It is always a pleasure to read and analyze Warren Buffett’s annual letter to Berkshire Hathaway shareholders.
Buffett’s letter is shorter than usual but remains upbeat, witty, and educational. 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.
This year’s message reminds us that the company’s well-positioned businesses reflect the economy, can withstand higher inflation, and pay a lot of taxes.
Warren Buffett and Charlie Munger began working together at a grocery store owned by Buffett’s grandfather in 1942. Since 1965, Buffett remains with his partner, friend, and Vice Chairman Charlie Munger at the helm as CEO.
Buffett is always ready to vocalize his criticism aimed at company managements who use financial engineering to prop up earnings and their stocks more than is acceptable. This year’s letter was not an exception. Buffett and Munger do not suffer from a love affair with Wall Street, my home, before turning to teach college students. That’s alright by me.
This Year’s Letter To Shareholders
In the 2022 annual letter to shareholders, Warren Buffett’s writing feels like he is speaking directly to you, the individual investor, to understand his stalwart company, Berkshire Hathaway. The letter dispels any notion of Warren Buffett at age 92 and Charlie Munger at 98 retiring any time soon. They are still having too much fun.
Berkshire’s shares were up a healthy 29.6% in 2021, slightly above the S&P 500’s growth of 28.7%, reversing the prior two years’ underperformance. The shares continue to do well in 2022. I am not writing about quarterly results as my days as an equity analyst are gone.
I am an avid reader of Warren Buffett’s letters going back years (not to the 1960s!), as a business student, equity analyst, shareholder, investor, and finally, as 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 Munger are American treasures.
8 Epic Lessons From Warren Buffett’s 2022 Letter To Shareholders
1. Berkshire’s Four Giants Highlights The Company’s Diversified Assets, Growth, And Value
Property And Casualty Operations And Its Insurance “Float”
The first giant is Berkshire’s 100% ownership of its insurance companies, managed by Ajit Jain, which provide products that positively perform in economic growth and inflation. They have unique characteristics that allow them to enjoy $147 billion of insurance “investing float” at the end of 2021. Like other insurers, portfolio managers invest the premiums paid by customers in securities. Premiums are investable assets that typically exceed insurance costs and losses, but not always. Berkshire’s GAAP earning or net worth does not reflect the long-term investment value.
Warren Buffett comments, “This float has cost us less than nothing. Though we have experienced a number of years when insurance losses combined with operating expenses exceeded premiums, overall we have earned a modest 55-year profit from underwriting activities that generated our float.”
Berkshire’s Apple Stake
Berkshire owns a 5.55% in Apple, up from 5.39% interest a year ago. This holding is its second giant. The stake in Apple shares is a significant portion of the market value of all its interests, at $161.155 billion, or about 46% of total marketable investments based on 15 holdings. Since its investment, Apple’s shares have more than quadrupled in value, benefiting from its growth and share buybacks.
According to GAAP earnings, Berkshire’s earnings include only dividends of $785 million from Apple, but not the more significant share of Apple earnings of $5.6 billion. Warren Buffett shared strong praise for Tim Cook, “Apple’s brilliant CEO, (who) quite properly regards users of Apple products as his first love, but all of his other constituencies benefit from Tim’s managerial touch as well.”
BNSF – Its Railroad Business
Berkshire owns 100% ownership of BNSF, its railroad business, acquired in early 2010, and the third giant. BNSF is more significant than any other American carrier based on miles and tons of cargo.
Buffett refers to BNSF “as an indispensable asset for America as well as for Berkshire. If the many essential products BNSF carries were instead hauled by truck, America’s carbon emissions would soar.”
BNSF reported record earnings of $6 billion in 2021, and its profits are after interest, taxes, depreciation, amortization, and compensation. Buffett wants its shareholders to know in polite terms that Berkshire does not use “deceptive adjustments to earnings which have become more frequent and more fanciful…” Buffett adds, “Speaking less politely, I would say that bull markets breed bloviated bull….” So says the man from Omaha, whose city is often considered the steak capital of the world.
Berkshire Hathaway Energy
Berkshire’s fourth giant is Berkshire Hathaway Energy (BHE), owned since 2000 when it had no wind or solar generation. It is now a leading force in wind, solar, and transmission throughout much of the US. According to Buffett, this utility business has long been making climate-conscious moves that are capital intensive, and the reason why it doesn’t pay dividends to Berkshire.
Last year, BHE detailed its long-term project to rework and expand a substantial portion of its outdated electricity grid. This project is complex and essential to be able to deliver clean energy. The project began in 2006 with a 2030 competition date.
2. Three Ways To Increase Share Value
The first way to increase share values is through the long-term earnings power of Berkshire’s controlled and entirely owned businesses through internal growth or acquisitions. Buffett has been astute in making acquisitions, but the pace of buying companies in recent years that amount to the “elephant acquisition” has been hampered by elevated valuations that Berkshire will not pursue.
Despite some criticism aimed at Buffett, especially regarding his lack of technology holdings, he remains steadfast. Berkshire and Buffett’s patience may prove prescient given the recent market correction.
The way to amp value is to buy non-controlling partial interests in excellent publicly traded businesses, like its share ownership in Apple shares. Berkshire holds minority stakes in more than 15 stocks acquired over the years, amounting to a market value of $350.7 billion, well above three times its cost.
Buffett comments, “Today, though, we find little that excites us.” He points out that low long-term interest rates push prices of all productive assets upward and therefore out of reach for Buffett’s taste. With the Fed poised to raise interest rates in March and throughout 2022, the finances may change on a dime, yielding market opportunities in Berkshire’s favor.
