Berkshire Hathaway (BRK-A, BRK-B) CEO Warren Buffett published his annual letter to shareholders on Saturday, taking on some of his favorite topics in share buybacks, taxes, corporate accounting, and his long-term optimism about the U.S. economy.
Writing about the “American Tailwind” theme Buffett has so often referenced in recent years, the 92-year-old wrote: “At Berkshire we hope and expect to pay much more in taxes during the next decade. We owe the country no less: America’s dynamism has made a huge contribution to whatever success Berkshire has achieved — a contribution Berkshire will always need. We count on the American Tailwind and, though it has been becalmed from time to time, its propelling force has always returned.”
Elsewhere in his letter, Buffett criticized those critical of share buybacks, slammed Wall Street’s obsession with earnings “beats,” and outlined how the spirit of Berkshire will live on after he and vice chairman Charlie Munger are gone.
Here are seven top takeaways from Buffett’s annual letter.
‘At Berkshire, there will be no finish line.’
At Berkshire Hathaway’s 2021 annual meeting, Buffett told shareholders what many had long suspected — Greg Abel, currently CEO of Berkshire Hathaway Energy, will succeed Buffett as CEO.
Though Buffett and Munger, who turned 99 on Jan. 1, continue to show the spirit and enthusiasm of men much younger than them, life for Berkshire Hathaway after Warren and Charlie remains a key focus for investors.
In his latest annual letter, Buffett offered shareholders a brief history of Berkshire’s corporate story, which began with the ill-fated purchase of textile manufacturer Berkshire Hathaway in 1965 and continues today with a collection of businesses and investments that earned $30.8 billion in operating profits in 2022.
“Berkshire now enjoys major ownership in an unmatched collection of huge and diversified businesses,” Buffett wrote. Buffett noted that in 2021, there were 128 companies in the S&P 500 that earned more than $3 billion in profits — and Berkshire was the largest shareholder in 8 of these businesses: American Express (AXP), Bank of America (BAC), Chevron (CVX), Coca-Cola (KO), HP Inc. (HPQ), Moody’s (MCO), Occidental Petroleum (OXY), and Paramount Global (PARA).
Adding in Berkshire’s wholly owned subsidiaries BNSF and Berkshire Hathaway Energy, Buffett wrote: “All told, our 10 controlled and non-controlled behemoths leave Berkshire more broadly aligned with the country’s economic future than is the case at any other U.S. company.”
“As for the future, Berkshire will always hold a boatload of cash and U.S. Treasury bills along with a wide array of businesses,” Buffett wrote. “We will also avoid behavior that could result in any uncomfortable cash needs at inconvenient times, including financial panics and unprecedented insurance losses. Our CEO will always be the Chief Risk Officer – a task it is irresponsible to delegate. Additionally, our future CEOs will have a significant part of their net worth in Berkshire shares, bought with their own money. And yes, our shareholders will continue to save and prosper by retaining earnings.
“At Berkshire, there will be no finish line.”
On buybacks, ‘the math isn’t complicated’
In 2022, Berkshire Hathaway repurchased 1.2% of its outstanding shares, a move Buffett told shareholders “directly increased your interest in our unique collection of businesses.”
Buffett also noted buybacks at AmEx and Apple (AAPL) — Berkshire’s largest position at the end of last year — increased the company’s ownership in each firm.
“The math isn’t complicated: When the share count goes down, your interest in our many businesses goes up,” Buffett wrote. “Every small bit helps if repurchases are made at value-accretive prices.”
In recent months, as ever, share repurchases have remained a hot button political issue, with a new 1% tax on share buybacks taking effect in January and President Joe Biden floating a 4% tax on this activity in his State of the Union address earlier this year.
Actions and criticisms for which Buffett had no kind words.
“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),” Buffett wrote.
Dividends and Berkshire’s ‘secret sauce’
Investors have pored over Buffett’s writings for decades looking for ways to imitate his investment process and generate the kinds of returns Berkshire shareholders have enjoyed for three generations.
Writing about Berkshire’s “secret sauce” in this year’s letter, Buffett pointed to a simple variable: time.
