The Case for Capitalism

Highlights from Warren Buffett's annual Berkshire Hathaway shareholder letter... 'This system is called capitalism'... America is Exhibit A... The latest AI scare... Doc's AI Playbook for 2025...

Buffett, mostly unfiltered...

The wait is over...

Two weeks ago, I (Corey McLaughlin) mentioned that "we're about due" for Warren Buffett's annual letter to Berkshire Hathaway (BRK-B) shareholders.

On Saturday, Buffett delivered. And as usual, I spent part of my weekend reading through the letter. If you're sincerely interested in long-term investing, I urge you to read the whole PDF, too. It won't take you that long, and you can find it here.

I'd also urge you to check out the highlights and analysis of the letter from longtime Buffett acolyte and Stansberry's Investment Advisory lead editor Whitney Tilson, who wrote about it in his free daily newsletter earlier today.

In practice, the letter is part of Berkshire's annual report with its required financials. But Buffett's annual letter is much more than that... filled with plain English wisdom from one of the world's greatest investors. It's useful whether you're a Berkshire shareholder or not. For example, here's how this year's report begins...

This letter comes to you as part of Berkshire's annual report. As a public company, we are required to periodically tell you many specific facts and figures.

"Report," however, implies a greater responsibility. In addition to the mandated data, we believe we owe you additional commentary about what you own and how we think. Our goal is to communicate with you in a manner that we would wish you to use if our positions were reversed – that is, if you were Berkshire's CEO while I and my family were passive investors, trusting you with our savings.

This approach leads us to an annual recitation of both good and bad developments at the many businesses you indirectly own through your Berkshire shares. When discussing problems at specific subsidiaries, we do, however, try to follow the advice Tom Murphy gave to me 60 years ago: "praise by name, criticize by category."

It has been more than a year since Buffett's longtime business partner Charlie Munger passed away, and at 94 years old himself, Buffett acknowledged that "it won't be long before Greg Abel replaces me as CEO and will be writing the annual letters."

Buffett also concluded by pointing out that he and his 91-year-old "good-looking sister, Bertie," talk on "old-fashion telephones... and discuss such exciting topics as the relative merits of our canes" that help them get around.

So, soak in Buffett's wisdom while you can.

'This system is called capitalism'...

The size of Berkshire's "cash pile" has generated some headlines (again). Over the past few months, Buffett has been selling Berkshire's two largest equity holdings, Apple (AAPL) and Bank of America (BAC), and its cash on hand grew to a record $334.2 billion at the end of the fourth quarter.

This isn't just a signal of Buffett's concern about these stocks right now... It could also be foreshadowing. The last time Berkshire had such a high percentage (27%) of its assets in cash was the lead-up to the great financial crisis and, before that, the dot-com bust.

In addressing this point, Buffett shared what might have been the most compelling part of his letter. It's an insight into the philosophy on his entire business life... articulating his case for capitalism...

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.

Paper money can see its value evaporate if fiscal folly prevails. In some countries, this reckless practice has become habitual, and, in our country's short history, the U.S. has come close to the edge. Fixed-coupon bonds provide no protection against runaway currency.

Businesses, as well as individuals with desired talents, however, will usually find a way to cope with monetary instability as long as their goods or services are desired by the country's citizenry. So, too, with personal skills. Lacking such assets as athletic excellence, a wonderful voice, medical or legal skills or, for that matter, any special talents, I have had to rely on equities throughout my life. In effect, I have depended on the success of American businesses and I will continue to do so.

It has worked out for him and a lot of people.

The latest example: In the fourth quarter of 2024, Berkshire's earnings from its wholly owned businesses spiked by 71% to $14.5 billion. The gains were powered by its insurance businesses, which delivered profits of more than 300% compared with a year earlier. From the letter...

One way or another, the sensible – better yet imaginative – deployment of savings by citizens is required to propel an ever-growing societal output of desired goods and services. This system is called capitalism. It has its faults and abuses – in certain respects more egregious now than ever – but it also can work wonders unmatched by other economic systems.

America is Exhibit A. Our country's progress over its mere 235 years of existence could not have been imagined by even the most optimistic colonists in 1789, when the Constitution was adopted and the country's energies were unleashed...

If there's anyone who should be upset with 'waste'...

Every year, Buffett mentions how Berkshire hasn't paid out dividends (except for that one time in 1967) and instead has continuously reinvested revenue, a crucial factor in driving up Berkshire's income-tax bill.

Buffett also always makes a point to mention how much in taxes Berkshire pays to Uncle Sam. This year, the "Oracle of Omaha" disclosed that Berkshire paid the IRS $26.8 billion in 2024, or "about 5% of what all of corporate America paid."

He later put Berkshire's tax bill in more context...

If Berkshire had sent the Treasury a $1 million check every 20 minutes throughout all of 2024 – visualize 366 days and nights because 2024 was a leap year – we still would have owed the federal government a significant sum at yearend. Indeed, it would be well into January before the Treasury would tell us that we could take a short breather, get some sleep, and prepare for our 2025 tax payments.

He's not complaining, per se... Buffett wrote that Berkshire "would not have achieved its results in any locale except America." But amid today's conversations about government waste, fraud, and abuse, Buffett speaks with authority on this subject as much as anyone...

All he asks for in return for Berkshire paying about 5% of all corporate taxes is a "stable currency." As Buffett wrote...

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.

That last sentence should be required financial reading for everyone. I'm not sure 23 consecutive words have ever been truer or better directed.

