Berkshire Hathaway Inc. 2022 Annual Letter to Shareholders

Berkshire Hathaway Inc. 2022 Annual Letter to Shareholders: Briefing Document

Source: Berkshire Hathaway 2022 Shareholder Letter

This briefing document summarizes the key themes and important information presented in Warren Buffett's 2022 annual letter to the shareholders of Berkshire Hathaway Inc.

Overall Theme: The letter emphasizes Berkshire Hathaway's enduring investment philosophy centered on long-term ownership of quality businesses, the importance of trust and disciplined capital allocation, and the significant contribution of the "American Tailwind" to their success. Buffett also highlights the difference between operating earnings and GAAP earnings, the benefits of value-accretive share repurchases, and the profound influence of his partner, Charlie Munger.

Key Themes and Important Ideas:

1. Enduring Shareholder Base and Philanthropy: Berkshire's individual shareholders are primarily long-term savers who often direct significant wealth towards philanthropic endeavors rather than "look-at-me assets and dynasty-building."

• Quote: "We believe Berkshire’s individual holders largely to be of the once-a-saver, always-a-saver variety. Though these people live well, they eventually dispense most of their funds to philanthropic organizations."

• Quote: "The disposition of money unmasks humans. Charlie and I watch with pleasure the vast flow of Berkshire-generated funds to public needs and, alongside, the infrequency with which our shareholders opt for look-at-me assets and dynasty-building."

1. Berkshire's Investment Approach: Business Pickers, Not Stock Pickers: Berkshire allocates capital between two primary forms of ownership: controlling 100% of businesses and passively owning publicly-traded stocks. The core principle for both is investing in businesses with "long-lasting favorable economic characteristics and trustworthy managers."

• Quote: "Our goal in both forms of ownership is to make meaningful investments in businesses with both long-lasting favorable economic characteristics and trustworthy managers."

• Quote: "Please note particularly that we own publicly-traded stocks based on our expectations about their long-term business performance, not because we view them as vehicles for adroit purchases and sales. That point is crucial: Charlie and I are not stock-pickers; we are business-pickers."

1. Creative Destruction and Market Inefficiency: Buffett acknowledges the dynamic nature of capitalism, where some businesses fail ("losers") while others innovate and thrive ("gusher of improved goods and services"), referencing Schumpeter's "creative destruction." He also asserts that "efficient" markets exist only in theory and that opportunities arise to buy great businesses at "truly foolish prices."

• Quote: "Capitalism has two sides: The system creates an ever-growing pile of losers while concurrently delivering a gusher of improved goods and services. Schumpeter called this phenomenon “creative destruction.”"

• Quote: "It’s crucial to understand that stocks often trade at truly foolish prices, both high and low. “Efficient” markets exist only in textbooks. In truth, marketable stocks and bonds are baffling, their behavior usually understandable only in retrospect."

1. The Power of a Few Winners (The Secret Sauce): Berkshire's long-term success is attributed to a small number of exceptional investment decisions and the power of compounding over time. Investments like Coca-Cola and American Express, purchased decades ago, continue to generate significant and growing dividends and have seen substantial appreciation in market value.

• Quote: "Our satisfactory results have been the product of about a dozen truly good decisions – that would be about one every five years – and a sometimes-forgotten advantage that favors long-term investors such as Berkshire."

• Quote: "The 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 90s as well."

1. Focus on Operating Earnings vs. GAAP Earnings: Buffett emphasizes the importance of focusing on "operating earnings" (income exclusive of capital gains or losses from equity holdings) as the true measure of Berkshire's performance. He describes the GAAP figure as "wildly and capriciously" fluctuating and "100% misleading when viewed quarterly or even annually."

• Quote: "Charlie and I focus on this operational figure and urge you to do so as well. The GAAP figure, absent our adjustment, fluctuates wildly and capriciously at every reporting date."

• Quote: "The GAAP earnings are 100% misleading when viewed quarterly or even annually."

1. Insurance Operations and Float: The acquisition of Alleghany Corporation strengthened Berkshire's property-casualty insurance operations, leading to an increase in insurance float. Buffett highlights the historical significance and continuing value of this float, which has grown significantly over decades through disciplined underwriting and acquisitions.

• Quote: "Aided by Alleghany, our insurance float increased during 2022 from $147 billion to $164 billion."

• Quote: "Since purchasing our first property-casualty insurer in 1967, Berkshire’s float has increased 8,000-fold through acquisitions, operations and innovations. Though not recognized in our financial statements, this float has been an extraordinary asset for Berkshire."

