One document I always look forward to reading around this time of the year is Warren Buffett’s annual Berkshire Hathaway shareholder’s letter. Over the weekend, Buffett published the 2024 edition and here are some of my favourite insights from it that I wish to document and share.
Without further ado (emphases are Buffett’s)…
Could the use of the word “mistakes” frequently in company reports be a signal to find great investing opportunities?
During the 2019-23 period, I have used the words “mistake” or “error” 16 times in my letters to you. Many other huge companies have never used either word over that span. Amazon, I should acknowledge, made some brutally candid observations in its 2021 letter. Elsewhere, it has generally been happy talk and pictures.
I have also been a director of large public companies at which “mistake” or “wrong” were forbidden words at board meetings or analyst calls. That taboo, implying managerial perfection, always made me nervous (though, at times, there could be legal issues that make limited discussion advisable. We live in a very litigious society.)
It’s hard to strike a bad deal when you’re dealing with a great person, even when the deal is vaguely-worded
Let me pause to tell you the remarkable story of Pete Liegl, a man unknown to most Berkshire shareholders but one who contributed many billions to their aggregate wealth. Pete died in November, still working at 80.
I first heard of Forest River – the Indiana company Pete founded and managed – on June 21, 2005. On that day I received a letter from an intermediary detailing relevant data about the company, a recreational vehicle (“RV”) manufacturer…
…I did some checking with RV dealers, liked what I learned and arranged a June 28th meeting in Omaha…
…Pete next mentioned that he owned some real estate that was leased to Forest River and had not been covered in the June 21 letter. Within a few minutes, we arrived at a price for those assets as I expressed no need for appraisal by Berkshire but would simply accept his valuation.
Then we arrived at the other point that needed clarity. I asked Pete what his compensation should be, adding that whatever he said, I would accept. (This, I should add, is not an approach I recommend for general use.)
Pete paused as his wife, daughter and I leaned forward. Then he surprised us: “Well, I looked at Berkshire’s proxy statement and I wouldn’t want to make more than my boss, so pay me $100,000 per year.” After I picked myself off the floor, Pete added: “But we will earn X (he named a number) this year, and I would like an annual bonus of 10% of any earnings above what the company is now delivering.” I replied: “OK Pete, but if Forest River makes any significant acquisitions we will make an appropriate adjustment for the additional capital thus employed.” I didn’t define “appropriate” or “significant,” but those vague terms never caused a problem.
The four of us then went to dinner at Omaha’s Happy Hollow Club and lived happily ever after. During the next 19 years, Pete shot the lights out. No competitor came close to his performance.
A handful of great decisions can wash away a multitude of mistakes, and then some
Our experience is that a single winning decision can make a breathtaking difference over time. (Think GEICO as a business decision, Ajit Jain as a managerial decision and my luck in finding Charlie Munger as a one-of-a-kind partner, personal advisor and steadfast friend.) Mistakes fade away; winners can forever blossom.
A person’s educational background has no bearing on his/her ability
One further point in our CEO selections: I never look at where a candidate has gone to school. Never!…
…Not long ago, I met – by phone – Jessica Toonkel, whose step-grandfather, Ben Rosner, long ago ran a business for Charlie and me. Ben was a retailing genius and, in preparing for this report, I checked with Jessica to confirm Ben’s schooling, which I remembered as limited. Jessica’s reply: “Ben never went past 6th grade.”
Insurance companies are going to face a staggering environmental catastrophe event someday, but insurance companies can still do well if they price their policies appropriately
In general, property-casualty (“P/C”) insurance pricing strengthened during 2024, reflecting a major increase in damage from convective storms. Climate change may have been announcing its arrival. However, no “monster” event occurred during 2024. Someday, any day, a truly staggering insurance loss will occur – and there is no guarantee that there will be only one per annum…
…We are not deterred by the dramatic and growing loss payments sustained by our activities. (As I write this, think wildfires.) It’s our job to price to absorb these and unemotionally take our lumps when surprises develop. It’s also our job to contest “runaway” verdicts, spurious litigation and outright fraudulent behavior.
