Highlights From Warren Buffett's 2022 Letter
Many were wondering if Warren Buffett would address his recent unwind of Berkshire's $4+ billion stake in Taiwan Semi - a brand new position that had catapulted into the investing conglomerate's Top 10 holdings as of Sept 30 '22 only to see it slashed by 86% just one quarter later...
... and this morning, when Buffett filed the latest Berkshire annual letter, they got the answer: an unequivocal no.
So what did Buffett talk about in his latest and - at just barely 9 pages - shortest ever letter since Berkshire launched the practice of recapping his investment principles, activities and results some 46 years ago in 1977? Nothing that he hasn't addressed on countless previous occasions. Below we summarize some of the key highlights.
First, here is a snapshot of Berkshire Q4 financials:
Q4 profit fell, reflecting lower gains from investments and foreign currency exchange losses as the U.S. dollar lost value. Quarterly net income fell 54% to $18.16 billion, or $12,412 per Class A share, from $39.65 billion, or $26,690 per share, a year earlier.
Of course, as is well-known, Buffett despises GAAP earnings and instead urges investors to look at operating earnings instead which strip away the quarterly fluctuations of the conglomerate's public stock investments (i.e. unrealized gains/losses).
The GAAP earnings are 100% misleading when viewed quarterly or even annually. Capital gains, to be sure, have been hugely important to Berkshire over past decades, and we expect them to be meaningfully positive in future decades. But their quarter-by-quarter gyrations, regularly and mindlessly headlined by media, totally misinform investors.
For the 4th quarter, Berkshire generated $6.71BN in operating profis, down 8% from $7.29BN a year ago. Earnings fell as its rail road business and insurance operations saw softer results amid higher prices for materials and labor. That, however, did not dent the billionaire investor’s belief in the resiliency of the US economy, as he touted Berkshire’s record operating earnings of $30.8 billion for the year.
Berkshire repurchased $2.6 billion of its own stock in the quarter, the most since Q1, and boosting full-year buybacks to $7.9 billion. Buffett also noted that some of Berkshire's biggest investments such as Apple and American Express, also engaged in sizable stock buybacks.
Despite the buybacks, the company's cash hoard jumped by $20 billion in Q4 to $128.6 billion, the 9th largest cash stockpile in the company's history.
The cash mountain was so large that interest income alone in 2022 soared by 186% to $1.1 billion "primarily due to significant increases in interest income due to interest rate increases during the year."
Financials aside, here are some of the notable highlights from Buffett's annual letter to investors.
In 58 years of Berkshire management, most of my capital-allocation decisions have been no better than so-so. In some cases, also, bad moves by me have been rescued by very large doses of luck. (Remember our escapes from near-disasters at USAir and Salomon? I certainly do.)... The lesson for investors: The weeds wither away in significance as the flowers bloom. Over time, it takes just a few winners to work wonders. And, yes, it helps to start early and live into your 90s as well.
On Berkshire's float:
Aided by Alleghany [a purchase made in late 2022], our insurance float increased during 2022 from $147 billion to $164 billion. With disciplined underwriting, these funds have a decent chance of being cost-free over time. Since purchasing our first property-casualty insurer in 1967, Berkshire’s float has increased 8,000-fold through acquisitions, operations and innovations. Though not recognized in our financial statements, this float has been an extraordinary asset for Berkshire.
On stock buybacks... and a rare jab at Joe Biden (or rather, Joe Biden's handlers) from Buffett, a consummate, Hillary Clinton-supporting Democrat:
A very minor gain in per-share intrinsic value took place in 2022 through Berkshire share repurchases as well as similar moves at Apple and American Express, both significant investees of ours. At Berkshire, we directly increased your interest in our unique collection of businesses by repurchasing 1.2% of the company’s outstanding shares. At Apple and Amex, repurchases increased Berkshire’s ownership a bit without any cost to us.
Gains from value-accretive repurchases, it should be emphasized, benefit all owners – in every respect. Imagine, if you will, three fully-informed shareholders of a local auto dealership, one of whom manages the business. Imagine, further, that one of the passive owners wishes to sell his interest back to the company at a price attractive to the two continuing shareholders. When completed, has this transaction harmed anyone? Is the manager somehow favored over the continuing passive owners? Has the public been hurt? When you are told that all repurchases are harmful to shareholders or to the country, or particularly beneficial to CEOs, you are listening to either an economic illiterate or a silver-tongued demagogue (characters that are not mutually exclusive).
