Warren Buffett’s letter to shareholders

Warren Buffett’s letter to shareholders

The typical CEO is around 50 years of age, and stays in the position for an average of five years.

Then there’s Warren Buffett. Buffett will turn 93 this August, and he’s held the top job at Berkshire Hathaway for over half a century. His business partner is Charlie Munger, a former lawyer who also served as a US Army officer in World War 2. Munger is 99 years of age.

Yes, Australia has a few older CEOs, like the outspoken and often controversial Gerry Harvey. A co-founder of Harvey Norman, Harvey has vowed never to retire, and says he’ll live to be 100. He’s currently 83. But Harvey Norman’s market capitalisation is less than $5 billion. Buffett and Munger are managing assets worth around one trillion dollars.

For perspective, Berkshire Hathaway’s market capitalisation is nearly half that of the entire Australian share market, or twice the size of Australia’s entire banking sector.

And if performance is a guide, Buffett and Munger don’t seem to have lost much ability with age.

In 2022, Berkshire Hathaway scratched out a return of 4.0 per cent. The S&P 500 – an index tracking the performance of 500 large US companies – lost 18.1 per cent.

Of course, it’s performance over the long haul that counts, and since 1965, Berkshire Hathaway has delivered a compound annual gain of 19.8 per cent. Over the same timeframe, the S&P 500 has returned a comparatively modest 9.9 per cent.

It’s those stellar performance numbers that have made Buffett an icon in the investing game. And it partly explains why his disciples number in the millions. Those disciples hang on to every word Buffett says (it helps that he usually has plenty to say, on any topic.) And no more document is more keenly awaited by Buffett fans than his annual letter to shareholders.

Buffett’s letters (the entire collection of which is available on the web) usually go well beyond a simple analysis of Berkshire Hathaway’s performance. He usually includes sage observations on the economy, together with some stories and anecdotes drawn from a lifetime of investing. In his 2023 letter released in late February, Buffett identifies the four key ingredients to Berkshire Hathaway’s enduring success:

Continuous savings

“We believe Berkshire’s individual holders largely to be of the once-a-saver, always-a-saver variety. Though these people live well, they eventually dispense most of their funds to philanthropic organizations. These, in turn, redistribute the funds by expenditures intended to improve the lives of a great many people who are unrelated to the original benefactor. Sometimes, the results have been spectacular.”

Buffett’s endorsement of the power of regular saving goes behind investors – he’s an advocate for businesses that save through retained earnings rather than paying dividends (Berkshire Hathaway has only ever paid one dividend, in 1967). He believes paying dividends can rob a business of the power to provide compound growth.

The power of compounding

Compounding is the process of reinvesting an asset’s earnings to generate additional earnings over time. Eventually, the exponential nature of compound earnings (because those reinvested earnings are producing their own earnings) can produce spectacular results. As Buffett admits, “it helps when you’ve been investing for more than 80 years”.

Avoidance of major mistakes

Buffett cheerfully admits he’s made plenty of errors, but he got his biggest mistake out of the way early in his career.

“In 1965, Berkshire was a one-trick pony, the owner of a venerable – but doomed– New England textile operation. With that business on a death march, Berkshire needed an immediate fresh start. Looking back, I was slow to recognize the severity of its problems. And then came a stroke of good luck: National Indemnity became available in 1967, and we shifted our resources toward insurance and other non-textile operations.”

He also says not every investment will be a winner.

“Our satisfactory results have been the product of about a dozen truly good decisions – that would be about one every five years.”

The American tailwind

Berkshire Hathaway owns around 50 stocks, the largest being a $200 billion stake in Apple. Just a handful of those companies are headquartered outside the US. The reason? Buffett is, and has always been a strong backer of the US economy. He believes in he calls ‘the American tailwind’ – the power of the US capitalist economy to create value over the longer term.

While Berkshire Hathaway’s share performed well in comparison to the S&P 500 in 2022, that hasn’t always been the case – the company has endured difficult times in the past, and will do again.

As for the future of Berkshire Hathaway when both Buffett and Munger eventually depart, the 99-year-old Vice Chairman had this to say: “A great company keeps working after you are not; a mediocre company won’t do that.”