What Does Warren Buffett Buy When “The Market Acts Like a Casino”?

After the loss of his golden partner Charlie Munger, the 93-year-old “Oracle of Omaha,” Warren Buffett, penned his 46th annual letter to shareholders. Regarding the current market conditions, Buffett wrote: “For whatever reasons, the market now seems more like a casino than when I was young. This casino is present in many households, tempting residents daily.” However, he also candidly stated, “One of Berkshire’s investment principles has not changed and will not change, which is never to risk a permanent loss of capital.”

Earning a hundred billion dollars a year but also making mistakes

On February 24th, local time, Buffett’s Berkshire Hathaway disclosed its Q4 and annual reports for 2023. Along with these, Buffett’s annual letter to shareholders was also released.

Buffett began his shareholder letter with a tribute to his late partner Munger, whom he described as sometimes a brother and at other times a father figure. Munger was the “architect” of Berkshire Hathaway, while Buffett saw himself as the “general contractor,” implementing Munger’s vision day after day.

According to Berkshire’s financial report, the company reported a net profit of $96.223 billion for the year, significantly exceeding the market’s expectation of $40.821 billion, compared to a net loss of $22.819 billion the previous year. Moreover, Berkshire’s revenue for 2023 was $364.482 billion, above the market expectation of $314.08 billion, and up from $302.089 billion the previous year; operating profit was $37.35 billion, compared to $30.8593 billion the previous year.

Berkshire’s investment portfolio as of December 31, 2023, shows that about 79% of its fair value is concentrated in five companies: Apple ($174.3 billion), Bank of America ($34.8 billion), American Express ($28.4 billion), Coca-Cola ($23.6 billion), and Chevron ($18.8 billion).

The record operating income and robust stock market propelled Berkshire’s net worth to $561 billion by the end of 2023. Currently, Berkshire’s GAAP net worth is the highest among American corporations, with the other 499 S&P 500 companies having a combined net worth of $8.9 trillion in 2022.

However, even the “Oracle” makes mistakes. At Berkshire’s annual meeting in May 2023, Buffett predicted good performance for Berkshire’s insurance, railway, and energy businesses. But the actual results showed that except for the strong performance of the insurance business, both the railway and energy sectors experienced revenue declines compared to the previous year.

In his annual letter to Berkshire shareholders, Buffett admitted to a costly mistake of not anticipating or accounting for unfavorable regulatory returns in the utilities industry.

Identifying excellent companies and maintaining investment

Reflecting on stock investments in 2023, Buffett mentioned his favorites, Coca-Cola and American Express. He said, “In 2023, we neither bought nor sold shares of American Express or Coca-Cola, yet both companies rewarded our ‘inaction’ through their earnings and dividends. Although these holdings are not as large as our stake in Apple, each representing 4%–5% of Berkshire’s GAAP net worth, they are valuable assets.”

Regarding the lessons from investing in Coca-Cola and American Express, he stated that when you find a truly outstanding company, stick with it. Patience is always rewarded, and choosing an excellent company can offset many inevitable poor decisions. “There are only a handful of companies that can truly change the destiny of Berkshire Hathaway, and they have been consistently selected by us and others. Some we can price, and some we cannot.”

Regarding future investment directions, Buffett expects Berkshire Hathaway to maintain its investments in Itochu Corp., Marubeni Corp., Mitsubishi Corp., Mitsui & Co., and Sumitomo Corp. “indefinitely,” as well as its investment in Occidental Petroleum. Buffett also stated that BNSF Railway would become an important asset for both Berkshire Hathaway and America. He anticipates that capital gains will be a very important component of increasing Berkshire Hathaway’s value over the next few decades.

Buffett explained his perspective on investing in the Japanese stock market, emphasizing that the shareholder-friendly policies of the five Japanese trading companies he invested in are far superior to American practices. He mentioned a trip to Tokyo last year with Greg Abel to meet with the management of these five companies. Currently, Berkshire holds about 9% of the shares in each of these companies and has promised not to acquire more than 9.9% of the shares in any of them.

Berkshire’s investment cost in these five companies totals 1.6 trillion yen, with a year-end market value of 2.9 trillion yen. However, the recent depreciation of the yen has resulted in an unrealized gain of 61% or $8 billion for Berkshire.

Choosing a successor, hoping for enduring prosperity

In this shareholder letter, Buffett also revisited the topic of succession, which has garnered external attention. “Greg Abel is in charge of all of Berkshire’s non-insurance operations and, in every respect, he is ready to be Berkshire’s CEO tomorrow,” Buffett stated.

Buffett announced that this year’s shareholder meeting will take place in Omaha on May 4th. With Munger’s passing, only three people will be on stage at this year’s Berkshire shareholder meeting: Buffett, Greg Abel, and Ajit Jain.

He also previewed the challenges for his successor, stating that it is nearly “impossible” for Berkshire, given its current vast scale, to achieve jaw-dropping performance in the coming years.

However, Buffett emphasized that Berkshire’s ability to withstand unprecedented financial disasters is something it will not give up. When economic turmoil strikes, Berkshire aims to act as a national asset—like it did during 2008–2009—helping to extinguish financial fires rather than being one of the many companies that inadvertently or otherwise ignite them.

“Berkshire’s ability to respond quickly to market turmoil with substantial funds and certainty of performance may occasionally provide us with large-scale opportunities,” Buffett further noted, reiterating that one of Berkshire’s investment rules remains unchanged: never to risk a permanent loss of capital.

“Our cash requirements are also low, even if the nation faces a prolonged global economic downturn, fear, and paralysis.” Additionally, Buffett mentioned that Berkshire currently does not pay dividends, and its stock repurchases are 100% discretionary. Annual debt maturities are never a concern.

Buffett stated, “Extreme fiscal conservatism is our corporate commitment to those who join us in Berkshire ownership. Over the long decades, our caution may prove to be unnecessary. But Berkshire does not want to cause any permanent financial loss to any individual who trusts us, although long-term shrinkage of returns is inevitable.” “Berkshire hopes to prosper indefinitely,” Buffett declared.