Unlike those of most other CEOs, Warren Buffett’s annual letter to shareholders is not just a corporate update. It’s a major event, one that Wall Street anticipates, discusses and analyzes in great detail. This year’s letter was no exception. However, unlike those written in years past, there were several surprises.
The simplest one is that it is much shorter than usual – only 4,455 words. More important were the review of his investment approach and how that has performed over time. Many investors, both novice and veterans, hope to learn from his insights and emulate his actions.
“In 58 years of Berkshire management, most of my capital allocation decisions have been no better than so-so,” Buffett writes. “In some cases, bad moves by me have been rescued by very large doses of luck…
“Our satisfactory results have been the product of about a dozen truly good decisions –– that would be about one every five years –– and a sometimes-forgotten advantage that favors long-term investors such as Berkshire,” he added.
Buffett defended the strategy of corporate stock buybacks, which has been an important ingredient in the bull market and one that he said benefits shareholders. He was particularly critical of the new 1% tax on share buybacks and had sharp criticism of President Biden’s plan for a 4% tax on them.
“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 (characteristics that are not mutually exclusive),” Buffett wrote.
In 2022, Berkshire Hathaway repurchased 1.2% of its outstanding shares, a move Buffett applauded as it “directly increased (shareholders’) interest in our unique collection of businesses.”
Dividends Make Sense
Although Berkshire sometimes goes on buying sprees, investing many billions at a time, it retains a large enough cash position to cover “uncomfortable cash needs at inconvenient times,” including “financial panics and unprecedented insurance losses” and will continue doing this (the company now hoards $88 billion).
Further in the letter, Buffett also discussed an approach that has worked to Berkshire’s benefit and one that ordinary investors might want to consider as well and that’s investing in dividend-paying stocks. Although these may not have the excitement of companies developing cutting-edge technologies or exploring for new deposits of resources, their dividends can add up steadily and be very gratifying.
“The lesson for investors: The weeds wither away in significance as the flowers bloom,” Buffett wrote. “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.”
He offered several examples to make this point. In 1994, Berkshire completed purchasing the 400 million shares of Coca-Cola it now owns. The cash dividend from Coke in 1994 was $75 million. However, by 2022, the dividend had increased to $704 million and “growth occurred every year… All Charlie (Munger, Vice Chairman of Berkshire who Buffett called his right-hand man) and I were required to do was cash Coke’s quarterly dividend checks. We expect that those checks are highly likely to grow.”
Berkshire had comparable results from its investment in American Express. Its holdings in AMEX, too, were completed about 30 years ago, and both account for roughly 5% of Berkshire’s net worth; in 2022 these companies generated combined dividends of more than $1 billion.
Moreover, the shares in both also appreciated very sharply. Berkshire invested some $1.3 billion in each; at year’s end 2022, Berkshire’s position in Coke was worth $25 billion, and its holdings in AMEX $22 billion - even today a nice piece of change.
In late February, when the Letter to Shareholders was released, Berkshire’s Top 5 holdings were: Apple, Bank of America, Chevron, Coca-Cola, and American Express. Occidental Petroleum, which he has been buying heavily in recent months, is in seventh place.
Individuals as influential as Buffett often don’t speak in plain English - that would make their thoughts too obvious and could create an unwanted impact on stocks and/or markets. Instead, they talk in a roundabout way, hinting at the point they want to make without being direct.
Some market observers believe that’s exactly what Buffett was doing when he warned about the government’s growing deficit; “Huge and entrenched fiscal deficits have consequences,” he stated.
This message came on the heels of two disappointing economic news stories. The first is that the PCE, a wide followed measure of inflation, jumped in December by the biggest monthly increase since last June. The other is one related to that: The Fed’s repeated raises in interest rates have hardly slowed rising inflation.
Buffett also appeared to predict something more ominous, namely that “financial panics or severe recessions” were on the way and would unleash tough economic times.
“Our job is to manage Berkshire’s operations and finances in a manner that will achieve an acceptable result over time, and that will preserve the company’s unmatched staying power when financial panics or severe worldwide recessions occur,” he wrote.
“Berkshire also offers some modest protection from runaway inflation, but this attribute is far from perfect,” he added, suggesting everyone would be impacted by the forecasted recession; other experts also predicted a recession and said it would begin this year.
Despite these serious potential challenges, Buffett tried to reassure investors, adding that he’s confident that the US economy would ultimately rebound.
Still, he closed the Letter with yet another warning, namely that “in the upcoming tough times some managers might try to mask poor performance by “manipulating” numbers, a tactic he called “disgusting” since it requires no talent and only a deep desire to deceive...This deception is one of the shames of capitalism.”
One hopes that the gloomy forecasts Buffett has alluded to will not materialize, because at the very least recessions always cause pain. Also, these days many people, companies, and even governments are already on shaky ground because of their huge debt and high inflation, and because no one can predict the ramifications of an economic crisis.
These subtle and not so subtle remarks need to be considered carefully because the last thing one can call him is an alarmist and because he’s as Main Street as they come. As they say, let’s hope for the best and prepare for the worst.
Sources: www.dailymail.co.uk; www.foxnews.com; www.marketwatch.com; www.yahoofinance.com