Greg Abel's First Berkshire Hathaway Shareholder Letter
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Welcome, welcome, welcome. How's everybody doing? Hope you are doing well. My name is Andrew with Focus Compounding. On air live with Jeff Gannon. Jeff, how's it going today? It's going very well, Andrew. How's it going with you? It's going great. We hope it's going great with everybody else as well. If this is the first time you are tuning in with us, thank you so much for joining us. Be sure to check out all of our content that we push out into the investing universe. The best way to do that is to follow me on X at @focusedcompound. Be sure to hit the subscribe button if you're watching this on YouTube. And also hit that subscribe button if you're listening on the podcast side of things to be notified every time that we upload a podcast. So, in today's podcast, Jeff, we are finally getting around to Greg Abel's first Berkshire Hathaway shareholder letter. The contents of the letter, his actual letter was 18 pages. The total PDF file was 20 pages. So, I wanted to go through it. And obviously pretty monumental given that it's his first Berkshire letter. And I think a lot of people were waiting to see how it would be. I mean, what were your first impressions of the letter? Um good. I was wondering if he would do the same sort of letter as as Buffett did, and he is sticking to that for now, so that's interesting. You know, it's a really long letter for a CEO letter, and it's all written by him, so that was interesting. And and then you can see some differences between him and and Buffett, obviously. And then I think they also maybe use that opportunity to change up some things um or which we can get into. Like they kind of presented some things in ways that might mean um they're going to go in a different direction with how they talk about some stuff, stocks especially cuz we talk about stocks in this podcast a lot. I think they'll present that differently in the future. Um and all of that. Um I did see since it's been a long time since this letter came out Buffett headlines, so obviously Buffett gave an interview. Um and we didn't know that at that you know, that's like real recent to when we're recording. So, we didn't have any um I'm just giving you a from the letter with no um ideas about what Buffett said since then or anything like that, right? I did see Abel on I I saw transcript of Abel on CNBC cuz he did do that. But otherwise just the letter, so you know, not a lot of context beyond that. Um but I thought it was interesting and you know, we've talked about like looked for some specific names. Definitely the first what, three quarters of a page or something is about um Buffett, and that's not surprising. >> dedicated Buffett. Yeah. I mean, the opener obviously, "To my fellow Berkshire shareholders, Warren Buffett is arguably the greatest investor of all time." To invest in Berkshire has long been a vote of trust in our founder, and trust that now rests with Berkshire. Basically dedicated the you know, first page to him. Talks about Warren Buffett's strike zone or Ted Williams, but what Warren Buffett is. Talked about every value investors familiar with that. Talks about how Warren is still in the office five days a week. He's there as they underwrite insurance, operate our non-insurance business, and deploy capital including equity investments. Don't want to put the cart before the horse, but later on he does I think it was page seven, I believe. Yes, page seven. He does you know, say that they aren't going to pay a dividend anytime soon is is what it sounds like. >> say that. Yeah, which is sort of a a break from what we had talked about in the past. You know, they're going to be so overcapitalized, they're probably going to have to start paying a dividend, but Greg is sort of you know, drawing a a line in the sand with that at least for now. Um but yeah, dedicates the first page to Buffett, talks about the stewardship, talks about you know, the longest tenure of of owners of any company, right? Sort of continues on with you know, the culture, right? So, he later on talks about the culture from of actual business perspective, but it's almost like earlier on he wants to continue the culture from a shareholder perspective. Yeah, and he does kind of do a redo of the sort of a redo of the owner's manual, the principles that they had from the '80s, I guess, when they did the merger. Um I forget when in the '80s, but Berkshire kind of did this thing to when they got a bunch of new shareholders. And this is very similar to that, but kind of an update of that. It's a little different. Yeah, and then I did also notice in the beginning he does mention Charlie. I wondered whether what names would show up, and Warren, Charlie, and Ajit do all show up. I believe Todd does not ever show up, and David Sokol does not ever show up. Yeah, so so Ted Ted shows up one time when I think he says he's managed 6%, but and then it was just one line that Ted's taken over the assets that Todd was managing. But other than that, he doesn't you know, that was one thing we spoke about. I was kind of curious if he would talk about Todd or anything like that. Nothing. Didn't really talk about or at all about his time at GEICO, his history with Berkshire, anything like that. I mean, if you can recall when Buffett talked about Todd leaving, all he really said was that Todd made good hires. Mhm, but he was there for a long time. How long? Decade or something? More than that? Yeah, which I think is Buffett speak for like maybe being disappointed with how things played out. Yeah, I see what you mean. It seems like that's the case, yeah. And then related to that, you know, on the stock things, what I was saying is kind of how we talked about Ted and how he talked about the equity investments and also the way that he separated out the Japanese ones and the kind of permanent ones. I'm not sure if we'll see all the smaller investments, you know, going forward. I mean, Buffett's still making decisions, I guess. So, we might see some related to that, but I don't I kind of don't picture um Greg like buying small amounts of publicly traded companies or something with Berkshire's money. I think more you'll see the the bigger ones in that. I don't think they'll present all of that anymore. I mean, we still get 13F, so we'll see it. You know, later there's a table of like kind of their permanent type investments, you know, their big investments. And then also the Japanese ones, and I do feel like Greg would be more doing those long-term investments in that. And that we'll see fewer of these smaller investments. I just also think with you know, with um Todd not being there, too. I mean, Ted is still like they said managing that small portion of it, but if that's true, you know, 19 out of 20 dollars almost is is not being invested that way. So, I just don't know that in the long term they're ever going to do that, really. So, that will be a change. Though I wouldn't be surprised if that happens where we'll no longer see dozens of of smaller stakes in stocks and things. Mhm, mhm. Says, "I am honored by our board's decision to appoint me CEO of Berkshire and humbled to succeed Warren as I write my first annual letter to you. Warren is obviously a very hard act to follow." I I don't think anyone I mean, I wouldn't want that job. I don't know about you, but yeah, that's um definitely true. But you know, he talks about a little bit about his history with Berkshire, right? So, um he talks about how he moved to Omaha to join CalEnergy, which was then unaffiliated with Berkshire, and talked about the history there. And ultimately how he ended up joining Berkshire, right? I didn't even know that he lived in Omaha. I I must have missed that. So, that's that's interesting. That's good. Yeah. >> Talks about how he met Warren and Charlie. Yeah, go ahead. No, I was just going to say it's been a long it's actually been a long time that he's been with Berkshire. You know, it's been quarter century, basically. Mhm, so. Yeah. To your point about like the operating framework that Buffett laid out you know, a long time ago, Greg does his own version of that, which is you know, listing out six key things and and you know, it was you know, bolded and and talks about it, right? And you have you know, the values, the culture. So, we hit on the culture, the the values, decentralized model, right? So, he's he's going to keep that, but you know, I would say it's a little bit different than like Buffett's version of a decentralized model, right? Like he says that they have a new which we knew I think from a press release last year. Um they they have like a new business head, I guess you could call it, right? Of consumer products who's overseeing >> They've never had that before, yeah. 30 companies or something like that, right? Um 26 or 30. They have an in-house general counsel. Yep. So, yeah. Let's see. What else? Financial strength, capital discipline, risk management, and just operational um excellence, right? Mhm. So, we can go through each uh uh version of a decentralized model, right? We seek the best managers to run our operating businesses who in turn lead talented teams. We operate our decentralized model with the autonomy grounded in deserved trust. That's a Buffett uh thing right there. We minimize bureaucracy to provide our managers the independence to focus relentlessly on their business. In return, we expect accountability and integrity in performance. This autonomy attracts exceptional people to Berkshire. Yep, which is the same as Buffett, but as he mentioned, he was transitioned to vice chair of non-insurance about eight years ago. So, this isn't like a new change, but it was a change then. And I think you know, he's been a little more hands-on probably than Buffett ever was doing that job. Why do you think Buffett was never like a little bit more hands-on? He was just completely ah, we buy it, we get updates once a year. Is that more of a personality thing, or is that because it works? I think personality. I think it works. I think it also helps buy other businesses in the future. And then I think he thinks that that's not the best spending of his own time. I mean, it's an interesting question. Like, he did bring in some people to change things where he got annoyed with something. I mean, he kind of fired a few people or or um uh in kind of extreme situations. Uh he brought in people to turn something around a couple times. Um like NetJets was an example of that or something. And then there were some not reported a lot, but some things where someone kind of broke with he had said they should do. Like Benjamin Moore, I think he basically removed that person, put someone else in because