{"id":1459124,"date":"2024-02-24T18:37:31","date_gmt":"2024-02-24T23:37:31","guid":{"rendered":"https:\/\/bugaluu.com\/news\/?p=1459124"},"modified":"2024-02-24T18:37:31","modified_gmt":"2024-02-24T23:37:31","slug":"berkshire-cash-hits-record-168-billion-as-buffett-warns-days-of-eye-popping-results-are-over","status":"publish","type":"post","link":"https:\/\/bugaluu.com\/news\/berkshire-cash-hits-record-168-billion-as-buffett-warns-days-of-eye-popping-results-are-over\/1459124\/","title":{"rendered":"Berkshire Cash Hits Record $168 Billion As Buffett Warns Days Of “Eye-Popping” Results Are Over"},"content":{"rendered":"

Berkshire Cash Hits Record $168 Billion As Buffett Warns Days Of “Eye-Popping” Results Are Over<\/span><\/p>\n

\n

One of the longest running traditions in modern finance is that every year, one Saturday morning in late February, the world’s financial class – from professionals to mere amateurs – would sit down as they have for the past 65 years<\/a> – for an hour and read the latest Berkshire annual letter written by Warren Buffett in which the man seen by many as the world’s greatest investor wrote down his reflections, observations, aphorisms and other thoughts which were closely parsed and analyzed for insight into what he may do next, what he thinks of the current market climate, or simply for insights into how to become a better investor. And with Buffett’s long-time investing partner, Charlie Munger, having recently passed away just shy of his 100th birthday and Buffett himself now 93, every such letter may well be the last, which is why – even though their informational content and signal-to-noise ratio has been severely diluted in recent years – they are read just as obsessively as they were when Buffett was in his prime.<\/p>\n

Which brings us to the latest Berkshire annual report and accompanying letter, which – clocking in at a good six pages more than last year’s edition <\/a>– was somewhat of a downer as the Omaha billionaire is quick to warn Berkshire’s shareholders that his massive $900 billion conglomerate, whose share price just close at a new all time high, has \u201cno possibility of eye-popping performance\u201d <\/strong>in the years ahead, which is also why the company’s cash pile hit a new record high of $167.6 billion, <\/strong>as Buffett reiterated that there were very few deals that offer the kind of transformative impact past takeovers have had, such as its purchases of insurers Geico and National Indemnity or the BNSF railroad.<\/p>\n

“There remain only a handful of companies in this country capable of truly moving the needle at Berkshire, and they have been endlessly picked over by us and by others. <\/strong>Some we can value; some we can\u2019t. And, if we can, they have to be attractively priced. Outside the U.S., there are essentially no candidates that are meaningful options for capital deployment at Berkshire. All in all, we have no possibility of eye-popping performance<\/strong>“, he wrote.<\/p>\n

It is a problem that Buffett has been staring down for almost a decade as the growth of Berkshire\u2019s operations and cash levels have compounded. That however did not prevent the company from reporting another stellar quarter, and in Q4 2023, Berkshire reported quarterly net income more than doubled to $37.574 billion, or $26,043 per Class A share, from $18.8 billion, or $12,355 per share, a year earlier.<\/p>\n

<\/a><\/p>\n

Of course, as is well-known, Buffett despises GAAP earnings and instead urges investors to look at operating earnings instead which strip away the quarterly fluctuations of the conglomerate’s public stock investments (i.e. unrealized gains\/losses). This is what he wrote last year.<\/p>\n

The GAAP earnings are 100% misleading when viewed quarterly or even annually. Capital gains, to be sure, have been hugely important to Berkshire over past decades, and we expect them to be meaningfully positive in future decades. But their quarter-by-quarter gyrations, regularly and mindlessly headlined by media, totally misinform investors.<\/em><\/p>\n

Buffett did not fail to take a stab at “net earnings” this year either, and addressing those who seek the “proverbial bottom line labeled Net earnings”, he writes that “The numbers read $90 billion for 2021, ($23 billion) for 2022 and $96 billion for 2023. What in the world is going on?”<\/em><\/p>\n

