This weekend the annual treasure trove (the shareholders letter) appeared on the website of Berkshire again.
Below are takeaways from the 2024 Berkshire Hathaway shareholder letter written by Warren Buffett.
There are always lessons to learn from Omaha.
For those who listen closely.
So let’s jump right in.
Berkshire Hathaway (BRK) is now a great American company.
It wasn’t always that way.
Warren Edward Buffett has been the chairman and the largest shareholder of Berkshire since 1970.
He was only about 40 years old then.
Charlie told him in 1965 that he had made a dumb decision in buying control of buying control of Berkshire Hathaway.
Charlie advised;
“Warren, forget about ever buying another company like Berkshire. But now that you control Berkshire, add to it wonderful businesses purchased at fair prices and give up buying fair businesses at wonderful prices”.
Warren calls out Charlie Munger as the architect and creator of Berkshire in the present form.
Himself he sees as in charge of the construction crew of that Omaha S&P 500 company.
So if you want to build your own mini version of Berkshire Hathaway here is the first lesson;
1. Don’t start with a sh*tty textile company that is cash flow negative and constantly needs more new capital investments then money that comes out of it.
I know from my family folklore some about that.
Apparently my grandfather had his own textile company in the east of The Netherlands and was constantly advised by his banker to buy new machines and take out new bank loans in order to do that.
Competition from Spain, Portugal and Morocco was not exactly great for margins.
Finally my grandmother had to pull the plug or it would have meant a personal bankruptcy.
My grandmother understood what my grandfather didn’t; don’t throw good money after bad money.
Or as in the shareholder letter;
"Berkshire can sustain financial surprises but we will not knowingly throw good money after bad".
Warren managed to take the cash from Berkshire’s textile business that it didn’t need to keep going and invested that in wonderful businesses instead.
Time for the second lesson of this year’s shareholders letter;
2. Buy wonderful businesses or part thereof at fair prices.
Above; AI generated image of how wonderful businesses can help your investment portfolio.
Warren writes the shareholder letter every year for investors who trust Berkshire with their savings without any expectation of resale.
Charly and he cherished the presence of lifetime shareholders and their heirs.
That brings us to the third lesson;
3. If you want to own your own mini Berkshire Hathaway copycat company then buy and hold forever some Berkshire Hathaway stock in your company.
Berkshire Hathaway has been decades in the making.
Warren and Charly managed to turn a failing company around into a compounding machine.
More importantly Berkshire is robust and not fragile.
“Berkshire should do a bit better than the average American corporation and should also operate with materially less risk of permanent loss of capital”.
Fourth lesson coming up;
4. America has been a fantastic country for investors. All they have needed to do is sit quietly, listening to no one. So buy U.S.-based equities like those in the Dow Jones Industrial Average and just keep on holding them.
Within capitalism, some businesses will flourish for a very long time while others will prove to be sinkholes.
It is harder than you would think to predict which will be the winners and the losers.
Berkshire favours 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.
Even heirs to such a business can sometimes live a lifetime of leisure.
Whilst hoping that those favoured businesses are run by able and trustworthy managers that is a more difficult judgement to make.
You and everyone else will have your share of disappointments in managers.
Berkshire now has the largest GAAP net worth recorded by any American business.
Not bad for a previously failing textiles company....
Managing Berkshire is mostly fun and always interesting.
Fifth lesson;
5. Assemble your company so you can have mostly fun and find your business always interesting.
A few huge winners have emerged from a great many dozens of decisions.
Berkshire benefits from an unusual constancy and clarity of purpose.
“We emphasise treating our employees, communities, and suppliers well. Who wouldn’t wish to do so”?
Our allegiance will always be to our country and our shareholders.
The not-so-secret weapon is that occasionally markets misprice good businesses and stock markets can unpredictably seize up.
Instant panics will happen.
The wonders of technology facilitate instant worldwide paralysis.
Markets now exhibit far more casino-like behaviour than they did when I was young.
The casino now resides in many homes and daily tempts the occupants.
Berkshire is able and willing to respond to market seizures with huge sums of money.
Sixth lesson;
6. Avoid debt and always have cash available to buy more than you normally buy in stock market panics.
Berkshire Hathaway operates with minimal requirements for cash.
The strength comes from its Niagara of diverse earnings.
During the 2008 panic Berkshire Hathaway generated cash from operations and did not rely on commercial paper, bank lines or debt markets in any manner.
Berkshire is built to last.