he changed things up with dealers when his original deal had been not to do that. Um Uh so um I mean, like going to it sounded like the company was thinking about going directly to stores and things instead of only having their own things, which I think he kind of promised wasn't going to be the case when he bought it. So, there's cases like that. Um but here I think um Abel is like actually acting more like a CEO on those things. Um I don't know how much it makes one difference or the other. You know, Buffett's thing, which I think is true overall, is that yes, we in terms of batting average, we have plenty of companies that don't have that much success, but we did starve them for capital over time and they were smaller mistakes and then we never let them get bigger, you know, and never invest a lot in trying to turn things around. So, overall, you know, old investments that slowly got worse that they own really haven't hurt them a lot. The things that hurt them is more like a Precision Cast Parts um or like uh for a um public company like a Kraft Heinz or something where they actually put in a lot of money or put in a lot of money like, you know, and kept it in there um for things that were big bets and didn't go well initially. But for things that like, you know, they originally made the investment and people say, "Well, whatever happened to like, you know, um World Book and things like that." Yeah, they pumped out cash for a while and then, you know, we didn't put more money into them over time and they they disappear from the record kind of, you know what I mean? Um so, I they haven't grown bad businesses. So, I think it's not bad what their record is. Um uh yeah. But Greg's history is completely on the other side of things. I also think it's interesting that he did they do have someone who's in basically the more consumer-facing businesses cuz I do think he that's not his area of interest and certainly not his area where he's been historically. So, the thing he's really interested in is like utilities and railroads and all that kind of business. And not some of these really small consumer businesses cuz Berkshire has a lot of pretty good really small consumer businesses. They also have a lot of good really small insurance businesses and I don't get the sense that he has much of anything to do with either of those. So, um cuz a lot of companies would put them all those all together basically. Get rid of them or consolidate them all, yeah. Which is interesting because I mean, at this point those I mean, apps other than the insurance business, those really the utility railroads, Berkshire Hathaway Energy, those are the needle movers for the company. >> Absolutely. Yeah, like a See's Candy or Dairy Queen or a Nebraska Furniture Mart or something doesn't really move things a lot. And you have to learn about the specifics of that business, which could be a lot different from what you're doing in in the other ones. No. And even that isn't even close to like an investment in Apple or something like that. Their biggest public investments are even bigger than that. Um I mean, Coke has actually been their biggest Coke and Apple cuz Apple's really consumer brand have been their biggest like consumer businesses even bigger than the ones that they own. But I don't know how many there's is dozens and dozens of ones that each have their own kind of dynamics. And some of them are perfectly good. But, you know, I don't know that you could know a lot about them um if you're the CEO or that it was worth a lot of your time to focus on that. And same thing on the insurance side, we talk about it, but basically it's National Indemnity um and reinsurance stuff and um and GEICO that they talk about. They have a ton of really good um primary insurance um group they call them and stuff, but they're really small, but they're good. But so, it's not worth their time to worry about like, you know, a dozen different insurance companies or something or even talk about them in the letter. Mhm. Uh integrity, right? So, he he brings up uh Buffett's uh line during the Salomon Brothers uh scandal. Lose money for the firm and I'll be understanding, lose a shred of reputation for the firm and I'll be uh ruthless. Um talked about an example of um when maybe they, you know, didn't at first uh where they had a dispute, I guess you could say, with the Indian tribe uh BNSF and um you know, how they handled that. Uh protecting our integrity and reputation is a never-ending journey. You can rest assured that we will remain relentless in this effort. Uh financial strength, they have 370 billion in cash and US Treasuries. Uh he talks about a fortress-like balance sheet. Um has a lot of dry powder. Um he says, "My role is to ensure our liquidity levels and capital deployment remain intentional and deliberate. We will always aim for ownership of productive businesses over US Treasuries." Right? Talked about the chief risk officer, which I don't know was in this section, but we could talk about it right now. Anyways, I guess we'll risk management Well, we'll hit on that actually here in a bit. Um but yeah, I mean, Berkshire has a lot of cash, right? Um >> he didn't really talk about that as much as Buffett would. And some of the things he said that probably were not um that exciting for shareholders. Like, they probably took it initially to mean, "Oh, he's less likely to um pay out a dividend and more likely to hold cash and stuff." Because Buffett would make more of a point of we don't like to hold this much cash. This is more than we need. We always like to own businesses, but we're not seeing the things that we want to invest in that way. He more played up the fact that they have a fortress-like balance sheet, which is true, but also is just excessive. You I mean, they have $300 more than they would need to be rated the best insurance company and stuff, basically. So. That's a that's a lot of money to have in in in T-bills. Um Yeah. Yeah. Uh let's see. Capital discipline, Greg writes, "We deploy our shareholders' capital to opportunities that generate rewards commensurate with their risk. When we expand existing operations, acquire new operating businesses, invest in equity securities, and repurchase Berkshire stock, we evaluate each opportunity based on its potential to grow Berkshire's intrinsic value per share over time horizon measured in perpetuity." Then he goes through his uh capital allocation principles and strategy. Invest in businesses that we thoroughly understand with durable advantages and long-term economic prospects. Partner with high-integrity leaders who understand their customers and act like owners. Avoid businesses that undermine the fabric of society or could jeopardize Berkshire's reputation. Act quickly and concentrate our capital in a few high-conviction ideas. Yeah, good luck with that. And maintain discipline and let let compounding unfold. Yeah. The undermine the fabric of society sounds like a little bit different um phrasing and stuff than normal, but that's basically, you know, in line with things that Buffett said before for things that aren't quantitative tests of what to buy. Um okay. Let's see. Risk management, we identify risks and strive to manage the level of risk across organization. Our approach is decentralized suited to each operating business's scale and complexity. We focus on risks that could threaten Berkshire's reputation, financial strength, or ability to realize opportunities for the long term. Um and then talks about the risk chief risk officer uh thing is and that's what the role of the CEO is, which I really like. I mean, before Buffett, I never heard another CEO talk about that, right? Being the chief risk officer. Yeah, cuz he wasn't happy about when they insisted that with like investment banks and things like that that they had to have a chief risk officer. He thought that was a dumb um idea after like 2008 and stuff like that. That, you know, the CEO really has to be the chief risk officer. Mhm. Mhm. Yep. Talks about Ajit, praises him. As uh you know, being great. Operational excellence, let's see. He says, "We pursue operational excellence across our operating businesses. Our employees continuously strive to exceed customer expectations, improve efficiency to better compete, and prepare for challenges to our operating models, and reinvest prudently in their operations. We recognize that performance fluctuates year to year, so we assess a business's success not by short-term results, by its ability over the long term to maintain and strengthen its competitive position and improve its economic prospects." Yeah, and then he talks about the fire at Precision Cast Parts. That is different cuz I don't feel like Buffett would talk a lot about that and all the safety things and and stuff related to that so much. He talks a little bit about Berkshire's importance to the um society and stuff in general, Buffett, but much more abstractly and not like in in this kind of way. I feel like this is more from his background utilities and and that kind of stuff. Do you have any thoughts on this general uh I do think this is an area that's different. That's definitely different from before. I don't feel like Buffett would ever say anything about operational excellence or any of that kind of stuff. >> Yeah. I mean, it reads more like a mission statement, right? So, you kind of read a lot of like, at least in more recent years, Buffett's letters are sort of, you know, personal, funny, self-deprecating in a way, right? Like, "Oh, I'm so dumb." Or I made this mistake, blah blah blah. And yeah, this reads to me much more like corporate in a way. Like, this is our mission statement. This is corporate. This is how we're doing it. Yeah, and Buffett specifically doesn't talk much about operational excellence. He talks about some kind times like um um managers who are amazing at kind of um running low-cost operations or really efficient ones. But he actually historically, of any CEOs that I've seen, believes the least in it and I mean, promoting and stuff. Like, even if you go back to when they were having a hard time and other CEOs probably would be saying operational excellence. When he talks about problems they're having in insurance and problems they were having in the textile stuff in early days, he talks a lot about like um the economics of the industry and how we can't all invest and save our way to lower costs because eventually we'll just if we become more efficient then, you know, it's a commodity business so we will all turn out in the same place. Um So, it is interesting this way. Um it's something that he would almost never talk about. Like if you think about how efficiency and you kind of search through all of his letters in the past, I