Warren Buffett talks Charlie Munger, earnings, markets, risk in annual letter (NYSE:BRK.B)

Warren Buffett’s annual letter to Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) shareholders, released on Saturday, opens with a tribute to his longtime business partner and friend, Charlie Munger, who died in late 2023 at 99.

Calling Munger “the architect of Berkshire,” Buffett said that he “never sought to take credit for his role as creator but instead let me take the bows and receive the accolades. In a way his relationship with me was part older brother, part loving father. Even when he knew he was right, he gave me the reins, and when I blundered he never – never –reminded me of my mistake.”

With the absence of Munger, Greg Abel, who leads Berkshire’s (BRK.B) noninsurance businesses, and Ajit Jain, who heads the insurance operations, will be on stage with Buffett at the company’s annual meeting in Omaha, Nebraska, on May 4.

In the letter, the 93-year-old chairman and CEO of the insurance-conglomerate behemoth once again explained the importance of focusing on operating earnings, rather than GAAP net income. And in judging Berkshire’s investment value, that’s “only as a starting point.”

The main difference between the mandated figures, such as net income, “and the ones Berkshire prefers is that we exclude unrealized capital gains or losses that at times can exceed $5 billion a day,” he wrote. Nonetheless, during the decades ahead, capital gains are expected to be “a very important concept of Berkshire’s value accretion.”

Based on Berkshire’s (BRK.B) GAAP net worth, which closed out the year at $561B, the company “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).”

On financial markets, Buffett differentiated markets between now and in his early years, saying, “for whatever reasons, markets now exhibit far more casino-like behavior than they did when I was young.” Still, while the stock market has grown markedly, “today’s active participants are neither more emotionally stable nor better taught than when I was in school.”

He emphasized that Berkshire (BRK.B) will continue to always abide by one particular investment rule: “Never risk permanent loss of capital. Thanks to the American tailwind and the power of compound interest, the arena in which we operate has been – and will be – rewarding if you make a couple of good decisions during a lifetime and avoid serious mistakes.

Weighing in on Berkshire’s (BRK.B) holdings in American Express (AXP) and Coca-Cola (KO), Buffett noted that it did not buy or sell a single share of either company in 2023, as “both companies again rewarded our inaction last year by increasing their earnings and dividends.” Berkshire will continue to leave its AXP and KO positions untouched throughout 2024 while garnering dividends.

For Occidental Petroleum (OXY), which Berkshire (BRK.B) had a 27.8% equity ownership at the end of the year, Buffett said his company has no interest in buying or managing the integrated oil and gas company. He also touched on Berkshire’s (BRK.B) stakes in each of large Japanese trading firms — Itochu (OTCPK:ITOCF) (OTCPK:ITOCY), Marubeni (OTCPK:MARUY) (OTCPK:MARUF), Mitsubishi (OTCPK:MSBHF), Mitsui (OTCPK:MITSY) (OTCPK:MITSF) and Sumitomo (OTCPK:SSUMF) (OTCPK:SSUMY) — noting that year-end unrealized gains, in aggregate, were $8B, or 61%.

Earlier, Berkshire Hathaway (BRK.B) Q4 operating earnings climb 28%, cash pile tops $167B.