Warren Buffett is at a crossroads

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Berkshire Hathaway, the investment vehicle of Warren Buffett, reported results for 2023 and Buffett left investors with some pearls of wisdom in the accompanying letter to shareholders.

As Warren Buffett explains, investing is not easy, but it is very rewarding, if good decisions are made more often than bad ones. But Buffett states that it is getting harder to find good investments.

Buffett, and his business partner Charlie Munger, have achieved an investment miracle over the last 59 years. Their compound annual returns since inception have been 19.8 percent, while the S&P500 index has grown at 10.2 percent with dividends reinvested.

 

  • You can find the 2023 16-page letter to shareholders here.
  • Previous letters (back to 1977) here.
  • ...And the 152-page annual report for 2023 here.

Here is an excerpt from this year's letter:

 

 

The anachronistic phrase — “snake oil salesmen” — shows Buffett’s age, which is now 93. His long-time partner in Berkshire, Charlie Munger, died in November 2023 at 99 years of age. Given their long history together this is a momentous event in the history of Berkshire and Buffett’s personal life.

Charlie Munger had been a mentor to Buffett since 1965 and is credited by Buffett as being the architect of the investment company and its remarkable success. For 59 years Buffett has relied on Munger to keep him on track, or to nudge him back if he veered off the best course.

While Buffett is alone now in managing Berkshire, he points out that two very qualified managers are ready to step in after he is gone.

He talked about Greg Abel as the most likely one to take the job of CEO. Abel runs everything but the insurance business, Berkshire’s most important division. Insurance is managed by Ajit Jain.

Abel is from Edmonton, Alberta and a graduate of the University of Alberta. Jain is from India and has been working with Buffett since 1986.

With Munger’s death the question of succession will be top of mind for Berkshire investors. But they have been counseled for a long time that patience is the key to investing.

Buffett addresses the issue of the cash holdings (US$133 billion in Treasury Bills) by highlighting the 2008 panic when Berkshire did not need any external finance. The cash hoard keeps growing as Berkshire receives cash flows of about $37 to $49 billion per year but has not made any large acquisitions recently. Berkshire ranks ninth in the most valuable companies in the S&P 500.

Buffett's largest holding, after insurance and railways, is Apple. Berkshire owns shares worth more than $170 billion of Apple now.

Warren Buffett, now alone at the top after Munger’s death, has sat on his hands and his cash pile while the U.S. stock market hits new highs, stating that it is difficult to find investments at a reasonable price and in the size that Berkshire requires.

But how long can he sit on that pile of cash if the market keeps rising?

 

Hilliard MacBeth

 

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