Introduction: Buffett's ten thousand word long letter mainly consists of four parts:
① Introduce Berkshire's investment principles, business philosophy, and goals to shareholders;
② Referring to American Express and Coca Cola, it is worth patiently holding on to good companies, and further introducing the other two investments that will be held indefinitely - Western Oil and Japanese company stocks;
③ Introduce the performance of Berkshire's multiple main businesses: unsatisfactory railway and new energy businesses, as well as outstanding insurance businesses;
④ Inviting shareholders to participate in the Omaha Annual Shareholders Meeting.
This letter is very long, and investors are advised to focus on the first two parts. The following is the main text
To the shareholders of Berkshire Hathaway:
Berkshire has over three million shareholder accounts. I am responsible for writing a letter every year, which is useful for this diverse and constantly changing group of owners. Many people hope to learn more about the companies they invest in.
Charlie Munger, as my partner in managing Berkshire over the past few decades, also agrees with this obligation. I believe he will expect me to continue communicating with you in the usual way this year. He and I agree on the responsibility to Berkshire shareholders.
For writers, it is useful to imagine the readers they are trying to attract, and they often hope to attract a large number of readers. At Berkshire, we have a more limited goal: investors who trust Berkshire and invest their savings without expecting to sell them again (this attitude is similar to those who save for buying farms or renting properties, rather than those who prefer to use their remaining funds to buy lottery tickets or "hot" stocks).
Over the years, Berkshire has attracted a large number of such "lifelong" shareholders, as well as their heirs. We value their existence and believe that they have the right to hear both good and bad news directly from our CEO every year, rather than from an investor relations officer or communication consultant who always sells optimism and sweet words.
When imagining the owner Berkshire is seeking, I am fortunate to have a perfect psychological model for my sister, Bertie Buffett. Let me introduce her.
Firstly, Betty is intelligent, wise, and enjoys challenging my thinking. However, we have never had a loud argument or a relationship approaching breakdown. We will never.
In addition, Betty and her three daughters also invested most of their savings in Berkshire stocks. Their ownership spans decades, and Betty reads my shareholder letter every year. My job is to anticipate her questions and provide her with honest answers.
Betty, like most of you, knows a lot of accounting terminology, but she is not yet ready to take the Certified Public Accountant exam. She pays attention to business news - she reads four newspapers a day - but doesn't consider herself an economic expert. She is very rational - very rational - instinctively aware that she should always ignore the opinions of those experts. After all, if she could reliably predict tomorrow's winner, would she share her valuable insights for free, thereby increasing competitive buying? It's like discovering gold and handing the neighbor a map showing its location.
Betty understands the power of motivation, whether good or bad, human weaknesses, and the "signs" that can be recognized when observing human behavior. She knows who is selling things and who can be trusted. In short, she is not anyone's fool.
So, what can arouse Betty's interest this year?
Operational results, facts and fiction
We start with numbers. The official annual report starts from page K-1 and extends to page 124. It contains a lot of information - some important, some insignificant.
In its disclosure, many owners, along with financial journalists, will pay attention to page K-72. There, they will find the commonly known "bottom line of the income statement," labeled as "net income (loss).". The figures show that in 2021, it was $90 billion, in 2022 it was $23 billion, and in 2023 it was $96 billion.
What exactly happened?
You seek guidance and are informed that the procedures for calculating these "returns" are issued by a serious and qualified Financial Accounting Standards Board (FASB), enforced by a group of dedicated and hardworking Securities and Exchange Commission (SEC) members, and audited by world-class professionals at Deloitte (D&T). On page K-67, Deloitte bluntly stated, "In our opinion, the financial statements... fairly present the financial condition of the company... and its operating results... in all material respects... for the three-year period ended December 31, 2023..."
So sanctified, this "net income" figure, which is worse than useless, soon spread all over the world through the Internet and media. All relevant parties believe that they have completed their work - legally speaking, they do.
However, we still feel uncomfortable. At Berkshire, our view is that "revenue" should be a meaningful concept, and Betty will find it useful in evaluating a business - but only as a starting point. Therefore, Berkshire also reports what we call "operating income" to Betty and you. Here is the story they tell: $27.6 billion in 2021; In 2022, it was $30.9 billion, and in 2023, it was $37.4 billion.
The main difference between Berkshire's preferred numbers and mandatory disclosure numbers is that we exclude unrealized capital gains or losses that can sometimes exceed $5 billion per day. Ironically, our preference was almost a rule before 2018, but some "improvements" were enforced at that time. The experience of Galileo several centuries ago should have taught us not to interfere with the orders of our superiors. However, at Berkshire, we can be very stubborn.
