Warren Buffets Letter to Shareholders

My favourite quotes from the opening statements

• yes we make mistakes, each case being capital allocation going wrong which we view as partial ownership of companies or acquisition of them.
• “praise by name, criticize by category.” - Tom Murphy
• Cardinal sin is delaying the correction of mistakes or what Charlie Munger calls “thumb-sucking”
• “Mistakes fade away, winners can forever blossom”

Berkshire Performance

• 53% of 189 operating businesses reported a decline in earnings however as a whole the Company did better than was expected by Warren.
  • Aided by predictable large gain in short term Treasury Bills
• Insurance delivered major increases in earnings but they are cautious as that one big staggering insurance loss is always a possibility
• Railroad and Utility operations are next largest and showed improvement
  • Utility is now owned 100%
• Operating earnings $47.4 billion
  • This excludes capital gains or losses, realized or unrealized
• Warren notes “All calculations are after depreciation, amortization and income tax. EBITDA, a flawed favorite of Wall Street, is not for us.”
  • EBITA stands for “Earnings Before Interest and Amortization” and is a non-GAAP measure of operating profitability.
    • GAAP stands for generally accepted accounting principles

Sixty years ago Berkshire Hathaway was purchased for a price that looked cheap, however, it was on a business headed for extinction. It in fact had not paid a dime of income tax in 1965. Charlie did notice this mistake immediately but the decision to buy plagued them for decades. Fast forward to today Berkshire has shattered another record and paid a total of $26.8 billion to the IRS in 2024. Thats about 5% of all of corporate Americas contributions

• this isn’t counting taxes to 44 states and foreign countries
• in the aggregate since 1965 Berskhire has paid cash income tax payments of $101 billion

For me that is an absolutely incredible amount of money hard to fathom.

Breakdown of holdings

• Generally hold at least 80% of any businesses they control with most of them being 100% control
  • Composition is a few gems, many good but far from fabulous and a few laggards
    • Nothing owned is a major drag
• About a dozen large and highly profitable businesses are owned with a small percentage stake
  • Such as Apple, American Express, Coca-Cola and Moody’s
    • small fractions of these gems can be purchased Monday through Friday on Wall Street and, very occasionally, they sell at bargain prices.
• Note at Berkshire’s present size it is impossible to come and go on a dime. It can sometimes take a year or more to establish or divest the position
• Another note for minority positions management cannot easily be changed if they are making poor decisions
• Current commentary is that Berkshire has an extraordinary cash position but the great majority is still in equities.
  • “Berkshire will never prefer ownership of cash-equivalent assets over the ownership of good businesses, whether controlled or only partially owned.”

Warren states his familiar gratitude for the success of America and how Berkshire wouldn’t have survived without American capitalism but America could have survived without Berkshire.

• In a minor way all Berkshire shareholders have participated in the American miracle by foregoing dividends.
• I will say based on the taxes paid, noted in the previous section, Berkshire contributes a fair amount to the USA.

Property-Casualty Insurance

“P/C insurance continues to be Berkshire’s core business. The industry follows a financial model that is rare – very rare – among giant businesses.”

• unlike most businesses in P/C insurance the payment is received upfront and the cost to the business is uncovered much later sometimes even decades later.
  • “We are still making substantial payments on asbestos exposures that occurred 50 or more years ago”

While some lines of insurance have a shorter turn-around the long lines can lead to executive and shareholder bliss while the company is going broke

• This is because of heavy investing of the float brings in a lot of money but when enough claims are filed it may turn out that the premiums were not high enough to cover.
  • “This accounting can be particularly dangerous if the CEO is an optimist or a crook.

Once again Warren praises Ajit’s running of the insurance side of the business. He notes that Ajit, Greg, himself and directors all have a large investment in Berkshire none of which is options or other forms of one sided compensation. They win and lose with the company.

The following is directly copied from the letter as it spoke to me and I want to keep it intact.

No private insurer has the willingness to take on the amount of risk that Berkshire can provide. At times, this advantage can be important. But we also need to shrink when prices are inadequate. We must never write inadequately-priced policies in order to stay in the game. That policy is corporate suicide.

Investments in Japan

Berkshire began purchasing shares in five Japanese companies 6 years ago. They all very successfully operate similarly to Berkshire. Alphabetically the five are ITOCHU, Marubeni, Mitsubishi, Mitsui and Sumitomo.

• They increase dividends when it makes sense
• They repurchase their stock when it is undervalued
• Top managers are (in my words) less greedy with compensation than their US counter parts.
• Berkshire agreed to keep ownership around 10% at most. This could change in the future

Wrap Up

The remainder of the article focusses on the annual Omaha gathering with some quips from Warren.

I hope you enjoyed my favourite pieces of the letter and I hope it makes you want to read the full thing found here:

• https://www.berkshirehathaway.com/letters/2024ltr.pdf

That’s all for this week folks, I hope you join me back here next week as I will be diving into my remaining single stocks and my plan for their future!

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