Warren Buffett admits Berkshire's days of “astonishing” gains are over

Warren Buffett has warned Berkshire Hathaway shareholders that his sprawling $905 billion conglomerate has “virtually no potential for eye-catching performance” in the coming years, laying out the challenges facing his successors.

The so-called “Omaha Oracle” said in his annual letter on Saturday that there are very few deals that deliver the kind of transformative impact that previous acquisitions have had, such as its purchases of insurers Geico and National Indemnity or the railroad BNSF.

“There are still only a handful of companies in this country capable of making a real difference at Berkshire, and they have been chosen by us and endlessly by others,” he said. “Outside the US, there are essentially no candidates who represent meaningful options for deploying capital at Berkshire.”

It's a problem Buffett has been staring at for nearly a decade as the growth of Berkshire's operations and cash levels worsened.

The company has spent billions of dollars acquiring truck stop operator Pilot Flying J and insurance conglomerate Alleghany in recent years, adding it to a portfolio that includes ice cream provider Dairy Queen and utility giant Berkshire Hathaway Energy.

But these expenses have only put a dent in Berkshire's cash pile, which continues to rise. It reached a record level of $167.6 billion at the end of 2023, an increase of $39 billion over the course of the year.

“Size has helped, although increased competition for purchases has also been a factor,” Buffett said. “For a while, we had an abundance of candidates to evaluate. If I missed one — and I missed many — another always came along. Those days are long behind us.”

The 93-year-old Buffett, who lost his longtime investment partner Charlie Munger last year, said Berkshire should continue to “do a little better” than the average US company and “more importantly, it should also operate with materially lower risks.” Capital loss.

“Anything beyond 'a little better' is just wishful thinking,” he added.

The stinging death of a Berkshire vice chairman has turned investors' attention toward the company's prospects without Buffett at the helm. Greg Appel, Buffett's designated successor, and Todd Combs and Ted Wechsler, his investment deputies, are lined up to guide the giant.

They have a tough job to follow. Since 1964, Berkshire shares have returned 4.4 million percent, far outpacing the 31,233 percent gain of the Standard & Poor's 500.

Buffett's letters, along with his comments at annual meetings and hundreds of interviews over the years, constitute almost a guide for the people who will one day sit at the top of Berkshire and the board that will govern it.

He stressed on Saturday that the “extreme fiscal conservatism” that has long been a guiding principle for the group will undoubtedly continue.

“One rule of investing at Berkshire has never changed and will never change: Never risk a permanent loss of capital,” he wrote. “Thanks to favorable American winds and the power of compound interest, the arena in which we operate has been—and will be—rewarding if you make a few good decisions during your life and avoid big mistakes.”

He added that Berkshire will continue to pounce on opportunities when they present themselves, as the company did in early 2022 when it invested more than $50 billion in stocks with a market selloff.

“Panics won't happen very often, but they will happen,” he said. “Berkshire's ability to respond promptly to market takeovers with large amounts and certainty in performance may provide us with a large-scale spin-off opportunity.”

However, the company faces much tougher competition than it did at the turn of the century, when private equity had much less power. Buffett complained of stretched valuations as markets hit record highs and buyout shops paid ever higher multiples to snatch up takeovers. In those periods, Berkshire remained largely idle.

Berkshire has become a large investor in its stocks and routinely resorts to buybacks when it cannot find attractive investments in the public markets. The company said it repurchased $2.2 billion worth of its shares in the fourth quarter, bringing its total for the year to more than $9 billion.

Since Munger's death, the duty of choosing when to implement these buybacks now falls squarely on Buffett's shoulders. The company did not name Combs or Weschler for the position, which Buffett previously shared with the late vice president.

Buffett used his letter to memorialize Munger as the architect of modern Berkshire Hathaway, describing the 99-year-old's relationship with him as “part big brother, part loving father.”

“In the physical world, great buildings are associated with their architect, while those who poured the concrete or installed the windows are quickly forgotten,” Buffett said. “Berkshire has become a great company. Although I have been in charge of the construction crew for a long time, Charlie should forever be credited with being the architect.

Munger was instrumental in transforming Buffett's investment approach, helping him shift away from the “cigar” style of investing: buying low-priced stocks that may only have one more good puff left. Bargain hunting was a technique Buffett learned under the tutelage of investment great Benjamin Graham, the father of value investing.

Encouraged by Munger, he began investing instead in affordable but well-managed companies.

“Charlie became my partner in managing Berkshire, and he repeatedly nursed me back to my mental health when my old habits surfaced,” Buffett said.

Berkshire also announced its annual results on Saturday, which showed a net profit of $96.2 billion. Buffett considers this number “worse than useless,” given that accounting rules require the company to include quarterly fluctuations in the value of its $354 billion stock portfolio in its net earnings.

Excluding these unrealized gains, Berkshire reported operating profits jumped 21 percent from the previous year to $37.4 billion for 2023. In the fourth quarter, operating profits rose 28 percent to $8.5 billion.

The gains were supported by strong results from Berkshire's insurance unit, including Geico, as well as rising interest rates. The company's short-term treasury portfolio and cash generated as much as $115 million in interest income for Berkshire's insurance unit each week last year — or about $6.1 billion — exceeding the $5.5 billion it earned from dividends.

Buffett struggled to find worthwhile investments on the open market, and in the fourth quarter he remained a net seller of stocks. Berkshire has sold more shares than it bought in each of the past five quarters, selling about $24 billion worth of shares in 2023.

The company's investment decisions are closely scrutinized for clues about Buffett's market view, and his inaction is often seen as an explanation because he sees pillars of the US stock market as overvalued.

“At Berkshire, we particularly favor rare projects that can deploy additional capital with high returns in the future,” he said on Saturday. “Owning just one of these companies — and simply waiting — could create almost immeasurable wealth.”

Despite the overall strong performance, Buffett spent part of his letter bemoaning missteps. The company is stuck in high-profile lawsuits that could cost it more than $10 billion, with its utility — where Abel, Berkshire's vice chairman, spent most of his career — at the eye of the storm.

Its electric subsidiary, Pacifi Corp, which has operations in Oregon and California, paid $631 million in settlements over wildfires last year. The unit has so far received $2.4 billion in charges related to the fires in 2020 and 2022, and warned that its overall losses could escalate, with individuals seeking nearly $8 billion in the two states. Berkshire warned that this number could double or triple.

The energy division also includes Berkshire's real estate broker, HomeServices of America, which faces 11 antitrust lawsuits over how it and other brokers collect commissions. The U.S. real estate industry was dealt a blow last year when a court found the country's largest players liable for nearly $1.8 billion in damages.

HomeServices appealed that decision but said it believed damages could triple under federal law to $5.4 billion.