10 Valuable Lessons In Warren Buffett’s This Year’s Letter To Shareholders

Once again, Warren Buffett’s letter to Berkshire Hathaway’s shareholders was publicly released. Our tradition has been to sift through his letters, looking beyond the company’s fourth-quarter and full-year earnings results to analyze Buffett’s golden nuggets. We found valuable lessons in this letter.

Buffett’s letter may be shorter than in recent years, but it remains informative, witty, and upbeat at just eight pages. Many of Buffett’s legendary quotes come from these letters, filled with integrity, sardonic humor, and corniness. Here is our analysis of last year’s letter.

After 58 years of managing Berkshire at the helm, Warren Buffett humbly issued a report card, referring to most of his capital allocation decisions as “so-so,” but saved his ire for those who argue that share repurchases as harmful for all owners, the country, or particularly beneficial to CEOs, “you are either listening to an economic illiterate or a silver-tongued demagogue.”

 

This Year’s Letter Is A Report Card of Sorts

Warren Buffett’s writing always feels like he is speaking directly to you, the individual investor, to understand his stalwart company, Berkshire Hathaway. The letter dispels any notion that Warren Buffett, at age 92, and Charlie Munger, at 99, plan to leave soon if they can help it. Here is the 2022 letter. 

Berkshire’s shares were up a healthy 19.8% in 2022, well above the S&P 500’s growth of  9.9%. Berkshire shares declined 1.49% year-to-date through February 24, in contrast to the 3.49% gain for the S&P 500 index. 

Like in previous letters, we pulled out his quotes to help explain his thoughts. I remain an avid reader of Warren Buffett’s letters going back years to when I was a business student, equity analyst, shareholder, investor, and finally, a college professor seeking personal finance lessons for my students. His writings, iconic quotes, and presentations provide refreshing financial wisdom in his quaint small-town voice. Buffett and his friend and partner, Vice Chairman Charlie Munger, are American treasures who value teaching others. 

1. Berkshire’s Shareholders Are Dedicated Savers

Buffett and Munger manage the savings of their shareholders, many of whom are “once-a-saver, always-a-saver” who retain their Berkshire Hathaway stock until their estate donates to philanthropic organizations that use funds to improve the lives of people in need. Buffett paints a charitable view of his shareholders who invest in the company and live well but tend to give back to communities rather than engage in “opt-at-me assets and dynasty building.” He adds, “The disposition of money unmasks humans.”

2. The Company’s Businesses

The company has two types of ownership:

Non-controlled ownership by buying publicly traded stocks representing passively owned businesses in that management doesn’t have active involvement. Buffett says, “It’s crucial to understand that stocks often trade at truly foolish prices, both high and low. Efficient markets exist only in the textbook.”

Controlled businesses are usually bought with a 100% interest, and Berkshire actively directs capital allocation run by the day-to-day CEOs who make operating decisions. Buffett contrasts these owned businesses with non-controlled stakes, saying, “Controlled businesses are different. They sometimes command ridiculously higher prices than justified but almost never available at bargain valuations.”

However, management uses similar investment strategies for both ownership types, looking for businesses with long-lasting favorable economic characteristics and responsible leadership.

3. Collection of Businesses, Capitalism, And Ethical Conduct

BH’s extensive collection of companies falls into three categories. A few enterprises are extraordinary businesses that perform well in any economy; many have very good economic characteristics, but a large group is marginal. Other businesses 

On the “creative destruction” concept coined by Joseph Schumpeter, Buffett explains, “Capitalism has two sides: The system creates an evergrowing pole of losers while concurrently delivering a gusher of improved goods and services.”

Buffett pointed to mistakes and disappointments in the current letter, saying, ” Disappointments are inevitable. We are understanding about business mistakes; our tolerance for personal misconduct is zero.”

4. A Report Card After 58 years Has the Secret Sauce

Buffett provided a report card for his 58 years of Berkshire management, saying that most of his capital-allocation decisions “have been no better than so-so.” On the other hand, Berkshire’s satisfactory results come from about a dozen good decisions or about one every five years, paralleling the need to be patient long-term investors in Berkshire.

