By Jonathan Stempel
(Reuters) - Warren Buffett on Saturday moved to reassure investors that his conglomerate Berkshire Hathaway (NYSE:BRKa) would serve them well over the long term, even as he mourned the recent passing of his longtime second-in-command Charlie Munger.
In his widely-read annual letter to Berkshire shareholders Buffett said his more than $900 billion conglomerate has become a fortress that could withstand even an unprecedented financial disaster.
"Berkshire is built to last," Buffett wrote.
Still, Buffett tempered expectations for Berkshire's stock price, saying his Omaha, Nebraska-based company "should do a bit better" than the average American corporation, but that its huge size left "no possibility of eye-popping performance."
"There remain only a handful of companies in this country capable of truly moving the needle at Berkshire, and they have been endlessly picked over by us and by others," Buffett wrote.
The letter was accompanied by Berkshire's financial results, including a record $37.4 billion operating profit and $96.2 billion net profit for all of 2023.
Berkshire's shares have risen by 4,384,748% since Buffett took over in 1965, or 19.8% compounded annually.
The Standard & Poor's 500, in contrast, gained a mere 31,223%, or 10.2% annually, though in recent years Berkshire has performed more like the index.
The 93-year-old Buffett assured investors that Vice Chairman and designated successor Greg Abel was "in all respects ready to be CEO of Berkshire tomorrow."
But the billionaire saved his most heartfelt words for Munger, who died in November at age 99.
Buffett called Munger the "architect" of Berkshire, with Buffett being only the "general contractor," and reminded investors how Munger pushed him to buy wonderful businesses at fair prices instead of fair businesses at wonderful prices.
Berkshire's "extreme fiscal conservatism," including a reluctance to pay inflated prices, is one reason Buffett let Berkshire's cash stake swell to a record $167.6 billion.
"In a way his relationship with me was part older brother, part loving father," Buffett wrote, referring to Munger. "Even when he knew he was right, he gave me the reins, and when I blundered he never--never--reminded me of my mistake."
Edward Jones analyst Jim Shanahan said Buffett "wouldn't have been as successful" without Munger.
STICKING TO ITS KNITTING
Cathy Seifert, a CFRA Research analyst who rates Berkshire "buy," said Buffett tried to show Berkshire's ability to withstand rocky shoals, after transforming it from a failing textile company into a colossus mirroring the broader economy.
"Nothing is perfect," she said. "He tried to show there is a succession plan, and Berkshire would stick to its knitting."
Buffett likened Berkshire's caution, with the stock market now routinely setting record highs, to an insurance policy against hasty, "dumb" business decisions that would irk Munger.
Thomas Russo, a longtime shareholder at Gardner, Russo & Quinn in Lancaster, Pennsylvania, said Buffett still offers shareholders "tremendous value from his ability to make decisions before the opportunity is far gone."
Berkshire said fourth-quarter operating profit from its dozens of insurance, railroad, industrial, energy, and retail businesses rose 28% to $8.48 billion. Full year profit rose 21%.
The Geico car insurer benefited in 2023 from improved underwriting and cost cuts, including the shedding of 7,700 jobs, or 20% of its workforce, while higher interest rates boosted investment income for Berkshire's insurance units.
That helped offset wage pressures at the BNSF railroad and wildfire losses at Berkshire Hathaway Energy.
"Berkshire has diversified, very solid assets," said James Armstrong, a longtime Berkshire investor at Henry H. Armstrong Associates in Pittsburgh. "A mom-and-pop investor can feel that Berkshire is unlikely to suffer permanent harm."
Investment gains in Berkshire's $354 billion portfolio of stocks such as Apple (NASDAQ:AAPL), American Express (NYSE:AXP), Bank of America and Coca-Cola (NYSE:KO), helped generate Berkshire's $96.2 billion net profit.
That amount reflects accounting rules that require Berkshire to report gains in stocks it hasn't sold, however, making it "worse-than-useless" to investors according to Buffett.
MARKET EXCESS
Berkshire's caution, and a reason for its record cash stake, was reflected in its having sold about $24 billion more stocks than it bought in 2023.
"His letter is cautioning that other investors may be massively overpaying for stocks and businesses," said Bill Smead, a longtime Berkshire investor at Smead Capital Management in Phoenix.
Results also included some of Occidental Petroleum (NYSE:OXY)'s earnings, which reflected Berkshire's approximately 28% stake in the oil company.
Buffett said he expects Berkshire will keep that stake "indefinitely," along with its stakes in five Japanese trading houses: Itochu, Marubeni, Mitsubishi, Mitsui and Sumitomo.
Munger's death means only Abel and Vice Chairman Ajit Jain will share the stage with Buffett at Berkshire's annual meeting, where Buffett and Munger spent hours entertaining and answering questions from shareholders, with millions more watching online.
This year's meeting is scheduled for May 4 in Omaha.
Buffett's letter made no mention of portfolio managers Todd Combs and Ted Weschler, who have been slated to oversee Berkshire's stock investments after he's gone.
Berkshire's businesses also include industrial parts and chemical companies, a big real estate brokerage, and retail brands such as Dairy Queen, Fruit of the Loom and See's candies.