In his 2016 Berkshire Hathaway Annual Letter, Warren Buffett discusses how he and Charlie Munger strive for yearly growth in normalized earnings per share, despite potential economic downturns or industry-specific challenges.
Retaining all earnings, they reinvest significantly more than competitors, prioritizing long-term growth. While recognizing occasional minor gains, they stress the readiness to seize major opportunities, particularly during economic crises, likening them to moments when “dark clouds… rain gold.”
Their strategy emphasizes efficient capital deployment, using downturns as opportunities to capitalize extensively, ensuring Berkshire is equipped with “washtubs, not teaspoons” to collect the windfall. Their approach underscores a commitment to maximizing returns for shareholders over time.
Here’s an excerpt from the letter:
Charlie Munger, Berkshire’s Vice Chairman and my partner, and I expect Berkshire’s normalized earning power per share to increase every year. Actual earnings, of course, will sometimes decline because of periodic weakness in the U.S. economy.
In addition, insurance mega-catastrophes or other industry-specific events may occasionally reduce earnings at Berkshire, even when most American businesses are doing well.
It’s our job, though, to over time deliver significant growth, bumpy or not. After all, as stewards of your capital, Berkshire directors have opted to retain all earnings.
Indeed, in both 2015 and 2016 Berkshire ranked first among American businesses in the dollar volume of earnings retained, in each year reinvesting many billions of dollars more than did the runner-up. Those reinvested dollars must earn their keep.
Some years, the gains in underlying earning power we achieve will be minor; very occasionally, the cash register will ring loud. Charlie and I have no magic plan to add earnings except to dream big and to be prepared mentally and financially to act fast when opportunities present themselves.
Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold. When downpours of that sort occur, it’s imperative that we rush outdoors carrying washtubs, not teaspoons. And that we will do.
You can read the entire letter here:
2016 Berkshire Hathaway Annual Letter
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