A tribute to Charlie Munger: 8 things I learned from Warren Buffett’s 2023 letter to Berkshire shareholders

Warren Buffett, widely regarded as one of the greatest investors of all time, has been sharing his wisdom, insights, and investment philosophy through his annual letters to shareholders of Berkshire Hathaway since 1977. These letters have become legendary in the world of finance and investing, eagerly anticipated by investors, analysts, and enthusiasts alike.

Buffett’s letters are renowned for their clarity, wit, and straightforwardness. In them, he not only discusses Berkshire Hathaway’s performance and financial results, but also his views on various aspects of investing, including his principles for evaluating businesses, the importance of a long-term perspective, the value of patience and discipline, and the dangers of speculation and market timing.

This year’s letter is the first without Charlie Munger, Buffett’s long-time business partner, who passed away in November 2023.

1. Buffett pays tribute to Munger on the very first page. Buffett recalls how Munger told him that he’d made a dumb decision buying control of Berkshire Hathaway in 1965. But it was also Munger who advised him to pivot his investment philosophy from buying ‘fair companies at wonderful prices’ to buying ‘wonderful business at fair prices’. Buffett credits Munger’s influence as the reason for Berkshire’s outstanding success.

‘In the physical world, great buildings are linked to their architect while those who had poured the concrete or installed the windows are soon forgotten. Berkshire has become a great company. Though I have long been in charge of the construction crew; Charlie should forever be credited with being the architect.’

2. Berkshire Hathaway has the largest net worth of any U.S. company. As of end-2023, the GAAP net worth of Berkshire stands at US$561 billion. For comparison, the other 499 companies in the S&P 500 have a combined net worth of US$9 trillion. The success and size of Berkshire speaks volumes about the company’s success under the decades-long stewardship of Buffett and his investment approach.

3. Buffett also dampened investor expectations due to Berkshire’s size. Buffett seeks companies with enduring economic fundamentals that can deploy additional capital at high returns. However, such companies are rare. And large companies like this are rarer still.

‘There remain only a handful of companies in this country capable of truly moving the needle at Berkshire, and they have been endlessly picked over by us and by others. Some we can value; some we can’t. And, if we can, they have to be attractively priced. Outside the U.S., there are essentially no candidates that are meaningful options for capital deployment at Berkshire. All in all, we have no possibility of eye-popping performance.’

4. However, Buffett reassured that opportunities for Berkshire will still exist. Markets today are still as prone to panic as they were in the past with modern communication and technology accelerating the spread of panic in the market. Whenever panic ensues, it invariably results in significant mispricing of stocks and bonds.

‘Berkshire’s ability to immediately respond to market seizures with both huge sums and certainty of performance may offer us an occasional large-scale opportunity. Though the stock market is massively larger than it was in our early years, today’s active participants are neither more emotionally stable nor better taught than when I was in school. For whatever reasons, markets now exhibit far more casino-like behavior than they did when I was young. The casino now resides in many homes and daily tempts the occupants.’

5. When you find a truly wonderful business, stick with it. Berkshire hasn’t bought or sold a single share of Coca-Cola and American Express for more than 20 years and has still seen the value of these two investments compound over the years. Berkshire’s US$1.3 billion cost of investment in Coca-Cola is currently worth US$24 billion (as of 31 December 2023). Similarly, Berkshire’s stake in American Express, at the same cost of investment, is worth over US$32 billion. Buffett’s steadfast commitment to holding onto wonderful businesses has allowed the value of these investments to grow significantly over the years.

6. Buffett outlined the challenges faced by BNSF. Despite playing a vital role in America’s economic success as one of its largest freight rail networks, Buffett says BNSF can be a disadvantageous business to own in terms of capital intensity. BNSF requires significant annual investments just to maintain its operations, and challenges such as extreme weather conditions, labour, and regulatory burdens underscore the complexities of the railroad business. BNSF’s profit margins have slipped relative to its competitors since Berkshire’s purchase of the company in 2010, and Buffett believes that BNSF’s margins can and should improve.

7. Buffett admits Berkshire Hathaway Energy (BHE) is a costly mistake. The traditional regulatory arrangement, in which privately-owned utilities receive a fixed return on equity, is being broken in some U.S. states. Without a guarantee of a fixed return, private utilities like BHE now have less incentive to invest in new projects and expand their operations. The U.S. government has also threatened to sue PacifiCorp, a unit of BHE, over the Californian and Oregon wildfires that started in 2020. Although Berkshire can stomach a financial loss resulting from claims or lawsuits, Buffett admits his failure to anticipate a possible change in private utilities regulations was a costly mistake.

8. Buffet shines the spotlight on his successors. Greg Abel serves as the Vice Chairman of Non-Insurance Operations at Berkshire Hathaway and was primed as the next CEO of Berkshire Hathaway in the letter. Ajit Jain is the Vice Chairman of Insurance Operations at Berkshire Hathaway and has been instrumental in managing Berkshire Hathaway’s insurance operations for several decades. Buffett left a final word for his old friend Munger as he reflected on their shared roots, reminiscing about their Omaha upbringing and the significant influence it had on both of them.

The fifth perspective

Warren Buffett’s annual letters to Berkshire Hathaway shareholders have served as invaluable resources for investors, offering profound insights into his investment philosophy and guiding principles. The passing of Charlie Munger marks a poignant moment in Berkshire’s history, with Buffett paying tribute to Munger’s pivotal role in shaping the company’s success.

You can read Warren Buffett’s latest 2023 shareholder letter here.