1. Value-Accretive Share Repurchases: Berkshire and its significant investees (like Apple and American Express) engaged in share repurchases in 2022, which Buffett views as a "very minor gain in per-share intrinsic value." He strongly argues that value-accretive repurchases benefit all continuing shareholders and dismisses claims that all repurchases are harmful.

• Quote: "At Berkshire, we directly increased your interest in our unique collection of businesses by repurchasing 1.2% of the company’s outstanding shares. At Apple and Amex, repurchases increased Berkshire’s ownership a bit without any cost to us."

• Quote: "The math isn’t complicated: When the share count goes down, your interest in our many businesses goes up. Every small bit helps if repurchases are made at value-accretive prices."

• Quote: "When you are told that all repurchases are harmful to shareholders or to the country, or particularly beneficial to CEOs, you are listening to either an economic illiterate or a silver-tongued demagogue (characters that are not mutually exclusive)."

1. Trust and Simplicity: Buffett emphasizes the trust placed in him and Charlie Munger by many shareholders, some of whom do not closely scrutinize the financial statements. He vows to continue treating their money as he does his own. He also condemns "bold imaginative accounting" and manipulation of earnings figures.

• Quote: "There are many Berkshire centimillionaires and, yes, billionaires who have never studied our financial figures. They simply know that Charlie and I – along with our families and close friends – continue to have very significant investments in Berkshire, and they trust us to treat their money as we do our own."

• Quote: "Even the operating earnings figure that we favor can easily be manipulated by managers who wish to do so. Such tampering is often thought of as sophisticated by CEOs, directors and their advisors. Reporters and analysts embrace its existence as well. Beating “expectations” is heralded as a managerial triumph. That activity is disgusting."

1. The American Tailwind: Buffett credits America's dynamism as a significant contributor to Berkshire's success and expresses unwavering optimism in the country's future despite economic challenges. He highlights Berkshire's substantial contribution to federal taxes.

• Quote: "Thus began our journey to 2023, a bumpy road involving a combination of continuous savings by our owners (that is, by their retaining earnings), the power of compounding, our avoidance of major mistakes and – most important of all – the American Tailwind. America would have done fine without Berkshire. The reverse is not true."

• Quote: "We owe the country no less: America’s dynamism has made a huge contribution to whatever success Berkshire has achieved – a contribution Berkshire will always need. We count on the American Tailwind and, though it has been becalmed from time to time, its propelling force has always returned."

• Quote: "During the decade ending in 2021, the United States Treasury received about $32.3 trillion in taxes... Berkshire’s contribution via the corporate income tax was $32 billion during the decade, almost exactly a tenth of 1% of all money that the Treasury collected."

1. The Wisdom of Charlie Munger: Buffett pays tribute to his long-time partner, Charlie Munger, sharing several of Munger's insightful and often blunt observations on investing, rationality, patience, and learning.

• Quote: "Charlie and I think pretty much alike. But what it takes me a page to explain, he sums up in a sentence."

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

Performance Data (Key Fact):

• Compounded Annual Gain (1965-2022): Berkshire Hathaway - 19.8%; S&P 500 with Dividends Included - 9.9%.

• Overall Gain (1964-2022): Berkshire Hathaway - 3,787,464%; S&P 500 with Dividends Included - 24,708%.

Important Financial Facts:

• Berkshire's operating earnings in 2022 were a record $30.8 billion.

• Berkshire's insurance float increased from $147 billion to $164 billion in 2022.

• Berkshire repurchased 1.2% of its outstanding shares in 2022.

• At year-end 2022, Berkshire was the largest owner of eight major companies: American Express, Bank of America, Chevron, Coca-Cola, HP Inc., Moody’s, Occidental Petroleum, and Paramount Global.

• BNSF and BH Energy, wholly or majority-owned by Berkshire, also had earnings exceeding $3 billion in 2021.

• Berkshire paid $32 billion in corporate income taxes during the decade ending in 2021.

Conclusion: The 2022 letter reinforces the core tenets of Buffett's value investing philosophy: patience, long-term perspective, focusing on intrinsic business value, avoiding market noise, and the significant advantages derived from a few excellent decisions over time. It also underscores the importance of trustworthy management, a strong balance sheet, and the positive impact of the American economy on Berkshire's trajectory. The letter is also marked by Buffett's characteristic wit and candor, particularly in his appreciation for Charlie Munger and his critique of deceptive accounting practices.