Warren Buffett, the chairman and CEO of Berkshire Hathaway, recently released his annual letter to shareholders, highlighting the company’s commitment to long-term investment in businesses with strong economic characteristics and trustworthy managers, as well as the company’s gratitude for its dedicated and philanthropic shareholders. The letter also discussed the significance of operational earnings over GAAP earnings, the importance of repurchasing shares, and the lesson of focusing on winners and letting losers wither away.
Buffett gave examples of the company’s investments in Coca-Cola and American Express, which were bought for $1.3 billion each in the 1990s. Berkshire’s dividends from Coca-Cola grew from $75 million in 1994 to $704 million in 2022, while annual dividends from American Express grew from $41 million to $302 million. These investments not only brought pleasing dividend gains but also significant increases in stock prices. The total value of Berkshire’s investments in Coca-Cola and American Express now amounts to roughly $25 billion and $22 billion, respectively, accounting for about 5% of Berkshire’s net worth.
Warren Buffett emphasized the importance of operational earnings over GAAP earnings, urging investors to focus on the operational figure and mentioned that the GAAP figure fluctuates wildly and capriciously at every reporting date. He stated that capital gains have been hugely important to Berkshire over the past decades, and they are expected to be meaningfully positive in future decades.
Buffett also discussed the significance of share repurchases, stating that they increase shareholders’ interest in the company’s many businesses when the share count goes down. He emphasized the importance of making value-accretive share repurchases, which benefit all owners.
Furthermore, Warren Buffett reflected on the history and growth of Berkshire Hathaway, admitting that he was slow to recognize the severity of the company’s problems in the early days. However, a stroke of good luck came when National Indemnity became available in 1967, leading Berkshire to shift its resources towards insurance and other non-textile operations. This decision proved to be a wise one, and Berkshire’s book value per share increased from $19 to $400,000 over the past 58 years.
The lesson from Buffett’s letter is clear: long-term investing in businesses with strong economic characteristics and trustworthy managers can lead to significant gains over time. Focusing on winners and letting losers wither away, emphasizing operational earnings over GAAP earnings, and making value-accretive share repurchases are key strategies for long-term investment success. Buffett’s annual letter serves as a reminder to investors to have patience, discipline, and a long-term perspective when it comes to investing.
II. Long Term Investing
Warren Buffett’s annual message to shareholders of Berkshire Hathaway Inc. begins by expressing gratitude for the trust and loyalty of the company’s long-time investors. He notes that unlike the common belief that people save for retirement and leave their assets to family or philanthropy, Berkshire’s individual shareholders tend to be lifelong savers who eventually donate most of their funds to charitable causes. Warren Buffett and his partner, Charlie Munger, take pleasure in the fact that their shareholders rarely opt for flashy assets or dynasty-building.
Summary of the key points
- Berkshire Hathaway manages the savings of many individuals who are largely once-a-saver, always-a-saver types, and often end up dispensing most of their funds to philanthropic organizations.
- Berkshire Hathaway invests in two related forms of ownership: businesses they control and publicly-traded stocks. They aim to make meaningful investments in businesses with both long-lasting favorable economic characteristics and trustworthy managers.
- Berkshire Hathaway buys publicly-traded stocks based on their expectations about their long-term business performance, not because they view them as vehicles for adroit purchases and sales.
- Berkshire Hathaway’s extensive collection of businesses consists of a few enterprises that have truly extraordinary economics, many that enjoy very good economic characteristics, and a large group that are marginal.
- Berkshire Hathaway is not a stock-picker but a business-picker. Over the years, they have made many mistakes, and their satisfactory results have been the product of about a dozen truly good decisions and an advantage that favors long-term investors.
- Berkshire Hathaway’s secret sauce lies in their investments in companies such as Coca-Cola and American Express. The dividends received from these investments have grown over the years and brought with them important gains in stock prices.
- Berkshire Hathaway’s satisfactory results have been the product of about a dozen truly good decisions and a sometimes-forgotten advantage that favors long-term investors such as Berkshire.
Overall, Buffet’s annual message provides valuable insights into Berkshire Hathaway’s performance, as well as his perspectives on the broader economy and business strategy. His views are widely respected in the business community and are closely followed by investors around the world.
III. Buffet’s Investment Strategy
Buffett then explains that Berkshire Hathaway’s investment strategy involves two types of ownership: controlling businesses and passive ownership of publicly-traded stocks. For the former, Berkshire acquires 100% ownership of businesses and selects the CEOs who make day-to-day decisions, while for the latter, they purchase stocks of publicly-traded companies without any say in management. Warren Buffett emphasizes that they invest in businesses based on their long-term economic prospects and the trustworthiness of their managers, rather than their short-term stock price fluctuations.
