Warren Buffett’s Berkshire Hathaway (BRK.A, BRK.B) posted a net loss of $22.8 billion in 2022 due to market volatility. However, Berkshire’s “operating income,” which excludes certain capital gains and losses, rose to a record $30.8 billion. In his much-anticipated letter to shareholders, Buffett reiterated his faith in the U.S. economy and focused on overpriced stock buybacks.
Key things
- Berkshire Hathaway posted a $22.8 billion loss in 2022 due to market volatility.
- The Oracle of Omaha failed to provide a meaningful outlook on the economy, but it reaffirmed faith in the US economy.
- Buffett took aim at overpriced stock buybacks.
- Berkshire shares have gained 4% in 2022, compared with an 18% decline in the S&P 500.
Rocky Q4 2022, but shares outperform
Berkshire Hathaway swung to a loss of $22.8 billion in 2022 from a profit of more than $90 billion the previous year. Market volatility and investment losses from derivative contracts totaling more than $67 billion played a big role in this.
The company’s operating profit, excluding capital gains or losses, fell to $6.7 billion in the fourth quarter of 2022, down 14% from the prior quarter.
Despite the setback due to market volatility, Berkshire’s stock has gained 4% in 2022, significantly outperforming the S&P, which fell 18.1% including dividends.
Berkshire is the largest shareholder in the eight largest companies in America — American Express, Bank of America, Chevron, Coca-Cola, HP Inc., Moody’s, Occidental Petroleum and Paramount Global — and some of them are writing big dividend checks.
“Looking forward, Berkshire will always hold large amounts of cash and U.S. Treasury bills, along with a wide variety of businesses. We will also avoid any behavior that could result in any inconvenient need for cash at an inopportune time, including financial panics and unprecedented insurance losses. ” Buffett wrote.
Buffett hopes to pay more taxes
According to Buffett, Berkshire has been responsible for paying about 1% of all taxes collected by the US government over the past decade.
“At Berkshire, we hope and expect to pay much more in taxes over the next decade. We owe the country no less: America’s dynamism has contributed greatly to whatever success Berkshire has achieved — a contribution Berkshire will always need,” Buffett wrote. betting that growth in the US economy will make society pay more through corporate taxes.
Buffett focuses on share buybacks
Not all stock buybacks are created equal in Buffett’s eyes. While he mentioned that Apple’s buybacks (AAPL) and American Express (AXP) were beneficial to Berkshire, the price of this buyback is key. Shares bought back at a “value-enhancing price” benefit all shareholders, but if a company overpays for a share buyback, shareholders lose out, he said.
“When you’re told that all buybacks are bad for shareholders or the country, or especially good for CEOs, you’re listening to either an economic illiterate or a silver-tongued demagogue (not mutually exclusive figures),” he wrote.
To be sure, Berkshire itself spent a significant amount of money on buybacks in 2021.
Buffett’s highly anticipated short letter on the economic outlook
The Oracle of Omaha may have disappointed many investors with its latest annual letter to shareholders, which failed to provide an update on the economy. Buffett, now 92, has scaled back his public appearances in recent years, and the letter marks his first major communication with shareholders since the company’s annual meeting last April. Investors were hoping for an update on the US economy and Buffett’s thoughts on inflation and its potential recession but let them read between the lines. The company’s record return on operating profits reminded investors that he and longtime partner Charlie Munger, 99, were “business pickers,” “not stock-pickers.”
Treasury yields soared to their highest level since the 2008 financial crisis following the Federal Reserve’s aggressive rate hike cycle. Six-month and one-year yields have topped 5% for the first time since 2007, while the benchmark 10-year Treasury yield is near 4%.
“Interest rates are driven by asset prices, you know, kind of like gravity for an apple,” Buffett said earlier at Berkshire’s annual meeting in 2013. His comments highlighted the “gravitational pull” that higher rates can have on stocks, especially years down the line. almost zero interest rates. However, Buffett made no meaningful changes to the company’s portfolio to indicate a dire outlook.
But one thing is for sure, Buffett continues to remain optimistic about long-term expectations for the US economy.
“Despite our citizens’ penchant—almost enthusiasm—for self-criticism and self-doubt, I have yet to experience a time when it makes sense to make a long-term bet against America. And I highly doubt that any reader of this letter will have a different experience in the future,” he wrote .
Berkshire is a seller in Q4, but top holdings remain
Berkshire Hathaway’s 13F filing in mid-February shows the conglomerate was a net seller of stock in the fourth quarter. The company divested a significant portion of its stake in Taiwan Semiconductor (TSM) while reducing its holdings in Bank of New York Mellon and US Bancorp. The conglomerate also shifted much of its cash position to short-term T-bills, increasing its position from $9.6 billion to $17.6 billion.
Investors can use the filing to gauge Buffett’s feelings about the U.S. economy for the rest of the year. Berkshire’s investment in bank stocks has been cut as the Federal Reserve slows the pace of rate hikes, adding headwinds to the banking sector. Taiwan Semiconductor’s stake was only bought in the third quarter and may indicate geopolitical concerns related to diplomatic tensions between the US and China. Despite selling those stakes, Berkshire Hathaway hasn’t significantly increased its cash, and Buffett is happy to hold on to his prized assets.
Bottom Line
Investors hoping for an update on Warren Buffett and Charlie Munger’s thoughts on the US economy will have to wait until the annual shareholder pilgrimage on May 6. Until then, the company’s willingness to hold on to its current stock will be a guarantee that celebrity investors don’t see any storm clouds gathering anytime soon.