EBITDA (earnings before interest, taxes, depreciation, and amortisation) is not a good measure of a company’s profitability
Here’s a breakdown of the 2023-24 earnings as we see them. All calculations are after depreciation, amortization and income tax. EBITDA, a flawed favorite of Wall Street, is not for us.
A company can pay massive tax bills and yet be immensely valuable
To be precise, Berkshire last year made four payments to the IRS that totaled $26.8 billion. That’s about 5% of what all of corporate America paid. (In addition, we paid sizable amounts for income taxes to foreign governments and to 44 states.)…
…For sixty years, Berkshire shareholders endorsed continuous reinvestment and that enabled the company to build its taxable income. Cash income-tax payments to the U.S. Treasury, miniscule in the first decade, now aggregate more than $101 billion . . . and counting.
Shares of public-listed companies and private companies should be seen as the same kind of asset class – ownership stakes in businesses
Berkshire’s equity activity is ambidextrous. In one hand we own control of many businesses, holding at least 80% of the investee’s shares. Generally, we own 100%. These 189 subsidiaries have similarities to marketable common stocks but are far from identical. The collection is worth many hundreds of billions and includes a few rare gems, many good-but-far-from-fabulous businesses and some laggards that have been disappointments…
…In the other hand, we own a small percentage of a dozen or so very large and highly profitable businesses with household names such as Apple, American Express, Coca-Cola and Moody’s. Many of these companies earn very high returns on the net tangible equity required for their operations…
…We are impartial in our choice of equity vehicles, investing in either variety based upon where we can best deploy your (and my family’s) savings…
…Despite what some commentators currently view as an extraordinary cash position at Berkshire, the great majority of your money remains in equities. That preference won’t change. While our ownership in marketable equities moved downward last year from $354 billion to $272 billion, the value of our non-quoted controlled equities increased somewhat and remains far greater than the value of the marketable portfolio.
Berkshire Hathaway has a great majority of its capital invested in equities, despite what may seem to be otherwise on the surface (this is related to the point above on how shares of public-listed companies and private companies should be both seen as equities); Berkshire will always be deploying the lion’s share of its capital in equities
Despite what some commentators currently view as an extraordinary cash position at Berkshire, the great majority of your money remains in equities. That preference won’t change. While our ownership in marketable equities moved downward last year from $354 billion to $272 billion, the value of our non-quoted controlled equities increased somewhat and remains far greater than the value of the marketable portfolio.
Berkshire shareholders can rest assured that we will forever deploy a substantial majority of their money in equities – mostly American equities although many of these will have international operations of significance. Berkshire will never prefer ownership of cash-equivalent assets over the ownership of good businesses, whether controlled or only partially owned.
Good businesses will still succeed even if a government bungles its fiscal policy (i.e. government spending), but it’s still really important for a government to maintain a stable currency
Paper money can see its value evaporate if fiscal folly prevails. In some countries, this reckless practice has become habitual, and, in our country’s short history, the U.S. has come close to the edge. Fixed-coupon bonds provide no protection against runaway currency.
Businesses, as well as individuals with desired talents, however, will usually find a way to cope with monetary instability as long as their goods or services are desired by the country’s citizenry…
…So thank you, Uncle Sam. Someday your nieces and nephews at Berkshire hope to send you even larger payments than we did in 2024. Spend it wisely. Take care of the many who, for no fault of their own, get the short straws in life. They deserve better. And never forget that we need you to maintain a stable currency and that result requires both wisdom and vigilance on your part.
Capitalism is still a force for good
One way or another, the sensible – better yet imaginative – deployment of savings by citizens is required to propel an ever-growing societal output of desired goods and services. This system is called capitalism. It has its faults and abuses – in certain respects more egregious now than ever – but it also can work wonders unmatched by other economic systems.
