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Waiting for the big opportunity

: Warren Buffett

Photo: Rick Wilking / REUTERS

In his annual letter to shareholders,

Warren Buffett

(93) warned the shareholders of his investment company Berkshire Hathaway that the best times for good deals are over.

His $905 billion conglomerate no longer has “any chance of a breathtaking performance.”

“There are only a handful of companies left in this country that have the ability to make a real difference at Berkshire.

They have been scrutinized endlessly by us and others.

[...] If we can value them, then they must be offered at an attractive price.” At the same time, there are “essentially no candidates outside the USA that represent a sensible option for Berkshire to deploy capital.”

Buffett is describing a dilemma that he has been dealing with for almost a decade: finding suitable takeover targets in order to reduce the massively grown cash holdings.

Berkshire had bought a number of companies in recent years.

The investment company's own size helped, but those days are now long gone and competition has also increased, explained Buffett.

In the past, investment companies raised ever larger sums of money for takeover candidates, thereby driving up their valuations to levels that the legendary investor considered unreasonable.

The mountain of money grows to 168 billion dollars

Ultimately, Berkshire's investments in the ever-decreasing number of deals were only able to reduce the mountain of money slightly and in the short term.

At the end of last year, cash holdings increased by $39 billion to around $168 billion.

Berkshire will continue to take advantage of cheap buying opportunities when they arise in the future, Buffett assured.

The mass of market participants today are no more emotionally stable than before or better educated than when they were young, writes the man who his admirers call “the Oracle of Omaha”.

At the same time, he observed, investors were exhibiting more casino-like behavior than before.

In other words: Panic-like conditions don't happen often, "but they will come," predicts the old master.

“And Berkshire’s ability to immediately respond to market downturns with huge amounts of money can provide us with a great opportunity.”

In fact, Berkshire shareholders have little reason to complain.

Since 1964, Berkshire shares have achieved a return of 4.4 million percent, far exceeding the 31,233 percent increase of the benchmark index S&P 500, according to the Financial Times.

Berkshire Class A shares have gained around another 16 percent this year

And the investment company's profits continue to bubble up: Berkshire achieved an operational profit of around 37.5 billion US dollars - an increase of a good 20 percent compared to the previous year.

The final quarter contributed around $8.5 billion.

The insurance business, which once made Berkshire great, made a significant contribution to increasing operating profits.

However, the results of the railway business as well as the supply and energy businesses declined.

Buffett appeals that investors should focus on the operating profit and not on the company's net profit, which fluctuates greatly due to price gains.

In 2023, the net profit was around $96 billion, and in 2022 Berkshire had to report a loss of around $22 billion.

Buffett dedicates a long passage in the annual report to his long-time companion

Charlie Munger

and honors him as the “architect of Berkshire Hathaway.”

Munger died last November at the age of 99, and Buffett had not yet commented personally on the death of his friend and chairman of Berkshire.

He now found even warmer words: “Charlie never tried to take the credit for his role as creator, but instead let me do the bows and accept the awards,” Buffett wrote.

“In a way, his relationship with me was part older brother, part loving father.

Even when he knew he was right, he gave me the reins, and when I made a mistake, he never – ever – reminded me of my mistake.”

Munger obviously had a decisive influence on Buffett's investment style: away from pure bargain stocks at the lowest prices and towards stocks of companies that were comparatively low-valued on the market but were characterized by very good corporate management.

In 1965, Munger advised him: “Now that you control Berkshire, add to it wonderful companies that you buy at fair prices and give up buying fair companies at wonderful prices,” Buffett writes.

With initially “a lot of reluctance” he then “followed his instructions”.

Munger also repeatedly brought Warren Buffett back down to earth “when my old habits resurfaced.”

Buffett and Munger worked together for decades.

Their appearances at the annual general meetings of their holding company, where the two passed balls to each other, were legendary.

Buffett once asked his right-hand man if Charlie could explain why so many people simply don't understand the simplest financial questions.

“Well,” replied Munger, “if people weren’t wrong so often, we wouldn’t be so rich.”

Without a doubt: Munger was not only a smart investor, but also a humorous one.

According to the Wall Street Journal,

Greg Abel

(61) and

Ajit Jain

(72) will share the podium with Buffett at the next shareholder meeting in May.

Abel and Jain lead Berkshire's non-insurance and insurance businesses, respectively.

Abel is considered Buffett's designated successor.

And the veteran reassured his investors that Abel is “ready in every way to become CEO of Berkshire tomorrow.”

Analysts expect plain language from designated Buffett successors

"Berkshire is built to last," Buffett asserts in his letter.

But analysts are asking anxious questions about whether subsequent management can continue Birkshire Hathaway's decades-long success.

Edward Jones analyst Jim Shanahan, for example, doubts whether Abel would actually be brave enough to take advantage of the opportunity mentioned should there be a great panic on the market and then buy good companies with billions of dollars.

Cathy Seifert, an analyst at CFRA Research, believes Berkshire has "really strong, stable second- and third-tier managers" that haven't received much attention, according to the AP.

When it comes to the future of the investment company, shareholders understandably wanted to hear more from Abel and Jain - they now have the opportunity to do so on May 4th.