bet it'll be associated with a manager that he talks about efficiency in Buffett's letters if you like, you know, control F that or whatever. That'll be like, you know, um uh this banker was so efficient and stuff and let me tell you about it. This retailer was so efficient, let me tell you what he did. Not like as a culture that we are efficient that way. But that is the criticism of like is GEICO as efficient as Progressive under uh Buffett's time there and stuff, things like that. So, this is always the uh BNSF is the same thing. So, I think this is response to that. Mhm. Yeah, I mean these five bullet points under capital discipline is both Buffett-like. Other than that, it it's it's all Greg, basically. That's sort of my takeaway. You know, I was kind of wondering, too, right? Like in a weird way I do wonder if this is a way to sort of set the table for all, you know, 400,000 of their employees as well. But not all of them are going to read it, but you know, this is kind of sending to the managers that will to to install that culture right throughout the company. Okay, let's see. Where are we? We could go to the next section, which page eight, uh which really starts its Berkshire's performance, right? So, we're sort of at the report card part of the um of the letter. Uh 44.5 billion in operating earnings in 2025, which is below 2024 levels of 47.4 billion. Uh and above the 37.5 billion we have the average over the past five years. What stood out to me here is I know like when we look at companies, it's like we always take sort of the three-year averages of like EBITDA or or earnings to kind of smooth things out and I I just I thought it was I don't know if I've ever seen Buffett like say here's the average over the past five years, right? And like compare last year's number to that. >> Buffett does one thing and one thing not only, but basically return on capital and things like that. So, he says here's the number and this is because of the return on equity and everything. He does it for this year and then moves on to the next year, never talking about He does He like does not say this is They've set the record so many times and he doesn't say we had record earnings or something like that. Um but coming from utilities and stuff, it it does make sense that he talks about like the averages and that does kind of set things for investors of okay, if we have a trend that's going up over a five-year average, we should start to be happy with that instead of Buffett saying, "Well, is our return on equity or improvement in book value good enough every year?" You know. Mhm. Mhm. I'll go over the highlights. Uh 46 billion cash flow from operations, 87.1% combined ratio, 176 billion in insurance float, uh which grew from 171 billion. Um Interestingly, talked about the LA fires um and that that it was mother from Mother Nature's perspective, it was a good year for them. Yep, that is true that that was a good year. Uh-huh. Talked about GEICO um and that it contributed uh to the low combined ratio and that pricing discipline uh was good. Todd Combs is doing >> like they're going to lose customers is kind of what they're saying though, that they're raising prices and so that'll slow growth. That was my impression. Let's see if I can find this. Um Yeah, it said rate rate increases cost customer retention. Yeah. >> And competitors are cutting rates going into uh 2026, which is good. You know, it's I feel like everyone in real life when they talk about like price increases, it's all insurance lately, you know, which is obviously like so obvious in hindsight, right? After like 2022 and 2023 that rates were going to go higher. We even talked about that on the podcast, I remember, a couple years ago. Yeah, I mean I think they said their prime uh wait, no, they said their entire property and casualty group had uh 87% um combined ratio, right? They're not going to You're not going to stay at an 87%. I mean if that was the case if everyone could make 13 cents for every dollar premiums you took in, you wouldn't need any float. You just everyone would just get in the business of writing insurance, you know? So, obviously that's a ridiculously good year. Um so, I think they do talk a little bit about reinsurance. Let's see where they talk about it. Um The um Basically uh where is it? Um reinsurance. Yeah, that's what it is. Reinsurance sector has attracted significant increases in available capital from both the traditional alternative markets, which together with a more benign reinsured catastrophe loss burden in 2027 in most major regions has led to significant price declines in property reinsurance. Um yeah, I do think that that's true and they say that they expect to write less reinsurance. And reinsurance is really important to Berkshire. So, that is one thing to keep in mind. I think that that is gotten very tough is my impression. Um that that business is actually there's too much capital in it right now. And that's such an important part of Berkshire's overall business and their especially their float that, you know, their float might not grow. But I mean, as we talked about how much of that float they have? 100 something billion of which it's basically not invested, you know, because we said they're sitting on 300 billion in Treasuries. So, it's, you know, that that money just is earning what? 4% or something? I don't know what the T-bill rate is that they have, but something like that. So, it's not a huge deal, but the the um their primary business is doing is in a better place than than reinsurance in terms of cyclicality. Mhm. Mhm. Um let's see. Yeah, so he hit on Adam Johnson, who's now serving as president of our consumer products, service, and retailing businesses. >> 32 companies, yeah. Yep. Yep, 32 companies. Uh BNSF he uh you know, calls out explicitly that uh they'll be disappointed if we do not deliver substantial improvement at BNSF over the next few years. So, that's uh direct accountability that way on what he's expecting. Yep. And I think he talks about Does he talk about the merger? Uh you know, um Union Pacific and Norfolk Southern. Yeah, that they didn't want to buy another railroad, right? They don't want to participate >> that was it. Yeah. That was basically all he said, yeah. So, more consolidation in the industry? There's not much consolidation possible left, but yeah. Um it's interesting. It's been a good investment for Berkshire because of just being a good investment, but but the business probably hasn't even been run as well as it could have been recently. You know, now that Let's see, what date was it? It was Yeah, 15 years ago they bought it. Um but it just shows you like just having a moat and paying the right price can work well even if you don't have the most efficient operation that way. He would have done well buying any railroad probably, at least as well if not better. Um but if you remember Buffett bought all the railroads in pieces at first and then just settled on buying only one, so. Talks about Precision Castparts, some manufacturing companies. Yeah. Any part stick out to you, stand out to you? Talking about these. I feel like Buffett wouldn't talk about any of these businesses. Uh no. >> at a high level he'd talk about like railroads and BHE, but like talking about like, you know, building products, consumer products, service and retailing, he didn't really ever talk about them. No. And if he did, it was just to tell specific story about it usually um and group them together in different ways. So, like Shaw and things like that, he probably did talk about with like the housing stuff or whatever um and lump them together and then talk about them that way or something, but not like go over them each year, whereas this might be going over those categories each year. Um Uh there was interesting with Pilot. Did you see where he talked about that mistake will not happen again? If people don't know, there was a whole issue with Pilot between Berkshire and Pilot and lawsuits that were removed that were um dropped before >> [clears throat] >> they actually went to trial, right? Or I don't remember if the trial started or they dropped it before or whatever. >> give a snapshot of the history there between them. So, it was an earnout agreement, right? Um he says we first invested in Pilot in 2017. However, ability to manage it was contractually delayed until 2023. My memory was that it was an earnout where it would be based on their earnings. I remember that there was a um uh Department of Justice or FBI investigation um of Pilot, not specifically of Berkshire, um of whether certain people at Pilot, the former owners, um may have um used influence and things like that to basically um get people to cause inflated earnings for the purposes of hitting certain um targets for the earnout um that was set up that way. And so, they weren't able to manage it themselves as he was saying. Then there was the question about the earnout and things. I do not know all of the details. I from some stuff that Buffett said, it seemed as if maybe there was a generational um divide there in terms of what his feelings were. Um but I don't know that for a fact. Like in terms of one generation of that uh family versus the other and but uh obviously they made a deal with the company and were not happy with how that turned out only, you know, five years or whatever later. And there were lawsuits and everything, which is unusual for Berkshire. Mhm. Mhm. So, next section, the equity investments, um market value of these top companies He highlighted 158 billion. Uh Apple market value 62 billion. So, still massive. And he sold it down. Uh American Express 56 billion. Top nine holdings, uh which is on the next page, 194 billion. It's funny and I did the math on it. If you you know, sometimes you would do like the yield on cost, right? So, if you did the yield on cost from 2025 dividends, it's like 10%. Um on the top nine. So, I mean, you know, pretty good. Um cost basis for >> worst of those is almost a 10-bagger. Yeah. I mean, look at American obviously that's because it's been owned for less of time. Yep. American Express, I know. Crazy. Yeah. And >> listening, 1.3 billion cost basis and 56 billion market value today. Yeah. And that's because that they've owned that stock for I don't know, about 35 years, the first piece of it. They bought a preferred, they bought a little common, and then they bought more common like 5 years later or something. But Berkshire has not bought, to my knowledge, much American Express since then. So, most of those purchases are from the 1990s. Um Moody's, do you remember they ever trimmed some Moody's or anything? I remember he's he's said that Moody's, you know, after the financial crisis was not as good a business and