Never misunderstand the importance of capital gains: I expect them to be a very important component of Berkshire's value appreciation in the coming decades. Otherwise, why should we use your (and Betty's) huge funds to invest in the stock market, just like what I have been doing with my own funds throughout my investment career?
Since March 11, 1942- the date of my first stock purchase - I don't remember a time when I didn't invest most of my net assets in stocks, especially American stocks. So far, everything has been very good. In that unlucky year of 1942, when I pulled the trigger, the Dow Jones Industrial Average fell below 100 points. By the time school was over, I had lost about $5. Soon, the situation changed, and now the index is hovering around 38000 points. The United States is an amazing country for investors. What they need to do is sit quietly and not listen to anyone.
However, it is foolish to judge Berkshire's investment value based on incorporating the daily or even annual fluctuations of the stock market into its returns. As Ben Graham taught me, "In the short term, the market behaves like a voting machine; in the long run, it becomes a weighing machine."
Our goal
Berkshire's goal is simple: we want to have all or part of those businesses that have a good economic foundation and are sustainable. In capitalism, some businesses will prosper for the long term, while others will prove to be a black hole in money. Predicting which winners and losers will be more difficult than you imagine. And those who tell you they know the answer are usually either self deceivers or scammers who sell snake oil.
At Berkshire, we particularly favor rare companies that can invest additional capital with high returns in the future. Having only such a company - and sitting still - can bring almost immeasurable wealth. Even the inheritor of such a company's holdings can - ah—— Sometimes live a leisurely life for a lifetime.
We also hope that these favored enterprises will be operated by capable and trustworthy managers, although this is a more difficult judgment to make. Of course, Berkshire also had moments of disappointment.
In 1863, Hugh McCulloch, the first banking supervisor in the United States, sent a letter to all national banks. His instructions include a warning: "Never expect you to prevent a rogue from deceiving you." Many bankers who believe they can "manage" rogue issues have learned the wisdom suggested by Mr. McCulloch - and so have I. People are not easy to understand. Sincerity and empathy are easily disguised. This is now as true as in 1863.
The combination of the two essential conditions I described for purchasing a company has long been our goal when purchasing a business. For a period of time, we had a large number of candidate objects available for evaluation. If I miss one - in fact, I miss a lot - there will always be another one appearing.
Those days have already passed; Our scale has put us in a predicament, although increased competition when purchasing companies is also a factor.
Berkshire now holds - to date - the largest GAAP net asset in any US corporate record. The record breaking revenue and strong stock market led to a year-end figure of $561 billion. The total GAAP net assets of 499 other S&P companies - elite American companies - in 2022 were $8.9 trillion. (S&P's 2023 figures have not yet been compiled, but it is unlikely to substantially exceed $9.5 trillion.)
By this measure, Berkshire now holds nearly 6% of its operating universe. It is impossible to simply double our large base within a period of five years, especially because we strongly oppose issuing stocks (an immediate increase in net assets).
In this country, only a few companies have the ability to truly drive Berkshire's development, and they have been endlessly scrutinized by us and others. We can value some companies; For others, it is not possible. Even if we can value them, they must have attractive pricing. Outside the United States, there are basically no meaningful choices available for Berkshire's capital deployment. Overall, we have no possibility of achieving astonishing performance.
However, managing Berkshire is often fun and always enjoyable. On the positive side, after 59 years of combination, the various enterprises that the company now fully or partially owns, on a weighted basis, have slightly better prospects than most large American companies. Through luck and courage, some huge winners emerged from numerous decisions. And we now have a small group of long-term managers who never consider going elsewhere and believe that turning 65 is just another birthday.
Berkshire benefits from an unusual level of constancy and clarity of purpose. Although we emphasize treating our employees, communities, and suppliers well - who wouldn't want to do so—— Our loyalty always belongs to our country and our shareholders. We will never forget that although your money is mixed with ours, it does not belong to us.
With such a focus and our current business portfolio, Berkshire is expected to perform slightly better than generally speaking American companies, and more importantly, be able to operate while significantly reducing the risk of permanent capital losses. However, except for "slightly better", the rest are all extravagant expectations. This humble vision was not the case when Betty fully invested in Berkshire - but now it is.
Our (not so secret) weapons
Sometimes, the market and/or economy can lead to extreme overvaluation of the stocks and bonds of some large and fundamentally sound companies. In fact, the market can - and will - collapse or even disappear unpredictably, just like the four months of 1914 and a few days of 2001. If you think American investors are more stable now than in the past, think back to September 2008. The miracle of communication speed and technology has led to an instant global paralysis, and we have developed a long way from the era of emitting smoke signals. This kind of momentary panic doesn't happen frequently - but it will happen.
