10 Points From Uncle Warren
The annual Berkshire Hathaway shareholder letter always contains some investment gems, and this year was no exception.
If we consider all attributes combined, Warren Buffett and Charlie Munger likely manage the longest-lasting, highest-returning, most accessible and transparent investment vehicle in history.
Below are the total returns since 1965:
Berkshire Hathaway: 3,787,464%
S&P 500 (with dividends): 24,708%
Bananas.
Investing in Berkshire can be done by anyone with a brokerage account, for little to no transaction costs, any time public markets are open.
The quarterly filings and annual reports not only detail the holdings and transactions of Berkshire, but Mr. Buffett and Mr. Munger openly discuss their investment playbook in interviews at their publicly broadcasted shareholder meetings and in the annual Berkshire shareholder letter.
There is no secret trading algorithm.
No AI research.
No formal investment committee.
No complex options strategy.
No dividend-only investment strategy.
No magical technical indicators.
Just some common sense investment principles, carried out methodically, unemotionally, and sensibly.
Ten points made in the most recent annual shareholder letter (released yesterday – 2/25/2023) are noted below:
Partnership: Warren and Charlie view Berkshire’s shareholders as individuals they personally manage money for alongside their own.
Charlie Munger, my long-time partner, and I have the job of managing the savings of a great number of individuals. We are grateful for their enduring trust, a relationship that often spans much of their adult lifetime. It is those dedicated savers that are forefront in my mind as I write this letter.
Businesses, not stocks: A routine topic revisited here is the idea that they view their work as buying companies, not tickers on a screen. This mindset has served them well for over half a century.
Please note particularly that we own publicly-traded stocks based on our expectations about their long-term business performance, not because we view them as vehicles for adroit purchases and sales. That point is crucial: Charlie and I are not stock-pickers; we are business-pickers.
Volatility is a wonderful feature of public markets: Mr. Buffett points out that while private equity can offer ridiculously high valuations from time to time, it rarely offers up bargains unless a company is under severe stress. Public markets, on the other hand, regularly offer up prices that are both high and low. For the disciplined long-term investor, this can be a massive advantage.
One advantage of our publicly-traded segment is that – episodically – it becomes easy to buy pieces of wonderful businesses at wonderful prices. It’s crucial to understand that stocks often trade at truly foolish prices, both high and low. “Efficient” markets exist only in textbooks.
Let winners win: Many businesses will flounder, but a few great ones over time can make magic. One example was Coca-Cola, which he paid roughly $1.3B for as of 1994. Today it’s worth $25B, producing $704mm in cash dividends annually!
The weeds wither away in significance as the flowers bloom. Over time, it takes just a few winners to work wonders.
Will the real “earnings” please stand up?: Mr. Buffett covers the fact that current accounting rules require Berkshire to show “earnings” as a figure that includes the wild volatility of stocks, mentioned in #3 above, and how deceptive this can be. He urges readers to watch the “operating earnings” of Berkshire instead, as the true test for how business is going (it set a record this year at $30.8B). He also warns against business managers who creatively manage their earnings to meet or beat analysts’ expectations.
Beating “expectations” is heralded as a managerial triumph. That activity is disgusting. It requires no talent to manipulate numbers: Only a deep desire to deceive is required.
Defending the share buyback: In past letters, the power of share buybacks has been covered plenty, particularly among some of the larger Berkshire Hathaway investment holdings and Berkshire Hathaway itself. With recent political rhetoric bashing buybacks in general, Mr. Buffett lays out a classic folksy story to illustrate how buybacks can work and how they benefit all parties involved when shares are bought back at appropriate valuations. He ends with the jab below.
When you are told that all repurchases are harmful to shareholders or to the country, or particularly beneficial to CEOs, you are listening to either an economic illiterate or a silver-tongued demagogue (characters that are not mutually exclusive).
A grateful contributor: Another point Mr. Buffett seems to come back to often is acknowledging the luck involved in being in America and having the ability to leverage a society based on capitalism. He also notes that Berkshire has paid roughly 0.1% of ALL taxes collected by the U.S. Treasury over the past decade ($32B of the $32T collected).
America would have done fine without Berkshire. The reverse is not true.
The crystal ball is always cloudy: It’s rare to see Mr. Buffett fail to rail against market or economic forecasting. He makes no exception here.
Charlie and I … firmly believe that near-term economic and market forecasts are worse than useless.
Berkshire after Buffett and Munger: Plans have been in place for some time now regarding the leadership and continuity of Berkshire after the duo of Buffett and Munger is no longer there. Another brief but important nod is given to this notion, and more specifically to the alignment of interests between shareholders and the future leaders of Berkshire.
Our future CEOs will have a significant part of their net worth in Berkshire shares, bought with their own money.
The importance of a great partner: Mr. Buffett talks glowingly of Mr. Munger and offers up a string of quotes from his business partner. These men respect one another greatly and share the same philosophy on investing. Mr. Buffett is the verbose storyteller, while Mr. Munger is more abrasive and quick to the point. Two paths to the same outcome.
Finally, I will add two short sentences by Charlie that have been his decision-clinchers for decades: “Warren, think more about it. You’re smart and I’m right.”
CLICK HERE to view the full letter for 2022.
As always, invest well!