You seek guidance and are told that the procedures for calculating these \u201cearnings\u201d are promulgated by a sober and credentialed Financial Accounting Standards Board (\u201cFASB\u201d), mandated by a dedicated and hard-working Securities and Exchange Commission (\u201cSEC\u201d) and audited by the world-class professionals at Deloitte & Touche (\u201cD&T\u201d). On page K-67, D&T pulls no punches: \u201cIn our opinion, the financial statements . . . . . present fairly, in all material respects (italics mine), the financial position of the Company . . . . . and the results of its operations . . . . . for each of the three years in the period ended December 31, 2023 . . . . .\u201d So sanctified, this worse-than-useless \u201cnet income\u201d figure quickly gets transmitted throughout the world via the internet and media. All parties believe they have done their job \u2013 and, legally, they have.<\/em><\/p>\n

We, however, are left uncomfortable. At Berkshire, our view is that \u201cearnings\u201d should be a sensible concept that Bertie will find somewhat useful \u2013 but only as a starting point \u2013 in evaluating a business. Accordingly, Berkshire also reports to Bertie and you what we call \u201coperating earnings.\u201d Here is the story they tell: $27.6 billion for 2021; $30.9 billion for 2022 and $37.4 billion for 2023.<\/em><\/p>\n

Yet while he did bash GAAP treatment of net income, he had a far more glowing view of the company’s GAAP assessment of its balance sheet:<\/p>\n

Berkshire now has \u2013 by far \u2013 the largest GAAP net worth recorded by any American business. Record operating income and a strong stock market led to a year-end figure of $561 billion<\/strong>. The total GAAP net worth for the other 499 S&P companies \u2013 a who\u2019s who of American business \u2013 was $8.9 trillion in 2022. (The 2023 number for the S&P has not yet been tallied but is unlikely to materially exceed $9.5 trillion.)<\/em><\/p>\n

Turning to Berkshire’s preferred metric for Q4, Berkshire generated operating earnings of $8.48 billion, versus $6.63 billion for the same period a year earlier, helped by an increase in insurance underwriting earnings and investment income amid higher interest rates and milder weather.\u00a0<\/p>\n

<\/a><\/p>\n

Berkshire\u2019s earnings are always closely watched as a proxy for US economic health because of the wide-ranging nature of his businesses \u2014 from railroad\u00a0BNSF,\u00a0Geico\u00a0and\u00a0Dairy Queen. That also makes the company particularly susceptible to higher interest rates, which can crimp demand, and Buffett warned in May last year that earnings at most of its operations would fall in 2023 as an \u201cincredible period\u201d for the US economy draws to an end.<\/p>\n

Indeed, while the company’s core insurance-linked businesses once again outperformed – as earnings from insurance underwriting jumped to $848 million for the period from $160 million in the same quarter a year earlier and Geico posted full-year pretax underwriting earnings of $3.64 billion compared to a loss in 2022 after it raised premiums and received fewer claims –\u00a0 Berkshire noted that operating earnings from its railroad operations fell to $1.36 billion for the quarter, versus $1.47 billion for the same period a year earlier. Operating earnings from utilities and energy also fell to $632 million from $739 million.<\/p>\n

\u201cOur insurance business performed exceptionally well last year, setting records in sales, float and underwriting profits,\u201d Buffett said in the shareholder letter. \u201cWe have much room to grow.\u201d<\/p>\n

Berkshire also repurchased $2.2 billion of its own stock in Q4, and boosted full-year buybacks to $9.2 billion. Buffett noted that investors’ “indirect ownership of both Coke and AMEX increased a bit last year because of share repurchases we made at Berkshire. Such repurchases work to increase your participation in every asset that Berkshire owns. To this obvious but often overlooked truth, I add my usual caveat: All stock repurchases should be price-dependent. What is sensible at a discount to business-value becomes stupid if done at a premium.<\/em>“<\/p>\n