Berkshire's ability to immediately respond to market tightening with massive funds and confirmed performance may provide us with occasional large-scale opportunities. Although the stock market is much larger than in our early years, today's active participants are neither more emotionally stable nor better educated than when I was in school. For some reason, the market is now showing more casino behavior than when I was young. Casino now exists in many households, tempting residents every day.
A fact in financial life should never be forgotten. Wall Street - in the metaphorical sense of this word - hopes its clients make money, but what really excites its investors is the frenzy of activities. At such times, anything foolish will be heavily promoted - not everyone does it, but there are always people who do it.
Occasionally, the scene becomes ugly. Then, politicians became angry; The most blatant perpetrators of evil escape silently, wealthy and unpunished; And your neighbors and friends become confused, impoverished, and sometimes even harbor a vengeful attitude. He began to learn that money had surpassed morality.
One investment rule of Berkshire remains unchanged: never take the risk of permanent capital loss. Thanks to the favorable winds and the power of compound interest in the United States, our area of operation has been - and will continue to be - rewarded if you make a few good decisions and avoid major mistakes throughout your life.
I believe Berkshire can cope with a financial disaster that is more severe than any historical disaster. We will not give up this ability. When economic turbulence occurs, as they are sure to happen, Berkshire's goal will be to serve as a national asset - just like in the small ways from 2008 to 2009- to help extinguish financial fires, rather than being a member of many affected companies, whether unintentionally implicated or otherwise triggering fires.
Our goal is realistic. Berkshire's strength comes from the diversified returns it provides after deducting interest costs, taxes, and significant depreciation and amortization expenses (EBITDA is a prohibited measure by Berkshire). Our operations also have very little demand for cash, even when the country has been experiencing long-term global economic weakness, fear, and near paralysis.
Berkshire currently does not pay dividends, stock repurchases are entirely discretionary, and debt maturity has never posed a major problem.
Your company also holds cash and treasury bond bill positions far beyond the conventional wisdom. In the panic of 2008, Berkshire generated cash from operations and did not rely in any way on commercial paper, bank lines, or debt markets. We did not predict the time of economic paralysis, but we have always been prepared for it.
Extreme financial conservatism is a commitment we make to those who share Berkshire with us. In most years, our caution may prove to be unnecessary - just like the insurance policy for a fortress style building. But Berkshire does not want to cause permanent financial harm to Betty or anyone who trusts us - of course, the market value of the assets they hold may experience a certain degree of decline over a longer period of time, which is part of the natural volatility of the investment market and cannot be avoided.
Berkshire's construction philosophy is to withstand the test of time.
Non controlling businesses that make us feel comfortable
Last year, I mentioned Berkshire's two long-term holdings - Coca Cola and American Express. These two companies are not like our huge investment in Apple. Each only accounts for 4-5% of Berkshire's net assets under Generally Accepted Accounting Principles. But they are meaningful assets and also demonstrate our thinking process.
American Express began operations in 1850, and Coca Cola was launched in 1886 at a pharmacy in Atlanta. (Berkshire does not favor newcomers.) These two companies have attempted to expand into unrelated fields for many years, but have been almost unsuccessful in these attempts. In the past - but definitely not now - they have even encountered incorrect management.
But each company has achieved great success in its basic business and has made various adjustments according to the needs of the situation. And, crucially, their products have gone global. Coca Cola and American Express have become globally recognizable names, just like their core products. The consumption of liquids and the demand for unquestionable financial trust are eternal basic needs in our world.
During 2023, we neither purchased nor sold any shares of American Express or Coca Cola - continuing our own Rip Van Winkle style slumber that has lasted for over twenty years. Last year, these two companies once again rewarded our inaction by increasing their profits and dividends. In fact, our earnings from American Express in 2023 far exceeded the $1.3 billion spent on purchasing stocks a long time ago.
American Express and Coca Cola are almost certain to increase their dividends in 2024- with American Express around 16% - and we will almost certainly maintain our holdings unchanged throughout the year. Can I create a better global business than these two? As Betty will tell you: "Impossible.".
Although Berkshire did not purchase any shares of these two companies in 2023, your indirect ownership of Coca Cola and American Express increased slightly last year due to our repurchase at Berkshire. This repurchase effect increases your participation in every asset owned by Berkshire. For this obvious but often overlooked truth, I would like to add a warning that has been repeated many times: all stock repurchases should rely on price. It is wise to repurchase at a discount below the business value, but it is foolish to repurchase at a premium.
What can be learned from investing in Coca Cola and American Express? When you find a truly amazing enterprise, stick to it. Patience pays off, and a great company can offset many inevitable mediocre decisions.
This year, I would like to describe two other investments that we expect to maintain indefinitely. Like Coca Cola and American Express, these commitments are not significant relative to our resources. However, they are valuable and we have increased our holdings in this area during 2023.
As of the end of the year, Berkshire