Since the first letter to shareholders in 1957, communication between the "stock god" Buffett and investors has become a tradition that has lasted for more than 60 years. In 2023, Buffett's partner Charlie Munger passed away, and Berkshire Hathaway did not outperform the S&P 500 index, but still achieved an annual market value return of 15.8%.
Just now, Buffett sent a letter to shareholders! What will Buffett say in his letter this year?
Munger is Berkshire's "designer"
At the beginning of his 2023 letter to shareholders, Buffett paid special tribute to his late partner Charlie Munger.
Buffett referred to Munger as Berkshire's "designer" and himself as the "general contractor". He said, "Charlie never tried to fight for honor for him as a creator, but instead allowed me to receive all the applause and praise. To some extent, his relationship with me is both brother and father. Even if he knows he's right, he gives me control. Even if I make a mistake, he never blames me in return."
"In the real world, people often associate great architecture with architects, and those who pour concrete or install windows are quickly forgotten. Berkshire has become a great company, and I have always been responsible for architecture, while Charlie will always be Berkshire's designer."
No interest in acquiring Western oil companies
Looking back at stock market investments in 2023, Buffett has consistently mentioned the two major "good intentions" of Coca Cola and American Express. He said in the letter, "In 2023, we did not buy or sell stocks of American Express or Coca Cola, but these two companies once again rewarded us with 'inaction' through their profits and dividends."
When summarizing the experiences brought by these two stocks, Buffett said, "When you find a truly outstanding company, persevere and patience will pay off. An excellent company can offset many mediocre decisions."
In addition, Buffett also talked about two "investments that are expected to be held indefinitely" - Western Oil and the top five Japanese companies. As of the end of 2023, Berkshire owns 27.8% of Western Oil's common stock. "We particularly appreciate the vast oil and gas resources owned by Western oil companies in the United States, as well as their leading position in carbon capture initiatives."
However, he emphasized that despite being very fond of its current holdings, Berkshire still has no interest in acquiring or managing Western oil companies.
Continue to hold five large Japanese companies
The investment situation in the Japanese stock market occupies a large amount of space in the letter. Berkshire's investment in the Japanese stock market began on July 4, 2019 and currently continues to hold positions in five large Japanese companies, namely Itochu, Marubeni, Mitsubishi, Mitsui, and Sumitomo.
"After communicating with their management, we increased our holdings in all five companies last year. Berkshire now holds approximately 9% of each of these five companies. Berkshire has also promised them that its shareholding will not exceed 9.9% in the future. Buffett believes that these five companies are very similar to Berkshire's own business model and have a high degree of diversification.". At the same time, the policies of these companies are very shareholder friendly.
He said, "Since we started buying Japanese stocks, each of these five companies has reduced their outstanding shares at attractive prices. At the same time, compared to the typical situation in the United States, the management of these five companies is far less aggressive about their salaries."
In the letter, Buffett also revealed that considering Berkshire's current size, establishing a position through public market purchases requires considerable patience. "This process is like spinning a battleship. This is a significant disadvantage that we did not face in Berkshire's early days."
He stated that currently Berkshire's total investment cost in these five companies is 1.6 trillion yen, and their year-end market value is 2.9 trillion yen. The Japanese yen has depreciated in recent years, with unrealized profits at the end of 2023 calculated in US dollars at 8 billion US dollars. However, due to holding a large amount of Japanese bonds, the depreciation of the yen also resulted in Berkshire earning $1.9 billion at the end of the year.
The profitability of railway and energy businesses has failed
The "Stock God" admits that he will also make mistakes: at Berkshire's annual conference in May 2023, the "Stock God" predicted that Berkshire's insurance, railway, and energy businesses would have good performance. However, in reality, apart from the strong performance of the insurance business, both the railway and energy businesses saw a year-on-year decline in revenue for the entire year of 2023.
Buffett explained, "Last year, BNSF Railroad's profits declined beyond my expectations due to a decrease in revenue. Although fuel costs decreased, the wage increase in the United States far exceeded the inflation target. Even though BNSF Railroad transported a lot of goods and had higher capital expenditures than any of the other five major railway companies in North America, its profit margin was declining."