some people were really criticizing him for not dumping Moody's after it, but obviously financially that has worked out to not dump Moody's after the financial crisis. Cuz he had not complimentary things to say about it, sort of. Do you remember some people were complaining um why would you invest in a business if you didn't think the CEO was smart and stuff because when he was asked a committee question on that, he was like, "What was your take on the CEO and stuff?" And he was like, "I didn't have a thought about the CEO really. I thought it was a business that anyone could run and it would be highly profitable." And yeah. So. Uh look at this. I mean, and I always love my favorite thing to look at. So, cost basis for Coca-Cola, 1.3 billion. The dividends in 2025, 816 million. Yeah. And that's on a stock that has not done very well for 20 years, 25 years for him. Yeah. So, that shows you how well it did for that first, you know, 13 or whatever. Mhm. Mhm. Uh obviously owns the five trading houses in Japan. >> [clears throat] >> That's got to be really big. Really big. Um like when he first did it, I was like, I don't know that this is going to be significant. And in Berkshire, you know, it's so big, it may not be significant. But if you take it together now, we're talking about you know, at the time of this letter, uh at the time of the end of the year, and it's actually had gone up since then. I don't know since the the war in Iran, but um it it was probably 50 billion earlier this year in US dollars. Um uh the Japanese investments, which if taken as one investment would be huge. Yeah. Talks about the the the debt, the cost of that debt, 1.2%. For the Japan. Yeah. The way that he structured it. Yep. Yeah. He came right out and said that. Buffett has kind of hinted that before, but Mhm. Mhm. Yep. Talks about the the yield on cost. Um talks about how they were, you know, disappointed in Kraft Heinz. Um even after considering the preferred equity component, um the return has been well short of adequate. Mhm. Yep. And then this is where he talked about Todd. So, he said, "Ted Weschler manages about 6% of our investments, including a portion of the portfolio formerly overseen by Todd Combs." And he did give him a little bit more than that. Ted, not Todd. Ted's in fact extends beyond these investments, continues to play a broader role, and assists in significant opportunities providing valuable input on our businesses and supporting Berkshire in various other ways. So, um which is kind of how Ted and Todd were described years ago in the past. So, um but until that point, he basically just says all the investment stuff resides with me and Ted just manages 6%. So, it makes it sound like a small um thing. Mhm. So, they had like what? Two um I guess newer acquisitions, right? OxyChem uh Occidental's chemical business. And then uh Bell Laboratories. Um so, that's that's basically all they were able to do in a big way, right? And Greg says he wished it had been 10 times bigger, which is a obviously a big compliment from uh from uh Berkshire Hathaway. So, it's kind of it's the same story that we've talked about for years, right? It's it's the size is sort of its own prison, you know, on like what they could do. And and they're not going to pay dividends. So, I don't I don't know what they're going to do. We don't know, but I mean, to give you some idea, I would say they have definitely 300 billion in excess cash in terms of like what insurance regulation things would be. They give some things about how much they're allowed to take out in insurance business and stuff, which basically means they could take out whatever it makes each year at this point. Um and close to it. So, um And he acknowledges that, right? Towards the end, he says that the uh the uh that the math of the compounding is working against them. Oh, yeah, yeah. But I mean, like like if you think about the big things that might go public in the next year, right? Like um OpenAI or like um SpaceX or one of those things. I don't know how much more than 300 billion they're going to offer to the entire public. Like they You know what I mean? Like Berkshire could take the entire offering of what it is what I mean. Um you know, it might be somewhat bigger than that, but not a lot. I mean, there's almost never a case in which a company There are companies that are valued overall at more than 300 billion. They're rarely ever sold. And things don't go initially to the public or anything asking for 300 billion. Um you know, it's a handful of companies. So, in terms of deploying that in any one place, obviously, we're talking about buying one of the biggest companies in the world um is what you would have to do. Now, you could say, "Well, we could put we could buy 10 different ones at 30 billion." Um and you could. But you could just look at Dow things or something. I mean, after you get past the first few, um you know, after you get past five names or something, it's you know, we're talking about they they'd have to buy one of the biggest companies in the world um to to spend that money. So, at some point, they will have to pay dividends or do something. Now, they could buy back stock and and because they have obviously have a lot of their own um stock they could buy back, and that could work for a while. Mhm. Mhm. Talks about how the CFO is uh retiring, right? >> Yep. Um which I think we knew that already from a different filing. Uh the general counsel hire. Um what else? Talked about a different format for the annual meeting. Um how he's going to be up there answering questions with the G. And then, let's see. And then the second Q&A is going to be uh the uh head of BNSF, NetJets, and well, NetJets isn't president of consumer products, service, and retailing. Um so, he'll be up there with a few people each for each Q&A to answer questions. >> Yeah. And uh yeah. So, that that's that's basically the letter. Mhm. What are what are your takeaways? What are what's, you know, the same? What's different? What do you think about it? >> Well, it's definitely more of an operationally focused letter, more of a technical letter than anything. It's more of a you know, not not so much like a you know, Buffett foxy, rub my face, laugh, we're going to eat a thousand pounds of chocolate, you know. [laughter] Which That is true. That is true. But in some ways, there's also less um uh substance to it in some of the regards because see, Buffett does do that as a um to make it palatable and everything on the top. So, people might take that away. But Buffett also does just tell you what the returns on the different, you know, this is our return equity on this, this is our whatever on this. This is, you know, and those kinds of ratios are not really being discussed here a lot, right? Um so, it is different that way. Um I think it'd be harder without reading this with also the um release on the actual financial results to get an idea of how well the business performed or not financially, right? There's a lot more operational stuff. I do think there's more things about kind of stakeholders in general than just shareholders, things like that. So, it is a little different that way. But it's still extremely shareholder focused and stuff compared to most companies. I'm just saying there is obviously a shift from from Buffett that way. It's not surprising cuz who would there ever be at Berkshire who would be like that? They never created someone else that way. Um unless it was going to be like that they could bring someone in like a Ted or Todd or something who would take over that role. So, what they chose to do is have someone who was from a CEO position to come up to be the CEO instead of someone from like an investor owner type business to to um background to be the CEO. Um after Warren and Charlie, that was it, you know. So, it is interesting that he mentioned, you know, I won't be around as long as they were obviously, but even just like 20 years or something, which would take him well into his 80s. So, there still is the expectation that you are supposed to be at Berkshire till you're really old and everything as compared to normal companies. Keeping the culture the same, Jeff. That's the takeaway, right? Culture from what? >> Yeah. Uh shareholder perspective. Culture from an actual operational perspective. Um you know, the the uh not going to pay dividends, it sounds like, and a you know, flow continues to grow, which is their most valuable asset, right? Mhm. And um going to pile up cash and still look to do deals, right? Improve the operations where they can. And uh yeah. It's going to like like Munger said and like Greg wrote about, right? Um that it he's going to keep the culture intact. It'd be interesting to see if and when they ever do a big deal, what that looks like. That'll be really interesting. And then I also think it would be interesting to see if he just has like a what his answers would be to like a ton of questions that would be more of what you would get at a a shareholder meeting, like the actual shareholder questions as opposed to just the the ones more like media things or whatever, you know, in that kind of format cuz it's such a long format to do that that you do have to end up answering a lot of things that you wouldn't otherwise. So, you get a better feel for it that way. Yeah, I think those two would be give us a lot more insight into them. And then I think explicitly on the dividends, I don't have in front of me, but I think he did say they'll revisit it each year. So, like they kind of made it sound more like a formal policy that they're adopting of not paying dividends like each year then board might actually be making that determination. Whereas I don't know that that was technically really being done with Buffett. I think there's just an acceptance of kind of his market value test and stuff and as long as he was kind of saying it to the board, maybe the board was discussing it, but they're kind of going, okay, we're doing that. Now, it does feel like something he said makes it sound like it is a policy review each year of, okay, let's let's go off a whole another year without any dividends. Um didn't talk much about buybacks, but I wouldn't be surprised if they do buy back a lot just knowing him and Berkshire and stuff. I think that would be the area that they're more likely to go into. Buffett was probably more careful about that than most public companies would be. They'd be more willing to buy back a lot. Mhm. Got it. Cool. Well, I want to thank everybody so much for tuning in with the both of us on the Focus Compounding podcast. Be sure to hit the subscribe button wherever you're listening and watching to be notified whenever we upload a new episode. And if you're interested in learning about our money management services, you can reach out to me at andrew@focuscompounding.com. I want to thank everybody so much for all the support and we will see you in the next podcast. Take care.
