Warren Buffett’s
Annual Letter to Shareholders

Berkshire Hathaway is the largest investment position held by Hendershot Investments, Inc., an investment management firm. Ingrid Hendershot, a value-oriented money manager and editor of Hendershot Investments provides the following review of 92-year old Warren Buffett’s annual letter to Berkshire shareholders. The Bull & Bear Financial Report added the pearls of investing wisdom by 99-year old Charlie Munger, Berkshire’s vice chairman.

Berkshire Hathaway (BRKB) reported the company had a good year in 2022 with revenues rising 9% to $302 billion and operating earnings increasing 12% to a record $30.8 billion. The company’s net worth during 2022 decreased by 6.7%, or $33.8 billion, to $472.4 billion with book value equal to about $323,600 per Class A share as of 12/31/22.

On a GAAP basis, Berkshire reported a net loss of $22.8 billion during 2022 compared to $89.8 billion in earnings in the prior year period.

Investment gains and losses from changes in the market prices of Berkshire’s substantial equity investments will produce significant volatility in earnings. The investment losses were primarily paper losses from changes in unrealized gains of equity holdings during the year given the stock market’s correction. Berkshire’s five major equity investment holdings which represent about 75% of total equities held, include American Express at $22.4 billion (which charged 10% lower during the year or $2.4 billion); Apple at $119 billion (which dropped 26.2% during the year or $42.2 billion); Bank of America at $34.2 billion (which declined $11.8 billion in value); and Coca-Cola with the stock popping 7% higher, or $1.7 billion, to $25.4 billion at the end of the year. Chevron rounds out the top five at $30 billion after Buffett purchased more than $20 billion of Chevron during the first quarter of 2022.

In his letter to shareholders, Buffett reflected on a couple of his large holdings. In 1994, Berkshire acquired Coca-Cola for $1.3 billion with its value growing to $25.4 billion at the end of 2022 while Berkshire’s annual dividends from Coca-Cola have steadily increased from $75 million to $704 million. American Express is much the same story with Berkshire’s purchase of American Express in 1995 at $1.3 billion growing to $22.4 billion at the end of 2022 while its annual dividends have steadily grown from $41 million to $302 million. Buffett concluded with this lesson for investors: “The weeds wither away in significance as the flowers bloom. Over time, it takes just a few winners to work wonders. And yes, it helps to start early and live into your 90’s as well.”

During 2022, Berkshire’s insurance businesses generated losses from underwriting of $90 million compared to underwriting gains last year of $728 million. Catastrophe losses during the year included $2.4 billion from Hurricane Ian.

Underwriting results were also negatively impacted by increases in claims frequencies and severities at GEICO due to significant cost inflation in automobile markets. Thanks to premium rate increases, GEICO expects to generate an underwriting profit in 2023. 2022 underwriting results were favorably impacted by higher earnings from reinsurance underwriting and foreign currency exchange rate gains. Insurance investment income increased 35% during the year to $6.5 billion, reflecting higher dividend and interest income as interest rates increased significantly in 2022.

The float of the insurance operations increased $17 billion to end the year at about $164 billion. The increase in float includes $14 billion related to the acquisition of Alleghany Corporation. Berkshire’s float has increased 8,000-fold since 1967 through acquisitions, operations and innovations and with disciplined underwriting these funds have a decent chance of being cost-free over time. The average cost of float was nominal in 2022 due to the $90 million underwriting loss during the year.

Burlington Northern Santa Fe’s revenues chugged 12% higher during the year to $25.2 billion, reflecting higher revenue per car/unit, with net earnings dipping 1% to $5.9 billion due to lower overall freight volumes and higher average fuel and other operating costs. The 5.8% volume decrease for the year was in all business segments except for coal which was flat, reflecting supply chain disruptions, network challenges, lower demand for crude by rail and lower building products shipments.

Berkshire Hathaway Energy reported revenues rose 5% during the year to $26.4 billion with net earnings rising 9% to $3.9 billion. The earnings increase reflected higher earnings from other energy businesses, including tax equity investments and the Northern Powergrid businesses, as well as from the natural gas pipeline businesses, partly offset by lower earnings from the real estate brokerage business.

Berkshire’s Manufacturing businesses reported revenues rose 10% to $75.8 billion with operating earnings up 14% to $11.2 billion in 2022. The Buildings Products segment led the way for the year with revenues rising 16% to $28.9 billion and operating earnings jumping 41% to $4.8 billion thanks to strong demand for residential housing construction. However, significant increases in mortgage interest rates slowed demand for new housing construction during the fourth quarter so that comparative revenues and earnings in the near term will likely decline from current levels. Berkshire’s operations also were negatively impacted by supply chain disruptions and significant cost increases for raw materials, freight, labor and other input costs.

Service and Retailing revenues increased 9% during the year to $91.5 billion with pre-tax earnings increasing 7% to $5.0 billion. The Service group led the way as revenue increased 20% to $19.0 billion with pre-tax earnings up 14% to $3.0 billion thanks to strong growth from TTI, reflecting strong demand in nearly all electronic component markets, and the aviation business services due to higher training hours at FlightSafety and significantly higher customer flight hours at NetJets. However, during the third quarter and fourth quarters, new orders slowed at TTI in part attributable to elevated inventory levels within the supply chain.

Berkshire’s balance sheet continues to reflect significant liquidity and a very strong capital base of $472.4 billion as of 12/31/22.

