Each year, in his capacity as chairman and chief executive of Berkshire Hathaway (NYSE:BRK.A), Warren Buffett has written a letter to shareholders.
The latest one covers events in 2024, a period during which the group’s 189 operating businesses (mainly in the insurance, railroad and utility sectors) reported earnings of $47.4bn.
This figure excludes the $52.8bn of gains made on its investments in other listed companies. Most of this ($49.3bn) has yet to be realised, it simply reflects the change in market value of these shareholdings over the course of the year.
Buffett tends not to focus on this number. That’s because “over time, we think it highly likely that gains will prevail — why else would we buy these securities?”
And he notes that the value of these will change significantly from one period to another. That’s why he stresses (yet again) the need to take a long-term view when it comes to investing.
Buffett writes: “Our horizon for such commitments is almost always far longer than a single year. In many, our thinking involves decades. These long-termers are the purchases that sometimes make the cash register ring like church bells.”
Indeed, this approach appears to have paid off.
Spectacular growth
From 1965-2024, Berkshire Hathaway’s stock price has grown by an average annual rate of 19.9%, almost double that of the S&P 500. Overall, this has resulted in an astonishing 5,502,284% increase in the value of each share.
And if it wasn’t for the US stock market, I’m not sure what Buffett would be doing today. The billionaire modestly writes: “Lacking such assets as athletic excellence, a wonderful voice, medical or legal skills or, for that matter, any special talents, I have had to rely on equities throughout my life.”
Piles of cash
Elsewhere in his letter, Buffett acknowledges that the group’s sitting on a lot of cash. At 31 December, its balance sheet disclosed $334bn of cash, cash equivalents and short-term Treasury Bills. To put this in context, it’s enough to buy Shell and BP, and have $35bn left over.
Some have speculated that the $167bn increase during the course of the year is a sign that he thinks a crash is coming.
But without explaining why the company’s been selling equities and stockpiling cash, he says: “Berkshire shareholders can rest assured that we will forever deploy a substantial majority of their money in equities… Berkshire will never prefer ownership of cash-equivalent assets over the ownership of good businesses, whether controlled or only partially owned.”
And finally…
However, not everything in the Berkshire Hathaway garden’s rosy. In aggregate, its operating companies are hugely profitable. But 53% of them reported falling earnings.
Also, Buffett admits to sometimes making mistakes, both in terms of “assessing the future economics of a business” and hiring people.
And I think with tinge of sadness, the American writes: “At 94, it won’t be long before Greg Abel replaces me as CEO and will be writing the annual letters.”
But whenever that time comes, I’m sure millions of investors around the world will acknowledge his influence. I think he’s proven that by investing in quality companies at a fair price – and taking a long-term view – it’s possible to make lots of money.
May those cash registers keep on ringing!