Greg Abel's First Berkshire Hathaway Shareholder Letter
Summary
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Welcome, welcome, welcome. How's everybody doing? Hope you are doing well. My name is Andrew with Focus Compounding. On air live with Jeff Gannon. Jeff, how's it going today? It's going very well, Andrew. How's it going with you? It's going great. We hope it's going great with everybody else as well. If this is the first time you are tuning in with us, thank you so much for joining us. Be sure to check out all of our content that we push out into the investing universe. The best way to do that is to follow me on X at @focusedcompound. Be sure to hit the subscribe button if you're watching this on YouTube. And also hit that subscribe button if you're listening on the podcast side of things to be notified every time that we upload a podcast. So, in today's podcast, Jeff, we are finally getting around to Greg Abel's first Berkshire Hathaway shareholder letter. The contents of the letter, his actual letter was 18 pages. The total PDF file was 20 pages. So, I wanted to go through it. And obviously pretty monumental given that it's his first Berkshire letter. And I think a lot of people were waiting to see how it would be. I mean, what were your first impressions of the letter? Um good. I was wondering if he would do the same sort of letter as as Buffett did, and he is sticking to that for now, so that's interesting. You know, it's a really long letter for a CEO letter, and it's all written by him, so that was interesting. And and then you can see some differences between him and and Buffett, obviously. And then I think they also maybe use that opportunity to change up some things um or which we can get into. Like they kind of presented some things in ways that might mean um they're going to go in a different direction with how they talk about some stuff, stocks especially cuz we talk about stocks in this podcast a lot. I think they'll present that differently in the future. Um and all of that. Um I did see since it's been a long time since this letter came out Buffett headlines, so obviously Buffett gave an interview. Um and we didn't know that at that you know, that's like real recent to when we're recording. So, we didn't have any um I'm just giving you a from the letter with no um ideas about what Buffett said since then or anything like that, right? I did see Abel on I I saw transcript of Abel on CNBC cuz he did do that. But otherwise just the letter, so you know, not a lot of context beyond that. Um but I thought it was interesting and you know, we've talked about like looked for some specific names. Definitely the first what, three quarters of a page or something is about um Buffett, and that's not surprising. >> dedicated Buffett. Yeah. I mean, the opener obviously, "To my fellow Berkshire shareholders, Warren Buffett is arguably the greatest investor of all time." To invest in Berkshire has long been a vote of trust in our founder, and trust that now rests with Berkshire. Basically dedicated the you know, first page to him. Talks about Warren Buffett's strike zone or Ted Williams, but what Warren Buffett is. Talked about every value investors familiar with that. Talks about how Warren is still in the office five days a week. He's there as they underwrite insurance, operate our non-insurance business, and deploy capital including equity investments. Don't want to put the cart before the horse, but later on he does I think it was page seven, I believe. Yes, page seven. He does you know, say that they aren't going to pay a dividend anytime soon is is what it sounds like. >> say that. Yeah, which is sort of a a break from what we had talked about in the past. You know, they're going to be so overcapitalized, they're probably going to have to start paying a dividend, but Greg is sort of you know, drawing a a line in the sand with that at least for now. Um but yeah, dedicates the first page to Buffett, talks about the stewardship, talks about you know, the longest tenure of of owners of any company, right? Sort of continues on with you know, the culture, right? So, he later on talks about the culture from of actual business perspective, but it's almost like earlier on he wants to continue the culture from a shareholder perspective. Yeah, and he does kind of do a redo of the sort of a redo of the owner's manual, the principles that they had from the '80s, I guess, when they did the merger. Um I forget when in the '80s, but Berkshire kind of did this thing to when they got a bunch of new shareholders. And this is very similar to that, but kind of an update of that. It's a little different. Yeah, and then I did also notice in the beginning he does mention Charlie. I wondered whether what names would show up, and Warren, Charlie, and Ajit do all show up. I believe Todd does not ever show up, and David Sokol does not ever show up. Yeah, so so Ted Ted shows up one time when I think he says he's managed 6%, but and then it was just one line that Ted's taken over the assets that Todd was managing. But other than that, he doesn't you know, that was one thing we spoke about. I was kind of curious if he would talk about Todd or anything like that. Nothing. Didn't really talk about or at all about his time at GEICO, his history with Berkshire, anything like that. I mean, if you can recall when Buffett talked about Todd leaving, all he really said was that Todd made good hires. Mhm, but he was there for a long time. How long? Decade or something? More than that? Yeah, which I think is Buffett speak for like maybe being disappointed with how things played out. Yeah, I see what you mean. It seems like that's the case, yeah. And then related to that, you know, on the stock things, what I was saying is kind of how we talked about Ted and how he talked about the equity investments and also the way that he separated out the Japanese ones and the kind of permanent ones. I'm not sure if we'll see all the smaller investments, you know, going forward. I mean, Buffett's still making decisions, I guess. So, we might see some related to that, but I don't I kind of don't picture um Greg like buying small amounts of publicly traded companies or something with Berkshire's money. I think more you'll see the the bigger ones in that. I don't think they'll present all of that anymore. I mean, we still get 13F, so we'll see it. You know, later there's a table of like kind of their permanent type investments, you know, their big investments. And then also the Japanese ones, and I do feel like Greg would be more doing those long-term investments in that. And that we'll see fewer of these smaller investments. I just also think with you know, with um Todd not being there, too. I mean, Ted is still like they said managing that small portion of it, but if that's true, you know, 19 out of 20 dollars almost is is not being invested that way. So, I just don't know that in the long term they're ever going to do that, really. So, that will be a change. Though I wouldn't be surprised if that happens where we'll no longer see dozens of of smaller stakes in stocks and things. Mhm, mhm. Says, "I am honored by our board's decision to appoint me CEO of Berkshire and humbled to succeed Warren as I write my first annual letter to you. Warren is obviously a very hard act to follow." I I don't think anyone I mean, I wouldn't want that job. I don't know about you, but yeah, that's um definitely true. But you know, he talks about a little bit about his history with Berkshire, right? So, um he talks about how he moved to Omaha to join CalEnergy, which was then unaffiliated with Berkshire, and talked about the history there. And ultimately how he ended up joining Berkshire, right? I didn't even know that he lived in Omaha. I I must have missed that. So, that's that's interesting. That's good. Yeah. >> Talks about how he met Warren and Charlie. Yeah, go ahead. No, I was just going to say it's been a long it's actually been a long time that he's been with Berkshire. You know, it's been quarter century, basically. Mhm, so. Yeah. To your point about like the operating framework that Buffett laid out you know, a long time ago, Greg does his own version of that, which is you know, listing out six key things and and you know, it was you know, bolded and and talks about it, right? And you have you know, the values, the culture. So, we hit on the culture, the the values, decentralized model, right? So, he's he's going to keep that, but you know, I would say it's a little bit different than like Buffett's version of a decentralized model, right? Like he says that they have a new which we knew I think from a press release last year. Um they they have like a new business head, I guess you could call it, right? Of consumer products who's overseeing >> They've never had that before, yeah. 30 companies or something like that, right? Um 26 or 30. They have an in-house general counsel. Yep. So, yeah. Let's see. What else? Financial strength, capital discipline, risk management, and just operational um excellence, right? Mhm. So, we can go through each uh uh version of a decentralized model, right? We seek the best managers to run our operating businesses who in turn lead talented teams. We operate our decentralized model with the autonomy grounded in deserved trust. That's a Buffett uh thing right there. We minimize bureaucracy to provide our managers the independence to focus relentlessly on their business. In return, we expect accountability and integrity in performance. This autonomy attracts exceptional people to Berkshire. Yep, which is the same as Buffett, but as he mentioned, he was transitioned to vice chair of non-insurance about eight years ago. So, this isn't like a new change, but it was a change then. And I think you know, he's been a little more hands-on probably than Buffett ever was doing that job. Why do you think Buffett was never like a little bit more hands-on? He was just completely ah, we buy it, we get updates once a year. Is that more of a personality thing, or is that because it works? I think personality. I think it works. I think it also helps buy other businesses in the future. And then I think he thinks that that's not the best spending of his own time. I mean, it's an interesting question. Like, he did bring in some people to change things where he got annoyed with something. I mean, he kind of fired a few people or or um uh in kind of extreme situations. Uh he brought in people to turn something around a couple times. Um like NetJets was an example of that or something. And