Buffett's Annual Shareholder Letter Released, Berkshire's Cash Reserves Hit Record High
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On February 24 local time, Berkshire Hathaway released its 2023 fiscal year report. The data shows that the company's net profit for the 2023 fiscal year exceeded $96 billion, while its cash reserves reached a record high. As of December 31, 2023, approximately 79% of Berkshire Hathaway's total fair value of equity investments was concentrated in American Express, Apple, Bank of America, Coca-Cola, and Chevron. Buffett also stated that he has no plans to sell his nearly 30% stake in Occidental Petroleum or his 9% stake in Japan's five major trading companies.
The annual shareholder letter from the "Oracle of Omaha," Warren Buffett, and the financial report of Berkshire Hathaway, which he leads, have just been released.
On February 24 local time, Berkshire's latest financial report showed that, thanks to strong performance in its insurance business, the company's operating profit for the fourth quarter of last year was $8.48 billion, a 28% increase year-over-year, with the full-year operating profit reaching $37.35 billion.
Notably, Berkshire's investment and derivative gains in the fourth quarter of last year surged to $29.1 billion, compared to a loss of $23.5 billion in the third quarter and a gain of $11.5 billion in the same period in 2022. With the increase in investment gains, Berkshire's net profit in the fourth quarter of 2023 also soared to $37.574 billion, doubling from $18.08 billion in the same period in 2022. The stock gains were primarily driven by its largest holding, Apple, which accounts for about half of the investment portfolio. Apple's stock price rose 12.6% in the fourth quarter, creating paper gains of over $20 billion for Berkshire.
Thanks to the substantial unrealized investment gains in 2023, Berkshire's net profit attributable to shareholders for the 2023 fiscal year reached $96.223 billion, compared to a net loss of $22.759 billion in 2022. Of course, Buffett himself does not favor this reporting method, believing that GAAP profits are 100% misleading. In what may be one of his last annual shareholder letters, Buffett stresses that while capital gains are undeniably important, it would be foolish to evaluate Berkshire's investment value based solely on earnings, as earnings encompass the unpredictable daily fluctuations and year-to-year volatility of the stock market. As Benjamin Graham famously said: "In the short run, the market is a voting machine but in the long run, it is a weighing machine."
Paying Tribute to the 'Forever Architect'
On November 28 last year, Charlie Munger, Buffett's "golden partner" and vice chairman of Berkshire's board, passed away in California at the age of 99, just 33 days shy of his 100th birthday.
This year's Berkshire annual report begins with Buffett's letter honoring Munger. In it, Buffett refers to Munger as Berkshire's "architect," while describing himself as the "general contractor" who day after day brings Munger's vision to life.
"In the physical world, great buildings are linked with their architects while those who poured the concrete or installed the windows are quickly forgotten," Buffett writes. In his eyes, although he has long been in charge of the construction crew, Charlie remains the "forever architect."
Since 1978, Munger served as vice chairman of Berkshire's board, working closely with Buffett to transform a failing textile mill into a nearly trillion-dollar behemoth spanning industries from insurance to energy. Outspoken Munger was famously known as Berkshire's 'Mr. No,' who pointed out Buffett's mistakes and steered him away from the so-called 'cigar butt' investment strategy—buying mediocre companies at cheap prices—toward a quality-focused approach. Munger breathed new life into value investing: not just hunting for bargains, but identifying overlooked yet exceptional opportunities.
With a legal background, Munger was also hailed as a 'walking encyclopedia.' He believed investing extended beyond finance, encompassing broader fields like social sciences, psychology, and cognitive science. His thinking and strategies were deeply influenced by these disciplines. He advocated for independent thinking, urging investors to ignore short-term market fluctuations and adhere to long-term value investing principles.
Munger, seven years older than Buffett, was seen by Buffett as both 'a brother and a loving father.' 'Charlie never sought credit for his role as a creator, instead letting me take the applause and accolades. In a way, our relationship was like that of an elder brother and a caring father,' Buffett once said.
Indefinitely maintaining investments in five major trading houses and Occidental Petroleum
In his shareholder letter, Buffett also revisited his 'old friends' Coca-Cola and American Express.
