball as an example. If you're a point guard, you're bringing the ball down the floor.

And you've gotten your mind you want to call a play. That might not be the right play to call because the defense is set up way better to do something else. Let the game come to you.

That's one of the brilliant things about Buffett. Let the game come to you. Wait until the opportunities come to you.

So that's why it's great to have loads of cash. And he and Munger would both tell you that this isn't an optimal time to buy stocks the way when he wrote in late September of 2008, buy American I am. Not because it was the bottom.

But if you bought stocks over the next year or two after that, you were likely to do really well. And so we're more worried about his Apple position than we are about his cash position. Because in many ways, he's called Apple the most wonderful company that he's owned.

And the last time he did that was with Coca-Cola and General Electric. He called in the 98 annual letter, which would be 26 years ago. He called Coke and Gillette the inevitables.

And they were very poor performing stocks for the next 10 to 12 years. As John Neff, the great manager of Vanguard Windsor once said, when you want to brag about a stock, you should probably sell it.

JULIE HYMAN: So you think he should sell Apple?

BILL SMEAD: Well, he just did sell some apples.

JULIE HYMAN: Well, sell some or sell all. Do you think you should exit the position?

BILL SMEAD: Well, certainly, after the mania that we were seeing, it is a very, very, very large company that it takes a lot to move their needle now. And I would not be surprised to see him be a relatively consistent tremor in that stock, not because it's not a great company, not because I wouldn't want to own it at 12 times earnings. But these large mature growth companies have had a halo of investors just seeking exactly that. Large consistent growth with a wide moat, that might be the most popular trade outside of the Magnificent Seven.

JOSH LIPTON: And, Bill, one kind of mystery out there. And the journal touched on this recently, which is Berkshire wrote for a second consecutive quarter that it was requesting confidential treatment from the SEC for one or more holdings. It omitted, Bill, from its public 13F filing. What do you make of that, Bill? Why all the confidentiality here you think?

BILL SMEAD: Banks are the cheapest relative to the S&P going back to like 1941. So if he is buying into a bank or an insurance company, he's doing what he always does, which is taking advantage of deeply out of favor sector in comparison to the rest of the stocks.

JULIE HYMAN: Bill, finally, you mentioned, of course, Charlie Munger who was the consiglieri for Buffett for so many years. This is going to be the first letter that we will get from Buffett since the passing of Charlie Munger. How do you think he's going to process that in writing to investors?

BILL SMEAD: Well, he'll certainly honor Charlie. You know, I'm a 65-year-old guy that's 43 years in the investment business. And I can tell you that I feel very strongly about my best friends over the years in this industry.

And, in effect, Charlie has been his business spouse, you know. And so it's very hard. Very hard. And I'm sure he'll honor him in his comments.

And I'm sure he'll say a few things. Well, if Charlie was helping me write this, he'd probably say this. And so, yeah, we're big fans.

Our podcast is called The Book With Legs in honor of the fact that Charlie's family called him a book of legs because he always had his face stuck in a book all the time.

So very difficult. And, again, what I'd hope to see-- I don't know if you remember this probably 12 years ago. But Buffett mentioned what a good job Lou Simpson was for picking stocks for Geico.

And he said in tiny, tiny print, he's done a lot better than me the last couple of years. We'd like to see that kind of reference to Todd and Ted because they are definitely now much more on the forefront. I would like to see them spend a couple of answering questions with Warren, more so than Greg Abel who does a great job of running the operating businesses. But we're all hungry for thoughts on how to pick stocks or why they like the stocks they like.

JULIE HYMAN: Yeah, that makes a lot of sense, Bill. Thank you so much for spending so much time with us today. Have a great weekend.

BILL SMEAD: Yeah. Thank you for having me.

JULIE HYMAN: Take care.