Wealth, Wisdom and Warren.
“Berkshire is now a sprawling conglomerate, constantly trying to sprawl further.”
—Warren Buffett (2015).
Warren Buffett, the Chairman of Berkshire Hathaway, writes a “Chairman’s Letter” for every Berkshire Hathaway Annual Report, most of those letters are available at berkshirehathaway.com. What can be learned from reading them?
The Origins of Berkshire Hathaway
The story of the growth of Berkshire Hathaway into the colossus existing today can begin in 1955 when two northern textile manufacturers with roots in the 19th century merged: “Berkshire Fine Spinning Associates” and “Hathaway Manufacturing Company.”
Nine years later, in 1964, a 34-year-old Warren Buffett, living in Omaha, Nebraska, was operating, on behalf of himself and others, “Buffett Partnership Ltd” (BPL). This partnership owned around 7% of the stock of textile firm “Berkshire Hathaway.” Buffett found himself in a dispute with the then CEO of Berkshire Hathaway over the price of its shares and in response Buffett “began to aggressively buy more Berkshire shares.” As a result of “my childish behavior” Buffett took control of the company, a “terrible business about which I knew very little.” Buffett and Berkshire “struggled unremittingly” running a textile manufacturing firm in this dying industry, until they finally “threw in the towel and closed the operation.” (2014 Annual Report).
By 1966 Buffett had, as he modestly states, “enjoyed reasonable success” as an investor strategically looking for stocks at bargain prices, but he credits his subsequent creation of a business juggernaut to his fellow native from Omaha, Charlie Munger. Munger advised Buffett to stop trying to buy “fair businesses at wonderful prices” but to instead “buy wonderful businesses at fair prices.” Although “altering my behavior is not an easy task (ask my family),” Buffett ultimately did accept Munger’s advice. (In 1978 Munger became the Vice-Chairman of Berkshire Hathaway a position he held until his death at age 99 in 2023).
Buffett implemented what he calls “Charlie’s blueprint” in two ways: (1) buying controlling interests in “wonderful businesses” and operating them as a Berkshire subsidiary; and (2) buying significant but non-controlling positions in companies that met his criteria for long-term value.
Central to this first strategy from the start was the old-fashioned property and casualty insurance business and, in particular, the “float” (premiums paid upfront that can be invested until claims are paid) it provides. As Buffett writes, insurance has “been the engine propelling Berkshire’s growth since 1967, the year we acquired National Indemnity.”1Readers may wonder why Buffett did not use his limited partnership BPL to make this 1967 acquisition. In February 2015 Buffett appeared to answer this question – “I’ve had 48 years to think about that question, and I’ve yet to come up with a good answer. I simply made a colossal mistake. If BPL had been the purchaser, my partners and I would have owned 100% of a fine business, destined to form the base for building the company Berkshire has become.” Indeed, when Buffett was a student in 1951, a company then known as Government Employees Insurance, now known as GEICO, “instantly became my first love.” Berkshire has controlled GEICO since the-1990s. In short, insurance provides “the core of Berkshire’s well-being and growth.”
Berkshire’s current roster of 67 subsidiary companies is breath-taking in scope, collectively employing nearly 400,000 people, and includes household names Dairy Queen, Duracell, Fruit of the Loom, Kraft-Heinz and others. In 2010 it purchased for 44 billion BNSF Railroad – “the number one artery of American commerce”- an “all-in wager on the economic future of the United States.” Buffet charges the CEOs of these businesses to run them “as if it were the only asset your family will own” and “invariably they do”, sending “excess cash to Omaha for me to deploy.”
Buffett also implemented Munger’s blueprint by buying large non-controlling interests in public companies that meet his criteria for long-term investments. Berkshire by the end of 2022 was the largest shareholder of eight S&P 500 companies, including American Express. In fact, Buffett’s 1963 investment in American Express, made after a mostly forgotten but at the time serious scandal, was one of his early major successes. These equity holdings are collectively worth more than $250 billion.
The “American Tailwind”
Strikingly apparent from Buffett’s Letters is his unwavering faith in the United States of America as a wealth generating machine. He makes this point perhaps most poignantly through his recent statement that “America would have done fine without Berkshire. The reverse is not true.” In February 2009, in the middle of the Great Financial Crisis, a severe recession with many high-profile businesses failing, and equity market declines in the range of 50%, Buffett wrote that “America’s best days lie ahead.”
In February 2016 Buffett referenced the idea of a “tailwind”, writing:
For 240 years it’s been a terrible mistake to bet against America, and now is no time to start. America’s golden goose of commerce and innovation will continue to lay more and larger eggs. . . . Considering this favorable tailwind, Berkshire (and, to be sure, a great many other businesses) will almost certainly prosper.
By 2019 these ideas had crystalized into the phrase “The American Tailwind”:
[From 1788] to 1942, the United States had grown from four million people – about 1⁄2 of 1% of the world’s population – into the most powerful country on earth. . . . .
Today, the Federal Reserve estimates our household wealth at $108 trillion, an amount almost impossible to comprehend. . . . . [M]uch of Berkshire’s success has simply been a product of what I think should be called The American Tailwind. . . . We are lucky – gloriously lucky – to have that force at our back.
Equity Market Risks
A final lesson from Buffett seems appropriate given the large equity returns achieved in 2024 and 2023. The S&P 500, for example, reached over 50 record highs in 2024 and its cumulative return from 2023 to 2024 is 57.9%, its best two-year period since the late 1990s.
In years such as these it is easy to forget that equities can be risky, and that includes even shares of fabulously successful companies such as Berkshire Hathaway. As Buffett reports, Berkshire Hathaway stock has declined over 50% twice (during the period March 1973 through January 1975 and again from September 2008 through March 2009); nearly 50% from June 1998 to March 2000, and 37% in October 1987.
There is “simply no telling how far stocks can fall in a short period.” Plunging markets may make minds “rattled” – especially amongst people who have borrowed money to buy stocks – and an “unsettled mind will not make good decisions.” “No-one can tell you when these [large declines] will happen” and the light can at “any time go from green to red without pausing at yellow.”
Citing a Rudyard Kipling poem, Buffett advises that during times like those: “‘If you can keep your head when all about you are losing theirs, if you can wait and not be tired by waiting, if you can think – and not make thoughts your aim, if you can trust yourself when all men doubt you, Yours is the Earth and everything that’s in it.’”
Berkshire’s strategies have paid off for its long-term investors. From 1965 through 2023, Berkshire’s average annual gain was 19.8% compared to 10.2% for the S&P 500, which means that for every $10,000 invested in Berkshire investors would have $438.48 million by the end of 2023 compared to $3.13 million for S&P 500 investors. Buffett believes that, because of the massive size of Berkshire, these results are not duplicable in the future, but his aspiration is to continue to outperform the S&P to some extent.
Paraphrasing Deuteronomy’s 34:10 reflection on Moses, one might say, “There has not arisen another businessman in America like Buffett.”