<\/a><\/p>\n

\u201cBuffett is observing a lack of attractive opportunities \u2014 and with a rise in Berkshire\u2019s share price, even repurchasing its own shares is less attractive,\u201d\u00a0Jim Shanahan, an analyst with Edward Jones told Bloomberg. \u201cBut that\u2019s his pattern: Nothing will really happen and then he goes big.\u201d<\/p>\n

With buybacks well below levels reached during 2020-2021 when Buffett went on a stock repurchasing spree, and even though Berkshire spent billions acquiring truck-stop operator Pilot Flying J and insurance conglomerate Alleghany in recent years, adding them to a portfolio that includes ice cream purveyor Dairy Queen and utility behemoth Berkshire Hathaway Energy, those outlays put only a minimal dent in Berkshire\u2019s cash pile, which continues to climb. It hit a record $167.6 billion at the end of 2023, up $10 billion in the quarter, and up $39 billion over the course of the year.<\/p>\n

<\/a><\/p>\n

The cash mountain was so large that interest income alone in 2023 would be around $7.5 billion assuming the company earned a 5% interest on its $150 billion average cash hoard over the year.<\/p>\n

\u201cSize did us in, though increased competition for purchases was also a factor,\u201d Buffett said. \u201cFor a while, we had an abundance of candidates to evaluate. If I missed one \u2014 and I missed plenty \u2014 another always came along. Those days are long behind us.\u201d<\/strong><\/p>\n

That said, Buffett has a long history of stepping in to aid firms in crisis, leveraging his cult investing status and financial heft to help them restore confidence and rebound from their difficulties. In his letter, Buffett said Berkshire is ready to step in should financial disaster strike, noting such market seizures may offer it an \u201coccasional large-scale opportunity.\u201d That\u2019s a tacit reminder from Buffett that problems do arise, according to\u00a0Cole Smead, president of investment firm\u00a0Smead Capital Management.<\/p>\n

\u201cBuffett is whispering when he used a megaphone in the past,\u201d Smead said. \u201cHe\u2019s whispering: Be very careful \u2014 problems do arise. He\u2019s saying we\u2019ll be ready, but that Berkshire will only be a buyer when no one else is a buyer.\u201d<\/p>\n

But while the odds of a transformative deal may be gone (until the next crisis at least), Buffett believes that \u201cBerkshire should do a bit better than the average American corporation and, more important, should also operate with materially less risk of permanent loss of capital. Anything beyond \u201cslightly better,\u201d though, is wishful thinking.”<\/strong><\/em><\/p>\n

Whether “slightly better” is enough for Buffett shareholders remains to be seen: to be sure, the all time high in the stock is easing any concerns, but the recent passing of Berkshire\u2019s acerbic sidekick has turned investors\u2019 attention towards the company\u2019s prospects without Buffett at its helm. Greg Abel, Buffett\u2019s anointed successor, and Todd Combs and Ted Weschler, his investment deputies, are lined up to steer the giant. They have a very tough act to follow. Since 1964, Berkshire shares have returned 4,384,748%, a CAGR of 19.8%, far outstripping the 31,233% gain – and double the 10.2% CAGR – by the benchmark S&P 500.<\/p>\n

One final point: this was the first time Berkshire reported earnings since\u00a0Charlie Munger, Berkshire\u2019s vice chairman and Buffett\u2019s long-time sidekick and investing partner, died at 99 last November. Buffett devoted much of the letter to praising Munger\u2019s role in creating the sprawling firm, calling him the \u201carchitect\u201d of the company and referring to himself as the person \u201cin charge of the construction crew.\u201d Together the pair would hold court at Berkshire\u2019s annual meetings in a crowded Omaha sports arena, opining on topics ranging from stock markets to cryptocurrency and even life and success.<\/p>\n