then there were some not reported a lot, but some things where someone kind of broke with he had said they should do. Like Benjamin Moore, I think he basically removed that person, put someone else in because he changed things up with dealers when his original deal had been not to do that. Um Uh so um I mean, like going to it sounded like the company was thinking about going directly to stores and things instead of only having their own things, which I think he kind of promised wasn't going to be the case when he bought it. So, there's cases like that. Um but here I think um Abel is like actually acting more like a CEO on those things. Um I don't know how much it makes one difference or the other. You know, Buffett's thing, which I think is true overall, is that yes, we in terms of batting average, we have plenty of companies that don't have that much success, but we did starve them for capital over time and they were smaller mistakes and then we never let them get bigger, you know, and never invest a lot in trying to turn things around. So, overall, you know, old investments that slowly got worse that they own really haven't hurt them a lot. The things that hurt them is more like a Precision Cast Parts um or like uh for a um public company like a Kraft Heinz or something where they actually put in a lot of money or put in a lot of money like, you know, and kept it in there um for things that were big bets and didn't go well initially. But for things that like, you know, they originally made the investment and people say, "Well, whatever happened to like, you know, um World Book and things like that." Yeah, they pumped out cash for a while and then, you know, we didn't put more money into them over time and they they disappear from the record kind of, you know what I mean? Um so, I they haven't grown bad businesses. So, I think it's not bad what their record is. Um uh yeah. But Greg's history is completely on the other side of things. I also think it's interesting that he did they do have someone who's in basically the more consumer-facing businesses cuz I do think he that's not his area of interest and certainly not his area where he's been historically. So, the thing he's really interested in is like utilities and railroads and all that kind of business. And not some of these really small consumer businesses cuz Berkshire has a lot of pretty good really small consumer businesses. They also have a lot of good really small insurance businesses and I don't get the sense that he has much of anything to do with either of those. So, um cuz a lot of companies would put them all those all together basically. Get rid of them or consolidate them all, yeah. Which is interesting because I mean, at this point those I mean, apps other than the insurance business, those really the utility railroads, Berkshire Hathaway Energy, those are the needle movers for the company. >> Absolutely. Yeah, like a See's Candy or Dairy Queen or a Nebraska Furniture Mart or something doesn't really move things a lot. And you have to learn about the specifics of that business, which could be a lot different from what you're doing in in the other ones. No. And even that isn't even close to like an investment in Apple or something like that. Their biggest public investments are even bigger than that. Um I mean, Coke has actually been their biggest Coke and Apple cuz Apple's really consumer brand have been their biggest like consumer businesses even bigger than the ones that they own. But I don't know how many there's is dozens and dozens of ones that each have their own kind of dynamics. And some of them are perfectly good. But, you know, I don't know that you could know a lot about them um if you're the CEO or that it was worth a lot of your time to focus on that. And same thing on the insurance side, we talk about it, but basically it's National Indemnity um and reinsurance stuff and um and GEICO that they talk about. They have a ton of really good um primary insurance um group they call them and stuff, but they're really small, but they're good. But so, it's not worth their time to worry about like, you know, a dozen different insurance companies or something or even talk about them in the letter. Mhm. Uh integrity, right? So, he he brings up uh Buffett's uh line during the Salomon Brothers uh scandal. Lose money for the firm and I'll be understanding, lose a shred of reputation for the firm and I'll be uh ruthless. Um talked about an example of um when maybe they, you know, didn't at first uh where they had a dispute, I guess you could say, with the Indian tribe uh BNSF and um you know, how they handled that. Uh protecting our integrity and reputation is a never-ending journey. You can rest assured that we will remain relentless in this effort. Uh financial strength, they have 370 billion in cash and US Treasuries. Uh he talks about a fortress-like balance sheet. Um has a lot of dry powder. Um he says, "My role is to ensure our liquidity levels and capital deployment remain intentional and deliberate. We will always aim for ownership of productive businesses over US Treasuries." Right? Talked about the chief risk officer, which I don't know was in this section, but we could talk about it right now. Anyways, I guess we'll risk management Well, we'll hit on that actually here in a bit. Um but yeah, I mean, Berkshire has a lot of cash, right? Um >> he didn't really talk about that as much as Buffett would. And some of the things he said that probably were not um that exciting for shareholders. Like, they probably took it initially to mean, "Oh, he's less likely to um pay out a dividend and more likely to hold cash and stuff." Because Buffett would make more of a point of we don't like to hold this much cash. This is more than we need. We always like to own businesses, but we're not seeing the things that we want to invest in that way. He more played up the fact that they have a fortress-like balance sheet, which is true, but also is just excessive. You I mean, they have $300 more than they would need to be rated the best insurance company and stuff, basically. So. That's a that's a lot of money to have in in in T-bills. Um Yeah. Yeah. Uh let's see. Capital discipline, Greg writes, "We deploy our shareholders' capital to opportunities that generate rewards commensurate with their risk. When we expand existing operations, acquire new operating businesses, invest in equity securities, and repurchase Berkshire stock, we evaluate each opportunity based on its potential to grow Berkshire's intrinsic value per share over time horizon measured in perpetuity." Then he goes through his uh capital allocation principles and strategy. Invest in businesses that we thoroughly understand with durable advantages and long-term economic prospects. Partner with high-integrity leaders who understand their customers and act like owners. Avoid businesses that undermine the fabric of society or could jeopardize Berkshire's reputation. Act quickly and concentrate our capital in a few high-conviction ideas. Yeah, good luck with that. And maintain discipline and let let compounding unfold. Yeah. The undermine the fabric of society sounds like a little bit different um phrasing and stuff than normal, but that's basically, you know, in line with things that Buffett said before for things that aren't quantitative tests of what to buy. Um okay. Let's see. Risk management, we identify risks and strive to manage the level of risk across organization. Our approach is decentralized suited to each operating business's scale and complexity. We focus on risks that could threaten Berkshire's reputation, financial strength, or ability to realize opportunities for the long term. Um and then talks about the risk chief risk officer uh thing is and that's what the role of the CEO is, which I really like. I mean, before Buffett, I never heard another CEO talk about that, right? Being the chief risk officer. Yeah, cuz he wasn't happy about when they insisted that with like investment banks and things like that that they had to have a chief risk officer. He thought that was a dumb um idea after like 2008 and stuff like that. That, you know, the CEO really has to be the chief risk officer. Mhm. Mhm. Yep. Talks about Ajit, praises him. As uh you know, being great. Operational excellence, let's see. He says, "We pursue operational excellence across our operating businesses. Our employees continuously strive to exceed customer expectations, improve efficiency to better compete, and prepare for challenges to our operating models, and reinvest prudently in their operations. We recognize that performance fluctuates year to year, so we assess a business's success not by short-term results, by its ability over the long term to maintain and strengthen its competitive position and improve its economic prospects." Yeah, and then he talks about the fire at Precision Cast Parts. That is different cuz I don't feel like Buffett would talk a lot about that and all the safety things and and stuff related to that so much. He talks a little bit about Berkshire's importance to the um society and stuff in general, Buffett, but much more abstractly and not like in in this kind of way. I feel like this is more from his background utilities and and that kind of stuff. Do you have any thoughts on this general uh I do think this is an area that's different. That's definitely different from before. I don't feel like Buffett would ever say anything about operational excellence or any of that kind of stuff. >> Yeah. I mean, it reads more like a mission statement, right? So, you kind of read a lot of like, at least in more recent years, Buffett's letters are sort of, you know, personal, funny, self-deprecating in a way, right? Like, "Oh, I'm so dumb." Or I made this mistake, blah blah blah. And yeah, this reads to me much more like corporate in a way. Like, this is our mission statement. This is corporate. This is how we're doing it. Yeah, and Buffett specifically doesn't talk much about operational excellence. He talks about some kind times like um um managers who are amazing at kind of um running low-cost operations or really efficient ones. But he actually historically, of any CEOs that I've seen, believes the least in it and I mean, promoting and stuff. Like, even if you go back to when they were having a hard time and other CEOs probably would be saying operational excellence. When he talks about problems they're having in insurance and problems they were having in the textile stuff in early days, he talks a lot about like um the economics of the industry and how we can't all invest and save our way to lower costs because eventually we'll just if we become more efficient then, you know, it's a commodity business so we will all turn out