Yesterday, Warren Buffett’s latest annual letter to shareholders was released.
It’s 16 pages long and VERY easy to read.
The first page was a tribute to Charlie Munger that you really should check out.
Here is my super quick and condensed summary for you-
Warren said Charlie is the architect of Berkshire, and Warren is the general contractor.
Charlie would guard against Warren’s old habits of buying fair businesses at wonderful prices, as Ben Graham taught him, instead of buying wonderful businesses at fair prices.
Warren wants “lifetime” shareholders who ignore pundits and have the mindset of people who would use excess funds to buy a farm or rental property versus lottery tickets or hot stocks.
Warren said operating earnings over net earnings are more important because “Net earnings (loss) read $90 billion for 2021, ($23 billion) for 2022, and $96 billion for 2023”.
But “Berkshire also reports its “operating earnings” and here is the story they tell: $27.6 billion for 2021; $30.9 billion for 2022 and $37.4 billion for 2023.
Operating earnings show a steady yearly increase where net earnings are way up one year, then way down the next, and the media will only focus on the net earnings.
Operating earnings are the money that a company makes from selling its products or services, without counting the extra costs of taxes, interest, or other things that are not part of its main business.
The goal at Berkshire is simple: “We want to own either all or a portion of businesses that enjoy good economics that are fundamental and enduring. Within capitalism, some businesses will flourish for a very long time while others will prove to be sinkholes. It’s harder than you would think to predict which will be the winners and losers. And those who tell you they know the answer are usually either self-delusional or snake-oil salesmen.”
“At Berkshire, we particularly favor the rare enterprise that can deploy additional capital at high returns in the future. Owning only one of these companies – and simply sitting tight – can deliver wealth almost beyond measure.”
If you miss an opportunity, another always comes along.
Instant panics don’t happen often, but they will happen and you have to be ready to seize the opportunity because the market is like a casino that resides in people’s homes and tempts them daily.
Size is hampering their ability to rapidly grow, but Berkshire has one eternal rule: NEVER risk permanent loss of capital.
Because of the rewarding tailwind of compound interest, all you have to do during your lifetime is make a couple of good decisions and avoid serious mistakes.
Berkshire’s strength is its earnings AFTER interest costs, taxes, and substantial charges for depreciation and amortization.
EBITDA is a banned word at Berkshire – see Charlie’s interpretation below.
Stock repurchases increase your participation in EVERY asset that the business owns. But, they should be price dependent – “What is sensible at a discount to business value becomes stupid if done at a premium.”
He used Coke and AmEx as examples of how they have done nothing, like Rip Van Winkle, yet their earnings and dividends in those businesses increase every year – like how their 2023 AmEx earnings surpassed the price they initially paid long ago.
The lesson is that when you find a truly wonderful business, stick with it and have patience because one wonderful business can offset many of your inevitable mediocre decisions.
They have a passive investment in 5 Japanese businesses, which began on July 4th, 2019 and they will not exceed 9.9% because they don’t want an “ownership” stake, which is at 10% or greater.
Those businesses are –
Itochu
Marubeni
Mitsubishi
Mitsui
Sumitomo
Warren says that the Japanese managers are far less aggressive about compensation than US companies, they apply about ⅓ of their earnings towards dividends and with the retained earnings build their many businesses and buy back shares at attractive prices.
Two Berkshire businesses that didn’t fare very well were BNSF Railroad and BHE Utility.
Railroads are essential to America’s economic future and are superior to trucks in hauling many hundreds of miles, but the nature of the business eats lots of capital.
Overall BNSF has produced acceptable returns to the 2010 purchase price, but not as well as it would seem because of the capital required for the business, labor costs, and politics.
Railroads don’t get much attention when they’re working, but when they aren’t it’s noticed immediately.
Warren says that a century from now BNSF will continue to be a major asset for the country and Berkshire.
Their utility business, BHE, also faces heavy capital investments, regulations, and weather-related events, leaving razor-thin profit margins that could turn negative soon.
Warren thinks he made a mistake in forecasting the public utility environment as an investment.
What did do very well was its insurance business because its underwriting earnings are not correlated to earnings elsewhere in the economy.
Warren also said that he was wandering in the wilderness, struggling to build the insurance operation until Ajit Jain was hired in 1986.
Warren closed with an invitation to the Annual shareholder meeting in May, recognized Greg Abel – the next CEO, insurance operation manager Ajit Jain, and touched on Charlie’s absence from the stage.
And of course, he suggested you pick up a copy of the new 4th edition of Poor Charlie’s Almanack to improve your life as it’s improved Warren’s.
I’d love it if you would share with me your favorite thought or quote from Charlie Munger and I’ll share it in the next newsletter.
😁Special THANK YOU to the (6) people who responded to the last newsletter!!
Be sure to check out a few of the responses below.
That said, let’s get to the moves made this week. And remember, you can always check out the PORTFOLIOS, the PODCAST, or see what’s cooking on the YouTube channel.
Dividends Received This Week ~$203.16
- Starbucks (SBUX) | $14.25
- Energy Transfer (ET) | $9.77
- Nexstar Media (NXST) | $179.14
Dividends Received Year to Date~
$1,109.74
Stocks Sold (AVERAGE)
- 31 Energy Transfer (ET) | $14.65
- 26 Warner Bros. Discovery (WBD) | $9.80
Stocks Bought (AVERAGE)
- 7 Realty Income (O) | $52.49
- 12 Agree Realty (ADC) | $56.85
Notable Ex-Dividends This Week + SSD Score
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- 2/28 Agree Realty (ADC), 5.15% | 70S
- 2/28 Union Pacific (UNP), 2.02% | 88VS
- 2/29 Realty Income (O), 5.81% | 80S
- 2/29 Diageo (DEO), 2.68% | 99VS
- 2/29 PepsiCo (PEP), 3.20% | 93VS
- 2/29 Lockheed Martin (LMT), 2.92% |84VS
- 2/29 McDonald’s (MCD), 2.24% | 77S
- 3/1 Nike (NKE), 1.40% | 99VS
🎙️Podcasts You Should Check Out!🎙️
🤑 Looking for an enlightening interview? Super-investor Bruce Berkowitz chatted with William Green on We Study Billionaires about his diverging from the crowd approach and the two dividend stocks that comprise the bulk of his portfolio.
🎧 A minimalist approach to investing in a fun Barron’s Streetwise episode called “On Financial Nudism“. ‘Nuff said.
✍️What You Said!✍️
In last week’s newsletter, I asked how you deal with dividends and taxes… this is what you had to say.
Ron said he’s living off dividends in retirement and hasn’t paid a dime in taxes on the dividend income in 5 years. He also added, “It’s better to be a (business) owner than a worker.”
Matz said, “0% taxes is a good incentive for a new investor, but sadly 2/3 of my dividend income is from non-qualified dividends so I pay a fair amount of taxes every year.”
Investing Newsletters You Might Like
⭐Ryne Williams writes a free weekly dividend newsletter and creates multiple top-notch YouTube videos every week. This is a community for dividend investors by dividend investors.
🤑Connor Von Ooyen used to build mobile games at Zynga, and became obsessed with the stock market, so he built an AI tool to scour the internet for the best stock market ideas and news and summarize straight to your inbox. Check out The Yellowbrick Road newsletter!
💰Dividend Earner wants to make your money work for you through dividend growth investing and shares all his holdings and trades monthly. Learn from my mistakes and profit from my success by subscribing to his newsletter.
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Random music video I enjoy and you might too!
🎵The Smashing Pumpkins – Tonight, Tonight 🎵
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With that being said, have a WONDERFUL week and I’ll see you in the next one.
