Highlights from Warren Buffett's annual letter; Porter Stansberry's critique of Berkshire Hathaway; Dinner with Porter and me

1) On Saturday, Warren Buffett released his much-anticipated annual letter to Berkshire Hathaway (BRK-B) shareholders (you can see it in full here)...

Woven throughout it are 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 [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 Buffett's letter...

I was particularly struck by the number of individuals that Buffett mentioned by name in the letter. He seemed especially proud of Berkshire managers' performance this year.

Buffett started by discussing investment mistakes, which are inevitable – and must be rectified quickly:

A decent batting average in personnel decisions is all that can be hoped for. The cardinal sin is delaying the correction of mistakes or what Charlie Munger called "thumb-sucking." Problems, he would tell me, cannot be wished away. They require action, however uncomfortable that may be.

One of the (many) reasons I admire Buffett so much is that, while he could easily sweep his mistakes under the rug and point to his extraordinary long-term track record, he instead almost delights in discussing them... and he warns investors to stay away from companies that refuse to acknowledge them – with a nice shout-out to Amazon (AMZN):

During the 2019-23 period, I have used the words "mistake" or "error" 16 times in my letters to you. Many other huge companies have never used either word over that span. Amazon, I should acknowledge, made some brutally candid observations in its 2021 letter. Elsewhere, it has generally been happy talk and pictures.

I have also been a director of large public companies at which "mistake" or "wrong" were forbidden words at board meetings or analyst calls. That taboo, implying managerial perfection, always made me nervous...

Buffett is clearly feeling his age and acknowledges his mortality. As he puts it: "At 94, it won't be long before Greg Abel replaces me as CEO and will be writing the annual letters."

Buffett then took nearly two pages to eulogize Pete Liegl, who passed away in November at age 80.

Liegl was the founder and manager of recreational-vehicle ("RV") manufacturer Forest River, which Buffett purchased in 2005. As Buffett concluded: "During the next 19 years, Pete shot the lights out. No competitor came close to his performance." And as he added:

I expect to make my share of mistakes about the businesses Berkshire buys and sometimes err in evaluating the sort of person with whom I'm dealing.

But I've also had many pleasant surprises in both the potential of the business as well as the ability and fidelity of the manager. And our experience is that a single winning decision can make a breathtaking difference over time. (Think GEICO as a business decision, Ajit Jain as a managerial decision and my luck in finding Charlie Munger as a one-of-a-kind partner, personal advisor and steadfast friend.) Mistakes fade away; winners can forever blossom.

Buffett then gave an overview of Berkshire's performance – highlighting how Todd Combs "has reshaped GEICO in a major way," how the property-casualty (which he calls P/C in the letter) insurance business benefited from no major catastrophic events, and the railroad and utility operations "have much left to accomplish" (that's Buffett-speak for "they're really stinking up the joint" – see my old friend and Stansberry Research founder Porter Stansberry's comments further below in this e-mail).

Buffett takes pride in how much Berkshire pays in taxes – a result of its massive profitability and inability (and unwillingness) to engage in tax-avoidance schemes. This is truly staggering:

[Berkshire] paid far more in corporate income tax than the U.S. government had ever received from any company – even the American tech titans that commanded market values in the trillions.

To be precise, Berkshire last year made four payments to the IRS that totaled $26.8 billion. That's about 5% of what all of corporate America paid.

Buffett spends a page discussing (as he has many times in the past) how he has the flexibility to invest Berkshire's prodigious cash flows and insurance float in two areas. First is wholly owned businesses, which he describes as follows:

189 subsidiaries have similarities to marketable common stocks but are far from identical. The collection is worth many hundreds of billions and includes a few rare gems, many good-but-far-from-fabulous businesses and some laggards that have been disappointments. We own nothing that is a major drag, but we have a number that I should not have purchased.

The other area is large positions in publicly traded stocks. As Buffett says:

We own a small percentage of a dozen or so very large and highly profitable businesses with household names such as Apple, American Express, Coca-Cola and Moody's. Many of these companies earn very high returns on the net tangible equity required for their operations. At yearend, our partial-ownership holdings were valued at $272 billion. Understandably, really outstanding businesses are very seldom offered in their entirety, but small fractions of these gems can be purchased Monday through Friday on Wall Street and, very occasionally, they sell at bargain prices.

Buffett is happy investing in either, and he discussed the pros and cons of each.

But, critically, if he doesn't find any attractive investment opportunities, he's content to largely sit idle – sometimes for years – as cash piles up. We're in such a period now.

As I'll discuss in tomorrow's e-mail, Berkshire's cash hoard has risen to a mind-boggling $334 billion... but Buffett doesn't think this is too much:

Despite what some commentators currently view as an extraordinary cash position at Berkshire, the great majority of your money remains in equities. That preference won't change. While our ownership in marketable equities moved downward last year from $354 billion to $272 billion, the value of our non-quoted controlled equities increased somewhat and remains far greater than the value of the marketable portfolio.

