Interpreting Warren Buffett's Letter to Shareholders 2024
Who is Berkshire?
Warren Buffett's letter to shareholders is an annual focus of the investment community, and investors want to know how the stock god evaluates his investments this year.
In fact, I think these letters are more worthy of repeated study by people in the marketing and public relations industry, and these letters have been repeating one thing for decades -Who is Berkshire?
There are all kinds of investors in this world, with different expectations, different investment periods, and different tolerance for drawdowns, even Buffett can only satisfy a small number of investors, so every investment institution and investment managerBefore constructing a portfolio, it is more important to define your own investors; It's more important to let them know about themselves before they go for a higher yield.
In this year's letter, Buffett concretized a real shareholder - his sister Bertie.
Bertie, like most of you, knows a lot of accounting terms, but she's not ready to take the CPA exam. She follows business news and reads four newspapers a day but doesn't consider herself an economic expert. She is sane, very sane, so to speak, instinctively knowing that experts should always be ignored.As a giant asset manager with $1 trillion under management, Berkshire's shareholder base has grown from more than 1,000 in 1980 to one million now.
Therefore, most of the contents of the annual shareholder letter, in addition to the regular content of the annual report and the operation of the insurance company, are answering - who is Berkshire?
In this article, we will interpret this year's shareholder letter.
The power of repetition
At the beginning of the letter, Warren Buffett once again repeated the view he had repeated for six years - he didn't care about the profit figures disclosed in the financial reports according to the ** regulations, he cared more about the real profits of the companies he invested.
Why? Because the early stage contains the fluctuation of stock prices, and Buffett has always believedShort-term fluctuations in stock prices are meaningless- Even if he discloses it as requested, it will not change his opinion.
Then, Buffett once again repeated his stock selection criteria that he repeated n times -
Our goal at Berkshire is simple: we want to have businesses that enjoy good, fundamental, and lasting economic benefits.Although Warren Buffett's shareholder letter and speech at the shareholder meeting have become a mandatory investment bible every year, and in fact these investment standards have hardly changed since they were finalized in the 70s, Buffett still does not assume that you already know him very well, and it is still repeated year after year.At Berkshire, we particularly favor rare businesses that can invest additional capital at a high rate of return in the future. Owning such a company, and then sitting quietly, can create almost immeasurable wealth. Even the heirs of such holders can sometimes live a leisurely life for life.
We also want these favored businesses to be run by competent and trustworthy managers, although this is a more difficult judgment to make, and Berkshire has experienced some disappointments.
This is a great example for companies to learn. Our CEOs and executives have always been confident that everyone should understand the company's long-term growth strategy, and always use it as a self-evident premise for the audience to make up for it. They think so simply because these strategies are written on the company's official website and reception hall, and in fact almost no one sees them, and they don't care if they see them.
The more important things are, the simpler things are, the more repetitive things are, and the more repetitive things are, the more important they are.
Of course, repetition is not a slogan, and every year Buffett describes the reasons for his specific investments in companies, such as Coca-Cola, Amex, Occidental Petroleum and Japan's Big Five trading companies this year.
What kind of businesses do we invest in?
Warren Buffett has an interesting point this year: although Apple is the largest in the position, Coca-Cola and American Express are more "embodying our considerations and ideas" for three reasons:
1. Both companies have tried to expand into unrelated areas without success, and have been poorly managed in the past, butAll have achieved great success in their main business, and their products have become world-renowned brands, with the consumption of beverages and the demand for financial trust with certainty, is an eternal and fundamental element in today's world.
2. Both companiesProvide consistent shareholder returns in the form of dividends or buybacks over the long term.
When you find a truly great business, stick with it. Patience pays off, and a good business can counteract many of the inevitable banal decisions.
These ideas, which have been repeated countless times, are mediocre in themselves, and what gives them magical power is Buffett's ability to pick stocks, and in the initial and past when Buffett was not very large, there must have been a large number of choices similar to Coca-Cola and Amex, and in the process, Buffett also had other options (such as IBM) for a short time, but finally gave up when they proved to fail.
