Warren Buffett, Berkshire Hathaway — 2022
Berkshire’s Performance vs. the S&P 500 Annual Percentage Change Year in Per-Share Market Value of Berkshire in S&P 500 with Dividends Included 1965.........................................................................49.510.0 1966.........................................................................(3.4)(11.7) 1967.........................................................................13.330.9 1968.........................................................................77.811.0 1969.........................................................................19.4(8.4) 1970.........................................................................(4.6)3.9 1971.........................................................................80.514.6 1972.........................................................................8.118.9 1973.........................................................................(2.5)(14.8) 1974.........................................................................(48.7)(26.4) 1975.........................................................................2.537.2 1976.........................................................................129.323.6 1977.........................................................................46.8(7.4) 1978.........................................................................14.56.4 1979.........................................................................102.518.2 1980.........................................................................32.832.3 1981.........................................................................31.8(5.0) 1982.........................................................................38.421.4 1983.........................................................................69.022.4 1984.........................................................................(2.7)6.1 1985.........................................................................93.731.6 1986.........................................................................14.218.6 1987.........................................................................4.65.1 1988.........................................................................59.316.6 1989.........................................................................84.631.7 1990.........................................................................(23.1)(3.1) 1991.........................................................................35.630.5 1992.........................................................................29.87.6 1993.........................................................................38.910.1 1994.........................................................................25.01.3 1995.........................................................................57.437.6 1996.........................................................................6.223.0 1997.........................................................................34.933.4 1998.........................................................................52.228.6 1999.........................................................................(19.9)21.0 2000.........................................................................26.6(9.1) 2001.........................................................................6.5(11.9) 2002.........................................................................(3.8)(22.1) 2003.........................................................................15.828.7 2004.........................................................................4.310.9 2005.........................................................................0.84.9 2006.........................................................................24.115.8 2007.........................................................................28.75.5 2008.........................................................................(31.8)(37.0) 2009.........................................................................2.726.5 2010.........................................................................21.415.1 2011.........................................................................(4.7)2.1 2012.........................................................................16.816.0 2013.........................................................................32.732.4 2014.........................................................................27.013.7 2015.........................................................................(12.5)1.4 2016.........................................................................23.412.0 2017.........................................................................21.921.8 2018.........................................................................2.8(4.4) 2019.........................................................................11.031.5 2020.........................................................................2.418.4 2021.........................................................................29.628.7 2022.........................................................................4.0(18.1) Compounded Annual Gain – 1965-2022.............................................19.8%9.9% Overall Gain – 1964-2022........................................................3,787,464%24,708% Note:Data are for calendar years with these exceptions: 1965 and 1966, year ended 9/30; 1967, 15 months ended 12/31. 2
BERKSHIRE HATHAWAY INC. To the Shareholders of Berkshire Hathaway Inc.: Charlie Munger, my long-time partner, and I have the job of managing the savings of a great number ofindividuals. We are grateful for their enduring trust, a relationship that often spans much of their adult lifetime. It is those dedicated savers that are forefront in my mind as I write this letter. A common belief is that people choose to save when young, expecting thereby to maintain their living standards after retirement. Any assets that remain at death, this theory says, will usually be left to their families or, possibly, to friends and philanthropy. Our experience has differed. We believe Berkshire’s individual holders largely to be of the once-a-saver, always-a-saver variety. Though these people live well, they eventually dispense most of their funds to philanthropic organizations. These, in turn, redistribute the funds by expenditures intended to improve the lives of a great many people who are unrelated to the original benefactor. Sometimes, the results have been spectacular. The disposition of money unmasks humans. Charlie and I watch with pleasure the vast flow of Berkshire-generated funds to public needs and, alongside, the infrequency with which our shareholders opt for look-at-me assets and dynasty-building. Whowouldn’tenjoy working for shareholders like ours? What We Do Charlie and I allocate your savings at Berkshire between two related forms of ownership. First, we invest in businesses that we control, usually buying 100% of each. Berkshire directs capital allocation at these subsidiaries and selects the CEOs who make day-by-day operating decisions. When large enterprises are being managed, both trust and rules are essential. Berkshire emphasizes the former to an unusual – some would say extreme – degree. Disappointments are inevitable. We are understanding aboutbusinessmistakes; our tolerance for personal misconduct is zero. In our second category of ownership, we buy publicly-traded stocks through which we passively ownpiecesof businesses. Holdingtheseinvestments, we have no say in management. 3
Our goal in both forms of ownership is to make meaningful investments inbusinesseswith both long-lasting favorable economic characteristics and trustworthy managers. Please note particularly that we own publicly-traded stocks based on our expectations about their long-term businessperformance, not because we view them as vehicles for adroit purchases and sales. That point is crucial: Charlie and I arenotstock-pickers; we are business-pickers. Over the years, I have made many mistakes. Consequently, our extensive collection of businesses currently consists of a few enterprises that have truly extraordinary economics, many that enjoy very good economic characteristics, and a large group that are marginal. Along the way, other businesses in which I have invested have died, their products unwanted by the public. Capitalism has two sides: The system creates an ever-growing pile of losers while concurrently delivering a gusher of improved goods and services. Schumpeter called this phenomenon “creative destruction.” One advantage of our publicly-traded segment is that – episodically – it becomes easy to buypiecesof wonderful businesses at wonderful prices. It’s crucial to understand that stocks often trade at truly foolish prices, both high and low. “Efficient” markets exist only in textbooks. In truth, marketable stocks and bonds are baffling, their behavior usually understandable only in retrospect. Controlled businesses are a different breed. They sometimes command ridiculouslyhigher prices than justified but are almost never available at bargain valuations. Unless under duress, the owner of a controlled business gives no thought to selling at a panic-type valuation.
