Warren Buffett on Saturday lamented the lack of attractive investments available for his $713 billion Berkshire Hathaway conglomerate, warning that low interest rates over the past two years have inflated valuations in financial markets.
The reflections, in Buffett’s long-awaited annual letter, accompanied results that showed Berkshire’s operating profits rose 45% year-on-year to $7.3 billion in the last quarter of the year. . Earnings were driven by strong results from its BNSF Railroad and the series of electric utilities it owns.
Buffett, 91, told Berkshire investors that both he and his longtime right-hand man Charlie Munger found “little that got us excited” as they looked for investments with which to invest some of the mammoth $146.7 billion (R. $754 billion) of the group.
“Charlie and I have faced similar heavy cash positions from time to time in the past,” he said. “These periods are never pleasant; they are also never permanent. And luckily, we had a moderately interesting alternative in 2020 and 2021 for deploying capital.”
Buffett, who has been criticized for not using more of the company’s available cash to buy companies to add to his portfolio, has instead returned to buying Berkshire stock. The company spent $27.1 billion on share buybacks last year, and Buffett noted in his letter that he had already bought another $1.2 billion worth of Berkshire stock in 2022.
The dean of the investment industry’s view comes after three turbulent months in financial markets, with investors sloughing off shares in loss-making companies as they run from riskier corners of the stock market.
“Speaking less politely, I would say that bull markets generate bloated bulls,” Buffett said, before changing the subject.
The stock market moves were spurred largely by a move by the Federal Reserve, which is preparing to raise interest rates for the first time since 2018, as it works to tame inflation and curb the excesses it sees in markets.
“Low long-term interest rates push the prices of all productive investments up, whether it’s stocks, apartments, farms, oil wells, whatever,” Buffett wrote. “Other factors also influence valuations, but interest rates will always be important.”
Market conditions began to favor old industrial conglomerates, financial, energy and utilities giants — all of Berkshire’s lines of business. The company’s shares are up 6.4% so far this year, well above the S&P 500’s 8% drop.
Many of the excesses Buffett and Munger warned about in recent years have begun to leak out of the market. The average company in the Russell 3000, which captures US companies large and small, is down more than 30% from 52-week highs, according to Financial Times calculations.
Data from Finra, the Wall Street watchdog, also signals that some of the speculation that dominated trading activity in 2021 has been eliminated. The amount of borrowed money used to fund equity positions has dropped by more than a tenth since October.
“People who are comfortable with their investments, on average, will achieve better results than those motivated by ever-changing headlines, conversations and promises,” Buffett said.
Buffett’s long-term strategy has attracted legions of devotees over the years, who read his annual letter both for investment advice and to hear his opinion on world events.
The company’s annual report, also released on Saturday, showed it had added few new positions to its $351 billion equity portfolio, and instead was a net seller of shares. Berkshire spent $8.4 billion in 2021 buying stock. On the other hand, it sold shares worth US$ 15.8 billion.
Berkshire’s many operating companies, which include ice cream supplier Dairy Queen, insurance company Geico and private jet operator NetJets, had an exceptional year.
Full-year net income more than doubled from the previous year to $89.8 billion, or $59,460 per Class A share, a result that included a great gain with the appreciation of its shares. Buffett has long said that the total profit Berkshire must report, which is affected by fluctuations in the stock market, is often “negligible.”
Instead, he focused on the operating profits generated by the company’s individual divisions. BNSF reported a 16% jump in profits to nearly $6 billion, driven by higher shipments of consumer and industrial goods and coal on its railroad. Revenue from the unit, which Buffett described in his letter as Berkshire’s “most important acquisition”, has almost returned to pre-pandemic levels.
The company’s results are often seen as a barometer of the overall US economy, given its hundreds of subsidiaries that operate in a variety of industries. Sales at its dealerships increased, as well as in the manufacturing, retail and homebuilding businesses.
Buffett also gave space in the annual report to Greg Abel, whom the board named his eventual successor, to detail how Berkshire plans to address sustainability within the group. The company this year listed climate change as a risk factor for its business.
Abel said the effort was focused on Berkshire Hathaway Energy, where the company is investing in solar and wind power projects, and BNSF.
Translated by Luiz Roberto M. Gonçalves
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