Annual letter to shareholders transcript

On February 24, Warren Buffett released his traditional message to Berkshire Hathaway shareholders, where he shared his thoughts on investments, summed up some analysis of 2023 for the company, and also spoke about prospects. We analyzed the entire letter and would like to share with you the main points and conclusions that we came to.

Charlie Munger tribute

A partner and a major influence on Berkshire and Buffett’s investing principles, passed away last year.
“You control Berkshire, add to it wonderful businesses purchased at fair prices and give up buying fair businesses at wonderful prices. In other words, abandon everything you learned from your hero, Ben Graham.” — famous words often attributed to Buffett were originally written by Charlie Munger. Buffett gave credit to Charlie Munger, calling him more or less the architect of Berkshire Hathaway.

Operating results and accrual incomes

In 2019 Buffett made changes to his model for assessing Berkshire’s financial performance. If previously the key metric was the change in book value per share, now it is operating profit. In the letter, Buffett repeats this idea, emphasizes it and warns against analyzing the final net profit, since it contains a considerable share of revaluation of unrealized investments, which diverts investors’ attention from the real results of the company’s activities.

$27.6 billion for 2021; $30.9 billion for 2022 and $37.4 billion for 2023 — the dynamics of the company’s operating profit, and Berkshire prefers to exclude unrealized capital gains or losses that at times can exceed $5 billion a day. Buffett adds that he does not doubt growth in the future, otherwise he would not have made these investments at all.
“Oracle of Omaha” seems to be trying to cool down the ardor of modern investors a little, because the speed of information exchange and decision-making has increased sharply, and sometimes impatience can be costly.

What do we do

Berkshire’s goals and principles remain unchanged. Answering the question posed to yourself: “We want to own either all or a portion of businesses that enjoy good economics that are fundamental and enduring. We particularly favor the rare enterprise that can deploy additional capital at high returns in the future”.

Casino-like behavior

Buffett seems to say obvious things in his letters from year to year, but for some reason, they do not continue to reassure, inspire and motivate. There was a feeling that the investor wanted to reassure his shareholders and protect them from unnecessary fuss, twitching and uninformed decisions.
“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”, — writes Buffett.
The investor asks not to forget that Wall Street benefits from the frantic activity of investors because then anything can be sold. In order not to be left out in the cold, Berkshire has a diversified stream of income from its financial sectors and businesses.

Berkshire is built to last

Buffett believes that Berkshire can handle financial disasters of a magnitude beyond any heretofore experienced. And he will also be able to help the economy and the country if necessary. The investor seems to be warning us of difficult times soon and expressing how important it is for him that Berkshire be on the list of those who can put out the fire, rather than cause it.

EBITDA” is a banned measurement at Berkshire

Hello to everyone who is looking for excuses for a company’s net loss with growing profits and inventing favorable parameters and ratios that can be filled with an investor presentation, leading themselves away from answering why shareholders’ equity has not grown along with the multiple growth in revenue.

Why Coca-Cola and American Express?

In explaining his vision of Berkshire’s role in the US economy, it seems very natural to describe the reasons for the presence in the company’s portfolio of shares in the business of Coca-Cola, American Express and Occidental Petroleum. The most clear, concise and transparent justification for investment ends with a simple thought: “Could I create a worldwide better business than these two enjoy? No way.”

Buffett does not put himself above the rest, does not extol the ideas of Berkshire over others, and does not want to increase his stake in these companies to the level of controlling ones to gain complete control, but at the same time, he wants to participate in their business and help both these companies and the entire economy of the country grow. However, we would like to remind you that the listed stocks represent less than 20% of Berkshire’s portfolio, while the position in Apple is more than 50%.

Japanese stocks

Buffett reviews his thoughts on investing in Japan. Perhaps it is only worth noting that since entering Japanese stocks, Nikkey has doubled since 2019! Just as a reminder, these stocks are in the portfolio: Itochu, Marubeni, Mitsubishi, Mitsui and Sumitomo

Greg Abel

Buffett also essentially introduced the world of his successor. Greg Abel, who runs all of Berkshire’s non-insurance operations “is every bit as poised to become Berkshire’s CEO tomorrow.”

Financial results

At the end of 2023, Berkshire’s revenue amounted to $364.5 billion, which is 20% better than the previous year. The company’s net profit amounted to a record $97 billion against losses of almost $22 billion a year earlier. However, both of these values ​​to a greater extent form a revaluation of unrealized investments, which Buffett spoke about a lot and rightly in the letter, calling for monitoring operating income to analyze the company’s financial performance. The annual report is available here.

We also note that the company has accumulated more than $167 billion of cash (taking into account the position in US treasury bills of $129.6 billion). In light of access to risks of any nature that Buffett also wrote in the letter, this amount looks more than logical.

The revaluation of assets and the associated strong volatility of financial results, as well as the policy of accounting for assets and liabilities of Berkshire, always leave their mark on the final analysis of its stocks in our model. Although Buffett and we are on the same team when discussing investing and analysis, BRK’s rating in our model is not traditionally high.

However, it seems to us that if you are pursuing the status of constant and stable capital growth over several years, then BRK stock should get your attention, even without a relative analysis of rating and value. I’ll paraphrase the hero of today’s article: if Buffett doesn’t know how to grow capital, who does?