What makes Warren Buffett make this or that choice is certainly not something that the investment method and philosophy itself can tell youI owe it to his experience and business instincts that no one else can learn.
Therefore, I have been emphasizing in my previous articles about Warren Buffett that a letter to shareholders is not a letter to investors on how to invest, and the problem it solves is always -Who are we? What kind of businesses do we invest in? How we invest in themWarren Buffett will never tell you the details of his decision, and while this makes more sense to investors, it has nothing to do with shareholder interests.
Shareholders are more concerned about how Buffett chooses stocks, but whether the reasons behind it are sufficient, and whether there are better options — such as AI stocks, which everyone on Wall Street is talking about right now.
So Warren Buffett repeats another golden rule every year.
A relentless struggle against scale
Another Warren Buffett rule -Never risk a permanent loss of capital.
Berkshire Hathaway's biggest problem is that the management is too large:
Berkshire Hathaway's net worth is now the highest among U.S. companies, ending the year at $561 billion. The combined net assets of 499 other S&P companies in 2022 were 8$9 trillion, and in this way, Berkshire has a 6% share.In the average industry, size means security, but in the world of finance,Scale just means it's getting harder to find the right place to invest, but it doesn't mean it's safe- Think of Lehman Brothers and long-term capital that fell overnight.
The problems Buffett faces in the selection of investment targets are:
1. Only a few companies are large enough to attract Berkshire's investment interest;
2. These companies have accepted our and others' endless pickiness, and most of them are unattractive;
3. Some of the remaining companies we do not have the ability to evaluate.
This year, Warren Buffett once again repeated his three solutions:
Never risk a permanent loss of capital.
The market and/or the economy can lead to significant pricing errors in the ** and bonds of some large corporations with good fundamentalsThis instant panic doesn't happen very often, but they do. Berkshire's ability to respond immediately to market volatility with huge sums of money and a proven track record could provide us with an occasional great opportunity.
Thanks to the power of "American tailwinds" and compound interestIf you are able to make a few good decisions in your lifetime and avoid making serious mistakes, the field in which we operate has been—and will be—rewarding.
The last clause is not much premise, but repeated twice this year "outside of the United States, there are basically no candidates for Berkshire to make meaningful capital deployments", this sentence will certainly make Chinese investors uncomfortable, butOn the basis of the first criterion of "never risk the permanent loss of capital", it is not difficult to understand.
Interestingly, Warren Buffett's most talked-about new investment this year is an overseas investment - Japan's five major trading companies, how to explain this contradiction?
In this shareholder letter, Warren Buffett detailed the rationale for this investment, which I summarized into four points:
1. Positive shareholder returnsAll five companies pursued shareholder-friendly policies, retaining huge sums of money that were both used to build up their many businesses and repurchased with a small fraction**, each reducing the number of shares outstanding by attractively**. Like Berkshire, these five companies are also reluctant to issue **. This is much better than the usual policies pursued by the United States;
2. Excellent management: The management of these five companies is far less aggressive in their own compensation than in the United States;
3. Japan's ultra-low interest rates: Berkshire with 1The proceeds of the 3 trillion yen bonds financed most of its positions in Japan, where the bonds are popular;
4. More opportunities for cooperationEach company operates in a highly diversified way that is somewhat similar to Berkshire itself, and our investment has the potential to give us the opportunity to work with five well-managed, well-respected companies around the world.
Of course, this won't be the whole reason to invest in Japan's five largest trading companies, but the core reason is clear:The Big Five, because of their large overseas investments, became another cheaper "Berkshire".Buffett believes that U.S. stocks are too high now, but out of risk considerations, he is reluctant to directly invest in overseas assets on a large scale, so he carries out overseas investment through excellent partners such as the five major trading companies.
Therefore, Buffett does not reject more changes on top of his investment principles.
What caught my attention this time, though, was another growing investment in Occidental Petroleum last year, which was somewhat unusual in addition to meeting the previous set of criteria.
