Warren Buffett, the Chairman and CEO of Berkshire Hathaway Inc (BRK.A) and (BRK.B), published his annual shareholder letter for 2022 to his shareholders last month. This article provides highlights from Warren Buffett’s annual letter for 2022. The letter makes for excellent reading; many experienced investors look to his wisdom annually.
As a historical note, the first annual letter on the Berkshire Hathaway website is from 1977. You can also download all the letters between 1977 and 2021 from the Berkshire Hathaway website. In addition, there is a book containing unedited letters from 1965 to 2014, including ones not on the website.
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Warren Buffett Beat the S&P 500 Index
Buffett’s annual shareholder letter always starts with listing yearly gains for Berkshire Hathaway compared to the S&P 500 Index since 1965. In 2022, Buffett returned 4.0%, while the S&P 500 Index returned (-18.1%). This year is the second in a row Buffett has outperformed the Index. This is unsurprising because technology stocks, a significant component of the S&P 500 Index, were down significantly in 2022.
An investment in 1965 in Berkshire Hathaway would have returned a compounded annualized gain of 19.8% and an overall increase of 3,787,464%. Over the same period, the S&P 500 Index had a compound annualized increase of 9.9% and an overall gain of 24,708%, with dividends included.
Anyone who started investing with Buffett in 1965 would be very wealthy by this point. For instance, the Othmers were early investors in Buffet’s partnerships and eventually owned Berkshire Hathaway (BRK.A, BRK.B) stock by 1970. They almost became billionaires before they died in the late-90s. Even people who invested later became wealthy. For example, Stewart Horejsi became a billionaire.
Notably, not all years were gains for Berkshire Hathaway. There were ten down years; the worst year was a (-48.7%) decline in 1975. Interestingly, the S&P 500 Index did much better in 1975, with a loss of only (-26.4%). But in most years, Warren Buffett’s Berkshire Hathaway outperformed the S&P 500 Index by a wide margin. Consequently, this fact has led to outsized total compounded annual gains.
Berkshire Hathaway’s Stock Holdings
Berkshire Hathaway’s stock holdings continue to grow in value over time. Publicly traded businesses are one of two main components in the firm’s portfolio of businesses. Most people who follow Buffett know the main stocks owned by Berkshire Hathaway.
In Warren Buffett’s Annual Letter for 2022, he discusses, two of Berkshire Hathaway’s most significant holdings are Coca-Cola (KO) and American Express (AXP). Both companies now generate substantial dividends for Buffett to deploy as he sees fit. “Our favorite holding period is forever,” is a Warren Buffett statement, and he is indeed following through with KO and AXP.
Berkshire Hathaway started buying Coca-Cola in 1987 and finished buying 400 million shares in 1994 at the cost of $1.3 billion. Berkshire owns ~$25 billion of Coke stock, nearly 10% of the market capitalization. The stock initially paid a dividend of $75 million, no small sum. But in 2022, Berkshire received $704 million in dividends. In 1994, Coca-Cola was not yet a Dividend King. But consistent annual growth allowed it to reach 61 years of increases this year. In addition, the company achieved the 100-years of dividends in 2020.
A similar story has occurred for American Express. The firm completed purchasing shares in 1995 at the cost of $1.3 billion. Berkshire owns about $22 billion of the company, nearly 17% of the market capitalization. The total annual dividends were $41 million at the time. It rose to $302 million in 2022.
In addition, Berkshire invested $10 billion in Occidental Petroleum (OXY) in a combination of preferred stock and warrants to buy common stock. This holding was valued at $10.7 billion at the end of 2021. Notably, Berkshire actively bought OXY common stock in 2021 and 2022.
Also, Berkshire Hathaway owns 26.6% of Kraft Heinz (KHC), carried at $13.1 billion.
The bottom line is Buffett is receiving dividends from giant companies like Coca-Cola, American Express, Apple (AAPL), Bank of America (BAC), Chevron (CVX), HP Inc (HPQ), Moody’s (MCO), Paramount Global (PARA), Occidental Petroleum, and Kraft Heinz. The annual dividend usually grows yearly, adding to Berkshire Hathaway’s cash hoard. Moreover, some companies buy back shares, increasing Berkshire’s ownership percentage. It is crucial to remember Buffett and Munger do not view themselves as stock pickers but as business pickers creating value.
