Some Thoughts on the Berkshire Hathaway Letter (2022)
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Warren Buffett is a man of few words.
Last Saturday, Buffett released the annual shareholder letter for Berkshire Hathaway (NYSE: BRK.B), which contained over 4400 words.
Investors eagerly read the Berkshire shareholder letters to glean investment insights from Buffett, one of the world's best investors.
This year's shareholder letter didn't disappoint!
Buffett discussed many topics, including their investment process, the importance of dividends to their investment portfolio, the company's portfolio of businesses and investments, and his thoughts on share buybacks and paying taxes.
Let me hit a few highlights:
- The world is full of foolish gamblers, and they will not do as well as the patient investor.
- Patience can be learned. Having a long attention span and the ability to concentrate on one thing for a long time is a huge advantage.
- Ben Graham said, "Day to day, the stock market is a voting machine; in the long term it's a weighing machine." If you keep making something more valuable, then some wise person is going to notice it and start buying.
- You don't, however, need to own a lot of things in order to get rich.
- You have to keep learning if you want to become a great investor. When the world changes, you must change. (emphasis mine)
1. Berkshire invests in businesses, not in stocks
According to Buffett, the companies Berkshire invests in must have "...long-lasting favorable economic characteristics and trustworthy managers."
He means that long-lasting favorable economic characteristics have a "moat." A moat is a competitive advantage(s) a firm has over other companies that allows the business to protect its market share and profitability.
Good people are needed to run firms with a moat to remain profitable.
The way Buffett identifies good managers is by how they treat their shareholders. Looking at a manager's accomplishments and their allocation of shareholder capital are hallmarks of good stewardship, according to Buffett.
In sum, a good business run by great people is the hallmark of Buffett-like investing.
2. Dividends matter to total returns at Berkshire
Using examples of two companies with moats from Berkshire's stock portfolio - American Express & Coca-Cola - Buffett explained how cash dividends paid by both firms helped grow the value of their holdings over time.
The lesson is that investors can use cash dividends to buy more shares of great companies with moats that will increase in value over time.
3. Berkshire is a conglomerate of businesses and stocks
And that's just fine with Buffett!
Berkshire owns many businesses, from See's Candies to Geico, one of the nation's largest property-casualty insurers.
Berkshire Hathaway's insurance businesses remained a vital driver of the company's growth in 2022, benefitting from its recent purchase of Alleghany, a property-casualty insurer.
As its insurance operations grew its float in 2022 by over 10% to $164 billion, Berkshire used that money to buy stocks of great companies for its equity portfolio.
The results of these investments from its float were a positive return on investment for Berkshire in 2022.
4. Repurchasing stock isn't evil
Buffett explains that stock repurchases are a good way of returning capital to shareholders.
Repurchasing stocks should only be done when they are made at value accretive prices.
What Buffett means by this is that a company's stock price should be trading below its intrinsic value.
He argues that "value-accretive repurchases" are a benefit, not a harm, to all shareholders and not a select few.
Buffett's idea here is to serve notice that legislation to tax stock buybacks won't stop good companies from making those repurchases when they're value-accretive to shareholders.
5. Paying taxes isn't something to avoid
Berkshire paid over $32 billion in taxes for the last ten years ending in 2021. Big companies such as AIG, AT&T, and Amazon have had at least a year or more where they paid no taxes.
Buffett, in his letter, offered this tidbit: If 1,000 individuals paid 1/10th of 1% of the $32 trillion in debt owed by the federal government, no one would ever have to pay taxes again.
Let the sink in for a minute!
The Berkshire shareholder letter is a delight to read for the insights Buffett shares with his investors in Berkshire Hathaway.
Buffett's note wouldn't be complete without words of wisdom from his partner, Charlie Munger.
Here are a few of Munger's gems from the shareholder letter:
Thanks for reading!