Warren Buffett on Saturday released his annual letter to shareholders. As always, my custom has been to try to unpack any insights therein. This time, his remarks over the past year were wide-ranging; from carbon capture to problems of having a big balance sheet, the loss of his friend, Charlie Munger, Shale oil economics, among other topics. Be that as it may, I only sought to decipher his investment philosophy. I found at least three (I was lucky).
One is conservatism. Warren's unadventurous usage of cash is well known. Berkshire Hathaway is not big on newcomers. Its holdings on cash and US Treasury Bill position far exceed what he deems “necessary.” He even boasts that should the US face another 2008-level financial crisis, Berkshire will be ready to save the day (think “financial superman”). Also well known is that Berkshire does not pay dividends and its share repurchases are 100 percent discretionary.
His insistence on conservative reporting is also widely known (No EBITDA gimmicks). But it's his style of making cheaper bets that stood out for me. In the letter, he speaks of buying five-year call warrants on Occidental Petroleum (He’s yet to exercise them yet, Berkshire already owns almost a third of the business).
Not entirely surprised though as the 'Oracle of Omaha' has sold put options before, utilising premiums collected to make his purchases even better bargains. Lastly, his aversion to debt is legendary. Although owning a stake in one of the most capital-intensive industries, rail, through BNSF, one of its largest contributors to operating earnings, he still chooses lower dividends than debt, utilising internal cash to make huge capital expenditures. Impressive.
Two is long-term investing. Warren still holds several names bought in the 80s such as Coca-Cola. But it's his views on short-term investing that I found refreshingly hilarious. He quips, “.....today’s active participants are neither more emotionally stable nor better taught than when I was in school. For whatever reasons, markets now exhibit far more casino-like behaviour than they did when I was young. The casino now resides in many homes and daily tempts the occupants.”
In the letter, he restates his desire to always own either all or a portion of businesses that enjoy good economics that are fundamental and enduring. He demonstrates the wisdom of this approach showing the share of American Express (one of his older holdings) earnings in 2023 considerably exceeded the $1.3 billion purchase cost.
Three is diversification. Mr Buffett accepts the reality that within capitalism, some businesses will flourish for a very long time while others will prove to be sinkholes. Tougher still is predicting, which will be the winners and losers - and those who tell you they know the answer are usually either self-delusional or snake-oil salesmen.
Although Berkshire runs some concentrated bets, he admits that the strength of the business comes from its “Niagara of diverse earnings.” Note: Berkshire has posted a compounded annual return of 19.8 percent since 1964 to date, exceeding S&P 500’s 10.2 percent gain over the same period.