Berkshire shareholders can rest assured that we will forever deploy a substantial majority of their money in equities – mostly American equities although many of these will have international operations of significance. Berkshire will never prefer ownership of cash-equivalent assets over the ownership of good businesses, whether controlled or only partially owned.

Buffett then spent a page highlighting the amazing story of America since its founding ("From a base of only four million people – and despite a brutal internal war early on, pitting one American against another – America changed the world in the blink of a celestial eye."), but concluded with a stern warning to our leaders:

So thank you, Uncle Sam. Someday your nieces and nephews at Berkshire hope to send you even larger payments than we did in 2024. Spend it wisely. Take care of the many who, for no fault of their own, get the short straws in life. They deserve better. And never forget that we need you to maintain a stable currency and that result requires both wisdom and vigilance on your part.

Near the end of his letter, Buffett discussed the P/C insurance business and his investments in five Japanese trading companies.

Regarding the former, after discussing the many dangers, he concluded:

All things considered, we like the P/C insurance business. Berkshire can financially and psychologically handle extreme losses without blinking. We are also not dependent on reinsurers and that gives us a material and enduring cost advantage. Finally, we have outstanding managers (no optimists) and are particularly well-situated to utilize the substantial sums P/C insurance delivers for investment.

Over the past two decades, our insurance business has generated $32 billion of after-tax profits from underwriting, about 3.3 cents per dollar of sales after income tax. Meanwhile, our float has grown from $46 billion to $171 billion. The float is likely to grow a bit over time and, with intelligent underwriting (and some luck), has a reasonable prospect of being costless.

Buffett also showered praise on the Japanese trading companies and their managers:

Berkshire made its first purchases involving the five in July 2019. We simply looked at their financial records and were amazed at the low prices of their stocks. As the years have passed, our admiration for these companies has consistently grown. Greg has met many times with them, and I regularly follow their progress. Both of us like their capital deployment, their managements and their attitude in respect to their investors.

Each of the five companies increase dividends when appropriate, they repurchase their shares when it is sensible to do so, and their top managers are far less aggressive in their compensation programs than their U.S. counterparts.

And as he continued:

Our holdings of the five are for the very long term, and we are committed to supporting their boards of directors...

I expect that Greg and his eventual successors will be holding this Japanese position for many decades and that Berkshire will find other ways to work productively with the five companies in the future.

Finally, Buffett concluded, as always, with a plug to attend this year's annual meeting (which I highly recommend as well): "The Berkshire directors and I immensely enjoy having you come to Omaha, and I predict that you will have a good time and likely make some new friends."

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

2) Of course, as regular readers know, I can often be less than objective when it comes to anything related to Buffett and Berkshire...

So in the interest of balance, I want to highlight a thread on social platform X that Porter Stansberry posted, in which he critiqued Berkshire's asset-heavy energy, utility, and railroad businesses. Here's an excerpt:

BHE (the energy co.) is a disaster...

... despite (or maybe because of) investing over $30 billion in windmills over the last several years, the valuation of BHE has fallen by about 50%...

In total, Berkshire has invested almost $100 [billion] in building BHE, but it has only paid one dividend (!) ever to Berkshire ($1 [billion] in 2023). And, absent its regulatory credits, [it] cannot produce an adequate return on assets. This is a 25-year failure. It must end.

As for the railroad, Porter writes:

BNSF hasn't done very well lately. Earnings are down from $6 [billion] to $5 [billion] (-16%) over the last two years. Why? Big declines (-21%) in coal shipments! BHE has shut down coal operations at 18 coal generation units and plans to cease all coal-generation.

And as Porter concludes:

@warrenbuffett Spin off BNSF, BHE, and the other, asset-heavy businesses. They can be slow-growing, debt financed, [dividend]-paying stocks. Turn Berkshire into what it once was: the world's best insurance company & investment portfolio. Let's Make Berkshire Great Again (MBGA)!

It's possible that Porter is right about this, but I don't spend a lot of time thinking about it because I can't imagine that Buffett would ever spin off any businesses. It's not in his nature... and it would violate the promises he made to the owners of the businesses he acquired.

But once Buffett has passed and Abel is running things, new possibilities (including paying a dividend) will be on the table...

3) Speaking of Porter, I'll wrap up today with some deep gratitude for him...

If you'll be in New York City on Monday, March 3, you can join Porter and me for a fundraiser dinner he's hosting at 6 p.m. to support my campaign for mayor. As he says:

I've learned a lot about Berkshire Hathaway from Whitney Tilson, who is probably the most famous "Buffett-watcher" on Wall Street. Tilson has been to every Berkshire annual meeting for the last 25 years and, you should know, he doesn’t agree with my [Berkshire] analysis...

But we do agree that major changes are needed in New York City, where I am a part-time resident (Hudson Yards) and where Tilson is running for mayor. If you are a resident of New York City, I'd like to invite you to sit down with me and Tilson on March 3. I'll pay for dinner – but we need you to make a donation to Tilson's campaign.

Thank you, Porter!

If you're interested, you can get more details here.

Best regards,

Whitney

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