in the same place. Um So, it is interesting this way. Um it's something that he would almost never talk about. Like if you think about how efficiency and you kind of search through all of his letters in the past, I bet it'll be associated with a manager that he talks about efficiency in Buffett's letters if you like, you know, control F that or whatever. That'll be like, you know, um uh this banker was so efficient and stuff and let me tell you about it. This retailer was so efficient, let me tell you what he did. Not like as a culture that we are efficient that way. But that is the criticism of like is GEICO as efficient as Progressive under uh Buffett's time there and stuff, things like that. So, this is always the uh BNSF is the same thing. So, I think this is response to that. Mhm. Yeah, I mean these five bullet points under capital discipline is both Buffett-like. Other than that, it it's it's all Greg, basically. That's sort of my takeaway. You know, I was kind of wondering, too, right? Like in a weird way I do wonder if this is a way to sort of set the table for all, you know, 400,000 of their employees as well. But not all of them are going to read it, but you know, this is kind of sending to the managers that will to to install that culture right throughout the company. Okay, let's see. Where are we? We could go to the next section, which page eight, uh which really starts its Berkshire's performance, right? So, we're sort of at the report card part of the um of the letter. Uh 44.5 billion in operating earnings in 2025, which is below 2024 levels of 47.4 billion. Uh and above the 37.5 billion we have the average over the past five years. What stood out to me here is I know like when we look at companies, it's like we always take sort of the three-year averages of like EBITDA or or earnings to kind of smooth things out and I I just I thought it was I don't know if I've ever seen Buffett like say here's the average over the past five years, right? And like compare last year's number to that. >> Buffett does one thing and one thing not only, but basically return on capital and things like that. So, he says here's the number and this is because of the return on equity and everything. He does it for this year and then moves on to the next year, never talking about He does He like does not say this is They've set the record so many times and he doesn't say we had record earnings or something like that. Um but coming from utilities and stuff, it it does make sense that he talks about like the averages and that does kind of set things for investors of okay, if we have a trend that's going up over a five-year average, we should start to be happy with that instead of Buffett saying, "Well, is our return on equity or improvement in book value good enough every year?" You know. Mhm. Mhm. I'll go over the highlights. Uh 46 billion cash flow from operations, 87.1% combined ratio, 176 billion in insurance float, uh which grew from 171 billion. Um Interestingly, talked about the LA fires um and that that it was mother from Mother Nature's perspective, it was a good year for them. Yep, that is true that that was a good year. Uh-huh. Talked about GEICO um and that it contributed uh to the low combined ratio and that pricing discipline uh was good. Todd Combs is doing >> like they're going to lose customers is kind of what they're saying though, that they're raising prices and so that'll slow growth. That was my impression. Let's see if I can find this. Um Yeah, it said rate rate increases cost customer retention. Yeah. >> And competitors are cutting rates going into uh 2026, which is good. You know, it's I feel like everyone in real life when they talk about like price increases, it's all insurance lately, you know, which is obviously like so obvious in hindsight, right? After like 2022 and 2023 that rates were going to go higher. We even talked about that on the podcast, I remember, a couple years ago. Yeah, I mean I think they said their prime uh wait, no, they said their entire property and casualty group had uh 87% um combined ratio, right? They're not going to You're not going to stay at an 87%. I mean if that was the case if everyone could make 13 cents for every dollar premiums you took in, you wouldn't need any float. You just everyone would just get in the business of writing insurance, you know? So, obviously that's a ridiculously good year. Um so, I think they do talk a little bit about reinsurance. Let's see where they talk about it. Um The um Basically uh where is it? Um reinsurance. Yeah, that's what it is. Reinsurance sector has attracted significant increases in available capital from both the traditional alternative markets, which together with a more benign reinsured catastrophe loss burden in 2027 in most major regions has led to significant price declines in property reinsurance. Um yeah, I do think that that's true and they say that they expect to write less reinsurance. And reinsurance is really important to Berkshire. So, that is one thing to keep in mind. I think that that is gotten very tough is my impression. Um that that business is actually there's too much capital in it right now. And that's such an important part of Berkshire's overall business and their especially their float that, you know, their float might not grow. But I mean, as we talked about how much of that float they have? 100 something billion of which it's basically not invested, you know, because we said they're sitting on 300 billion in Treasuries. So, it's, you know, that that money just is earning what? 4% or something? I don't know what the T-bill rate is that they have, but something like that. So, it's not a huge deal, but the the um their primary business is doing is in a better place than than reinsurance in terms of cyclicality. Mhm. Mhm. Um let's see. Yeah, so he hit on Adam Johnson, who's now serving as president of our consumer products, service, and retailing businesses. >> 32 companies, yeah. Yep. Yep, 32 companies. Uh BNSF he uh you know, calls out explicitly that uh they'll be disappointed if we do not deliver substantial improvement at BNSF over the next few years. So, that's uh direct accountability that way on what he's expecting. Yep. And I think he talks about Does he talk about the merger? Uh you know, um Union Pacific and Norfolk Southern. Yeah, that they didn't want to buy another railroad, right? They don't want to participate >> that was it. Yeah. That was basically all he said, yeah. So, more consolidation in the industry? There's not much consolidation possible left, but yeah. Um it's interesting. It's been a good investment for Berkshire because of just being a good investment, but but the business probably hasn't even been run as well as it could have been recently. You know, now that Let's see, what date was it? It was Yeah, 15 years ago they bought it. Um but it just shows you like just having a moat and paying the right price can work well even if you don't have the most efficient operation that way. He would have done well buying any railroad probably, at least as well if not better. Um but if you remember Buffett bought all the railroads in pieces at first and then just settled on buying only one, so. Talks about Precision Castparts, some manufacturing companies. Yeah. Any part stick out to you, stand out to you? Talking about these. I feel like Buffett wouldn't talk about any of these businesses. Uh no. >> at a high level he'd talk about like railroads and BHE, but like talking about like, you know, building products, consumer products, service and retailing, he didn't really ever talk about them. No. And if he did, it was just to tell specific story about it usually um and group them together in different ways. So, like Shaw and things like that, he probably did talk about with like the housing stuff or whatever um and lump them together and then talk about them that way or something, but not like go over them each year, whereas this might be going over those categories each year. Um Uh there was interesting with Pilot. Did you see where he talked about that mistake will not happen again? If people don't know, there was a whole issue with Pilot between Berkshire and Pilot and lawsuits that were removed that were um dropped before >> [clears throat] >> they actually went to trial, right? Or I don't remember if the trial started or they dropped it before or whatever. >> give a snapshot of the history there between them. So, it was an earnout agreement, right? Um he says we first invested in Pilot in 2017. However, ability to manage it was contractually delayed until 2023. My memory was that it was an earnout where it would be based on their earnings. I remember that there was a um uh Department of Justice or FBI investigation um of Pilot, not specifically of Berkshire, um of whether certain people at Pilot, the former owners, um may have um used influence and things like that to basically um get people to cause inflated earnings for the purposes of hitting certain um targets for the earnout um that was set up that way. And so, they weren't able to manage it themselves as he was saying. Then there was the question about the earnout and things. I do not know all of the details. I from some stuff that Buffett said, it seemed as if maybe there was a generational um divide there in terms of what his feelings were. Um but I don't know that for a fact. Like in terms of one generation of that uh family versus the other and but uh obviously they made a deal with the company and were not happy with how that turned out only, you know, five years or whatever later. And there were lawsuits and everything, which is unusual for Berkshire. Mhm. Mhm. So, next section, the equity investments, um market value of these top companies He highlighted 158 billion. Uh Apple market value 62 billion. So, still massive. And he sold it down. Uh American Express 56 billion. Top nine holdings, uh which is on the next page, 194 billion. It's funny and I did the math on it. If you you know, sometimes you would do like the yield on cost, right? So, if you did the yield on cost from 2025 dividends, it's like 10%. Um on the top nine. So, I mean, you know, pretty good. Um cost basis for >> worst of those is almost a 10-bagger. Yeah. I mean, look at American obviously that's because it's been owned for less of time. Yep. American Express, I know. Crazy. Yeah. And >> listening, 1.3 billion cost basis and 56 billion market value today. Yeah. And that's because that they've owned that stock for I don't know, about 35 years, the first piece of it. They bought a preferred, they bought a little common, and then they bought more common like 5 years later or something. But Berkshire has not bought, to my knowledge, much American Express since then. So, most of those