Synoptic analysis on 2023 Shareholders Letter by Warren Buffett

Synoptic analysis on 2023 Shareholders Letter by Warren Buffett

-????????? Dr. Kishore Nuthalapati

?Warren Buffett’s Berkshire Hathaway is the world’s largest investment company with 3 million plus shareholders. Buffett feels that their majority shareholders are almost lifetime shareholders. He likens them to those who save to purchase a farm or a house.

Every year on last Saturday of February or first Saturday of March, Berkshire publishes its Annual Report along with Buffett penned shareholder letter. The 2023 shareholder letter published on 24-2-24 is the first one from Warren Buffett without any inputs from his partner Charlie Munger who died in November 2023. More than the annual report and the financial statements within, the shareholder letter is read worldwide by more than 25 million including its 3 million shareholders. Analysing Buffett’s letters is a learning experience and therefore is the below synoptic presentation.

Wonderful business should be purchased at fair prices than purchasing fair businesses at wonderful prices. This advice of Charles Munger to Warren Buffett required the latter to forget the value investing approach taught by Ben Graham and in taking Berkshire into value creating investment business.

Buffett calls himself a general contractor who executed the construction as per the investment structure designed by Charlie as an architect. Buffett compares Berkshire with great buildings where architects receive deserving appreciation and remembered than who poured the concrete. Buffett claims that Berkshire is a great company and Charlie should be credited forever as its architect.

Buffett feels the proverbial net profit is impacted with frequent volatility in the capital gains or losses. Therefore, in addition to the regulatorily required numbers, Buffett prefers to present operating earnings which exclude unrealized capital gains or losses. At the same time, he admits that capital gains are an important component since investment amounts of investors and his are committed for value accretion.

Buffett has been investing for the past 82 years. Buffett prefers to invest in companies which can deploy additional capital at higher returns in the future. Buffett refers to a caution made in year 1863 by Hugh McCulloch, the first comptroller of the United States. It reads, never deal with a rascal under the expectation that you can prevent him from cheating you.

Buffett claims that with $561 billion GAAP recorded net worth, Berkshire is by far the largest GAAP net worth company in America, and it occupies 6% in the universe it operates. Berkshire has not issued shares after year 1996 and its net worth increased only with earnings. Globally Berkshire has no match in terms of higher net worth. The next in order companies with higher net worth include Alphabet, Apple, Microsoft, Amazon, Meta, Johnson & Johnson, Proctor & Gamble, Exxon Mobil, Visa, etc.

Buffett feels markets are exhibiting casino like behaviour implying more gambling is taking place. He also states that active stock market participants now are no better in emotional stability or in being taught than 80 years before.

Buffett praises America as a terrific country. Investors can invest and sit quietly without concerns on volatilities. Buffett opines that with its present mix of businesses, Berkshire should do better than average American corporation and would operate with materially less risk of permanent loss of capital.

He also opines that there are not many meaningful options for Berkshire to deploy capital outside the US. However, Berkshire made investments in UK, Canada, Germany, China, Australia, Japan, India, etc. Berkshire exited from Paytm in India in November 2023 at Rs. 877 per share after which the share price has marginally increased but has later dropped to Rs. 318. Berkshire booked a loss of about Rs. 500 crs in Paytm but by exiting in November 2023 it avoided a further loss of Rs. 600 crs. Berkshire made investments in Japan in 5 big conglomerates mostly funded by Yen denominated debt again mobilized within Japan. Berkshire earned a return of more than 60% on its investments.

Berkshire can handle financial disasters. This ability makes it an asset to the United States and helps extinguish the financial fire inadvertently conflagrated by many impulsive companies. Berkshire continues not to pay dividends and undertake share repurchases (buybacks) at its absolute discretion, and its debt repayments are negligible.

The numbers also deserve an incisive analysis. The operating earnings increased by 21% in year 2023 over 2022. The gross earnings from insurance increased by $8.5 billion but the total net operating earnings in year 2023 increased only by $6.5 billion due to 8.4% losses in other businesses. Thus, insurance earnings compensated losses of other businesses.

The compounded annual gain on investments in Berkshire from years 1965 to 2023 is 20% whereas for investments in S&P 500 is 10%. However, this 20% gain is presuming the investor stayed invested for 58 years. The numbers are different for other investment periods. For investment in year 2000 until year 2023 which is recent 23 years period, the return in Berkshire is 8.57% whereas the comparable return for S&P 500 is 6.89%. For the recent 20 years period, it is 7.63% vs 7.58%; for the recent 15 years period it is 4.63% vs 5.58%; for the recent 10 years period it is 4.96% vs 5.08%; and for the very recent 5 years period, it is -0.84% vs -0.08%. This reveals in the past 20 years, Berkshire has been consistently trailing S&P 500.

Berkshire may regain its alpha as observable from its stock prices in February 2024. BRK.A touched all time high of $632,820 and is now trading at $628,930 (Rs. 5.22 crores approximately).

As at the end of FY 2023, Berkshire has about $167.6 billion cash and has the capability and flexibility to invest in available good picks. The 93 years old Warren Buffett claims in his letter that ‘Berkshire is built to last’.

The company is structured to be solely run by the team from some point in the future by continuing the legacy of Charlie Munger and Warren Buffett. Therefore, investors do believe that Berkshire is built to last.

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Disclaimer: Dr. Kishore Nuthalapati is an Economist and is the CFO of BEKEM Infra Projects Pvt Ltd, Hyderabad, India. Views are his personal and do not reflect those of any of the organizations he is or was associated with.

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