Buffett admits that he has made many mistakes over the years and that the company’s portfolio includes a mix of extraordinary, good, and marginal businesses. He acknowledges that capitalism has a tendency to create a growing number of losers while also delivering improved goods and services, which he refers to as “creative destruction.” Buffett points out that while the stock market can be unpredictable and irrational, publicly-traded stocks offer occasional opportunities to purchase pieces of wonderful businesses at attractive prices.
Warren Buffett notes that controlled businesses are typically not available at bargain valuations, as owners are usually not interested in selling at panic-type valuations. He then humbly gives himself a “report card,” stating that most of his capital-allocation decisions have been no better than so-so over 58 years of Berkshire management, with a few truly good decisions every five years or so. However, he believes that Berkshire’s long-term investment horizon gives them an advantage over short-term investors and that their satisfactory results are also partly due to luck.
Overall, Warren Buffett’s annual message highlights Berkshire Hathaway’s commitment to long-term investment in businesses with strong economic characteristics and trustworthy managers, as well as the company’s gratitude for its dedicated and philanthropic shareholders.
Buffet gave examples of the company’s investments in Coca-Cola and American Express, which were bought for $1.3 billion each in 1994 and 1995, respectively. Berkshire’s dividends from Coca-Cola in 1994 were $75 million, and this amount grew to $704 million in 2022. Similarly, annual dividends from American Express grew from $41 million to $302 million. These investments not only brought pleasing dividend gains but also significant increases in stock prices. The total value of Berkshire’s investments in Coca-Cola and American Express now amounts to roughly $25 billion and $22 billion, respectively, accounting for about 5% of Berkshire’s net worth.
Warren Buffett also pointed out the significance of the investment mistake he could have made. He assumed that if he had made an investment that did not grow and remained at $1.3 billion since the 1990s, it would now represent only 0.3% of Berkshire’s net worth, and would deliver an unchanged $80 million or so of annual income. Buffet stated that the lesson for investors is that over time, it takes just a few winners to work wonders, and investors should focus on the winners and let the losers wither away.
IV. Focus on Operational Earnings than GAAP earnings
In addition to discussing Berkshire’s investments, Buffet emphasized the importance of operational earnings over GAAP earnings. He urged investors to focus on the operational figure and mentioned that the GAAP figure fluctuates wildly and capriciously at every reporting date. He stated that capital gains have been hugely important to Berkshire over the past decades, and they are expected to be meaningfully positive in future decades. However, their quarter-by-quarter gyrations, regularly and mindlessly headlined by media, totally misinform investors.
Warren Buffett also discussed the significance of share repurchases, stating that they increase shareholders’ interest in the company’s many businesses when the share count goes down. He emphasized the importance of making value-accretive share repurchases, which benefit all owners. Buffet gave the example of three fully-informed shareholders of a local auto dealership, one of whom manages the business. He asked if a transaction in which one of the passive owners sells his interest back to the company at a price attractive to the two continuing shareholders harmed anyone, or if the manager was favored over the continuing passive owners, or if the public was hurt. The answer to all of these questions is no.
In summary, Buffet’s annual letter to the shareholders emphasized the importance of focusing on the winners and letting the losers wither away, the significance of operational earnings over GAAP earnings, and the importance of value-accretive share repurchases.
V. Buffet’s Report Card
In Warren Buffett’s annual message titled “58 Years – and a Few Figures,” he reflects on the history and growth of Berkshire Hathaway, a multinational conglomerate holding company. Warren Buffett recalls the early days of Berkshire Hathaway, when the company was struggling with its textile operations and in need of a fresh start. He admits that he was slow to recognize the severity of the company’s problems, but a stroke of good luck came when National Indemnity became available in 1967. This led Berkshire to shift its resources towards insurance and other non-textile operations, which marked the beginning of the company’s journey to where it stands today.
Buffett credits Berkshire Hathaway’s success to a combination of continuous savings by its owners, the power of compounding, the avoidance of major mistakes, and the American Tailwind. He notes that Berkshire Hathaway now owns major stakes in a diverse range of large and well-known American companies, including American Express, Bank of America, Chevron, Coca-Cola, HP Inc., Moody’s, Occidental Petroleum, and Paramount Global. Additionally, Berkshire owns 100% of BNSF and 92% of BH Energy, each with earnings that exceed the $3 billion mark. If these companies were publicly-owned, they would replace two present members of the S&P 500 Index. This broad range of ownership leaves Berkshire Hathaway more aligned with the country’s economic future than any other U.S. company.
