Warren Buffett, a legendary figure in the investment world, rightly considered the greatest investor of all time, has once again released his annual letter to shareholders. Currently, with a net worth of approximately $150 billion, he is the ninth wealthiest person in the world. He has built his wealth through investments in companies that his conglomerate, Berkshire Hathaway, has integrated, or through minority stake investments in other firms like Apple and American Express. And his annual letters to shareholders are “must-read” material for every investor. What does he write about this year?
The 94-year-old investor is renowned in the financial world for his keen sense of opportunity and his ability to use various metaphors and tell stories that are understandable even to less financially savvy investors. Over the weekend, Berkshire Hathaway once again released its financial results for the past quarter, which were very strong – particularly thanks to the insurance segment.
The key figures are as follows: Berkshire Hathaway announced on Saturday that its fourth-quarter after-tax operating profit surged by 71 percent year-over-year to a record $14.5 billion. The full-year operating profit also rose by 27 percent, reaching $47.437 billion. Thus, the profit has been record-breaking for the third consecutive year.
The first financial results of each year also mean that Warren Buffett publishes his traditional letter to shareholders, which is usually full of interesting thoughts, insights, and ideas. This year was no exception. And that’s why we are highlighting the most interesting points from this letter. You can read the entire letter at this link, and selected quotes are provided in the boxes below.
Mistakes Happen Even at Berkshire
Right at the beginning of the letter, Warren Buffett announces that he also makes mistakes. For example, he makes mistakes in evaluating the businesses he buys. We have seen this multiple times in recent years, such as with airline stocks, the rapid sale of TSMC shares, or the purchase of Paramount shares.
While everyone is a general after the war, evaluating a situation in real-time is, of course, something else. However, what’s admirable about Buffett is that, despite his vast experience, he admits his mistakes. So, remember that no investor gets every decision right.
- “Sometimes, I have made mistakes in evaluating the future economics of businesses I purchased for Berkshire – in every case, miscalculations about the future were mine. This happens with both marketable securities – which we view as partial ownerships of businesses – and 100% acquisitions.”
- “At other times, I have made mistakes in judging the abilities or loyalties of managers – those human factors. Disappointments of that kind can be more painful than financial ones; the pain approaches that of failed marriages.”
- “In personnel decisions, only a decent batting average should be expected. A cardinal sin is an immediate reach for a rose bush to cover up a mistake; Charlie Munger called that ‘licking your thumb.’ The inevitable problem with problems, he told me, is that they don’t get lighter with the passage of time. They demand action, however disagreeable that may be.” –Warren Buffett
Is Buffett Planning to Retire?
None of us (at least not yet) can live forever. Buffett realizes this, which is why he announced some time ago that Greg Abel would be his successor. Now, in the letter, he states that he is 94 years old and that it won’t be long before the Canadian businessman and current chairman and CEO of Berkshire Hathaway Energy replaces him.
- “At 94, it’s time for Greg Abel to take the reins of CEO. He will continue to have the Berkshire credo as his guide: ‘the report’ is what a Berkshire CEO owes the owners each year. He understands that if you begin to shade the truth to your shareholders, you will soon believe your own nonsense and be shading the truth to yourself.” –Warren Buffett
Is School an Important Criterion?
Warren Buffett devoted part of his letter to Pete Liegl, telling the remarkable story of a man who, while unknown to most Berkshire shareholders, contributed many billions to their overall wealth. Liegl passed away last November and, according to Buffett, was still working at the age of 80. Alongside his story, the founder of Berkshire also focused on the importance of education.
- “Another thing about our CEO choices: I never look at where a candidate went to school. Never! Of course, there are many great managers who attended the most elite schools. But there are lots of guys like Pete who may have been better served by attending a less prestigious institution or even by not completing college. Look at my friend, Bill Gates, who decided it was far more important to get started in an exploding industry that would change the world than to hang around and get a sheepskin to hang on a wall.”
- “I recently met – by phone – Jessica Toonkel, whose step-grandfather, Ben Rosner, once ran a business for Charlie and me. Ben was a retail genius, and in preparing this report, I checked with Jessica about Ben’s education, which I remembered as limited. Jessica’s reply: ‘Ben never finished more than the 6th grade.'”
- “I was fortunate to have been educated at three great universities. And I am a zealous believer in lifelong education. I have noticed, though, that a very great deal of business talent is innate, with nature prevailing over nurture.”
- “Pete Liegl was a natural.” –Warren Buffett
More Than Half of the Businesses Saw Profits Decline Last Year
Despite the very strong overall results of Berkshire, Buffett states that more than half of their owned businesses experienced a decline in profitability last year. The company was helped by the still high interest rates, thanks to which Berkshire earns billions of dollars in interest each quarter due to the huge volume of cash held.
This information shows us how unique Berkshire is. The fact that it consists of a large number of businesses is what causes the company to succeed in the long term – and even when some businesses perform less well, others usually pull them up. This quarter, the company’s profitability was significantly driven by cash and the insurance segment.
- “In 2024, Berkshire did better than I expected, even though 53% of our 189 operating businesses reported lower earnings. We were helped by a predictably large increase in investment income from better returns on Treasury Bills and by our having materially increased our holdings of these highly liquid short-term securities.”