The cornerstone of the stability of the U.S. financial system
The core reasons for investing in Occidental Petroleum are not complicated, Buffett said:
We are particularly bullish on Occidental Petroleum's large U.S. holdings of oil and gas, as well as its leading position in carbon capture, both of which are in good interest ...... our countryUnder the leadership of Occidental Petroleum CEO (Occidental Petroleum), Occidental Petroleum is doing the right thing for the country and its shareholders. No one knows how oil prices will change in the next month, year or decade.It is clear that investments in Western oil, in addition to meeting his traditional requirements, are much moreAttached is the meaning of the strategic resource of "doing the right thing for the country and shareholders".This is also a relatively big change in Buffett in recent years, and the fundamental reason for this change is that the company is too large, and normal investment will only return less and lessLarge-scale opportunities arise only when confronted with systemic financial risks, that's what Warren Buffett said-
When economic turmoil strikes, Berkshire's goal will be to function as an asset to the nation – as it did in a very small way in 2008-09 – to help put out the financial fire, rather than being one of the many companies that ignited it.So, whether it's Occidental Petroleum's investment, or the level of cash and Treasury bonds that far exceeds the necessary level, it shows that Berkshire Hathaway has become more than just an insurance company or an investment institution, butFor the back-up force that is the cornerstone of the stability of the U.S. financial system, it is not only the power of money, but also the power of confidenceThe fact that the United States was able to come out of the huge financial crisis of 2008 in just two years (Japan took 20 years) is precisely the existence of this kind of power.Firms are also holding far more cash and U.S. Treasury positions than conventional wisdom would consider necessary. In the midst of the 2008 scare, Berkshire was able to operate with cash and did not rely in any way on commercial paper, bank lines or the debt market.
Warren Buffett's time turn
As an old man in his 90s, Buffett keeps mentioning the past in his shareholder letters
He remembered the first time he bought **:
Since my first purchase, March 11, 1942, I don't recall a time when I didn't invest most of my net worth in **and in the United States**. On this day in 1942, when the gears of fate began to turn, the Dow Jones fell below 100 points, and I "pulled the trigger." I (bought**: City Services) was quick** $5 during school break. But soon after, the situation reversed, and now the Dow Jones is hovering around 38,000 points.He mentioned that investors have not changed much over the years:
If you think U.S. investors are more stable now than they were in the past, think back to September 2008. The speed of communication and the miracle of technology have contributed to instantaneous paralysis on a global scale, and we have come a long way since the smoke signal. This instant panic doesn't happen very often, but they do. While the market is much larger than it was in our early years, today's active players are neither more emotionally stable nor better educated than when I was in school.He referred to Standard Shareholder Bertie's life-threatening decisions:
In 1980, at the age of 46, Bertie decided to invest differently, and for the next 43 years, she only kept Co-Bond ** and Berkshire, without making any new deals. During this time, she became very wealthy, even after making a lot of charitable donations (think nine figures).He mentions Charlie Munger's most important advice in his life:
"Warren, don't buy another Berkshire company. But now that you control Berkshire, buy good businesses with a reasonable ** (under Berkshire's framework); Stop buying a reasonable business with excellent **".
He even mentions important reasons why the past deserves attention:
The United States is a very young country, and a footnote that may surprise you: out of 45 in the United States**, Charlie has experienced 15 places.Compared to most investors' blind confidence in the future,Warren Buffett's ability to use the "past **" is amazing. In the world of Wall Street and Lujiazui, everyone is looking forward, the former sees the bright promise of AI, and the latter has a deep fear of recessionOnly in the world of Omaha, isolated from the hustle and bustle, Buffett's time is different from ours.
The direction of his time is backwards, the younger he lives, back to the heyday of the 80s, back to the pivotal time of Berkshire's transformation, back to the first ** trade of his childhood, and snatching back the things that time took away from him one by one.
First published in "People and Gods Strive Together (ID: tongyipaocha)" WeChat *** Look at economic phenomena and read wealth passwords.