Make Share Repurchases When The Price Is Right
Buying back Berkshire Hathaway shares is the easiest path to increase the value if the price makes sense. Of course, this path is not open only to Berkshire, but this company has a strong cash position to deploy.
Share repurchases by companies in the market can create value for shareholders in a few ways. The company action is seen positively by shareholders, increasing their earnings per share as the outstanding share base shrinks, and boosting the stock price. If Berkshire can’t find good opportunities in the first or second choices, they can buy back Berkshire’s shares if they are at attractive levels.
In the past two years, Berkshire has repurchased 9% of its outstanding shares at the cost of $51.7 billion by the end of 2021, adding another $1.2 billion through February 23, 2022. However, Berkshire’s stockholders are long-term buy-and-keep investors meaning they are loyal to their shares, limiting Berkshire’s ability for share buybacks at low prices.
3. Berkshire’s Strong Cash Condition Ripe For Acquisition Opportunities
Berkshire’s balance sheet reflects $144 billion of cash and cash equivalents, excluding the holdings of the company’s railroad and energy businesses. Berkshire keeps about $120 billion of this amount in US Treasury bills, all maturing in less than a year. Buffett tells us that means that Berkshire is financing half of 1% of the US national debt, not an insignificant amount.
That cash position is too high and earns very little income due to current low yields. 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.
4. Buffett Would Rather Be Investing
Buffett’s investing prowess dates back to March 11, 1942, when at age 11, he paid all his savings, buying three shares of Cities Services preferred stock for $114.75 when the Dow Jones closed at 99. Cities Service was a natural gas company founded in 1910 but no longer exists.
In his 2019 letter, Buffett’s stake would have been worth $606,811 (for a gain of 5,288 to one) on January 31, 2019, had he invested the money in a no-fee S&P 500 index fund with reinvested dividends. By the way, young Warren wouldn’t have had a chance to buy an index fund until the mid-1970s so that we could forgive him.
Since then, Buffett has kept at least 80% of his net worth in equity but still prefers 100% in businesses or marketable stocks.
5. Berkshire Is The Biggest Infrastructure Company In The US
Although Berkshire’s insurance businesses, the company owns and operates more domestic infrastructure assets than any other American corporation, in terms of its property, plant, and equipment of $158 billion on its balance sheet. Berkshire is more of an infrastructure company than the perception that Berkshire has more financial assets.
6. Berkshires Pays A Lot of Taxes, But That Wasn’t Always The Case
The company paid $3.3 billion in federal tax payments, excluding state and foreign taxes, so they can say, “I paid at the office.”
Before Warren Buffett came to the company, two separate companies agreed to merge in 1955. They were Berkshire Fine Spinning and Hathaway Manufacturing, both New England textile businesses. The tender offer that was distributed to owners to agree to the combination read, “The combination of the resources and management will result in one of the strongest and most efficient organizations in the textile industry.”
Who was the advisor to that deal? Lehman Brothers, the investment bank that collapsed in 2008.
Buffett adds, ” After the bands stopped playing and the bankers went home, however, the shareholders reaped a disaster.” In the nine years post-merger, the combination cut company’s net worth more than half, caused by ill-advised dividends, plant shutdowns, and share repurchases. The merged company only paid about $337,359 in income taxes or $100 per day for that entire period.
Who rescued the merged company in 1965 and helped the US Treasury? The new management was Buffett and Munger, who have benefited shareholders, and the new Berkshire pays roughly $9 million daily to the US Treasury. (Reading this in the 2021 letter, I was surprised not to see, “And they lived happily forever,” but I digress).
7. His Advice For Students
Warren Buffett taught investing to students of all ages for decades, retiring from that pursuit in 2018. He shared that his most demanding audience was his grandson’s fifth-grade class. They didn’t show any interest until he mentioned Coca-Cola (one of Berkshire’s holding) and their secret formula, which enlivened class. I can relate to this scenario in my teachings, only I have to mention accounting scandals for attention.
Through the years, teaching has clarified Buffett’s thoughts. Charlie Munger calls this the orangutan effect: If you sit down with an orangutan and carefully explain to it one of your cherished ideas, you may leave behind a puzzled primate but will exit thinking more clearly.
Buffett’s advice to university students is that they seek employment in 1)the field and 2) the kind of people they would select if they did not need money. Following this advice may be economically challenging, but Buffett adds, “Even so, I urge students never to give up the quest, for when they find that sort of job, they will no longer be working.“
Buffett is not the first to say it or the last, but you have a greater chance of happiness and success when working in a field with people you respect and enjoy.
8. Berkshire’s Prosperity Is Due To America But Is The Reverse True?
Buffett acknowledges that Berkshire’s prosperity results from operating in America, whereas the country would have done splendidly in the years since 1995 without Berkshire.
That may be true though I think the country is in a better place for the contribution of both Warren Buffett and Charlie Munger. They worked together in 1942 in Buffett’s grandfather’s grocery store and remain partners and friends, today, 80 years later!.
It is hard to find two men who have devoted their entire lives to successfully managing one of the largest US companies, teaching young and experienced investors, and providing the moral standards that sometimes seem way in the past. This unique management team:
- Own up to their mistakes, of which they have had a few.
- Ask their shareholders to look long-term.
- Value conservative accounting over transparency rather than financial deception.
- Continue to run the company with grace and intelligence.
I learn a ton from Warren Buffett’s letters to Berkshire Hathaway’s shareholders. This letter was shorter and more mellow but contained several golden nuggets about Berkshire’s businesses, share buybacks, share values, investing, and business ethics.
The annual gathering will be from Friday, April 29, to Sunday, May 1.
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With a passion for investing and personal finance, I began The Cents of Money to help and teach others. My experience as an equity analyst, professor, and mom provide me with unique insights about money and wealth creation and a desire to share with you.