\u201cCome to Berkshire\u2019s annual gathering on May 4, 2024,\u201d Buffett said in the letter. \u201cOn stage you will see the three managers who now bear the prime responsibilities for steering your company,\u201d he said, referring to himself,\u00a0Ajit Jain\u00a0and\u00a0Greg Abel. Jain runs Berkshire\u2019s insurance businesses and Abel \u2014 Buffett\u2019s anointed successor-in-waiting \u2014 oversees the non-insurance operations.<\/p>\n

Financials aside, here are some of the notable highlights from Buffett’s annual letter <\/a>to investors.<\/p>\n

On what Berkshire does (well):<\/strong><\/p>\n

Our 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. <\/strong>Within capitalism, some businesses will flourish for a very long time while others will prove to be sinkholes. It\u2019s 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. <\/strong><\/p>\n

At Berkshire, we particularly favor the rare enterprise that can deploy additional capital at high returns in the future<\/strong>. Owning only one of these companies \u2013 and simply sitting tight \u2013 can deliver wealth almost beyond measure. Even heirs to such a holding can \u2013 ugh! \u2013 sometimes live a lifetime of leisure<\/em><\/p>\n

On finding attractive investments:<\/strong><\/p>\n

This combination of the two necessities I\u2019ve described for acquiring businesses has for long been our goal in purchases and, for a while, we had an abundance of candidates to evaluate. If I missed one \u2013 and I missed plenty \u2013 another always came along. Those days are long behind us; size did us in, though increased competition for purchases was also a factor.<\/em><\/p>\n

On Berkshire’s impact in the US economy:<\/strong><\/p>\n

Berkshire now has \u2013 by far \u2013 the largest GAAP net worth recorded by any American business. Record operating income and a strong stock market led to a yearend figure of $561 billion. The total GAAP net worth for the other 499 S&P companies \u2013 a who\u2019s who of American business \u2013 was $8.9 trillion in 2022. (The 2023 number for the S&P has not yet been tallied but is unlikely to materially exceed $9.5 trillion.) By this measure, Berkshire now occupies nearly 6% of the universe in which it operates. <\/strong>Doubling our huge base is simply not possible within, say, a five-year period, particularly because we are highly averse to issuing shares (an act that immediately juices net worth).<\/em><\/p>\n

On the difference between GAAP earnings and operating earnings:<\/strong><\/p>\n

The primary difference between the mandated figures and the ones Berkshire prefers is that we exclude unrealized capital gains or losses that at times can exceed $5 billion a day. Ironically, our preference was pretty much the rule until 2018, when the \u201cimprovement\u201d was mandated. Galileo\u2019s experience, several centuries ago, should have taught us not to mess with mandates from on high. But, at Berkshire, we can be stubborn.<\/em><\/p>\n

On compounding<\/strong><\/p>\n

Make no mistake about the significance of capital gains: I expect them to be a very important component of Berkshire\u2019s value accretion during the decades ahead. Why else would we commit huge dollar amounts of your money (and Bertie\u2019s) to marketable equities just as I have been doing with my own funds throughout my investing lifetime? I can\u2019t remember a period since March 11, 1942 \u2013 the date of my first stock purchase \u2013 that I have not had a majority of my net worth in equities, U.S.-based equities. And so far, so good. The Dow Jones Industrial Average fell below 100 on that fateful day in 1942 when I\u00a0 pulled the trigger.\u201d I was down about $5 by the time school was out. Soon, things turned around and now that index hovers around 38,000. America has been a terrific country for investors. All they have needed to do is sit quietly, listening to no one.<\/strong><\/em><\/p>\n

Full letter below (pdf link<\/a>).<\/em><\/p>\n<\/p>\n<\/div>\n

Tyler Durden<\/a><\/span>
\nSat, 02\/24\/2024 – 13:37<\/span><\/p>\n

\u200bRead More<\/a>\u00a0<\/p>\n

\u00a0<\/p>\n","protected":false},"excerpt":{"rendered":"

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