Warren Buffett, the world's most famous investor, has always said that the biggest mistake of his career was buying Berkshire Hathaway, the company that eventually put him at the top. He let himself be carried away by his impulses and joined a textile company without much of a future. If he was able to put it back in order, it was thanks to the help of Charlie Munger, his partner, friend and loyal squire, who died at the end of November at the age of 99. This year's annual report from Berkshire Hathaway, released this Saturday, begins with a tribute to Munger, whom Buffett describes as the company's true architect, “architect” as he calls him. Now without his partner, Buffett expressed his commitment to Japanese corporations and Occidental Petroleum in his letter to shareholders. However, it still isn't finding many opportunities and has amassed a record $168 billion in cash and cash equivalents.
Buffett teaches his investing lessons in two ways: with words and with actions. Sometimes he sends messages, like when he despised them as useless in the middle of the cryptocurrency bubble. Other times, it's your quarterly or annual reports or your financial statements that send the signal: you take positions in this company, reduce them in this other… And sometimes both things coincide.
Berkshire Hathaway recently bet on a group of highly diversified Japanese conglomerates that are somewhat similar to Buffett's own company. Now he assures in his letter to shareholders that his bet is very long-term. Berkshire Hathaway has taken positions in Itochu, Marubeni, Mitsubishi, Mitsui and Sumitomo. “Last year we increased our stake in all five following Greg Abel [señalado por Buffett como su sucesor] and I traveled to Tokyo to speak to the managers,” he emphasizes in the letter.
“In some important respects, the five companies pursue shareholder-friendly policies that go well beyond those typically practiced in the United States,” he says. “Meanwhile, managers at the five companies have been much less aggressive with their own compensation than is typical in the United States. Also note that each of the five corporations only allocates about 1 to 3 of their profits for dividends. The large sums retained by the five are used both to develop their many businesses and, to a lesser extent, to buy back shares. Like Berkshire, the five companies are reluctant to issue shares,” he adds.
Berkshire now owns about 9% of all five companies and has committed not to exceed 9.9%. In a short period of time, the value of their yen investments in these companies increased by 81%, although the depreciation of the yen reduced the latent profit in dollars to 61%, about 8 billion.
Buffett is eager to make them long-term investments in Berkshire, bringing them in line with his historic investments in Coca-Cola and American Express. The company's other big bet, which it made a long-term commitment to in its letter to shareholders, is Occidental Petroleum.
“At the end of the year, Berkshire owned 27.8% of Occidental Petroleum's common stock and also has warrants that give us the option to significantly increase our stake at a fixed price over a period of five years,” Buffett states in his letter at. “Although we like our investment and the option, Berkshire has no interest in purchasing or managing Occidental. We particularly like the extensive oil and gas reserves in the United States and the company's leadership in carbon capture initiatives, although the economic viability of this technology has yet to be proven. Both activities are of great interest to our country,” he added.
“Under Vicki Hollub’s leadership, Occidental is doing the right thing for its land and its owners.” Nobody knows what oil prices will do in the next month, year or decade. But Vicki knows how to separate the oil from the rock, and that is a rare talent, valuable to her shareholders and to her country,” he explains, referring to shale oil, which is produced by hydraulic fragmentation and is very strong in Occidental is.
Profits skyrocketed
Berkshire Hathaway has reported that the company ended 2023 with a net profit of 96,223 million dollars (88,800 million euros at current exchange rates), compared to losses of 22,759 million in the previous year. These abrupt fluctuations are due to the fluctuation of the values in your portfolio and especially those of Apple, your main investment. Buffett does not want to place undue value on this number in terms of annual results, although he considers it important in that it reflects the performance of his portfolio.
Given the lack of attractive investment opportunities, the group built up a liquidity position of 168,000 million at the end of the year, surpassing the record of 157,000 million from the previous quarter. Most of this money was invested in US government bonds.
About 79% of the value of Berkshire's portfolio at year-end was concentrated in five companies: Apple ($174.3 billion); Bank of America ($34.8 billion); American Express ($28.4 billion); Coca-Cola ($23.6 billion) and Chevron Corporation ($18.8 billion). Combined with these and other holdings, the total cost of portfolio investments is $109,416 million and capital gains are $244,426 million.
The company emphasizes in its findings that accounting standards require these changes in value to be recognized in the income statement, even if it is a stable investment and reduces its value: “The amount of gains/losses on the investments in a given quarter is often irrelevant and provides net income (loss) per share figures that can be very misleading to investors with little or no knowledge of accounting standards,” he notes.
For this reason, the company prefers to focus on developing its business. Operating income improved 28% to $8,481 million in the fourth quarter. In the cumulative figure for 2023 it reaches 37,350 million dollars, 21% more than in 2022. Much of the improvement is due to the recovery of the insurance business, which suffered losses of 30 million dollars in 2022 due to the accumulation of catastrophes that has now contributed 5,428 million to the operating result. The investment insurance sector also improved its balance sheet significantly by 47.5% to 9,567 million. On the other hand, the operating results of electric and energy companies deteriorated (by 40% to $2,331 million) and railways (14% to $5,087 million).
Munger, the “architect” of Berkshire Hathaway
Warren Buffett chose to separate his letter to shareholders from his tribute to his partner and friend Charlie Munger. As a preface to the letter, Berkshire Hathaway's annual report includes a tribute page signed by Buffett himself. In it, he maintains his thesis that investing in Berkshire was his biggest mistake and that everything turned out well in the end thanks to his friend, whom he calls the company's “architect”.
“In reality, Charlie was the 'architect' of the current Berkshire, and I served as the 'general contractor', carrying out the day-to-day implementation of his vision. Charlie never tried to acknowledge his role as creator, but instead I went and wanted to accept the laurels and praise. In a way, his relationship with me was part big brother, part loving father. Even when he knew I was right, he gave me the reins. And when I made a mistake “He never told me. I remembered it,” Buffett writes.
“In the physical world, great buildings are tied to their architect, while those who poured the concrete or installed the windows are quickly forgotten. Berkshire has become a large company. Although I have been in charge of Construction's construction team for a long time, Charlie.” “The architect should always be the architect,” he concludes.
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