I almost missed today’s blog post because I came down with “Covid 2.0 (aka Covid +)” which escaped a lab in Wuhan (not yet). I tried to go through United Healthcare to coordinate treatment but they decided to bill Medicare for a bunch of treatments I didn’t actually need. What a way to end a week. As a result I missed my call to discuss the “Mar-A-lago” accord, you know the plan to devalue the U.S. Dollar and simultaneously get China to buy longer-dated treasuries. Now I’ve unanchored my inflation expectations and reported that to the UofM. Anyway, I blame Canada - ever since they beat the U.S. team in the 4 Nation Face Off everything in the news cycle went down hill. There, you have everything you need to know from late last week.
But do not be dismayed, we got Berkshire Hathaway’s annual letter on Saturday morning, nothing beats a coffee and Buffett. So what did the GOAT have to say?
TLDR: Buffett believes in the core tenet of trust, he emphasizes transparency in leadership, urging CEO’s to acknowledge and correct their mistakes quickly, while also espousing the benefits of business instinct over formal education (be wary of flashy hires and managers who believe their own BS). Despite reporting on the record level of cash at Berkshire, Buffett remains committed to equities over cash, warning of inflation risks. He reaffirms his commitment to Berkshire's insurance model, highlights his Japanese investments and of course underscores the power of capitalism, savings and long-term compounding.
On Management Responsibilities
Buffett opens the letter explaining that he believes an Annual Report carries the responsibility of communicating to investors both the good and bad decisions in a manner that engenders the trust you put in the CEO.
“if you start fooling your shareholders, you will soon believe your own baloney and be fooling yourself as well.”
There is a level of lamentation about how few companies actually admit their mistakes.
Reflecting on “mistakes” or “errors”, Buffett recalled the advice of the late Charlie Munger, that the cardinal sin related to mistakes is delaying the correction of mistakes - problems cannot be wished away.
Buffett shares a tribute to Pete Leigl, owner of Forest River, an RV company that Berkshire acquired in 2005
He uses Pete’s story to share that he doesn’t care about where people went to school, believes in lifelong learning and that a large portion of business talent is innate.
While Buffett believes in disclosing mistakes, he also knows that a single winning decision can make a huge difference. “Mistakes fade away; winners can forever blossom.”
2024 Performance:
Overall performance was better than expected but 53% of the Berkshire operating subsidiaries reported a decline in earnings.
Earnings were aided by a large gain in investment income from their massive T-bill portfolio.
Despite the weather related events, Buffett described how no “monster” event occurred in 2024, but that such an event could occur any day.
Insurance operations had a great year.
Where Berkshire is invested:
His “ambidextrous” approach to allocating shareholder capital, where on one hand Berkshire controls 189 operating companies and on the other they own a small interest in a dozen or so large, profitable businesses like Coca Cola, Amex, and Apple.
Buffett somewhat claps back at the commentary around the size of their cash position, stating “Berkshire will never prefer ownership of cash-equivalent assets over the ownership of good businesses, whether controlled or only partially owned” and “we will forever deploy a substantial majority of their money in equities”
His advice to investors is that “Paper money can see its value evaporate if fiscal folly prevails.” “Fixed-coupon bonds provide no protection against runaway currency.” Buffett believes “Businesses, as well as individuals with desired talents, however, will usually find a way to cope with monetary instability as long as their goods or services are desired by the country’s citizenry.” Over his career he has depended on the success of American business and will continue to make that bet.
Buffett discusses the benefits of capitalism, the importance of savings and the magic of long-term compounding.
Buffett slips in some advice to politicians, “And never forget that we need you to maintain a stable currency and that result requires both wisdom and vigilance on your part.”
A note on the Property and Casualty Insurance business:
Buffett notes how the “money-up-front, loss-payment later” model has benefited Berkshire, allowing them to invest the float.
Buffett expresses confidence that despite growing climate risk, writing one year policies against this risk is manageable. Acknowledging that Berkshire only assumes risk they feel is appropriately priced.