- “Our insurance business also turned in a major increase in earnings, led by Geico’s performance. In five years, Todd Combs has dramatically remolded Geico, increasing efficiency and modernizing underwriting procedures. Geico was a long-held gem that needed some significant polishing, and Todd has worked tirelessly to complete that task. Though not yet finished, the 2024 improvement was spectacular.” –Warren Buffett
There Are Only Two Certainties. Death and Taxes
Warren Buffett mentioned the history of the originally textile company Berkshire Hathaway in the context of taxes in the letter. Last year, the entire conglomerate paid the highest taxes in the history of the USA, and it also paid taxes in forty-four other countries. Buffett argues that this is also due to the approach to paying dividends. In fact, dividends were paid only once, in 1967. The fact that the company reinvested the profits allowed it to grow at a high rate and pay so much in taxes.
- “Fast forward 60 years and imagine the surprise at the Treasury Department when that same company – still operating under the name Berkshire Hathaway – paid far more in federal income tax than any other U.S. company – even the American tech giants whose market values were in the trillions.”
- “To be precise, Berkshire last year made four payments to the IRS aggregating $26.8 billion. That’s roughly 5% of what all U.S. corporations paid. (Additionally, we paid substantial sums in income taxes to foreign governments and to the 44 states in which we operated.)” –Warren Buffett
More Than $300 Billion in Cash
Berkshire owns a record volume of cash, but most of the money is still invested. For nine consecutive quarters, Berkshire has been selling more shares than it has been buying. This can be interpreted in several ways. One of them is that Buffett expects a market correction, although he has not directly confirmed this.
The company currently owns $334 billion in cash, a large portion of which is invested in short-term bonds and Treasury bills, which bring the company a nice interest rate.
- “Despite what some commentators consider a gargantuan cash position at Berkshire, the great majority of your money remains in equities. That preference will remain. While our ownership of marketable securities decreased last year from $354 billion to $272 billion, the value of our non-traded equities increased somewhat and remains far larger than the value of the marketable portfolio.”
- “Berkshire shareholders can be certain that we will forever invest a substantial majority of their money in equities – largely U.S. equities, though many will have important international operations. Berkshire will never subordinate the owning of good businesses to the owning of cash-equivalent assets.” –Warren Buffett
Never Bet Against America
This statement, or a paraphrase of it, has been uttered (or written) by Warren Buffett several times. We saw it again in his latest letter when he wrote that Berkshire shareholders participated in the American miracle by forgoing dividends, which the company could have kept and reinvested.
Berkshire’s activities now touch all corners of our country. And we’re not done. Companies die for many reasons, but, unlike people, old age is not often the culprit. Berkshire is today far younger than it was in 1965.
Nevertheless, as Charlie and I have always acknowledged, Berkshire could not have achieved its results anywhere but in America, while America’s prosperity would have been fully achieved even if Berkshire had never existed.
So, thanks Uncle Sam. Your Berkshire nephews and nieces hope to send you even larger payments in 2024. Spend them well. Take care of the many who are pulling the heavy load in life, through no fault of their own. They deserve better. And never forget that you need to keep a stable currency. That result demands both wisdom and vigilance on your part. –Warren Buffett
Japanese Investments
About six years ago, Berkshire began buying shares in five major Japanese companies: Itochu, Marubeni, Mitsubishi, Mitsui, and Sumitomo. The companies themselves are similar in structure to Berkshire, as they operate in many areas and own many other companies. Over the years, enthusiasm for the companies has not diminished; on the contrary, Buffett’s admiration has grown. The companies gradually increase dividends and, when an opportunity arises, repurchase shares.
Berkshire initially held up to ten percent of the shares in these companies, but the companies later agreed that Berkshire could increase its holdings. So, it is likely that these holdings will grow in the future. Buffett expects his successor to hold these positions for many decades. The company clearly has a high degree of confidence in these firms and their management.
- “Berkshire made its initial purchases involving these five companies in July 2019. We simply looked at their financial records and were astounded by the low prices at which their shares were selling. As the years progressed, our admiration for these companies steadily grew. Greg has made multiple trips to see them and I regularly read their progress reports. We both like their capital allocation, their managers and their shareholder-friendly policies.”
- “Each of the five companies increases dividends when appropriate, buys back shares when sensible and their top managers are far less aggressively paid than their U.S. counterparts.”
- “Our ownership percentages in these five companies are very long-term and we are committed to supporting their boards. Early on, we also agreed to keep Berkshire’s holdings below 10% of the shares outstanding at each company. But as we approached that limit, the five companies gave us their blessing to move slightly above the ceiling. In time, you will likely see Berkshire’s ownership in each of them edge still higher.”
- “At year-end, Berkshire’s aggregate cost (in dollars) was $13.8 billion and the market value of our holdings totaled $23.5 billion.”
- “Meanwhile, Berkshire has consistently – but not by any formula – increased its yen-denominated borrowings. All are at fixed rates; none are ‘floating.’ Greg and I have no opinion about future exchange rates, but we do strive to be in a position approximating currency neutrality. By GAAP rules, however, we are required to regularly include in our earnings a calculation of any gains or losses from the yen we have borrowed, and at year-end we included $2.3 billion of after-tax earnings resulting from dollar strength, of which $850 million occurred in 2024.”
- “I expect Greg and his eventual successors to hold this Japanese position for many decades to come and for Berkshire to find additional opportunities to partner productively with these five companies.”
- “We also like the current math of our yen-balanced strategy. As I write this, estimated 2025 annual dividend income from the Japanese holdings is approximately $812 million and the interest cost of our yen-denominated debt will be approximately $135 million.”