He revealed the secret sauce of taking stakes in several excellent companies, notably Coke and American Express, among the earlier investments made in the 1990s, contributing to appreciation and dividend growth. These investments were substantially better than Berkshire’s money in high-grade 30-year bonds that would have just held their value over 30 years.

In yearend 2022, Berkshire was the largest owner of eight companies (or ten companies if you considered the railroad companies) that are part of the S&P 500 composite index that serves as the market proxy. Berkshire owns businesses that provide “modest protection from runaway inflation, but far from perfect.”

“The lesson for investors: The weeds wither away in significance as the flowers bloom. Over time, it takes just a few winners to work wonders. And yes, it helps start early and live into your 90s as well.”

5. Maintains Strong Liquidity

Berkshire’s balance sheet is over $128 billion of cash and cash equivalents in 2022, down from $144 billion in 2021 due to a few acquisitions, including new stakes. Berkshire “will always hold a boatload of cash and US Treasury bills.”

A fun fact:  Berkshire’s contributed almost a tenth of 1% of all the money the US Treasury collected during the decade ending 2021 (2022 has yet to be available).

Buffett and Munger have a pledge that they will always have more than $30 million in liquid funds so they can avoid adding debt in the event of a catastrophe. They would prefer to find worthy acquisitions or investable assets. That cash position is likely earning more income due to the currently higher yields for Treasuries, especially the two-year T-Notes.

6. Share Repurchases Benefit All Owners

Historically, Berkshire repurchases its shares at attractive prices and acknowledges similar moves made by other companies that they include among their non-controlled businesses, Apple and American Express, bought their shares. Buffett pointed to “A very minor gain in per-share intrinsic value took place in 2022 through Berkshire repurchases.”

He explained,” The math isn’t complicated: When the share count goes down, your interest in our many business goes up. Every small bit helps if repurchases are made at value-accretive prices. Just as surely, when a company overpays for repurchases, the continuing shareholders lose. At such times, gains flow only to the selling shareholders and the friendly, but expensive, investment banker who recommended the foolish purchases. Gains from value-accretive repurchases, it should be emphasized, benefit all owners – in every respect.” 

Buffett disputed the controversy raised by notable politicians that say all repurchases are harmful to shareholders or the country while beneficial to CEOs, blaming this argument on either “economic illiterate or a silver-tongued demagogue.”

7. Its  Behemoth Insurance “Float”

Berkshire purchased Alleghany Corporation, a property-casualty insurer, adding to their substantial insurance businesses. The company’s 100% ownership of its insurance companies provides products that positively perform in economic growth and inflation. Their unique characteristics allow them to enjoy $164 billion of insurance “investing float” at the end of 2022, up from $147 billion. Like other insurers, portfolio managers invest the premiums customers pay in securities. Premiums are investable assets that typically exceed insurance costs and losses, but only sometimes. Berkshire’s GAAP earnings or net worth does not reflect the long-term investment value.  

Warren Buffett comments, “This float has been an extraordinary asset for Berkshire.”

8. The Drivers of Berkshire’s Successes

From a bumpy ride in 1965 when Berkshire “was a one-trick pony” the company has had several long-term drivers to fuel its success, including:

• Continuous savings
• The power of compounding
• Avoidance of major mistakes
• The American Tailwind

9. The American Tailwind Has Fued Berkshire’s Prosperity

For many years, Buffett repeatedly said that Berkshire’s prosperity and success resulted from operating in America.

The 2022 shareholder letter is no different, and he stated, “We count on the American Tailwind and, though it has been becalmed from time to time, its propelling force has always returned.” He adds, “I have been investing for 80 years – more than one-third of our country’s lifetime. Despite our citizens’ penchant – almost enthusiasm – for self-criticism and self-doubt, I have yet to see a time when it made sense to make a long-term bet against America…”

10. Charlie Munger, A Great Partner

Praising Munger with several valuable quotes, Buffett ends the letter with a rule he relates to Charlie, advising, “Find a very smart high-grade partner – preferably slightly older than you and listen very carefully to what he says.”

Related Post: Charlie Munger Quotes Display His Legendary Wit and Wisdom