Buffett also takes a dig at efficient markets, saying,
“Efficient” markets exist only in textbooks. In truth, marketable stocks and bonds are baffling, their behavior usually understandable only in retrospect.
Berkshire owns and controls a large and growing list of companies. In some cases, these companies have little connection with each other. For instance, Berkshire owns See’s Candies, Dairy Queen, GEICO, Burlington Northern Santa Fe (BNSF), McLane, and others.
Berkshire’s reach has become vast, and you are likely buying something from a company that Berkshire owns. You can check the 10-K filing for the list of major companies. However, they are primarily organized into five business units: Insurance and Reinsurance Businesses, Railroad Business – Burlington Northern Santa Fe, Utilities and Energy Business – Berkshire Hathaway Energy (BHE), Manufacturing Businesses, and Service and Retailing Businesses.
The largest business in terms of value is the property and casualty insurance business. Berkshire bought National Indemnity in 1967, two years after Warren Buffett bought the textile maker.
Berkshire added to its insurance operations in 2022 by acquiring Alleghany Corporation, a property-casualty insurer.
The insurance business gives Berkshire its float, letting the firm invest and accumulate dividends. The float does not belong to Berkshire but is used to offset losses from its insurance operations. However, the float can be invested either in bonds or equities, in the case of Berkshire. The addition of Allegheny increased the float to $164 billion.
Besides insurance, Berkshire owns 100% of the railroad, BNSF, with $5.9 billion in earnings. It also owns 92% of BH Energy, with $4.3 billion in earnings.
The company also owned 38.6% of Pilot Corp. The percentage increased to 80% in late-January 2023, effectively taking control of it. The Haslam family owns 20%. They founded Pilot Company in 1958.
Millions, Billions, Trillions
We quote verbatim from Warren Buffett’s letter.
Millions, billions, trillions – we all know the words, but the sums involved are almost impossible to comprehend. Let’s put physical dimensions to the numbers:
- If you convert $1 million into newly-printed $100 bills, you will have a stack that reaches your chest.
- Perform the same exercise with $1 billion – this is getting exciting! – and the stack reaches about 3⁄4 of a mile into the sky.
- Finally, imagine piling up $32 billion, the total of Berkshire’s 2012-21 federal income tax payments. Now the stack grows to more than 21 miles in height, about three times the level at which commercial airplanes usually cruise.
Final Thoughts on Highlights from Warren Buffett’s Annual Letter for 2022
Warren Buffett’s Annual Letter always makes for good reading. He covers a wide array of items about Berkshire. In addition to the above, Buffett discusses federal taxes and recent quotes from Charlie Munger on a recent podcast. Below are a few of my favorite quotes from this new list,
- Patience can be learned. Having a long attention span and the ability to concentrate on one thing for a long time is a huge advantage.
- There is no such thing as a 100% sure thing when investing. Thus, the use of leverage is dangerous. A string of wonderful numbers times zero will always equal zero. Don’t count on getting rich twice.
- You have to keep learning if you want to become a great investor. When the world changes, you must change.
Prior Year Highlights
- Highlights from Warren Buffett’s Annual Letter for 2021
- Highlights from Warren Buffett’s Annual Letter for 2020
- Highlights from Warren Buffett’s Annual Letter for 2019
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Prakash Kolli is the founder of the Dividend Power site. He is a self-taught investor, analyst, and writer on dividend growth stocks and financial independence. His writings can be found on Seeking Alpha, InvestorPlace, Business Insider, Nasdaq, TalkMarkets, ValueWalk, The Money Show, Forbes, Yahoo Finance, and leading financial sites. In addition, he is part of the Portfolio Insight and Sure Dividend teams. He was recently in the top 1.0% and 100 (73 out of over 13,450) financial bloggers, as tracked by TipRanks (an independent analyst tracking site) for his articles on Seeking Alpha.