purchases are from the 1990s. Um Moody's, do you remember they ever trimmed some Moody's or anything? I remember he's he's said that Moody's, you know, after the financial crisis was not as good a business and some people were really criticizing him for not dumping Moody's after it, but obviously financially that has worked out to not dump Moody's after the financial crisis. Cuz he had not complimentary things to say about it, sort of. Do you remember some people were complaining um why would you invest in a business if you didn't think the CEO was smart and stuff because when he was asked a committee question on that, he was like, "What was your take on the CEO and stuff?" And he was like, "I didn't have a thought about the CEO really. I thought it was a business that anyone could run and it would be highly profitable." And yeah. So. Uh look at this. I mean, and I always love my favorite thing to look at. So, cost basis for Coca-Cola, 1.3 billion. The dividends in 2025, 816 million. Yeah. And that's on a stock that has not done very well for 20 years, 25 years for him. Yeah. So, that shows you how well it did for that first, you know, 13 or whatever. Mhm. Mhm. Uh obviously owns the five trading houses in Japan. >> [clears throat] >> That's got to be really big. Really big. Um like when he first did it, I was like, I don't know that this is going to be significant. And in Berkshire, you know, it's so big, it may not be significant. But if you take it together now, we're talking about you know, at the time of this letter, uh at the time of the end of the year, and it's actually had gone up since then. I don't know since the the war in Iran, but um it it was probably 50 billion earlier this year in US dollars. Um uh the Japanese investments, which if taken as one investment would be huge. Yeah. Talks about the the the debt, the cost of that debt, 1.2%. For the Japan. Yeah. The way that he structured it. Yep. Yeah. He came right out and said that. Buffett has kind of hinted that before, but Mhm. Mhm. Yep. Talks about the the yield on cost. Um talks about how they were, you know, disappointed in Kraft Heinz. Um even after considering the preferred equity component, um the return has been well short of adequate. Mhm. Yep. And then this is where he talked about Todd. So, he said, "Ted Weschler manages about 6% of our investments, including a portion of the portfolio formerly overseen by Todd Combs." And he did give him a little bit more than that. Ted, not Todd. Ted's in fact extends beyond these investments, continues to play a broader role, and assists in significant opportunities providing valuable input on our businesses and supporting Berkshire in various other ways. So, um which is kind of how Ted and Todd were described years ago in the past. So, um but until that point, he basically just says all the investment stuff resides with me and Ted just manages 6%. So, it makes it sound like a small um thing. Mhm. So, they had like what? Two um I guess newer acquisitions, right? OxyChem uh Occidental's chemical business. And then uh Bell Laboratories. Um so, that's that's basically all they were able to do in a big way, right? And Greg says he wished it had been 10 times bigger, which is a obviously a big compliment from uh from uh Berkshire Hathaway. So, it's kind of it's the same story that we've talked about for years, right? It's it's the size is sort of its own prison, you know, on like what they could do. And and they're not going to pay dividends. So, I don't I don't know what they're going to do. We don't know, but I mean, to give you some idea, I would say they have definitely 300 billion in excess cash in terms of like what insurance regulation things would be. They give some things about how much they're allowed to take out in insurance business and stuff, which basically means they could take out whatever it makes each year at this point. Um and close to it. So, um And he acknowledges that, right? Towards the end, he says that the uh the uh that the math of the compounding is working against them. Oh, yeah, yeah. But I mean, like like if you think about the big things that might go public in the next year, right? Like um OpenAI or like um SpaceX or one of those things. I don't know how much more than 300 billion they're going to offer to the entire public. Like they You know what I mean? Like Berkshire could take the entire offering of what it is what I mean. Um you know, it might be somewhat bigger than that, but not a lot. I mean, there's almost never a case in which a company There are companies that are valued overall at more than 300 billion. They're rarely ever sold. And things don't go initially to the public or anything asking for 300 billion. Um you know, it's a handful of companies. So, in terms of deploying that in any one place, obviously, we're talking about buying one of the biggest companies in the world um is what you would have to do. Now, you could say, "Well, we could put we could buy 10 different ones at 30 billion." Um and you could. But you could just look at Dow things or something. I mean, after you get past the first few, um you know, after you get past five names or something, it's you know, we're talking about they they'd have to buy one of the biggest companies in the world um to to spend that money. So, at some point, they will have to pay dividends or do something. Now, they could buy back stock and and because they have obviously have a lot of their own um stock they could buy back, and that could work for a while. Mhm. Mhm. Talks about how the CFO is uh retiring, right? >> Yep. Um which I think we knew that already from a different filing. Uh the general counsel hire. Um what else? Talked about a different format for the annual meeting. Um how he's going to be up there answering questions with the G. And then, let's see. And then the second Q&A is going to be uh the uh head of BNSF, NetJets, and well, NetJets isn't president of consumer products, service, and retailing. Um so, he'll be up there with a few people each for each Q&A to answer questions. >> Yeah. And uh yeah. So, that that's that's basically the letter. Mhm. What are what are your takeaways? What are what's, you know, the same? What's different? What do you think about it? >> Well, it's definitely more of an operationally focused letter, more of a technical letter than anything. It's more of a you know, not not so much like a you know, Buffett foxy, rub my face, laugh, we're going to eat a thousand pounds of chocolate, you know. [laughter] Which That is true. That is true. But in some ways, there's also less um uh substance to it in some of the regards because see, Buffett does do that as a um to make it palatable and everything on the top. So, people might take that away. But Buffett also does just tell you what the returns on the different, you know, this is our return equity on this, this is our whatever on this. This is, you know, and those kinds of ratios are not really being discussed here a lot, right? Um so, it is different that way. Um I think it'd be harder without reading this with also the um release on the actual financial results to get an idea of how well the business performed or not financially, right? There's a lot more operational stuff. I do think there's more things about kind of stakeholders in general than just shareholders, things like that. So, it is a little different that way. But it's still extremely shareholder focused and stuff compared to most companies. I'm just saying there is obviously a shift from from Buffett that way. It's not surprising cuz who would there ever be at Berkshire who would be like that? They never created someone else that way. Um unless it was going to be like that they could bring someone in like a Ted or Todd or something who would take over that role. So, what they chose to do is have someone who was from a CEO position to come up to be the CEO instead of someone from like an investor owner type business to to um background to be the CEO. Um after Warren and Charlie, that was it, you know. So, it is interesting that he mentioned, you know, I won't be around as long as they were obviously, but even just like 20 years or something, which would take him well into his 80s. So, there still is the expectation that you are supposed to be at Berkshire till you're really old and everything as compared to normal companies. Keeping the culture the same, Jeff. That's the takeaway, right? Culture from what? >> Yeah. Uh shareholder perspective. Culture from an actual operational perspective. Um you know, the the uh not going to pay dividends, it sounds like, and a you know, flow continues to grow, which is their most valuable asset, right? Mhm. And um going to pile up cash and still look to do deals, right? Improve the operations where they can. And uh yeah. It's going to like like Munger said and like Greg wrote about, right? Um that it he's going to keep the culture intact. It'd be interesting to see if and when they ever do a big deal, what that looks like. That'll be really interesting. And then I also think it would be interesting to see if he just has like a what his answers would be to like a ton of questions that would be more of what you would get at a a shareholder meeting, like the actual shareholder questions as opposed to just the the ones more like media things or whatever, you know, in that kind of format cuz it's such a long format to do that that you do have to end up answering a lot of things that you wouldn't otherwise. So, you get a better feel for it that way. Yeah, I think those two would be give us a lot more insight into them. And then I think explicitly on the dividends, I don't have in front of me, but I think he did say they'll revisit it each year. So, like they kind of made it sound more like a formal policy that they're adopting of not paying dividends like each year then board might actually be making that determination. Whereas I don't know that that was technically really being done with Buffett. I think there's just an acceptance of kind of his market value test and stuff and as long as he was kind of saying it to the board, maybe the board was discussing it, but they're kind of going, okay, we're doing that. Now, it does feel like something he said makes it sound like it is a policy review each year of, okay, let's let's go off a whole another year without any dividends. Um didn't talk much about buybacks, but I wouldn't be surprised if they do buy back a lot just knowing him and Berkshire and stuff. I think that would be the area that they're more likely to go into. Buffett was probably more careful about that than most public companies would be. They'd be more willing to buy back a lot. Mhm. Got it. Cool. 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