Key Valuable Takeaways From Warren Buffett’s 2024 Shareholder Letter

Billionaire Warren Buffett’s iconic annual 2024 letter to Berkshire Hathway shareholders is a must-read for investors and those who aspire to become more knowledgeable about the economy, investing, and how to run a business.

As one of the greatest investors with a long and enviable track record, Buffett’s influence on investors and business leaders is monumental. The financial world pays heed to the golden nuggets abundantly found in his wise comments. He has a renowned allegiance to his shareholders and vice-versa, which is valuable in troubled times.

I have read, analyzed, and written about his letters, sharing them with readers and my finance students for years. The letter is accessible, informative, and enriched with charm, wit, and wisdom. Buffett’s gems become legendary quotes filled with Buffett’s wit and wisdom accumulated from decades of success and a clever observer of life at age 93. Here is the latest Buffett letter.

Writing to Bertie, Perennial Investor

Buffett enjoys visualizing his shareholders, many of whom have owned shares for their lifetime and passed on to heirs. Using his younger sister, Roberta Buffett Elliot, known as Bertie, as the epitome of his favorite shareholder, who is intelligent and wise but challenges his thinking. He writes honestly about what investors, like myself, want to know.

Charlie Munger, “The Architect of Berkshire Hathaway”

This year’s 2024 letter is different, especially with Buffett’s friend and partner, Charlie Munger, passing in late 2023 at age 99.  Buffett has always praised Charlie for recognizing and correcting many of Warren’s mistakes. Charlie Munger joined Berkshire years after Buffett bought control of the country, which Munger called “a dumb mistake,” but then helped Buffett correct his error.

Munger’s advice to Buffett is legendary, “But now that you control Berkshire, add to it wonderful businesses at fair prices and give up buying fair businesses at wonderful prices.”

Munger was the “architect” of the present Berkshire to Buffett’s “general contractor,” still carrying out day-to-day decisions.

Berkshire’s  2023 Stock Performance

Berkshire’s shares were up a healthy 15.8% in 2023, slightly below the S&P 500’s growth of 26.3%, the latter dominated by the magnificent seven stocks that benefited from the AI and tech focus. However, on a compounded annual gain for 1965-2023, Berkshire shares grew 19.8%, towering over the market’s performance of 10.2%.

At this writing, the market capitalization of Berkshire Hathaway (BRK.B) is $905.6 billion, and it’s the 8th most valuable company globally. While it may be below Nvidia’s $1.942 trillion market valuation, the company has many gems in its businesses, investments, and management.

Berkshire’s Size, “Hard to Move The Needle”

Warren Buffett reflected on Berkshire having the most considerable GAAP net worth recorded by any American business, with a record operating income of $561 billion, helped by a strong stock market for its holdings, versus an estimated $9.5 trillion for the remaining 499 companies in the S&P 500.

Buffett said, “There remain only a handful of companies in this country capable of truly moving the needle at Berkshire.” Given its size, careful purchase considerations, and the lack of acquisition candidates in or out of the US, it may be difficult for Berkshire to have significant outperformance. “With that focus, and with our present mix of businesses, Berkshire should do a bit better than the average American corporation and, more important, should also operate with materially less risk of permanent loss of capital.”

Looking For Mispriced Businesses

Buffett pointed to historical times when fundamentally sound businesses may become strikingly mispriced. One recent example occurred when the September 2008 financial panic was exacerbated by technology that can facilitate instant panics. With its strong liquidity, Berkshire can better handle such market seizures to leverage large-scale opportunities.

As in the past, Berkshire can handle “financial disasters of a magnitude beyond any heretofore experienced, ” and “Berkshire’s goal will be to function as an asset to the country – just as it was in a very minor way in 2008-09 to extinguish the financial fire.”

He didn’t miss a chance at dishing out his criticism of Wall Street, saying,  “At such times, whatever foolishness can be marketed will be vigorously marketed-not by everyone but always someone.”  Then, the average person gets hurt, as “Money, he learns, has trumped morality.”

Maintaining a Strong Liquidity Position

“Extreme fiscal conservatism is a corporate pledge.” At the end of 2023, the company maintains a strong liquidity position according to its balance sheet, holding a total of $163.3 billion consisting of cash of $33.7 billion and T-bills of $129.619 billion. This liquid position is “far in excess of what conventional wisdom deems necessary.” They are always prepared for economic downturns or paralysis.

Berkshire’s Valuable Rules

• Net income may be a typical starting point in evaluating a business, but “worse than useless.” Operating earnings are far more helpful, and they should exclude unrealized capital gains or losses, which can be volatile day-to-day.
• Berkshire prefers earnings after interest costs, taxes, and substantial charges for depreciation and amortization. “EBITDA” is a banned measurement at Berkshire and is commonly used to value growth stocks.
• Berkshire does not pay dividends.
• Its share repurchases are 100% discretionary, meaning they are price-dependent, and the timing is right.
• Annual debt maturities are immaterial.

Insights Into Some of Berkshire’s Holdings

Berkshire highlighted the attributes of two of their longstanding holdings of 4% to 5% each of American Express and Coke and its 27.8% interest in Occidental Petroleum, which has vast oil and gas holdings and potential opportunities through its carbon-capture initiatives. While they can add to their position in Occidental, Berkshire has no interest in acquiring the company. Buffett reminded investors of the necessity of energy independence in the US, as American producers like Occidental play an essential role.

Buffett discussed its ownership of 9% of each of the five Japanese companies (Itochu, Marubeni, Mitsubishi, Mitsui, and Sumitomo) with shareholder-friendly policies. Berkshire will not purchase a stake over 9.9% of these companies, though he sees these investments leading to potential partnerships for Berkshire globally.

Insurance Performance Solid,  Concerns  In Non-Insurance Businesses

Regarding Berkshire’s controlled businesses, insurance performed well. However, there were disappointments in BNSF (extensive North American rail systems) and BHE (electric utilities and gas pipelines). Despite its high capital needs, Buffett seemed more optimistic about the railroad business’s future as a continued asset for Berkshire.

Buffett is concerned about the challenging regulatory climate and climate change (e.g., forest fires) impacting BHE’s costs. Sounding ominous, Buffett said,” America’s power needs and consequent capital expenditure will be staggering. I did not anticipate or even consider the adverse developments in regulatory returns and, along with Berkshire’s two partners at BHE, I made a costly mistake in not doing so.”

Berkshire’s Prosperity Due To America

Buffett acknowledges that Berkshire’s prosperity results from operating in America. Buffett wrote, “I can’t remember a period since March 11, 1942 – the date of my first stock purchase – that I have not had a majority of my net worth in equities, US-based equities. And so far, so good.” He recalls that the day he purchased his first stock, he was down $5 before school was let out, as the Dow Jones Industrial Average fell below 100. He wrote, “Soon, things turned around, and now that index hovers around 38,000 (Currently 39,131). America has been a terrific country for investors.”

In previous letters, Buffett has provided advice to prospective investors and company management:

• Own up to your mistakes, of which Buffett has admitted to a few.
• Shareholders should look long-term.
• Value conservative accounting rather than financial deception.
• Continue to run the company with grace and intelligence.

 

Warren Buffett will head the annual gathering on May 4, 2024. While Charlie Munger will be sorely missing, Greg Abel runs all non-insurance operations. He is expected to be the successor to Warren Buffett, Ajit Jain, Vice Chairman of the insurance operations, and his sister, Bertie.