Excluding railroad, energy and utility investments, Berkshire ended the year with $487 billion in investments allocated approximately 63.4% to equities ($308.8 billion), 5.2% to fixed-income investments ($25.1 billion), 25.6% in cash and equivalents ($125.0 billion) and 5.8% in equity method investments ($28.0 billion) which includes 26.6% ownership of Kraft Heinz, 21.4% of Occidental Petroleum and 38.6% in Pilot Travel Centers as of year end.

Free cash flow declined 16% during the year to $21.8 billion due to lower earnings and higher capital expenditures. During the year, capital expenditures approximated $15.5 billion, which included $11 billion for BNSF and BHE, its railroad and utility and energy units. Berkshire expects capital expenditures for 2023 for BNSF and BHE to approximate $13.7 billion.

During 2022, Berkshire paid cash of $67.9 billion to acquire equity securities and received proceeds of $33.7 billion from the sale of stocks. The stock purchases included about $21 billion in Chevron, about $11 billion in Occidental Petroleum, about $6 billion in Activision Blizzard as an arbitrage play, $5 billion in German stocks and Japanese stocks, $4 billion in HP, Inc. and an undisclosed additional amount of Apple. In addition, Berkshire purchased a net $27.5 billion in Treasury Bills and fixed-income investments. In June 2022, Berkshire Hathaway Energy (BHE) acquired the BHE common stock held by Greg Abel, Berkshire’s Vice Chairman, for $870 million. On Oct. 19,2022, Berkshire completed its purchase of Alleghany, a property and casualty reinsurance and insurance business, for $11.5 billion in cash, which held cash and investments of $19.7 billion. On January 31, 2023, Berkshire acquired an additional 41.4% interest in Pilot for approximately $8.2 billion which brought Berkshire’s ownership of Pilot up to 80%.

Berkshire repurchases its shares at prices below Berkshire’s intrinsic value, as conservatively determined by Warren Buffett and Charlie Munger. During 2022, Berkshire repurchased $7.9 billion of its common stock, including $2.6 billion in the fourth quarter.

These repurchases included 584 Class A shares purchased at an average price of approximately $468,114 per share and 3,046,794 Class B shares purchased an average price of $303.83 per share during December 2022.

On Aug. 16, 2022, the Inflation Reduction Act was signed into law. The 2022 act contains numerous provisions including a 15% corporate alternative minimum tax, expanded tax credits for clean energy incentives and a 1% excise tax on corporate stock repurchases, which all become effective in 2023. Berkshire currently does not expect a material impact on its financial statements from the act. Investors who stayed invested in Berkshire from 1964 to 2022 saw their shares gain 3,787,464% in value. Over the same period the S&P 500 with dividends included rose 24,708%.

Nothing Beats Having a Great Partner

In his annual letter to shareholders, Warren Buffett shared the following pearls of investing wisdom by Charlie Munger: Charlie and I think pretty much alike. But what it takes me a page to explain, he sums up in a sentence. His version, moreover, is always more clearly reasoned and also more artfully – some might add bluntly – stated.

Here are a few of his thoughts, many lifted from a very recent podcast:

• The world is full of foolish gamblers, and they will not do as well as the patient investor.

• If you don’t see the world the way it is, it’s like judging something through a distorted lens.

• All I want to know is where I’m going to die, so I’ll never go there. And a related thought: Early on, write your desired obituary – and then behave accordingly.

• If you don’t care whether you are rational or not, you won’t work on it. Then you will stay irrational and get lousy results.

• Patience can be learned. Having a long attention span and the ability to concentrate on one thing for a long time is a huge advantage.

• You can learn a lot from dead people. Read of the deceased you admire and detest.

• Don’t bail away in a sinking boat if you can swim to one that is seaworthy.

• A great company keeps working after you are not; a mediocre company won’t do that.

• Warren and I don’t focus on the froth of the market. We seek out good long-term investments and stubbornly hold them for a long time.

• Ben Graham said, “Day to day, the stock market is a voting machine; in the long term it’s a weighing machine.” If you keep making something more valuable, then some wise person is going to notice it and start buying.

• There is no such thing as a 100% sure thing when investing. Thus, the use of leverage is dangerous. A string of wonderful numbers times zero will always equal zero. Don’t count on getting rich twice.

• You don’t, however, need to own a lot of things in order to get rich.

• You have to keep learning if you want to become a great investor. When the world changes, you must change.

• Warren and I hated railroad stocks for decades, but the world changed and finally the country had four huge railroads of vital importance to the American economy. We were slow to recognize the change, but better late than never.

• Finally, I will add two short sentences by Charlie that have been his decision-clinchers for decades: “Warren, think more about it. You’re smart and I’m right.”

And so it goes. I never have a phone call with Charlie without learning something. And, while he makes me think, he also makes me laugh.

I will add to Charlie’s list a rule of my own: Find a very smart high-grade partner – preferably slightly older than you – and then listen very carefully to what he says.

Editor’s Note: Ingrid Hendershot, CFA is the founder and president of Hendershot Investments Inc., an investment management firm established in 1994. She is also the editor of Hendershot Investments, a quarterly investment newsletter 1 year, $50, designed for long-term investors seeking capital growth at reasonable valuations. For services offered by Hendershot Investment, visit www.hendershotinvestment.com.