At this point, a report card from me is appropriate: In 58 years of Berkshire management, most of my capital-allocation decisions have been no better than so-so. In some cases, also, bad moves by me have been rescued by very large doses of luck. (Remember our escapes from near-disasters at USAir and Salomon? I certainly do.) Our satisfactory results have been the product of about a dozen truly good decisions – that would be about one every five years –anda sometimes-forgotten advantage that favors long-term investors such as Berkshire. Let’s take a peek behind the curtain. The Secret Sauce In August 1994 – yes, 1994 – Berkshirecompletedits seven-year purchase of the 400 million shares of Coca-Cola we now own. The total cost was $1.3 billion – then a very meaningful sumatBerkshire. The cash dividend we received from Coke in 1994 was $75 million. By 2022, the dividend had increased to$704million. Growth occurred every year, just as certain as birthdays. All Charlie and I were required to do was cash Coke’s quarterly dividend checks. We expect that those checks arehighlylikelytogrow. 4
American Express is much the same story. Berkshire’s purchases of Amex were essentially completed in 1995 and, coincidentally, also cost $1.3 billion. Annual dividends received from this investment have grown from $41 million to$302million. Those checks, too, seem highly likely to increase. These dividend gains, though pleasing, arefarfrom spectacular. But they bring with them important gains in stock prices. At yearend, our Coke investment was valued at $25 billion while Amex was recorded at $22 billion. Each holding now accounts for roughly 5% of Berkshire’s net worth, akin to its weighting long ago. Assume, for a moment, I had made a similarly-sized investment mistake in the 1990s, one that flat-lined and simply retained its $1.3 billion value in 2022. (An example would be a high-grade 30-year bond.) That disappointing investment would now represent an insignificant 0.3% of Berkshire’s net worth and would be delivering to us an unchanged $80 million or so of annual income. The lesson for investors: The weeds wither away in significance as the flowers bloom. Over time, it takes just a few winners to work wonders. And, yes, it helps to start early and live into your 90s as well. The Past Year in Brief Berkshire had a good year in 2022. The company’soperating earnings– our term for income calculated using Generally Accepted Accounting Principles (“GAAP”),exclusiveof capital gains or losses from equity holdings – set a record at $30.8 billion. Charlie and I focus on this operational figure and urge you to do so as well. The GAAP figure,absent our adjustment, fluctuates wildly and capriciously at every reporting date. Note its acrobatic behavior in 2022, which is in no way unusual: Earnings in $ billions 2022 Quarter“Operating Earnings” GAAP Earnings We are Required to Report 17.05.5 29.3(43.8) 37.8(2.7) 46.718.2 The GAAP earnings are 100% misleading when viewed quarterly or even annually. Capital gains, to be sure, have been hugely important to Berkshire over past decades, and we expect them to be meaningfully positive in future decades. But their quarter-by-quarter gyrations, regularly and mindlessly headlined by media, totally misinform investors. 5
A second positive development for Berkshire last year was our purchase of Alleghany Corporation, a property-casualty insurer captained by Joe Brandon. I’ve worked with Joe in the past, and he understands both Berkshire and insurance. Alleghany delivers special value to us because Berkshire’s unmatched financial strength allows its insurance subsidiaries to follow valuable and enduring investment strategies unavailable to virtually all competitors. Aided by Alleghany, our insurance float increased during 2022 from $147 billion to $164 billion. With disciplined underwriting, these funds have a decent chance of beingcost-freeover time. Since purchasing our first property-casualty insurer in 1967, Berkshire’s float has increased 8,000-fold through acquisitions, operations and innovations. Thoughnotrecognized in our financial statements, this float has been an extraordinary asset for Berkshire. New shareholders can get an understanding of its value by reading our annually updated explanation of float on page A-2.
Averyminor gain in per-share intrinsic value took place in 2022 through Berkshire share repurchases as well as similar moves at Apple and American Express, both significant investees of ours. At Berkshire, we directly increased your interest in our unique collection of businesses by repurchasing 1.2% of the company’s outstanding shares. At Apple and Amex, repurchases increased Berkshire’s ownership a bit without any cost to us. The math isn’t complicated: When the share count goes down,yourinterest in our many businesses goesup. Every small bit helpsif repurchases are made at value-accretive prices.Just as surely, when a company overpays for repurchases, the continuing shareholderslose. At such times, gains flow only to thesellingshareholders and to the friendly, but expensive, investment banker who recommended the foolish purchases. Gains from value-accretive repurchases, it should be emphasized, benefitallowners – in everyrespect. Imagine, if you will, three fully-informed shareholders of a local auto dealership, one of whom manages the business. Imagine, further, that one of the passive owners wishes to sell his interest back to the company at a price attractive to the two continuing shareholders. When completed, has this transaction harmed anyone? Is the manager somehow favored over the continuing passive owners? Has the public been hurt? When you are told that