P/C (property and casualty) insurance companies often do not know the true cost of providing their services until much later; the act of pricing insurance policies is part art and part science, and requires a cautious (pessimistic?) mindset
When writing P/C insurance, we receive payment upfront and much later learn what our product has cost us – sometimes a moment of truth that is delayed as much as 30 or more years. (We are still making substantial payments on asbestos exposures that occurred 50 or more years ago.)
This mode of operations has the desirable effect of giving P/C insurers cash before they incur most expenses but carries with it the risk that the company can be losing money – sometimes mountains of money – before the CEO and directors realize what is happening.
Certain lines of insurance minimize this mismatch, such as crop insurance or hail damage in which losses are quickly reported, evaluated and paid. Other lines, however, can lead to executive and shareholder bliss as the company is going broke. Think coverages such as medical malpractice or product liability. In “long-tail” lines, a P/C insurer may report large but fictitious profits to its owners and regulators for many years – even decades…
…Properly pricing P/C insurance is part art, part science and is definitely not a business for optimists. Mike Goldberg, the Berkshire executive who recruited Ajit, said it best: “We want our underwriters to daily come to work nervous, but not paralyzed.”
There are forms of executive compensation that are one-sided in favour of the executives, which can create distorted incentives
Greg, our directors and I all have a very large investment in Berkshire in relation to any compensation we receive. We do not use options or other one-sided forms of compensation; if you lose money, so do we. This approach encourages caution but does not ensure foresight.
Economic growth in a country is a necessary ingredient for the P/C insurance industry to grow
P/C insurance growth is dependent on increased economic risk. No risk – no need for insurance.
Think back only 135 years when the world had no autos, trucks or airplanes. Now there are 300 million vehicles in the U.S. alone, a massive fleet causing huge damage daily
It’s important for an insurance company to know when to shrink its business (when policies are priced inadequately)
No private insurer has the willingness to take on the amount of risk that Berkshire can provide. At times, this advantage can be important. But we also need to shrink when prices are inadequate. We must never write inadequately-priced policies in order to stay in the game. That policy is corporate suicide.
A P/C insurance company that does not depend on reinsurers has a material cost advantage
All things considered, we like the P/C insurance business. Berkshire can financially and psychologically handle extreme losses without blinking. We are also not dependent on reinsurers and that gives us a material and enduring cost advantage.
Good investments can be made by just assessing a company’s financial records and buying when prices are low; it can make sense to invest in foreign countries even without having a view on future foreign exchange rates
It’s been almost six years since Berkshire began purchasing shares in five Japanese companies that very successfully operate in a manner somewhat similar to Berkshire itself. The five are (alphabetically) ITOCHU, Marubeni, Mitsubishi, Mitsui and Sumitomo…
…Berkshire made its first purchases involving the five in July 2019. We simply looked at their financial records and were amazed at the low prices of their stocks…
…At yearend, Berkshire’s aggregate cost (in dollars) was $13.8 billion and the market value of our holdings totaled $23.5 billion…
…Greg and I have no view on future foreign exchange rates and therefore seek a position approximating currency-neutrality.
Berkshire Hathaway will be investing in Japan for a very long time
A small but important exception to our U.S.-based focus is our growing investment in Japan…
…Our holdings of the five are for the very long term, and we are committed to supporting their boards of directors. From the start, we also agreed to keep Berkshire’s holdings below 10% of each company’s shares. But, as we approached this limit, the five companies agreed to moderately relax the ceiling. Over time, you will likely see Berkshire’s ownership of all five increase somewhat.
It can make sense to borrow to invest for the long haul in foreign countries if you can fix your interest payments at low rates
Meanwhile, Berkshire has consistently – but not pursuant to any formula – increased its yen-denominated borrowings. All are at fixed rates, no “floaters.” Greg and I have no view on future foreign exchange rates and therefore seek a position approximating currency-neutrality…
…We like the current math of our yen-balanced strategy as well. As I write this, the annual dividend income expected from the Japanese investments in 2025 will total about $812 million and the interest cost of our yen-denominated debt will be about $135 million.
Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. I currently have a vested interest in Amazon and Apple. Holdings are subject to change at any time.