Seventh lesson;
7. Built your own mini Berkshire to last.
In the search of investment opportunities remember that the consumption of liquids and the need for unquestioned financial trust are timeless essentials of our world.
When you find a truly wonderful business, stick with it.
Patience pays, and one wonderful business can offset the many mediocre decisions that are inevitable.
Five very large Japanese companies have received investments from Warren since 2019.
The cost for those five investments totals 1.6 trillion Yen.
Berkshire has hedged this very effectively with 1.3 trillion Yen in bonds in Japan.
Add in some dividend income and the cost for the 5 Japan investments has been taken care of with a nice positive carry between dividend income and interest costs for the bond.
The Yen has weakened in recent years.
Neither Warren nor Greg believes they can forecast market prices of currencies.
Hedging always costs money.
Most of the reader won’t be able to issue bonds in Japan themselves.
Say you (an U.S. investor) don’t hedge and invested 10 percent of your stock portfolio in Japan in 2019 and 90% in America.
Your Japanese investments doubled after 5 years while your S&P 500 ETF investment is up 50% in that time.
The Japanese Yen lost 50% of its value.
Now you hold in 2024 just below 7% of your portfolio in Japan and slightly over 93% of your portfolio in the U.S...
Eighth lesson;
8. Don’t hedge currencies. The investments and currencies that don’t work out will get smaller in your investment portfolio anyway and can therefore hurt you less going forward.
The huge U.S. Treasury bill position (Berkshire’s cash) has finally begun to pay us far more than the pittance we have been receiving before.
Insurance came through as expected.
Before the lucky day in 1986 that Ajit Jain joined Berkshire’s insurance operations Warren was largely wandering in the wilderness and struggled to build the insurance operation.
The insurance department explains part of the success story of BRK.
The float and positive investment results allowed the company to grow faster and gave it “free” money to invest with.
The insurance float can basically be seen as leverage.
Insurance can be a wonderful business if the insurance results are good enough for the float to come “free”, the investment results are positive enough over the long run and regulators don’t fine the insurance company.
A lot of companies have tried to replicate Berkshire’s insurance success.
Most have failed.
Surprises in the property-casualty insurance business are always almost negative.
Ninth lesson;
9. Don’t try to create your own insurance business because negative surprises in insurance can mean the end of your company.
Many successful people have lived in Omaha for at least a couple of years or go there every May to be re-energized.
Keep an open mind.
There might be something good in the air or water in Omaha.
Some instinctively know that pundits should always be ignored.
After all, if a pundit could reliable predict tomorrow’s winners, would the pundit freely share those insights and thereby increase competitive buying?
That would be like finding gold and then handing a map to the neighbours showing its location.
Understand the power of incentives and the weaknesses of humans.
Tenth and last lesson;
10. Ignore all pundits except Warren Buffett.
This blog is not advice on what you should do with your money and was written for information and entertainment purposes only.
This blog borrowed content and quotes liberally from Warren Buffett’s 2024 shareholder letter for Berkshire Hathaway.
To make sure Warren wrote something please check in the original shareholder letter 2024 on the Berkshire Hathaway website.
Since Warren tries to educate in these letters, he wouldn’t mind the copy write implications.
When you invest in the stock markets it is possible to lose money. Please do your own research. If in any doubt what is best in your individual situation, please hire a licensed financial advisor. Good luck on your investment journey.
Holland Park Capital London hopes you enjoyed the information in the blog.
Holland Park Capital London Ltd is not receiving any compensation from anyone to write this blog. Holland Park Capital London is long most of the stocks in the S&P 500 index and is also long the S&P 500 index ETF. Holland Park Capital London has no business relationship with any company whose stock is mentioned in this blog. Holland Park Capital London expressed its own opinions. This is not advice. Make your own decisions please. Please go and see an authorized financial advisor before making any investment decisions. What works for Holland Park Capital London may well not work for you and your personal situation is unknown to Holland Park Capital London. Stocks go up as well as down and you may get back less than you invest. Any information in this blog should be considered general information and not relied on as a formal investment recommendation. This blog is for information purposes only and helps Holland Park Capital London expand on the book “Beat the Stock Market Casino” (available on Amazon) and brings extra discipline in the investment process. Holland Park Capital London is not liable for any mistakes in this blog. This blog cannot be a substitute for comprehensive investment analysis. Any analysis presented in this blog is illustrative in nature, limited in scope, based on an incomplete set of information and has limitations to its accuracy. The information upon which this blog is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore the accuracy cannot be guaranteed. Any opinions are as of the date of publication and are subject to change without notice.
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