Warren Buffett emphasizes that Berkshire Hathaway will always hold a significant amount of cash and U.S. Treasury bills while avoiding behavior that could result in uncomfortable cash needs at inconvenient times, including financial panics and unprecedented insurance losses. He also states that the CEO will always be the Chief Risk Officer, a task that cannot be delegated. Future CEOs will have a significant part of their net worth in Berkshire Hathaway shares, bought with their own money. Furthermore, shareholders will continue to save and prosper by retaining earnings.
Performance of Share Berkshire Hathaway
Berkshire Hathaway’s performance is often compared to the S&P 500 Index as a benchmark. Annual percentage change in the per-share market value of Berkshire Hathaway compared to the S&P 500 with dividends included from 1965 to 2020. The table highlights the fluctuating performance of Berkshire Hathaway compared to the S&P 500 over the years.
Some years, Berkshire Hathaway outperformed the S&P 500 by a significant margin, such as in 1965, 1968, 1970, 1975, 1976, 1983, 1985, 1988, 1995, 1997, 1998, 2003, 2006, and 2007. In other years, Berkshire Hathaway underperformed the S&P 500, such as in 1974, 1977, 1981, 1999, 2000, 2001, 2002, 2008, and 2015.
It’s important to note that past performance is not an indicator of future results, and investing involves risk. It’s also worth noting that Berkshire Hathaway has outperformed the S&P 500 over the long-term, with an average annual return of approximately 20% compared to the S&P 500’s average annual return of approximately 10%. Additionally, Berkshire Hathaway’s portfolio is composed of a diverse range of companies and industries, which helps mitigate risk and maximize potential returns.
In conclusion, Buffett asserts that there will be no finish line for Berkshire Hathaway. The company will continue to grow and evolve, with a focus on responsible risk management and long-term value creation for its shareholders.
VI. Facts about Federal Taxes
Warren Buffett’s annual message to Berkshire Hathaway shareholders often includes his thoughts on the economy, investing, and the company’s performance. In the 2022 message, Warren Buffett shared some surprising facts about federal taxes in the United States.
Over the past decade, the US Treasury collected $32.3 trillion in taxes but spent $43.9 trillion. Buffett and his partner Charlie Munger do not offer an opinion on the consequences of this imbalance, but they believe that economic and market forecasts are often worse than useless. Their job is to manage Berkshire’s operations and finances in a way that achieves an acceptable result over time and preserves the company’s staying power during financial crises and recessions.
Berkshire’s contribution to the Treasury during the decade was $32 billion in corporate income tax payments, which is almost exactly a tenth of 1% of all the money the Treasury collected. Buffett notes that if there were about 1,000 taxpayers in the US who matched Berkshire’s payments, no other businesses or households would need to pay any taxes to the federal government.
To help readers comprehend the magnitude of these sums, Buffett uses physical dimensions. For example, a stack of newly-printed $100 bills worth $1 million would reach a person’s chest, while a stack of $1 billion would reach about 3/4 of a mile into the sky. The total of Berkshire’s federal income tax payments over the past decade, $32 billion, would result in a stack over 21 miles high, about three times the altitude at which commercial airplanes typically fly.
Warren Buffett hopes and expects that Berkshire will pay much more in taxes during the next decade, owing to America’s dynamism and its contribution to Berkshire’s success. He believes that the American Tailwind has always propelled the country forward, even during becalmed periods. Warren Buffett, who has been investing for 80 years, has never seen a time when it made sense to bet against America, and he doubts that any reader of his letter will have a different experience in the future.
Overall, Buffett’s message about federal taxes is a reminder of the enormous sums involved and their impact on businesses and individuals. Despite the complexity of the tax system, Berkshire strives to pay its fair share and contribute to the country’s prosperity.
Warren Buffett is widely recognized as one of the most successful investors of all time, with an estimated net worth of over $100 billion. Throughout his career, he has shared his wisdom and insights on investing, business, and life through various means, including annual shareholder letters and interviews.
VII. Role of Great Partner
One recurring theme in Buffett’s philosophy is the importance of having a great partner. He often speaks highly of his long-time friend and business partner, Charlie Munger, and attributes much of his success to their collaboration.
Buffett admires Munger for his ability to succinctly express complex ideas, as well as his clear and blunt communication style. Munger’s ideas have greatly influenced Buffett’s thinking, and he frequently cites Munger’s advice when making investment decisions.
Some of Munger’s key principles that Warren Buffett has adopted include the importance of patience, rational thinking, and continuous learning. Munger also emphasizes the need to look at the world objectively, without being swayed by emotional biases or distortions.
