Warren Buffett’s 2022 Annual Letter: A Reaffirmation of Berkshire’s Core Values
“At Berkshire, there will be no finish line.”
Happy Monday and welcome to our new subscribers!
For the value investor inside of me, the release of Warren Buffett’s annual letter can only be compared to Christmas morning.
Around 8 a.m. on the last Saturday of February, Buffett’s letter appears on Berkshire Hathaway’s nondescript website — and, in it, page after page of insight and wisdom from the greatest investor of all time.
This year, I devoured his letter in record time and then went back for more. No matter how many times you read one of Buffett’s letters, you’ll always come away with something new.
And, with it looking unlikely that he will ever write a book, these letters are Warren Buffett’s written legacy.
Thankfully, there are a lot of them.
Start with his first one in 1957 and don’t stop until reaching the present day. There, you just got an MBA in value investing.
Seriously, you should read Buffett’s 2022 letter in its entirety. While it’s not as long or detailed as some of his past efforts, it concisely captures the core philosophies and values that shaped his incredible career. And defiantly charts a course for Berkshire’s future, too. Here’s the link.
But, if you’re in that TL;DR mood, I’m here to help with a selection of the most important lines from this year’s letter…
“We own publicly-traded stocks based on our expectations about their long-term business performance, not because we view them as vehicles for adroit purchases and sales. That point is crucial: Charlie and I are not stock-pickers; we are business-pickers.”
Of everything that Warren Buffett ever learned at the feet of Benjamin Graham, perhaps nothing has proven more consequential than this simple concept: stocks are little pieces of actual businesses.
That might sound really obvious, but just look around at how many “investors” treat stocks like little electronic blips on a computer screen meant for quick flips and speculation. Not a proportional share in a real, productive business.
Buffett may no longer regale us with exactly how many 8 oz. servings of Coca-Cola consumed each day are owned by Berkshire, but it’s through that lens — contextualizing a company’s brand power in simple terms — that he made his best investments.
“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.”
Buffett has spent most of his career disproving the Efficient Market Hypothesis. When many academicians believed that irrationality had been driven out of the money game, Buffett knew better. The stock market still is — and probably always will be — a voting machine in the short run and a weighing machine in the long run.
Accepting that grants investors a superpower of sorts. An ability to detach from the wild ups and downs of the market and focus on what really counts. (If you’re not sure what that is, go back to the first quote and re-read it.) Soon enough, you’ll easily ignore — and maybe even profit from — Mr. Market’s moments of madness.
Buffett dealt a fatal blow to EMH with “The Superinvestors of Graham-and-Doddsville” in 1984, but obviously still relishes firing the occasional arrow into its bloated corpse. I can’t blame him.
“When large enterprises are being managed, both trust and rules are essential. Berkshire emphasizes the former to an unusual — some would say extreme — degree. Disappointments are inevitable. We are understanding about business mistakes; our tolerance for personal misconduct is zero.”
It isn’t lost on Warren Buffett that many shareholders have a disproportionate amount of their life savings invested in Berkshire. And he takes that trust seriously.
In other words, Buffett will not tolerate a single impropriety that might stain Berkshire’s reputation — or its shareholders’ wealth.
Since the days of the Salomon Brothers bond-trading scandal, Buffett has drawn a very bright red line that should never be crossed. Business foibles like declining sales and missed expectations can be forgiven; deceit and dishonesty cannot.
“The weeds wither away in significance as the flowers bloom. Over time, it takes just a few winners to work wonders.”
Warren Buffett acknowledges that his “satisfactory” results (lol) come from just a dozen or so truly great decisions over his career. But, where others might elect to cash out and take profits, he chose to let his winners run and run.
In Peter Lynch parlance, Buffett ably sidestepped the temptation to cut his flowers and water the weeds.
Over the years, some have criticized Buffett for never trimming his stake in Coca-Cola. Especially when the soft drink giant’s valuation ballooned to immense proportions in 1998. But, here, he holds up Coke as a triumph of the Berkshire way.
Buffett points out that, for an initial outlay of $1.3 billion, Berkshire now receives $704 million in annual dividends from Coca-Cola. And that amount should only get bigger year after year. KO 0.00%↑ is a Dividend King, after all.
“Growth occurred every year, just as certain as birthdays,” Buffett writes. “All Charlie and I were required to do was cash Coke’s quarterly dividend checks.”
Long may that continue.
“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.”
Each annual letter is carefully crafted to present shareholders with all of the relevant information needed to properly evaluate Berkshire’s business performance. Buffett includes the necessary facts and figures to allow an intelligent person, even without following the company’s day-to-day operations, to make an informed decision with his or her money.
I would argue — and Buffett evidently agrees — that mark-to-market accounting accomplishes just the opposite. Operating performance gets obscured by a misleading headline “loss” that exists only on paper and does not even necessarily reflect the quality and earnings power of a company’s investment portfolio.
Here’s what I wrote last November:
I don’t care about the misleading headlines (“Berkshire Loses Money!”) for Warren Buffett or Charlie Munger’s sake. Their reputations are strong enough to withstand the occasional wayward (and unfair) arrow.
But I fear that this muddled reporting might confuse individual investors who don’t obsessively hang on every last piece of public information about Berkshire.
It would be a grave injustice if this accounting quirk caused anyone to get the wrong idea about the company’s actual performance — which continues to grow at a good clip — and decide to sell off what should be a cornerstone of their portfolio.
All because of temporary, unrealized, paper losses.
Mark-to-market has got to go.
“The math isn’t complicated: When the share count goes down, your interest in our many businesses goes up.”
In 2022, Warren Buffett flexed all of his capital allocation muscles. He bagged an elephant in Alleghany, shelled out well over $50 billion on common stock investments, and continued to pull the buyback lever during stock price downturns. That last item received special mention in his letter.
During Q4, Berkshire spent $2.855 billion repurchasing its own shares. That’s well below the blistering buyback pace of 2020 and 2021, but also an appreciable increase over the two preceding quarters in 2022. In all, Buffett repurchased 1.2% of Berkshire’s outstanding stock last year.
And he hasn’t stopped there. Adam Mead of
astutely noticed that Berkshire’s buyback activity has continued into 2023. According to Mead’s calculations, Buffett has spent perhaps $700 million on repurchases during the first six weeks of the new year.“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).”
Buffett comes out swinging against the more virulent critics of share buybacks.
It also serves as a depressing reminder that politicians can turn even a mundane subject like share repurchases into a controversial lightning rod.
When done right, share buybacks are one of the most effective capital allocation tools available to CEOs. Just because most of them fumble away money on ill-timed repurchases, that’s no reason to demonize and stigmatize the concept as a whole.
And, speaking of controversial lightning rods, even Elon is on board.
“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.”
Despite a barrage of reports to the contrary, The American Tailwind is alive and well. 🇺🇸🇺🇸🇺🇸
“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. And yes, our shareholders will continue to save and prosper by retaining earnings. At Berkshire, there will be no finish line.”
Some might see this year’s letter as (mostly) a rehash of old ideas — but I think that sells Warren Buffett’s message short. The 2022 letter is not so much a retread, but a reaffirmation of the core values and principles that turned Berkshire Hathaway into an economic powerhouse.
And this passage, in particular, lays out a mission statement for the post-Buffett era.
Greg Abel will eventually be tasked with keeping the culture and managing risk in an increasingly uncertain world. Many years from now, if CEO Abel (or any of his successors) ever needs a refresher course on what makes Berkshire Hathaway tick and what the company stands for, he need only pick up this letter and give it a read.
Thanks for sharing your thoughts, Kingswell!