In his 2023 Berkshire Hathaway Annual Letter, Warren Buffett highlights Berkshire Hathaway’s strategy of acquiring businesses with strong, enduring economics and capable management. He emphasizes the challenge of predicting winners and the importance of rare companies that can reinvest capital at high returns.
Buffett reflects on past acquisition opportunities and notes that Berkshire’s size and competition have limited current prospects. Despite owning the largest GAAP net worth among U.S. companies, Berkshire’s growth potential is constrained.
While acknowledging past disappointments, Buffett expresses satisfaction in managing a diverse portfolio of strong businesses and long-term managers. He remains optimistic about Berkshire’s prospects, even as eye-popping performance becomes less achievable.
Here’s an excerpt from the letter:
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. 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. Even heirs to such a holding can – ugh! – sometimes live a lifetime of leisure.
We also hope these favored businesses are run by able and trustworthy managers, though that is a more difficult judgment to make. However, Berkshire has had its share of disappointments.
In 1863, Hugh McCulloch, the first Comptroller of the United States, sent a letter to all national banks. His instructions included this warning: “Never deal with a rascal under the expectation that you can prevent him from cheating you.”
Many bankers who thought they could “manage” the rascal problem have learned the wisdom of Mr. McCulloch’s advice – and I have as well. People are not that easy to read. Sincerity and empathy can easily be faked. That is as true now as it was in 1863.
This combination of the two necessities I’ve 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 – and I missed plenty – another always came along.
Those days are long behind us; size did us in, though increased competition for purchases was also a factor.
Berkshire now has – by far – 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.
The total GAAP net worth for the other 499 S&P companies – a who’s who of American business – 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. 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).
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.
Some we can value; some we can’t. 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.
Nevertheless, managing Berkshire is mostly fun and always interesting. On the positive side, after 59 years of assemblage, the company now owns either a portion or 100% of various businesses that, on a weighted basis, have somewhat better prospects than exist at most large American companies.
By both luck and pluck, a few huge winners have emerged from a great many dozens of decisions. And we now have a small cadre of long-time managers who never muse about going elsewhere and who regard 65 as just another birthday.
You can read the entire letter here:
2023 Berkshire Hathaway Annual Letter
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