Berkshire has held Coca-Cola and American Express for decades. While these stakes aren't as large as Apple's—each accounting for just 4%-5% of Berkshire's GAAP net worth—Buffett views them as valuable assets. In 2023, Berkshire Hathaway neither bought nor sold shares of American Express or Coca-Cola. Last year, both companies once again rewarded Berkshire's 'inaction' with increased profits and dividends. Buffett noted that Berkshire's share of earnings from American Express in 2023 far exceeded the $1.3 billion cost of the original purchase made long ago. In 2024, both American Express and Coca-Cola are almost certain to increase their dividends, and Berkshire will undoubtedly continue to hold its positions without changes throughout the year.
"When you find a truly outstanding business, stick with your investment. Patience always pays off, and choosing an excellent company can offset many inevitable poor decisions," Buffett advised investors.
Similar to Coca-Cola and American Express, Buffett expects Berkshire to maintain its investments in Japan's five major trading companies and Occidental Petroleum indefinitely.
Itochu, Marubeni, Mitsubishi, Mitsui, and Sumitomo operate in highly diversified ways, somewhat similar to Berkshire's own approach. Buffett mentioned that all five companies follow shareholder-friendly policies. Since he began acquiring Japanese stocks, these companies have reduced their outstanding shares at attractive prices. Each company allocates about one-third of its earnings to dividends, retaining substantial funds to build various businesses and, to a lesser extent, for stock buybacks. Like Berkshire, these five companies are also reluctant to issue new shares.
In August 2020, Berkshire first announced a passive 5% stake in Japan's five major trading companies. By June of last year, it was revealed that Berkshire had increased its holdings to over 8.5%. In his latest shareholder letter, Buffett revealed that Berkshire Hathaway holds approximately 9% stakes in these five companies. Starting its investment in Japanese stocks from July 2019, Berkshire's investment cost in these five companies was about 1.6 trillion yen, and by the end of 2023, their holdings were valued at 2.9 trillion yen. However, due to the weakening yen, Berkshire's unrealized dollar return stands at 61% ($8 billion).
Additionally, as of the end of 2023, Berkshire owns 27.8% of Occidental Petroleum's common stock along with warrants. Buffett reiterated in the letter that while Berkshire likes Occidental Petroleum, it has no interest in acquiring or managing the company.
Today's Market Resembles a Casino
Regarding the current market, Buffett offered blunt criticism.
"Although the stock market is much larger than in earlier days, today's active participants are neither more emotionally stable nor better educated than when I was in school," Buffett said. He believes today's market resembles a casino more than during his youth, with casinos now existing in many households, tempting residents daily. One of Berkshire's investment rules remains unchanged: never risk permanent loss of capital.
During economic turmoil, Berkshire aims to be an asset to the nation, helping extinguish financial fires as it did in a modest way during 2008-2009, rather than being among the many companies that inadvertently or intentionally ignite them. Buffett stated: "We believe Berkshire can handle unprecedented financial disasters and won't relinquish this capability." Berkshire Hathaway has already stockpiled considerable resources. According to the latest financial report, by the end of the fourth quarter of last year, Berkshire's cash reserves had risen to a record $167.6 billion, an increase of $10.6 billion from $157 billion in the third quarter.
Berkshire seeks to own businesses with good economic benefits, excellent fundamentals, and enduring operations. Buffett noted that some businesses will thrive in the long term, while others will prove to be 'bottomless pits.' Predicting which businesses will emerge as winners and which will become significant losers is far more challenging than one might think. Those who claim to know the answers are either deceiving themselves or are outright charlatans.
Regarding stock buybacks, Berkshire's repurchases in the fourth quarter of last year doubled sequentially to $2.2 billion, with total annual buybacks reaching $9.2 billion. However, Buffett also cautioned investors: all stock repurchases should be price-dependent. Buying back shares at prices above their business value turns wise actions into foolish ones.
This year's Berkshire Hathaway Annual Shareholders Meeting is scheduled for May 4 in Omaha. Following Munger's passing, the stage will feature only three individuals: Buffett, his successor Greg Abel, and Ajit Jain, Vice Chairman of Berkshire's insurance operations, marking the absence of the once 'golden duo.'
In closing the shareholder letter, Buffett once again reminisced about his late partner, announcing the release of the fourth edition of 'Poor Charlie's Almanack': 'Charlie's wisdom will change your life, just as it did mine.'