Warren Buffett has warned Berkshire Hathaway shareholders his sprawling US$905 billion ($1.46 trillion) conglomerate has virtually “no possibility of eye-popping performance” in the years ahead, laying bare the challenges that will confront his successors.

The
so-called Oracle of Omaha said in his annual letter today that there were very few deals that offer the kind of transformative impact past takeovers have had, such as its purchases of insurers Geico and National Indemnity or the BNSF railroad.

“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,” he said. “Outside the US, there are essentially no candidates that are meaningful options for capital deployment at Berkshire.”

It is a problem that Buffett has been staring down for almost a decade as the growth of Berkshire’s operations and cash levels have compounded.

The company spent billions of dollars acquiring truck stop operator Pilot Flying J and insurance conglomerate Alleghany in recent years, adding them to a portfolio that includes icecream purveyor Dairy Queen and utility behemoth Berkshire Hathaway Energy.

But those outlays put only a small dent in Berkshire’s cash pile, which continues to climb. It hit a record US$167.6b at the end of 2023, up US$39b over the course of the year.

“Size did us in, though increased competition for purchases was also a factor,” Buffett said. “For a while, we had an abundance of candidates to evaluate. If I missed one – and I missed plenty – another always came along. Those days are long behind us.”

The 93-year-old Buffett, who lost his long-time investment partner Charlie Munger last year, said Berkshire should continue to “do a bit better” than the average US company “and, more importantly, should also operate with materially less risk of permanent loss of capital”.

He added: “Anything beyond ‘slightly better’, though, is wishful thinking.”

The passing of Berkshire’s acerbic vice-chairman has turned investors’ attention towards the company’s prospects without Buffett at its helm. Greg Abel, Buffett’s anointed successor, and Todd Combs and Ted Weschler, his investment deputies, are lined up to steer the giant.

They have a tough act to follow. Since 1964, Berkshire shares have returned 4.4 million per cent, far outstripping the 31,233 per cent gain by the benchmark S&P 500.

Buffett’s letters, along with his comments at annual meetings and hundreds of interviews over the years, form a quasi-handbook for the people who will one day sit atop Berkshire and the board that will govern it.

Today, he emphasised the “extreme fiscal conservatism” that has long been a guiding principle of the conglomerate would undoubtedly persist.

“One investment rule at Berkshire has not and will not change: never risk permanent loss of capital,” he wrote. “Thanks to the American tailwind and the power of compound interest, the arena in which we operate has been – and will be – rewarding if you make a couple of good decisions during a lifetime and avoid serious mistakes.”

He added that Berkshire would continue to pounce on opportunities when they present themselves, as the company did in early 2022 when it ploughed more than US$50b into stocks as the market sold off.

“Panics won’t happen often – but they will happen,” he said. “Berkshire’s ability to immediately respond to market seizures with both huge sums and certainty of performance may offer us an occasional large-scale opportunity.”

However, the company faces much stiffer competition than it did at the turn of the century, when private equity had far less firepower. Buffett has complained of stretched valuations as markets hit records and buyout shops paid ever higher multiples to clinch takeovers. In those periods, Berkshire largely sat on its hands.

Berkshire has become a big investor in its own shares and routinely turns to buybacks when it cannot find appealing investments in public markets. The company said it bought back US$2.2b worth of its stock in the fourth quarter, taking its total for the year above US$9b.

Since Munger died, the duty of choosing when to execute those buybacks now falls squarely on Buffett. The company did not name either Combs or Weschler to a role that Buffett previously shared with the late vice-chairman.

Buffett used his letter to memorialise Munger as the architect of the modern-day Berkshire Hathaway, describing the 99-year-old’s relationship to him as “part older brother, part loving father”.

“In the physical world, great buildings are linked to their architect while those who had poured the concrete or installed the windows are soon forgotten,” Buffett said. “Berkshire has become a great company. Though I have long been in charge of the construction crew, Charlie should forever be credited with being the architect.”

Munger was instrumental in shifting Buffett’s investing approach, helping him to pivot away from a “cigar-butt” investment style: buying low-priced stocks that might have the equivalent of only one more good puff left. Searching out bargains was a style Buffett had learnt under the tutelage of investment great Benjamin Graham, the father of value investing.

With Munger’s encouragement, he began investing instead in fairly priced but well-run businesses.

“Charlie became my partner in running Berkshire and repeatedly jerked me back to sanity when my old habits surfaced,” Buffett said.

Berkshire also reported its annual results today, showing a net profit of US$96.2b. Buffett considers that figure to be “worse than useless”, given accounting rules require the company to include the quarterly swings in value of its US$354b stock portfolio in its bottom line.

Stripping out those unrealised gains, Berkshire reported that operating earnings jumped 21 per cent from a year earlier to US$37.4b for 2023. In the fourth quarter, operating profits were up a headier 28 per cent to US$8.5b.

The gains were fuelled by strong results from Berkshire’s insurance unit, including at Geico, as well as higher interest rates. The company’s short-term treasury portfolio and cash generated north of US$115 million in interest income for Berkshire’s insurance unit every week last year – or some US$6.1b – eclipsing the US$5.5b it earned in dividends on stocks.

Buffett has struggled to find worthwhile investments in the open market and in the fourth quarter he remained a net seller of stocks. Berkshire has sold more stocks than it bought in each of the past five quarters, dumping some US$24b of equities in 2023.

The company’s investment decisions are closely scrutinised for clues into Buffett’s view of the market, and his inaction is often taken as an interpretation that he sees corners of the US stock market as overvalued.

“At Berkshire, we particularly favour the rare enterprise that can deploy additional capital at high returns in the future,” he said today. “Owning only one of these companies – and simply sitting tight – can deliver wealth almost beyond measure.”

In spite of its overall strong performance, Buffett spent part of his letter bemoaning missteps. The company is locked in high-profile litigation that could cost it more than US$10b, with its utility – where Berkshire vice-chairman Abel spent much of his career – at the centre of the storm.

Its PacifiCorp electric utility, which has operations in Oregon and California, paid US$631m in settlements over wildfires last year. The unit has so far taken US$2.4b of charges related to blazes in 2020 and 2022 and has warned its overall losses could spiral higher, with individuals seeking roughly US$8b in the two states. Berkshire has warned that figure could double or triple.

The energy division also houses Berkshire’s realtor, HomeServices of America, which is facing 11 antitrust lawsuits over how it and other brokers charged commissions. The US realtor industry was dealt a blow last year when a court found the country’s largest players liable for almost US$1.8b in damages.

HomeServices is appealing that decision but said it believed the damages could be trebled under federal law to US$5.4b.

The Financial Times