Citing Berkshire’s longstanding investments in Coca-Cola and American Express, Buffett noted that positions in both companies completed nearly 30 years ago earned Berkshire dividends in 2022 worth more than $1 billion.
“These dividend gains, though pleasing, are far from spectacular,” he wrote. “But they bring with them important gains in stock prices. At yearend, our Coke investment was valued at $25 billion while Amex was recorded at $22 billion. Each holding now accounts for roughly 5% of Berkshire’s net worth, akin to its weighting long ago.”
Berkshire’s initial stake in both companies cost the company $1.3 billion.
“The lesson for investors: The weeds wither away in significance as the flowers bloom,” Buffett wrote. “Over time, it takes just a few winners to work wonders. And, yes, it helps to start early and live into your 90s as well.”
‘Bold imaginative accounting’ as ‘one of the shames of capitalism’
For Wall Street analysts and the business media alike, quarterly earnings are the most calendar markers for following any company.
But these four-times-per-year looks at a business — and the snap judgements investors can often make as a result — do not offer the kind of long-term perspective Buffett sees forming the framework of successful investing.
And moreover, the current focus on whether a company’s results beat expectations or not turn into a game that is just that — a game.
In 2022, Berkshire Hathaway reported operating earnings of $30.8 billion. Its GAAP earnings, which are required to take into account fluctuations in the value of its stock portfolio, showed Berkshire lost $22.8 billion last year.
Buffett called these GAAP losses “100% misleading,” noting that in future years he expects the results will be positive though the message stays the same: “Their quarter-by-quarter gyrations, regularly and mindlessly headlined by media, totally misinform investors.”
Even the “operating earnings” Buffett prefers to look at, however, fall short of offering investors the kind of clean view of a company’s results investors must make for themselves.
“Finally, an important warning: Even the operating earnings figure that we favor can easily be manipulated by managers who wish to do so,” Buffett wrote. “Such tampering is often thought of as sophisticated by CEOs, directors and their advisors. Reporters and analysts embrace its existence as well. 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. ‘Bold imaginative accounting,’ as a CEO once described his deception to me, has become one of the shames of capitalism.”
Taxes, the deficit, and ‘consequences’
In this year’s annual letter to shareholders, Buffett highlighted the taxes paid by Berkshire to the U.S. government over the years — and the taxes Berkshire expects to pay in the future.
From 2012-2021, Buffett said Berkshire paid some $32 billion in taxes, which he noted is almost exactly 0.1% of all tax payments taken in by the Treasury Department over that time.
“At Berkshire we hope and expect to pay much more in taxes during the next decade,” Buffett wrote. “We owe the country no less: America’s dynamism has made a huge contribution to whatever success Berkshire has achieved — a contribution Berkshire will always need.”
Buffett also noted over that period, the U.S. government took in about $32 trillion in tax receipts while spending closer to $44 trillion.
And though Buffett wrote he and Munger “plead ignorance” on the matter of the country’s fiscal imbalances, Buffett warned: “Huge and entrenched fiscal deficits have consequences.”
Though they’ve been business partners for over 40 years, Buffett remains a fan of Charlie Munger’s witticisms like so many of the rest of us.
In this year’s annual letter, Buffett used a full page to pull out Munger one-liners from a recent podcast:
“All I want to know is where I’m going to die, so I’ll never go there. And a related thought: Early on, write your desired obituary — and then behave accordingly.”
“You can learn a lot from dead people. Read of the deceased you admire and detest.”
“There is no such thing as a 100% sure thing when investing.”
As always, Buffett took the final section of this year’s letter to both invite shareholders to Omaha, Nebraska, for the annual shareholder meeting — and to shamelessly plug some of Berkshire’s portfolio companies that spend the weekend hawking wares to shareholders eager to spend their money where they’ve invested it.
“Charlie and I are shameless,” Buffett wrote. “Last year, at our first shareholder get-together in three years, we greeted you with our usual commercial hustle.”
Nearly 7,000 transactions were completed at the See’s Candies booth at the Berkshire annual meeting last year, good for a pace of 10 sales per minute.
Buffett wrote See’s is “selling products that haven’t been materially altered in 101 years. What worked for See’s in the days of Henry Ford’s model T works now.”
On May 5-6, Buffett will greet shareholders once again.
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