Warren Buffett's annual letter to Berkshire Hathaway (BRK-A, BRK-B) shareholders published Saturday morning marked the first missive sent to his investors since his longtime right-hand man, Charlie Munger, died last November at 99 years old.
To begin his letter to Berkshire shareholders, Buffett reminded readers of the role Munger played in creating what is now the country's largest conglomerate. A conglomerate, Buffett wrote Saturday, that has "by far...the largest GAAP net worth recorded by any American business."
"In reality, Charlie was the 'architect' of the present Berkshire, and I acted as the 'general contractor' to carry out the day-by-day construction of his vision," Buffett wrote.
"Charlie never sought to take credit for his role as creator but instead let me take the bows and receive the accolades. In a way his relationship with me was part older brother, part loving father. Even when he knew he was right, he gave me the reins, and when I blundered he never — never — reminded me of my mistake."
"In the physical world, great buildings are linked to their architect while those who had poured the concrete or installed the windows are soon forgotten," Buffett wrote.
"Berkshire has become a great company. Though I have long been in charge of the construction crew; Charlie should forever be credited with being the architect."
'I made a dumb decision'
Buffett and Munger both grew up in Omaha, where Berkshire is still headquartered. The two, however, didn't meet until 1959, when Buffett was 29 and Munger 35.
A lawyer by trade and a founding partner at the law firm Munger, Tolles, & Olson which bears his name, Munger was named vice chairman at Berkshire Hathaway in the late '70s.
But Munger and Buffett's investing relationship began long before this formal engagement, with Buffett writing Saturday it was Munger who told him in 1962, "that I had made a dumb decision in buying control of Berkshire."
At the time, Berkshire Hathaway was a struggling textile manufacturer in New England. Textile operations later ended, but the Berkshire Hathaway of today still bears the company's name.
Buffett wrote Saturday that, "Charlie, in 1965, promptly advised me: 'Warren, forget about ever buying another company like Berkshire. But now that you control Berkshire, add to it wonderful businesses purchased at fair prices and give up buying fair businesses at wonderful prices. In other words, abandon everything you learned from your hero, Ben Graham. It works but only when practiced at small scale.' With much back-sliding I subsequently followed his instructions."
Elsewhere in his letter to shareholders, Buffett wrote, "Our goal at Berkshire is simple: We want to own either all or a portion of businesses that enjoy good economics that are fundamental and enduring."
But Buffett noted the advice from Munger offered nearly 60 years ago to only buy "wonderful businesses purchased at fair prices" means the days Buffett and Berkshire Hathaway had plenty of investment opportunities to choose from are "long behind us."
"This combination of the two necessities I've described for acquiring businesses has for long been our goal in purchases and, for a while, we had an abundance of candidates to evaluate," Buffett wrote.
"If I missed one — and I missed plenty — another always came along. Those days are long behind us; size did us in, though increased competition for purchases was also a factor."
Berkshire purchased insurance company Alleghany for $11.6 billion in 2022 and took full control of rest stop operator Pilot earlier this year. Prior to these deals, the company hadn't made a sizable acquisition since its 2015 purchase of Precision Castparts for $37 billion.
"There remain only a handful of companies in this country capable of truly moving the needle at Berkshire, and they have been endlessly picked over by us and by others," Buffett continued.
"Some we can value; some we can't. And, if we can, they have to be attractively priced. Outside the U.S., there are essentially no candidates that are meaningful options for capital deployment at Berkshire. All in all, we have no possibility of eye-popping performance."
A 'severe' disappointment
Buffett also touched on the struggles at Berkshire's railroad and utilities businesses in 2023, with the latter serving as a "severe earnings disappointment last year."
In Buffett's view, a shifting regulatory outlook in some states has "broken" a model that relied on private investment backed by what Buffett called a "fixed-but-satisfactory-return" for these operators. Agreements were made on a state-by-state basis.
"Whatever the case at Berkshire, the final result for the utility industry may be ominous: Certain utilities might no longer attract the savings of American citizens and will be forced to adopt the public-power model," Buffett wrote. "Nebraska made this choice in the 1930s and there are many public-power operations throughout the country. Eventually, voters, taxpayers and users will decide which model they prefer.
"When the dust settles, America’s power needs and the 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 is built to last'
As he does most years, Buffett also took extensive time in this year's letter to write about his overarching investment philosophy and how it impacts the current iteration of Berkshire Hathaway.
For aspiring investors looking to Buffett for insights on how to manage their own portfolios, these passages are the main draw.
The modern Berkshire Hathaway, in Buffett's view, is built to both protect against and take advantage of the inevitable seizures and panics that have, and will again, gripped markets.
"Indeed, markets can — and will — unpredictably seize up or even vanish as they did for four months in 1914 and for a few days in 2001," Buffett wrote. "If you believe that American investors are now more stable than in the past, think back to September 2008. Speed of communication and the wonders of technology facilitate instant worldwide paralysis, and we have come a long way since smoke signals. Such instant panics won't happen often — but they will happen."
In turn, Berkshire holds a pile of cash and highly-liquid Treasury bills that Buffett called "far in excess of what conventional wisdom deems necessary."
Berkshire also does not pay dividends — a preordained cash outlay for companies — and makes no commitment on the size of any future stock buybacks. Buffett runs Berkshire Hathaway in a manner that keeps cash on hand for the sake of keeping cash on hand, not for some planned future deployment.
"During the 2008 panic, Berkshire generated cash from operations and did not rely in any manner on commercial paper, bank lines or debt markets," Buffett wrote. "We did not predict the time of an economic paralysis but we were always prepared for one.
"Extreme fiscal conservatism is a corporate pledge we make to those who have joined us in ownership of Berkshire."
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