Berkshire can financially and psychologically handle extreme losses without blinking.
Berkshire’s Japanese Investments:
Buffett believes Berkshire’s investment in ITOCHU, Marubeni, Mitsubishi, Mitsui and Sumitomo are investments in companies that are very similar to Berkshire itself and are for the long-term.
He takes a minute to take a subtle jab at U.S. executive compensation, “their top managers are far less aggressive in their compensation programs than their U.S. counterparts.”
Buffett discusses that from time to time they borrow Yen at fixed rates only and seek a position of Yen neutrality.
We ended last week with a down day for the major equity indexes. The S&P 500 closed at 6,013 down 1.7%, but the index still remains at valuations that are in the 90th percentile on a P/E basis on a historical basis, with IT being the sector trading at the highest P/E’s. The 2Y yield moved back to 4.20% and the 10Y yield moved back down to 4.43%.
On the week ahead the focus will be on PCE data and Nvidia earnings.
Today: Dallas Fed Mfg, 2Y Note auction
Tue: Home prices, Fedspeak, 5Y note auction
Wed: New Home Sales, 7Y note auction, Fedspeak
Thur: Durable Goods, GDP 2nd Est. Jobless claims, Pending Home Sales
Fri: PCE, Income & Spending
XTOD (You are welcome to read Jim’s entire thread): : 1/16 A thread on The Mar-A-Lago Accord (MALA). tl:dr Take it seriously, not literally The status quo cannot last. If we do nothing, it ends badly. What is the alternative? Most of it has either already happened, or is underway. We weren't aware of the name.
XTOD: In other words if you want U.S. military security going forward you need to swap your century bonds and manipulate your currency higher
If you don't want our protection we will tariff you to achieve our goals
XTOD: An email was sent out tonight to all federal employees, even those not under the Office of Personnel Management (OPM) or Executive Branch, by Elon Musk’s Department of Government Efficiency (DOGE), demanding that they reply to the email with “5 bullets of what you accomplished last week” or face forced resignation. Several agencies and departments, including a number in the Department of Defense, have already instructed their employees not to respond to the email, as they are not under DOGE’s purview or the OPM.
XTOD: Jamie Dimon just sold 33% of his J.P. Morgan stock on February 20th 🤨 Co-CEO Troy Rohrbaugh also sold 20% yesterday.
XTOD: Beta-adjusted gamma. This is a pretty simple thing but worth discussing.
So ordinarily you think about dollar gamma on your positions - if the underlying goes up by 1%, how much more dollar delta do you pick up?
XTOD: Everyone thinks Europe is finished. In 20 years, they'll wish they had bought in early. AGI takes over. Productivity is infinite. Everything is automated. So, tell me: what actually becomes scarce?
NOT another piece of software — but authentic human experience.
When machines handle everything, what do people crave? Beauty. Meaning. Significance.
And Europe has been accumulating that for centuries.
It's sitting on the most undervalued asset of the AI age:
- 500+ UNESCO World Heritage sites (the US? 25)
- The world's greatest museums
- 50M+ cultural tourists in France alone
- Centuries-old universities, libraries, cafés
- The birthplace of opera, ballet, fine wine
The real arbitrage? Owning land in places machines can't replicate. In the AI age, people will split into two groups:
- New "landlords" stacking assets
- New "renters" living off AI welfare (UBI, digital credits, whatever comes next)
XTOD: Warren Buffett: "I think I stay healthy partly by being happy. It really helps if your stomach isn't grinding all the time [because] you're doing things you don't want to do or you're working with people [you don't like]." "I'll usually sleep 8 hours a night."
https://x.com/biancoresearch/status/1893349442293538872
https://x.com/dampedspring/status/1893294640792584509
https://x.com/sentdefender/status/1893466912446922884
https://x.com/FinanceLancelot/status/1893101972028285242
https://x.com/bennpeifert/status/1892789658201055714
https://x.com/kejca/status/1892977205547876767
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