Annual Shareholder Letter

Warren Buffet released his much anticipated letter to the shareholders yesterday. The link to all of prior Buffet letters can be found below (they all make for a fascinating read!)

https://www.berkshirehathaway.com/letters/letters.html

Here is my summary of the 2022 letter below:

Buffet kicks off the letter by answering what it is that Munger and he do at the Berkshire?

They allocate your savings into two forms of business ownerships:

1. They invest in businesses directly controlled by themselves - in this form of ownership, Berkshire retains 100% control of day to day operations via selecting the managers (CEO) fit for the role . Buffet emphasizes that he is forgiving of business mistakes but any personal misconducts are intolerable . 

2. The second form of ownership is investing in different publicly traded companies like Coca Cola - with no direct say in the day to day operations of the company. The focus rather is on identifying long term economic characteristics which may benefit these companies in the future.

Buffet then elaborates they pick businesses based on long lasting economic characteristics and trustworthy management teams, and are not into timing the purchase of stocks. He writes: "We are not stock pickers, we are business pickers”.

Time and again this theme is present in the letter - lifelong savings via retaining earnings, investing for the long haul, a few good ideas take care of the bad ones, compounding the gains.

The businesses owned by Berkshire are categorized in terms of returns as:

1. A few that have truly extraordinary returns.

2. Many that are very good.

3. A large group that is only marginal. 

4. A few that have gone to 0.

He attributes this to his own investing mistakes and calls this phenomenon "creative destruction", that this is how capitalism works. 

“Efficient” markets exist only in textbooks.

Buffet compares a key difference between controlled and publicly traded businesses. In his view, it is almost always impossible to get good bargains on the controlled businesses as the owners typically do not sell the businesses under panic. He stresses the need to understand that the publicity traded stocks often trade at foolishly ridiculous prices - both on the expensive side and the cheaper side and this is what makes owning wonderful publicly traded businesses at wonderful prices possible. 

The secret sauce 

Buffet attributes the success of Berkshire to about a handful of really good decisions over a period of 60 years, about one every 5 years and the long term investing mindset behind their decisions. 

He elaborates this further using two examples: 

1. He mentions the purchase of Coca Cola (KO) some 30 years ago at a price of 1.3 billion dollars.  The cash dividend alone received from $KO last year for Berkshire was $704 million. The original 1.3 billion KO investment was valued at 25 billion dollars! 

2. American Express ( AXP 0.00%↑ ) is cited as another example where they purchased this stock for $3 billion dollars and the investment today about 28 years later is valued at 22 billion dollars. This investment brought Berkshire 302 million in dividends, up 7 times from 41 million back in 1995! 

A comparison is then made to if he had simply invested the 1.3 billion some 30 years ago in a high grade bond. That investment would be only delivering 80 million in income for the company today.

He summarized this section by an advice for other investors - you just need a few really large winners to make large returns and start early, invest for the long haul. 

2022 recap 

Buffet then recaps the year that 2022 was with a record 30.8 billion dollars in operating earnings - this in face of inflation, econ downturn, supply chain issues. Total insurance float of Berkshire owned insurance businesses increased to 167 billion dollars, 8000 fold increase from their very first property casualty business in 1967. 

Buffet notes that the largest, 500 companies in the S&P500 index made about 1.8 trillion dollars in profit in 2021. Of those 500, only 128 made a profit of 3 billion or more - Berkshire was the largest shareholder of 8 of those giants  - American Express, Bank of America, Chevron, Coca-Cola, HP Inc., Moody’s, Occidental Petroleum and Paramount Global.

This did not include the two giants Berkshire owns 100% - BNSF for instance made 5.9 billion dollars and BH energy made another 4.3 billion dollars. 

Detailing his future plans, Buffet inspiringly writes there will never be a finish line for Berkshire and it will hold a "boatload" of cash and US treasuries and US businesses, ready to pounce when opportunity presents itself. 

Share buybacks are a good thing 

In Buffet's view, share repurchases when done at attractive levels are beneficial to the current stock owners. He points out that share repurchases increase shareholder interest in the company but it is detrimental to current shareholders when a company overpays for these repurchases. 

Buffet has choice words for those criticizing all type of share repurchases as bad, as economic illiterates or silver tongues demagogues. 

Near-term economic and market forecasts are worse than useless

Buffet cites the huge imbalance between the US treasury tax collection revenues and it’s spending . For the last decade, the treasury collected $32.3 trillion in taxes and spent $43.9 trillion. The revenue was mostly raised from individual income taxes. He then goes on to point out that Berkshire paid 32 billion dollars in taxes, roughly 0.1% of all treasury income tax receipts - and how if there were only a 1000 more Berkshires , there would be no need for any the 131 million  individual households  to pay any incomes taxes. 

He wraps up this section by putting a physical dimensions on the 32 billion dollars tax payments - if you stacked $100 bills vertically then $32 billion will reach 21 miles high up in the air ! or about 100, 000 feet high! 

Do you ever see a time in the US where there can be a 1000 money managers the size and caliber of Berkshire?

He signs off the letter by sharing a few of favorite Munger quotes.

Here I quote him-

There is no such thing as a 100% sure thing when investing. Thus, the use of leverage is dangerous. A string of wonderful numbers times zero will always equal zero. Don’t count on getting rich twice.

Crypto, NFT and AI was mentioned a total of 0 times in the letter ;) !

Subscribe and share the post below to read more stuff like this. Also do not forget to bookmark and read my brand new weekly post below.

Weekly Plan 2/26/23

~ Tic

Disclaimer: This newsletter is not trading or investment advice, but for general informational purposes only. This newsletter represents my personal opinions which I am sharing publicly as my personal blog. Futures, stocks, bonds trading of any kind involves a lot of risk. No guarantee of any profit whatsoever is made. In fact, you may lose everything you have. So be very careful. I guarantee no profit whatsoever, You assume the entire cost and risk of any trading or investing activities you choose to undertake. You are solely responsible for making your own investment decisions. Owners/authors of this newsletter, its representatives, its principals, its moderators and its members, are NOT registered as securities broker-dealers or investment advisors either with the U.S. Securities and Exchange Commission, CFTC or with any other securities/regulatory authority. Consult with a registered investment advisor, broker-dealer, and/or financial advisor. Reading and using this newsletter or any of my publications, you are agreeing to these terms. Any screenshots used here are the courtesy of Ninja Trader, Think or Swim and/or Jigsaw. I am just an end user with no affiliations with them.