Investors wait excitedly for Buffett’s annual letter to shareholders every year, hoping to hear the insights of the “stock god”, but Barron’s believes that this year’s letter to shareholders is a bit disappointing.
This year’s shareholder letter is shorter than previous years, with a total length of regarding 11 pages. Buffett only used 2 pages to review what happened in the past year, and he didn’t have much insight. The letter did not address some key issues, including Berkshire’s (BRK.B-US ) slowdown in treasury stocks, Geico’s troubles and successors.
Buffett ‘bragged’ in letter to Coca-Cola (KO-US) investment. Baron believes he has every reason to boast, since the investment is now worth $24 billion, well above Berkshire’s original $1.3 billion investment.But given the role Coca-Cola’s sugary sodas play in the global obesity problem and the company’s stock price underperformance over the past two decades,S&P 500 IndexBuffett did not say why Coca-Cola is still a good investment in his view.
Looking to the future is what Buffett should be doing. With Buffett at 92 and his partner and close friend Charlie Munger, Berkshire’s vice-chairman, at 99, the question of succession has its urgency.
It would be nice if Buffett talked regarding why he has confidence in the future management team, including Greg Abel (60), who may succeed Buffett as CEO, and Ajit Jain (71), who may continue to run the huge insurance business. ), and Todd Combs and Ted Weschler, who currently manage 10% of Berkshire’s $300 billion-plus stock portfolio, may run the entire company in the “post-Buffett era.”
Combs and Weschler have worked at Berkshire for more than a decade, but Buffett has said little regarding their investment performance, revealing only four years ago that they were “slightly underperforming” in an interview with CNBC.S&P 500 Index」。
Investors are also wondering how long the 71-year-old Jann will manage the insurance business. Will Joe Brandon, the former CEO of Alleghany, the insurance company that Berkshire spent $11.5 billion in October last year, become Jann’s successor?
Baron noted that Buffett was also silent on other important issues. While he lashed out at critics of treasury stocks, he didn’t explain why Berkshire’s treasury holdings fell from $27 billion in 2021 and $25 billion in 2020 to $7.9 billion in 2022.
Buffett also didn’t mention Berkshire’s auto insurer Geico. The company has struggled over the past 18 months and posted a loss on underwriting in 2022. Combs has been at the helm of Geico for the past three years. Compared to another American auto insurance company, Progressive (PGR-US), Geico is underinvesting in technology, and its profitability and growth are not as good as its main competitors.
Berkshire did predict in its 10-K report that Geico’s underwriting business would turn a profit in 2023, but the letter to shareholders did not mention the progress of this important business worth regarding 75 billion U.S. dollars, and its face challenge.
Buffett didn’t even mention the good stuff, including Berkshire’s energy investments through 2022, notably its roughly $20 billion purchase of Chevron (CVX-US) stock, and the $12 billion purchase of Occidental Petroleum (OXY-US) 21% stake, both of which have paid off handsomely for Berkshire.
Buffett, known as the “Oracle of Omaha,” mentioned he made “many mistakes” during his 58 years at the helm of Berkshire, but he didn’t discuss them. One may refer to Berkshire’s acquisition of Precision Castparts in 2016, the largest acquisition in a decade for Berkshire’s more than $30 billion acquisition of the aircraft parts maker, followed by a 2020 Write down regarding 10 billion US dollars on it. Precision Castparts had $7.5 billion in revenue and $1.2 billion in operating income last year, compared with $10 billion in revenue and $2.6 billion in operating income in 2015, the year before the Berkshire acquisition. Baron asked Buffett if he still thought Precision Castparts would return to historical levels of profitability?
Berkshire announced its fourth-quarter financial report last Saturday, which indeed highlights its financial strength and profitability: following-tax operating profit in 2022 will exceed 30 billion U.S. dollars, an increase of 12% over 2021. Even with the acquisition of Alleghany, it still has 12.9 billion billion dollars in cash. Earnings should be higher this year, thanks to higher investment gains, a turnaround at Geico and the acquisition of Alleghany.
Berkshire Stock Underperforms Over 5 and 10 Years Despite Strong PerformanceS&P 500 Index. Baron believes the single most important question Buffett should address is: How did Berkshire stock remain an investment that outperformed the market following he left? Hopefully, Buffett will address some of the above issues at his annual shareholder meeting in early May, otherwise it will be another disappointment.
