Highlights from Warren Buffett's annual letter

There goes Warren Buffett... shamelessly cribbing all my best ideas once again.

I'm kidding, of course.

On Saturday, Buffett released his annual letter to Berkshire Hathaway (BRK-B) shareholders (you can download the whole thing here).

And in it, he once again hit on many of the themes that I return to again and again in my daily e-mails: invest in high-quality, enduring businesses, hold for the long run, ignore the Wall Street casino, etc.

Of course, Buffett has been preaching these things for more than half a century.

And I – like so many others who (as I like to say) "pray in the church of the famed Benjamin Graham, David Dodd, Warren Buffett, and Charlie Munger" – am one of his happy followers.

So today, I'll share some of the highlights from his annual letter...

Buffett starts by outlining the characteristics of the types of businesses he likes to own, whether outright (as one of nearly 100 subsidiaries of Berkshire Hathaway) or in part (as shares of publicly traded companies):

Our goal at Berkshire is simple: We want to own either all or a portion of businesses that enjoy good economics that are fundamental and enduring.

Within capitalism, some businesses will flourish for a very long time while others will prove to be sinkholes. It's harder than you would think to predict which will be the winners and losers. And those who tell you they know the answer are usually either self-delusional or snake-oil salesmen.

At Berkshire, we particularly favor the rare enterprise that can deploy additional capital at high returns in the future. Owning only one of these companies – and simply sitting tight – can deliver wealth almost beyond measure. Even heirs to such a holding can – ugh! – sometimes live a lifetime of leisure.

He then does his usual schtick, downplaying expectations (correctly, I think) that Berkshire's stock can significantly outperform in the future. He says this is due to the company's massive size (I didn't know that Berkshire's net worth, or shareholders' equity, is equal to 6% of all the companies in the S&P 500 Index – wow!):

Berkshire now has – by far – the largest GAAP net worth recorded by any American business. Record operating income and a strong stock market led to a yearend figure of $561 billion. The total GAAP net worth for the other 499 S&P companies – a who's who of American business – was $8.9 trillion in 2022. (The 2023 number for the S&P has not yet been tallied but is unlikely to materially exceed $9.5 trillion.)

By this measure, Berkshire now occupies nearly 6% of the universe in which it operates. Doubling our huge base is simply not possible within, say, a five-year period, particularly because we are highly averse to issuing shares (an act that immediately juices net worth).

There remain only a handful of companies in this country capable of truly moving the needle at Berkshire, and they have been endlessly picked over by us and by others. Some we can value; some we can't. And, if we can, they have to be attractively priced. Outside the U.S., there are essentially no candidates that are meaningful options for capital deployment at Berkshire. All in all, we have no possibility of eye-popping performance.

That said, Buffett remains, as always, optimistic. As he says, "managing Berkshire is mostly fun and always interesting":

On the positive side, after 59 years of assemblage, the company now owns either a portion or 100% of various businesses that, on a weighted basis, have somewhat better prospects than exist at most large American companies. By both luck and pluck, a few huge winners have emerged from a great many dozens of decisions. And we now have a small cadre of long-time managers who never muse about going elsewhere and who regard 65 as just another birthday...

Berkshire benefits from an unusual constancy and clarity of purpose. While we emphasize treating our employees, communities and suppliers well – who wouldn't wish to do so? – our allegiance will always be to our country and our shareholders. We never forget that, though your money is comingled with ours, it does not belong to us.

With that focus, and with our present mix of businesses, Berkshire should do a bit better than the average American corporation and, more important, should also operate with materially less risk of permanent loss of capital. Anything beyond "slightly better," though, is wishful thinking. This modest aspiration wasn't the case when Bertie went all-in on Berkshire – but it is now.

He believes that Berkshire's future outperformance will likely be driven by the ever-present – and, in fact, increasing – speculative, gambling behavior of other investors (which he rightly decries) and, even more important, occasional market panics:

Berkshire's ability to immediately respond to market seizures with both huge sums and certainty of performance may offer us an occasional large-scale opportunity. Though the stock market is massively larger than it was in our early years, today's active participants are neither more emotionally stable nor better taught than when I was in school.

For whatever reasons, markets now exhibit far more casino-like behavior than they did when I was young. The casino now resides in many homes and daily tempts the occupants.

Buffett also says that we should never forget one fact of financial life:

Wall Street – to use the term in its figurative sense – would like its customers to make money, but what truly causes its denizens' juices to flow is feverish activity. At such times, whatever foolishness can be marketed will be vigorously marketed – not by everyone but always by someone.

Occasionally, the scene turns ugly. The politicians then become enraged; the most flagrant perpetrators of misdeeds slip away, rich and unpunished; and your friend next door becomes bewildered, poorer and sometimes vengeful. Money, he learns, has trumped morality.

Buffett then spends most of the letter discussing some of Berkshire's major stock investments.

These are American Express (AXP), Coca-Cola (KO), Occidental Petroleum (OXY), and a basket of five Japanese trading companies.

He then follows with discussing Berkshire's wholly owned businesses: disappointing performance of the country's largest railroad, Burlington Northern Santa Fe, as well as utility Berkshire Hathaway Energy, offset by the "insurance business [that] performed exceptionally well" (with his usual shoutout for Vice Chairman of Insurance Operations Ajit Jain).

Buffett concludes by telling the story of his sister Bertie's extraordinary investment performance over her lifetime, despite knowing little about investing. This has lessons that every investor can apply:

As a final punctuation point to the "Omaha Effect," Bertie – yes that Bertie – spent her early formative years in a middle-class neighborhood in Omaha and, many decades later, emerged as one of the country's great investors.

You may be thinking that she put all of her money in Berkshire and then simply sat on it. But that's not true. After starting a family in 1956, Bertie was active financially for 20 years: holding bonds, putting 1⁄3 of her funds in a publicly-held mutual fund and trading stocks with some frequency. Her potential remained unnoticed.

Then, in 1980, when 46, and independent of any urgings from her brother, Bertie decided to make her move. Retaining only the mutual fund and Berkshire, she made no new trades during the next 43 years. During that period, she became very rich, even after making large philanthropic gifts (think nine figures).

Millions of American investors could have followed her reasoning which involved only the common sense she had somehow absorbed as a child in Omaha. And, taking no chances, Bertie returns to Omaha every May to be re-energized.

Thank you once again for sharing your wisdom, Mr. Buffett! It has been a true pleasure reading your annual letter year after year.

Best regards,

Whitney

P.S. I welcome your feedback – send me an e-mail by clicking here.