In the first earnings report since the passing of long-time Vice Chair Charlie Munger, Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) honored the investing legend and posted strong earnings that beat estimates.

The conglomerate’s stock price initially rose about 3% after the opening bell on Monday, only to drop back down to around $413 per share by early afternoon, off by about 1% for the day.

As always, Chairman and CEO Warren Buffett had a lot to say about Munger, the company and the markets in his annual letter to shareholders.

Berkshire’s origin story

In the 2023 annual report released on Saturday, Buffett honored his friend and partner with a personal note titled, “Charlie Munger: The Architect of Berkshire Hathaway.”

In the letter, Buffett recounted a hard truth Munger laid on him in 1965: that it was a “dumb decision” to buy control of Berkshire Hathaway. However, Munger told Buffett he knew how to fix the problem.

“Warren, forget about ever buying another company like Berkshire, but now that you control Berkshire, add to it wonderful businesses purchased at fair prices and give up buying fair businesses at wonderful prices. In other words, abandon everything you learned from your hero, Ben Graham. It works but only when practiced at small scale,” Buffett wrote, quoting Munger in 1965.

Buffett followed his instructions then, adding that Munger “jerked me back to sanity” any time he slid back into old habits, right up until the day he died on Nov. 28, 2023 — only 33 days before turning 100.

“In reality, Charlie was the ‘architect’ of the present Berkshire, and I acted as the ‘general contractor’ to carry out the day-by-day construction of his vision,” Buffett added. “Charlie never sought to take credit for his role as creator but instead let me take the bows and receive the accolades. In a way his relationship with me was part older brother, part loving father.”

Fourth quarter and year-end results

Berkshire Hathaway had a good fourth quarter and a strong year in 2023.

The firm’s net earnings amounted to $37.6 billion in the most recent quarter, more than double the $18.1 billion recorded in the fourth quarter of 2022. For the full year, Berkshire’s net earnings were $96 billion, up from a $22 billion net loss in 2022.

However, the firm’s net earnings are deceiving because they include Berkshire’s over-$370 billion portfolio of stocks, which include unrealized gains or losses, depending on the year. Additionally, these are long-term holdings, so to count year-over-year fluctuations doesn’t make much sense.

Incidentally, Berkshire’s stock portfolio was up 15.8% in 2023 and has an average annual return of 19.8% since 1965, topping the 10.2% annual return of the S&P 500 since then.

The metric that Berkshire Hathaway likes to use is operating earnings, which excludes the stock portfolio’s returns and focuses on how its businesses are doing. These numbers were good too, as the company generated $8.5 billion in operating earnings in the fourth quarter, up 29% year over year. For the full year, Berkshire’s operating earnings were $37.5 billion, up 21% over 2022.

Berkshire’s best-performing business in 2023 was insurance, as both the underwriting and investment income from the insurance business significantly outperformed in the quarter and for the year. On the other hand, the firm’s railroad and utilities businesses were down in the quarter.

However, the operating earnings in Berkshire’s other businesses rose 8% for the year to $15.1 billion. Berkshire Hathaway owns entirely or holds a controlling interest in about 65 companies, including diverse names like Benjamin Moore, Dairy Queen, Business Wire, and GEICO.

Built to last

As always, Buffett had some interesting — and perhaps sobering to some, but realistic to many — thoughts on the markets and his company.

“Size did us in,” Buffett wrote in the letter, referring to his team’s ability to find companies that can “move the needle” for Berkshire Hathaway.

“Berkshire now has — by far — the largest GAAP net worth recorded by any American business,” he added. “Record operating income and a strong stock market led to a year-end figure of $561 billion. The total GAAP net worth for the other 499 S&P companies — a who’s who of American business — was $8.9 trillion in 2022 … By this measure, Berkshire now occupies nearly 6% of the universe in which it operates. Doubling our huge base is simply not possible within, say, a five-year period, particularly because we are highly averse to issuing shares.”

Thus, while Buffett says the company has “no possibility for eye-popping performance,” it is “built to last,” with diverse earnings and fiscal conservatism that will allow it to adeptly navigate all markets, including the bad ones.

Buffett concluded the letter by inviting shareholders to attend the annual meeting on May 4 to hear from the three leaders of the company: himself and vice chairmen Greg Abel and Ajit Jain.

“Missing from the stage this year will be Charlie,” he noted.

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