On corporate profits:
In aggregate, the S&P500 earned $1.8 trillion in 2021. I don’t yet have the final results for 2022. Using, therefore, the 2021 figures, only 128 of the 500 (including Berkshire itself) earned $3 billion or more. Indeed, 23 lost money. At year-end 2022, Berkshire was the largest owner of eight of these giants: American Express, Bank of America, Chevron, Coca-Cola, HP Inc., Moody’s, Occidental Petroleum and Paramount Global.
On beating expectations and the "deep desire to deceive":
Even the operating earnings figure that we favor can easily be manipulated by managers who wish to do so. Such tampering is often thought of as sophisticated by CEOs, directors and their advisors. Reporters and analysts embrace its existence as well. Beating “expectations” is heralded as a managerial triumph. That activity is disgusting. It requires no talent to manipulate numbers: Only a deep desire to deceive is required. “Bold imaginative accounting,” as a CEO once described his deception to me, has become one of the shames of capitalism.
On cash as preparation for the future:
As for the future, Berkshire will always hold a boatload of cash and U.S. Treasury bills along with a wide array of businesses. We will also avoid behavior that could result in any uncomfortable cash needs at inconvenient times, including financial panics and unprecedented insurance losses. Our CEO will always be the Chief Risk Officer – a task it is irresponsible to delegate. Additionally, our future CEOs will have a significant part of their net worth in Berkshire shares, bought with their own money.
On the difference between "efficient" public and private markets:
One advantage of our publicly-traded segment is that – episodically – it becomes easy to buy pieces of wonderful businesses at wonderful prices. It’s crucial to understand that stocks often trade at truly foolish prices, both high and low. “Efficient” markets exist only in textbooks. In truth, marketable stocks and bonds are baffling, their behavior usually understandable only in retrospect.... Controlled businesses are a different breed. They sometimes command ridiculously higher prices than justified but are almost never available at bargain valuations. Unless under duress, the owner of a controlled business gives no thought to selling at a panic-type valuation.
During the decade ending in 2021, the United States Treasury received about $32.3 trillion in taxes while it spent $43.9 trillion.... Huge and entrenched fiscal deficits have consequences. The $32 trillion of revenue was garnered by the Treasury through individual income taxes (48%), social security and related receipts (34 1⁄2%), corporate income tax payments (8 1⁄2%) and a wide variety of lesser levies. Berkshire’s contribution via the corporate income tax was $32 billion during the decade, almost exactly a tenth of 1% of all money that the Treasury collected. And that means – brace yourself – had there been roughly 1,000 taxpayers in the U.S.matching Berkshire’s payments, no other businesses nor any of the country’s 131 million households would have needed to pay any taxes to the federal government. Not a dime.
At Berkshire we hope and expect to pay much more in taxes during the next decade. We owe the country no less: America’s dynamism has made a huge contribution to whatever success Berkshire has achieved – a contribution Berkshire will always need. We count on the American Tailwind and, though it has been becalmed from time to time, its propelling force has always returned.
On Buffett's traditional optimism about the US:
I have been investing for 80 years – more than one-third of our country’s lifetime. Despite our citizens’ penchant – almost enthusiasm – for self-criticism and self-doubt, I have yet to see a time when it made sense to make a long-term bet against America. And I doubt very much that any reader of this letter will have a different experience in the future.
He ends with several Charlie Munger (who will be 100-years-old soon) aphorisms.
- The world is full of foolish gamblers, and they will not do as well as the patient investor.
- If you don’t see the world the way it is, it’s like judging something through a distorted lens.
- All I want to know is where I’m going to die, so I’ll never go there. And a related thought: Early on, write your desired obituary – and then behave accordingly.
- If you don’t care whether you are rational or not, you won’t work on it. Then you will stay irrational and get lousy results
- 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.
- You can learn a lot from dead people. Read of the deceased you admire and detest.
- Don’t bail away in a sinking boat if you can swim to one that is seaworthy.
- A great company keeps working after you are not; a mediocre company won’t do that.
- Warren and I don’t focus on the froth of the market. We seek out good long-term investments and stubbornly hold them for a long time.
- 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.
- There is no such thing as a 100% sure thing when investing. Thus, the use of leverage is dangerous. A string of wonderful numbers times zero will always equal zero. Don’t count on getting rich twice.
- 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.
- Warren and I hated railroad stocks for decades, but the world changed and finally the country had four huge railroads of vital importance to the American economy. We were slow to recognize the change, but better late than never.
- Finally, I will add two short sentences by Charlie that have been his decision-clinchers for decades: “Warren, think more about it. You’re smart and I’m right.”
Full letter below (pdf link).