Berkshire

Berkshire Hathaway Annual Letter

Over the weekend, Warren Buffett released the Berkshire Hathaway annual letter. Here is what stood out to me:

Scale: Berkshire is the only fund of its kind, and its scale and impact is massive. The largest hedge funds in the world are around $120 billion, like Bridgewater Associates, run by Ray Dalio. Bridgewater is a diversified firm with dozens of strategies to choose from. Multiples larger than Bridgewater, one of the largest investment firms in the world is Blackstone, which Stephen Schwarzman runs. Blackstone controls large swaths of the private equity, real estate and credit world managed through diversified strategies that feed through large institutional sales distribution systems. Blackstone manages $880 billion. Then there is Berkshire Hathaway, where all investors commit to participating in a single unified investment strategy of both public and private market assets. Berkshire’s balance sheet assets are now over $1 trillion. Its cash balance alone, at $160 billion, is larger than the market value of all but the top 50 publicly traded companies.

Buy and hold: Warren Buffett is known for buying wonderful businesses at fair prices and holding them for a very long time. Many individual investors do this with companies they know well and trust, but it’s unusual for a professional investment strategy to include multi-decade holdings of publicly traded companies. He can only do this because his investors are investors for life by design. I’ll go into more detail on this later. In his letter, he reiterates the power of buying and holding quality American businesses as the secret to long-term investment success. Buffett has held 400m shares of Coca-Cola and 151m shares of American Express without a single buy or sale for over two decades.

No redemptions: I’m not sure it’s fully appreciated that one of the fundamental secrets to Berkshire’s success is there are no redemptions. Berkshire Hathaway has had the same structure since the inception of this strategy in 1965. Investors who want to participate in Berkshire Hathaway’s investment performance can buy publicly traded company shares on the open market. Redemptions from Berkshire Hathaway are impossible. Investors looking to exit must sell their shares on the open market, while Berkshire always retains its assets under management.

This is also part of the strength of the private equity market. PE funds take on new AUM through contractual agreements and return capital once the manager decides to exit. For the benefit of both the investor and the manager, investors cannot buy into a fund and sell it 18 months later at an inopportune time. This is one of the issues with public markets where investors always have the exit door next to them. The one-way door for capital at Berkshire means Warren Buffett can take his time allocating and never has to face an investor redemption at the wrong time.

A few other publicly traded companies, like Berkshire, use their balance sheet to own publicly traded assets. MicroStrategy Inc, MSTR, is famous for buying and holding Bitcoin, so much so that the stock has effectively become a levered Bitcoin proxy. On a much smaller scale, Amazon was an early investor in Rivian and still holds 15% of the company on its balance sheet, as well as quantum computing company IONQ and a few others. The late Charlie Munger used to run a separate publicly traded investment strategy within the Daily Journal stock’s balance sheet, DJCO. No redemptions allows investment managers total freedom to be patient and buy or sell to the best of their ability.

Details matter: Today, too much investment commentary is spent on index statistics, like a reversion to the mean. Buffett’s letter has a significant impact, as well as letters from other industry titans like Jamie Dimon, because they give us a curated and intelligent peak under the hood of what is happening at the ground level. These insights explain what drives markets. While many investors have worried about the weak performance of the utility sector and expect a reversion to the mean any day now, Buffett sheds light on the issues impacting performance at his company that may also apply to the industry at large. Berkshire owns the largest US rail company, BNSF. The issue at BNSF and many other utility companies is that they are unexpectedly becoming more expensive to maintain and operate than anticipated. It’s not hard to understand why, as we have a clear infrastructure age and cost problem across the US. Buffett remains constructive and optimistic about BNSF for the long term (referring to holding it for a century), but his concerns about the challenges are real for many utility assets.

We often cover detailed specifics within certain industries and individual companies because details shed light on the fundamental drivers of risks and returns. Markets cannot go up forever without positive momentum somewhere under the hood, whether that’s America’s capitalism and legal system or the cycle of innovation and capital investment that creates remarkable achievements, with the latest chapter being AI.