From Mistakes At Berkshire To Japan Investments — Key Takeaways From Warren Buffett's Annual Letter

Warren Buffett, the renowned investor and CEO of Berkshire Hathaway, recently shared insights in his annual letter to shareholders. He reflected on past mistakes, current strategies, and future plans, providing a comprehensive overview of the company’s performance and philosophy.

Buffett's Growing Cash Reserves

As of the end of 2024, Berkshire Hathaway's cash reserves reached a record $334.2 billion, marking the tenth consecutive quarter of growth. This increase can be attributed to a significant boost in operating earnings, which surged 71% in the fourth quarter. The rise in earnings was driven by higher interest rates and an improved insurance business.

Mistakes At Berkshire

In his letter, Buffett candidly acknowledged some mistakes made in capital allocation and assessing management capabilities. He highlighted the need for prompt action in addressing errors, quoting his business partner Charlie Munger: “Problems... require action, however uncomfortable that may be.” Unlike many corporations, Berkshire embraces transparency by openly discussing its mistakes, using terms like "mistake" and "error" multiple times throughout his letters over recent years.

Record Tax Payment

In 2024, Berkshire Hathaway paid $26.8 billion in federal corporate income taxes, the highest amount by any U.S. company. Buffett attributed this achievement to the company's long-term reinvestment strategy, noting that Berkshire has only paid a single dividend in its history.

Investment Strategy

Berkshire maintains a diverse portfolio, including both fully owned businesses and significant stakes in major companies such as Apple, Coca-Cola, and American Express. Notably, the company has reduced its marketable equity holdings significantly, yet remains dedicated to equity investments over cash. Buffett cautioned against relying too heavily on fixed-coupon bonds, underscoring the importance of strong businesses and skilled individuals in unstable economic times.

Buffett's Views on Capitalism

Buffett defended capitalism in his letter, recognizing its flaws while emphasizing its unparalleled potential for driving progress. He acknowledged that America's growth stems from continuous savings and intelligent investments, despite instances of mismanagement and fraud. He stated, “The savings of Americans have delivered a quantity and quality of output beyond the dreams of any colonist.”

Core Of Berkshire's Business

Buffett asserted that property-casualty insurance remains central to Berkshire's operations. He explained that unlike many industries where costs precede sales, the insurance industry collects premiums upfront while actual costs are determined much later. This unique structure can lead to risks, as liabilities might take years or even decades to materialize.

Managing Risk In A Volatile World

Buffett also addressed the increasing financial risks posed by extreme weather events, which have led to elevated insurance payouts. He stressed the need for proper pricing of policies to mitigate these risks, as well as to combat fraud and excessive litigation. Berkshire's ability to handle these challenges without depending on external reinsurers gives the company a competitive edge.

Investments in Japan

Buffett highlighted Berkshire's expanding interest in Japan, where the company has invested in five leading trading houses: ITOCHU, Marubeni, Mitsubishi, Mitsui, and Sumitomo. These firms were chosen due to their disciplined capital management and commitment to shareholders. Berkshire's strategy includes maintaining a yen-balanced approach, aligning investments in Japan with currency-neutral borrowing practices.

Buffett, Berkshire, Investments