As for the market today...

We saw another short-lived artificial-intelligence ("AI") volatility spike...

Late Friday, the major U.S. stock indexes sold off hard, with the benchmark S&P 500 Index down 1.7% and the Russell 2000 Index nearly 3% lower. The sell-off came after analysts at investment bank TD Cowen released a report suggesting that mega-cap Microsoft (MSFT) was canceling leases for at least two giant data centers because of the company "potentially being in an oversupply position."

This is market-moving information because, if true, it could be a sign of a broader AI spend slowdown from Microsoft and other companies. And news like this fuels sentiment that the companies at the forefront of the AI boom might have overcommitted resources.

But today, Microsoft refuted the idea that it's changing its long-term (10-year) data-center strategy. It didn't deny it might be adjusting its strategy, though. In comments to investment bank Jefferies, Microsoft said it could be expected to "tweak their forecasts up and down on this over time on a regional basis."

In another report today, TD Cowen added a hypothesis that Microsoft could be reallocating its capital after OpenAI, of which Microsoft is a major backer, agreed to be business partners with Oracle in the "Stargate" project to build AI infrastructure.

Today, the major U.S. indexes were mixed but again sold off late in the day.

The benchmark S&P 500 was slightly lower, and the tech-heavy Nasdaq Composite Index lost 1.2%. Meantime, the CBOE Volatility Index – the market's fear gauge – popped to almost 20 on Friday and fell by about 3% to a more placid level for much of today before rising again to 19 late in U.S. trading.

Microsoft shares were down about 1% today, following another 1% or so drop on Friday.

Something to note...

I think this is another example of "headline risk" – a concept we shared about last week via our friend Marc Chaikin, founder of our corporate affiliate Chaikin Analytics. The story has a whiff of the same market overreaction we saw from the "DeepSeek panic" a few weeks ago.

But it's something to take note of... because it shows how sensitive this market is to significant negative surprises about the AI boom. Dan Ferris just wrote about this in his Friday essay...

Right now, everyone wants to take advantage of the developments in AI. Eventually, they'll want to know when the current stock market bubble – largely fueled by AI – will end.

But most people aren't asking that yet. And that in itself is another sign of a huge bubble. Most folks are oblivious at the top.

This week will be another barometer for the "AI boom or bust?" game we seem to be playing. Chipmaker and industry bellwether Nvidia (NVDA) will report its quarterly earnings on Wednesday after the close.

In the meantime, be sure to check out Doc's 'AI playbook'...

Our Dr. David "Doc" Eifrig recently published his "playbook for AI in 2025" in another must-read issue of his flagship Retirement Millionaire newsletter...

Doc and his team took a comprehensive look at the AI trend – from what to understand about the technology itself to his favorite ways to invest in it without taking huge risks.

Cutting to the chase, Doc said: "Approach the promise of AI with optimism and the finance side of AI with caution, and you'll end up on the right side of this technological revolution." As he wrote in more detail in the issue...

[T]he AI revolution – if it's going to be a revolution – isn't just another tech story. This isn't like Apple releasing a new iPhone with an upgraded camera.

AI could change business, culture, and our society. So you need to take your time to get it right. That's why we've spent the time necessary to study AI and its implications. We've identified what we believe are the best ways to profit from AI – without taking on undue risk in hyped-up stocks.

Big opportunities are here... and billions (if not trillions) of dollars in wealth will be created. But before we get to the first steps you should take to participate in the AI revolution, we want to share our big-picture thoughts on AI.

• How well does it work?

• How can you use it?

• Will it lead to mass unemployment? Or unravel society?

• Will the machines kill all humans? (We'll answer this one here: No.)

Big, potentially terrifying changes are coming. You've got little choice about that. So you might as well benefit from the ride...

That's why today, we're sharing our Retirement Millionaire playbook for AI in 2025...

In the issue, Doc answered all the questions above and shared his three favorite stocks to benefit from the AI boom – including a brand-new addition to his model portfolio. Existing Retirement Millionaire subscribers and Stansberry Alliance members can find the issue here.

If you don't have access but are interested, click here for more information on how to get started with a Retirement Millionaire subscription today. There's really no reason not to give it a try – especially since today, for Digest readers only, we're offering access at 60% off the usual price. Plus, you'll get Doc's 30-day 100% satisfaction guarantee.

You can take the next 30 full days to read through Doc's work and see whether it's right for you. Read through all his recommendations and special reports, and if you're unhappy with the research within those 30 days, our customer service team will issue you a full 100% money-back refund.

Why do we offer this? Well, we think you'll like what you see. And, right now, I don't think you'll find a better, more practical primer on everything about AI than the issue Doc has just published. Again, click here to get started with a subscription today.

New 52-week highs (as of 2/21/25): Abbott Laboratories (ABT), Alpha Architect 1-3 Month Box Fund (BOXX), and Kellanova (K).

In today's mailbag, feedback on Dan Ferris' latest Friday Digest... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"Thanks, Dan. [Friday's] Digest was such a calming read for me. I know there will be lots of AI investing opportunities for me, but you (and Stansberry overall) have taught me so much about how to react to the market over the past decade plus. Stay educated and be aware – and your investment opportunities will become clear to you over time. Don't be rash, but don't keep your head in the sand. I only wish I could have written this about myself 50 years ago." – Stansberry Alliance member B.P.

All the best,

Corey McLaughlin with Nick Koziol
Baltimore, Maryland
February 24, 2025