Berkshire Beats Estimates; Buffett admires his company’s “architects”

In its first earnings report since the death of longtime Vice Chairman Charlie Munger, Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) celebrated an investment legend and posted strong, better-than-expected returns.

Shares of the conglomerate initially rose about 3% after opening Monday, but fell to about $413 per share by early afternoon, down about 1% for the day.

As usual, Chairman and CEO Warren Buffett had a lot to say about Munger, the company, and the markets in his annual letter to shareholders.

Berkshire’s Origin Story

In his 2023 annual report released on Saturday, Buffett paid tribute to his friend and partner with a personal note titled “Charlie Munger: The Architect of Berkshire Hathaway.”

In the letter, Buffett stated the hard truth that Munger had told him it was a “stupid decision” to take over management of Berkshire Hathaway in 1965. But Munger told Buffett that he knows how to solve problems.

“Warren, forget about acquiring other companies like Berkshire. But now that you control Berkshire, give up buying fair companies at great prices and fair companies at great prices. In other words, throw away everything you learned from your hero Ben Graham. It works, but only when done on a small scale.” Quoting Munger in 1965, Buffett wrote:

Buffett followed his instructions thereafter, until Munger’s death on November 28, 2023, just 33 days before he turned 100, adding that each time he returned to his old habits, “it brought me back to my senses.” Yes.

“In reality, Charlie was the ‘architect’ of what is now Berkshire, and I served as the ‘general contractor’ who put together his vision on a daily basis,” Buffett added. “Charlie never tried to take credit for his role as creator, and instead I “I made sure he was greeted and praised. In some ways, my relationship with him was part older brother, part loving father.”

Fourth quarter and year-end performance

Berkshire Hathaway had a good fourth quarter and a strong year in 2023.

In the most recent quarter, the company’s net income reached $37.6 billion, more than double the $18.1 billion recorded in the fourth quarter of 2022. Net income for the fourth quarter of 2022 was $96 billion, up from a net loss of $22 billion in 2022.

But the company’s net income is deceptive because it includes Berkshire’s stock portfolio of more than $370 billion, which includes unrealized gains or losses depending on the year. Additionally, since this is a long-term holding, calculating annual fluctuations is meaningless.

However, Berkshire’s stock portfolio rose 15.8% in 2023 and recorded an average annual return of 19.8% since 1965, exceeding the S&P 500’s average annual return of 10.2% since then.

Berkshire Hathaway’s favorite metric is operating profit. It focuses on how the business operates, excluding the returns from the stock portfolio. Those numbers were good too, as the company generated $8.5 billion in operating profit in the fourth quarter, up 29% year-over-year. For the full year, Berkshire’s operating income was $37.5 billion, up 21% from 2022.

Berkshire’s best-performing business in 2023 was insurance. Both underwriting and investment income from the insurance business were significantly ahead for the quarter and year. Meanwhile, the company’s rail and utilities business declined in the quarter.

But operating profits from Berkshire’s other businesses rose 8% this year to $15.1 billion. Berkshire Hathaway either outright owns or has controlling interests in about 65 companies, including names as diverse as Benjamin Moore, Dairy Queen, Business Wire, and GEICO.

Built to last

As always, Buffett had interesting, possibly serious, but realistic thoughts for many about the markets and his company.

“Scale has done us,” Buffett wrote in the letter, citing his team’s ability to find companies that can “move the needle” for Berkshire Hathaway.

“Berkshire currently has the largest GAAP net worth of any U.S. company,” he added. “Record operating profits and strong equity markets drove the year-end figure to $561 billion. The combined GAAP net assets of the other 499 S&P companies representing U.S. companies were $8.9 trillion in 2022. By this measure, Berkshire currently has almost 6% of the world in which it operates. It is impossible to double our massive base in five years. “Especially because we really hate issuing shares.”

So while Buffett says the company is “unlikely to produce stellar performance,” it is “built for sustainability,” with diversified returns and financial conservatism that allow it to deftly navigate any market, even the bad ones.

Buffett concluded his letter by inviting shareholders to attend the annual general meeting on May 4 to hear from the company’s three leaders: himself, Vice Chairman Greg Abel and Vice Chairman Ajit Jain.

“The only person missing from the stage this year will be Charlie,” he said.