Warren Buffett (Trades, Portfolio) surprised many loyal readers this year with a much shorter missive, which did not go into detail about his equity investments or his thoughts on the current market situation.
This is the second part of a series covering some of the key takeaways from Berkshire Hathaway’s (BRK.A, Financial)(BRK.B, Financial) 2022 shareholder letter, along with my thoughts on it.
Takeaway 6
Buffett wrote, “A very minor gain in per-share intrinsic value took place in 2022 through Berkshire share repurchases as well as similar moves at Apple (AAPL, Financial) and American Express (AXP, Financial), 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.”
As I have discussed previously, Berkshire slowed down its share repurchases from $27 billion in 2021 to around $8 billion in 2022. In my opinion, this was because its shares are likely trading close to their intrinsic value. Berkshire uses its retained earnings to buy back its own shares, which suggests Buffett has not been able to find opportunities elsewhere.
Stock repurchases generally serve as a catalyst that increases shareholders' value and also helps resuscitate the falling stock price. But in my opinion, the share repurchases of Berkshire have not really helped improve its stock performance or change its shareholder sentiment because its Class B stock is still trading within the same range of between $300 and $310 since last year.
Takeaway 7
Buffett was attempting to reassure shareholders when he wrote: “Almost endless details of Berkshire’s 2022 operations are laid out on pages K-33 – K-66. Charlie and I, along with many Berkshire shareholders, enjoy poring over the many facts and figures laid out in that section. These pages are not, however, required reading. There are many Berkshire centimillionaires and, yes, billionaires who have never studied our financial figures. They simply know that Charlie and I – along with our families and close friends – continue to have very significant investments in Berkshire, and they trust us to treat their money as we do our own.”
Understandably, Buffett wants his shareholders to have confidence in him. By reassuring them that a large portion of his and Charlie Munger (Trades, Portfolio)’s net worth is tied to Berkshire, he is telling them not to worry or pay attention to the unnecessary noise related to Berkshire’s short-term operating results.
The Oracle of Omaha is aware shareholders might be disappointed with Berkshire’s losses in 2022. Therefore, he is discouraging shareholders from paying any serious attention to the GAAP earnings as he thinks they are useless. Being a shareholder myself, I feel investors are more concerned whether Buffett will be able to meet expectations as he is aging. Therefore, there is more skepticism and scrutiny of Berkshire’s operating and investment performance today than ever before, which could be why Buffett is advocating his shareholders not to delve too much into the reported financial figures.
Takeaway 8
The Oracle of Omaha said, “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.”
By the end of 2022, Berkshire still had about $130 billion in cash and Treasury bills. This is despite spending almost $90 billion on share repurchases over the last three years. Though he is very conservative and loves to sit on a hoard of cash, Buffett may also be waiting for the right time to pull the trigger. While he has not mentioned anything about a possible recession in a rapidly rising interest rate environment, Berkshire’s large cash position and reduction in share repurchases signal the possibility of a recession and more opportunities to come for value investors in the near future.
Takeaway 9
Continuing on, the guru noted, “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.”
Buffett is reassuring his shareholders that he is the chief risk officer, willing to take responsibility for all decisions and their outcomes, whether good or bad. As a shareholder of Berkshire, I think he is the biggest risk to Berkshire because of his age. This is one of the concerns many long-term shareholders have that needs to be addressed. They are worried whether Buffett will be able to keep up with the same investment record we have seen in the past, beating S&P 500 year after year.
Munger has entrusted Li Lu (Trades, Portfolio) with the important task of investing his funds, particularly in China. In my opinion, this is because of his age (which is nearing 100) and his health, which could be impeding his ability to execute his investing activity. This, perhaps, was one of the reasons why Buffett paid a tribute to Munger in the letter, dedicating a full page filled with his valuable quotes.
Therefore, I think the pressing question from shareholders at this year’s general meeting will be if Buffett is going to delegate some more power to his successor soon. Greg Abel has a significant stake in Berkshire, which should provide some relief to its shareholders.
Takeaway 10
Finally, the billionaire investor said, “During the decade ending in 2021, the United States Treasury received about $32.3 trillion in taxes while it spent $43.9 trillion.”
Buffett briefly mentioned the fiscal deficit, but did not elaborate much on whether there is any potential threat of a possible recession anytime soon. As always, the guru remains optimistic and bullish about the U.S. economy despite the huge fiscal deficit, a slowing economy and a declining stock market, which is why, in my opinion, shareholders and investors are worried about the future of Berkshire. Buffett is optimistic because of the foresightedness that he has developed over the years, which makes him absolutely certain about the future of the company and the U.S. economy that most other investors cannot see.
The guru goes on to say, “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."
Berkshire obviously pays more corporate taxes in the U.S. because of its size and the profits it generates. That is why Buffett is well respected in the investment world for creating this behemoth with integrity. In my opinion, he wanted to provide some sort of comfort here, too, to his worried shareholders so that they are not dissuaded by short-term losses in 2022. Therefore, it is important to reassure shareholders that Berkshire will continue to deliver superior results for many more years to come and deliver market-beating results. It will continue to pay its fair share of taxes in a large chunk because of its ever-increasing profits year after year.
