Listed industrial group Berkshire Hathaway, controlled by legendary investor Warren Buffett, on Saturday reported a record high operating profit (operating profit) in portfolio companies of $30.8 billion in 2022.
In the latest annual report, which comes around the same time as Buffett’s annual speech to shareholders, Berkshire Hathaway appears to have had $128.6 billion in cash at the end of last year.
The result in the fourth quarter was $6.7 billion, down from $7.3 billion in the same quarter of 2021.
Berkshire Hathaway is made up of a number of companies in various industries, including insurance, industrial, consumer and technology. The annual message from Buffett is closely followed in the financial markets, and always comes before Berkshire’s Capital Markets Day in Omaha, a gathering dubbed “Woodstock for Capitalists.”
Capital Markets Day is held in May.
Two distinct investments
In the letter, Buffett begins by referring to two investments that have become valuable to Berkshire Hathaway: Coca-Cola and American Express.
The investment in the first was completed in 1994, then amounted to 1.3 billion dollars. It was a large sum for Berkshire at the time, Buffett wrote in the letter.
In the 29 years since, annual profits have increased from $75 million in 1994 to $704 million last year.
– There has been growth every year, like birthdays for sure. All Charlie (Monger) and I had to do was collect the quarterly dividend checks. Buffett wrote, “We expect this to likely continue to grow.”
The story is the same for investing in American Express, where annual earnings have grown from $41 million in 1995 to $302 million in 2022.
The highlight background for these two investments, though, is not because the profits are particularly colossal, but because they came at the same time as prices skyrocketed, Buffett writes. At the end of 2022, Berkshire’s Coca-Cola stake was worth $25 billion, while its stake in Amex was worth $22 billion. Together, they make up about five percent of Berkshire’s net worth, as they did more than 20 years ago.
If Buffett had made what he calls himself a mistake, investing $1.3 billion in something that developed only laterally, it would have given Berkshire only about $80 million in annual income and represented less than 0.5 percent of the company’s net worth.
The lesson is: Over time, you only need a couple of winners to succeed. And then, it pays to start early and live to be over 90 years old.
Big investment losses
As is usually Berkshire, they highlight what’s called “operating earnings,” where capital gains or losses are excluded. So this number is the income from the core companies in the conglomerate.
The reason for this is to adapt to the potentially large fluctuations that reflect price developments in the stock exchange. If you include investments, the after-tax result was $22.8 billion last year, saddled with large unrealized losses on various investments.
During the fourth quarter, Berkshire bought back its shares for $2.85 billion, nearly $8 billion up from the entirety of last year. The buyback program was first launched in 2011, and Buffett has been an outspoken supporter of companies that buy back their own stock.
– It’s not complicated math. “When the number of shares goes down, the value of your holdings goes up in many of our companies,” Buffett wrote in the shareholder letter.
Last year, Berkshire Hathaway bought insurance company Alleghany for $11.6 billion, Buffett’s largest acquisition since 2016, according to CNBC.
Over the past year, the group also bought heavily in Taiwan Semiconductor, a position that was almost completely diluted at the end of 2022.
According to the Bloomberg Billionaires Index, Buffett is ranked the fifth richest person in the world, with an estimated fortune of $106 billion. Berkshire Hathaway, for its part, is among the most valuable companies in the world, with a market capitalization of $671 billion.
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