Buffett also stresses the importance of finding a partner who is smarter and more experienced than oneself. He believes that working with someone who has a different perspective and complementary skills can lead to better decision-making and ultimately greater success.
Overall, Buffett’s philosophy emphasizes the importance of long-term thinking, rationality, and continuous learning. By finding a great partner and listening carefully to their advice, investors and business leaders can achieve greater success and avoid costly mistakes.
In his annual message titled “A Family Gathering in Omaha,” Warren Buffett, Chairman of the Board of Berkshire Hathaway, begins by humorously acknowledging his and Charlie Munger’s commercial hustle at the previous shareholder get-together, where they sold eleven tons of See’s peanut brittle and chocolates. He notes that their P.T. Barnum pitch promised longevity, as they attributed their long lives to the nourishing candy from See’s.
Warren Buffett then goes on to provide specifics of the sales during the event, revealing that on Friday, the candy counters registered 2,690 individual sales and on Saturday, an additional 3,931 transactions occurred, amounting to about 10 sales per minute during prime operating time and $400,309 of volume during the two days. He attributes the success of See’s to the fact that their products haven’t been materially altered in 101 years, suggesting that what worked for See’s in the days of Henry Ford’s model T still works today.
In conclusion, Buffett invites shareholders to attend the upcoming gathering in Omaha on May 5-6, expressing his excitement and that of the entire Berkshire Hathaway team for the event. The message showcases Buffett’s lighthearted and humorous side, while also highlighting the continued success of one of Berkshire Hathaway’s subsidiaries, See’s Candies.
Major 5 Shareholding of Warren Buffett’s
As of December 31, 2022, Warren Buffett’s investments in equity securities had a fair value of $308.8 billion, with approximately 75% of that value concentrated in just five companies. These companies were American Express Company, Apple Inc., Bank of America Corporation, The Coca-Cola Company, and Chevron Corporation. The largest investment was in Apple Inc., which had a fair value of $119.0 billion.
Compared to the previous year, the fair value of Warren Buffett’s equity securities had increased by $42.1 billion. The biggest change in the composition of his portfolio was the addition of Occidental Petroleum Corporation, in which his aggregate voting interest exceeded 20% on August 4, 2022. This investment was adopted under the equity method, with a fair value of $1.9 billion as of December 31, 2022. Additionally, Warren Buffett continued to hold investments in Occidental Cumulative Perpetual Preferred Stock and Occidental common stock warrants at fair value, as these interests were not in-substance common stock under GAAP and were not eligible for the equity method.
Warren Buffett’s investment in American Express Company, in which he owned 20.4% of the outstanding common stock as of December 31, 2022, was not accounted for under the equity method due to passivity commitments requested by the Board of Governors of the Federal Reserve System. These commitments restricted Buffett’s ability to exercise significant influence over the operating and financial policies of American Express.
Overall, Warren Buffett’s portfolio consisted of investments in banks, insurance, and finance; consumer products; and commercial, industrial, and other industries. The consumer products sector had the largest fair value, at $152.9 billion, followed by banks, insurance, and finance at $69.6 billion, and commercial, industrial, and other at $86.3 billion.
Based on the information provided above, Warren Buffett’s top shareholdings as of December 31, 2022 are:
Apple Inc. – fair value of $119.0 billion
Bank of America Corporation – fair value of $34.2 billion
Chevron Corporation – fair value of $30.0 billion
The Coca-Cola Company – fair value of $25.4 billion
American Express Company – fair value of $22.4 billion
These five companies accounted for approximately 75% of the aggregate fair value of Warren Buffett’s investments in equity securities as of December 31, 2022.
A. Recap of the key messages:
In conclusion, Warren Buffett’s annual message highlights the importance of ethical behavior in business, Berkshire Hathaway’s journey to success, its investment portfolio, approach to the future, and its contribution to the federal tax system. Warren Buffett emphasizes the need for honesty, transparency, and ethical behavior in corporate reporting, and also reflects on the significant impact of Berkshire’s investments in various sectors.
B. Reflection on the value of Warren Buffett’s insights:
Warren Buffett’s insights offer valuable lessons to investors and business leaders on various aspects of business, including the importance of risk management, CEO ownership, and cash reserves. The annual message provides a glimpse into the strategies that have helped Berkshire Hathaway become one of the most successful companies in the world.
C. Implications for investors and business leaders:
Investors and business leaders can learn from Berkshire Hathaway’s investment strategy and the importance of a long-term approach to investing. They can also benefit from Buffet’s emphasis on ethical behavior and transparency in corporate reporting. Additionally, Berkshire’s significant contribution to the federal tax system highlights the importance of corporate responsibility and giving back to the community.
Source: Warren Buffett’s Annual Letter