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2023: Buffett sums up what Berkshire is all about.
WARREN BUFFETT: And with that, I would like to next move onto the earnings and a couple small slides that explain what we’re all about, and then we’re going to get to Q&A. And the slide is up behind me, and there it is.
We reported in the first quarter operating earnings a little over $8 billion. And when we talk about operating earnings, we’re basically referring to the earnings of Berkshire Hathaway as required under GAAP, excluding however, capital gains both realized and unrealized.
There’s a few other very minor items, but basically, we expect to make capital gains over time. Why would we own the stocks otherwise? Doesn’t always work out, but overall, it works out pretty well over time. But in any day, any quarter, any year, even occasionally over a five-year period, the stock prices move around capriciously.
Now, we own a lot of other businesses. We consider those stocks businesses. We own a lot of other businesses where they get consolidated, and they don’t move around in value. Now, if we had a little bit of Burlington stock outstanding, if we had a little bit of the energy stock trading, those stocks would move around a lot.
But the businesses are what count. So, the operating earnings, as you’ll see in the first quarter, came it at about $8 billion. And I would say that in the general economy, the feedback we get is that, I would say, perhaps the majority of our businesses will actually report lower earnings this year than last year.
In various degrees in the last six months or so, at various times, the businesses have left the incredible period, which is about extraordinary as I’ve seen a business since World War II, which poured out a lot of money to people who couldn’t get goods.
It was more extreme in World War II, but this was extreme this time. And it was just a question of getting goods to deliver. And people bought, and they didn’t wait for sales. And if you couldn’t sell them one thing, they would put another thing in their backlog. It was an extraordinary period.
And that period has ended. As you know, it isn’t that employment has fallen off a cliff or anything, in the lest. But it is a different climate than it was six months ago. And a number of our managers were surprised. Some of them had too much inventory on order, and then all of a sudden it got delivered, and people weren’t in the same frame of mind as earlier.
And now we’ll start having sales at places where we didn’t need to have sales before. But despite the fact that this year I think in general will be slower than last year, we actually are situated so that I would expect, and believe me when I say expect, nothing is sure.
Nothing is sure tomorrow, nothing is sure next year, and nothing is ever sure, either in markets or in business forecasts, or in anything else. And we don’t pay much attention to markets or forecasts unless the markets happen to offer something interesting to do.
But nevertheless, we are positioned in two respects, as you’ll see from this first report. Our investment income is going to be a lot larger this year than last year. And that’s built. I mean, as you’ll see in a minute, we’ve had $125 billion or so in very short-term investments.
And believe it or not, not that long ago we were getting four basis points, which is next to nothing on that $125 billion, which means we were getting $50 million a year. And now the same money, just the day before yesterday, we actually bought because of some funny twist the market, because of doubts about the debt ceiling.
We bought $3 billion of bills at 5-90. That’s 5.92 bond equivalent yield. So, we will have what produced just not that long ago on a 12-month basis was producing $50 million a year, producing something in the area of $5 billion a year. So, we’re in a position where the investment income is certain to increase quite a bit.
And insurance underwriting does not correlate with business activity. It depends on things like hurricanes, and earthquakes, and other events. So, on a perspective basis, on a probability basis, we’re likely to have a better year this year in insurance underwriting than we had last year.
It just isn’t affected by what you might call the business cycle or what applies to generally in industry, retailing, you name it. So, I would expect in one massive earthquake or one hurricane that came in at just the wrong place could affect that prediction. But on a probabalistic basis, our insurance looks better this year.
So, if you get two of the elements there of our main elements of earnings that look like they will swing in our direction, I would expect, but I can’t promise, that our operating earnings will be greater than last year.
And if we’ll move to the second slide, I give you those operating earnings figures just to give you a overview of what has happened since the pandemic started, and also the year before as a base. And we retain all our earnings, as you know.
So, if we’re retaining $30 billion or $35 billion, or whatever it may be, a year, they should expect more operating earnings over time. I mean, this number should be significantly higher five, or ten, or 15 years from now because we have the advantage of retaining earnings, and that’s what got us to these figures because they were essentially nothing when we started.
And they got there by retaining earnings and will keep retaining earnings. So, it’s no great triumph if these numbers move up. And what we hope is that they move up at a reasonable rate. Historically, they moved up at an unreasonable rate sometimes.
But we were working with much smaller sums then, and that can’t be repeated with our present capital base. Because I note there — I believe it’s on this slide. Let’s take a look. No, that will be — let’s see, it’s on the — well, on the next place, page. Let’s move to the next slide. We show that we had on March 31st, now what was it, $504 billion of GAAP net worth.
Now, what might surprise you is that there’s no other company in the United States that has a number that is that large. Now, that isn’t because we have the most valuable company in the United States. Other companies have used their money to repurchase shares.
They could’ve accumulated $504 billion in GAAP. But basically, we have more under GAAP accounting now than any other company in the U.S. And of course, if you measure return on equity that becomes a very big number to increase at a rapid rate, but we hope to do so.
Not a rapid rate, a decent rate. And right below that, you see something called float. And float is money that is left in our hands somewhat akin, but very importantly different, than a bank deposit. But you have to pay interest to get a bank deposit.
And you have to pay more interest these days, and you have to run a bank and do a lot of things. And basically, this is money that represents unpaid losses at this time. You get paid in advance in insurance. So, what shows up as a net liability on our balance sheet gives us funds to exercise with an amount of discretion that no other insurance company that I know of in the world enjoys, just because we have so much net worth.
And our float now comes to $165 billion, and the man sitting at the far left is responsible for moving that number up from a pittance in 1986 to this incredible figure, which in most years, practically all years, hasn’t cost us anything. So, it’s like having a bank with no employees, no interest, and no ability to withdraw the money in a hurry that we have working for us.
And it’s a very valuable asset that shows up as a liability. And Ajit is responsible for building up this treasure, which has been done by out-competing insurance companies all over the world. And now, a number of our insurance companies, in turn, are run by talented managers who contributed one way or another.
Start with GEICO at the beginning of my career. And that float, if you think about it, just think of a balance sheet. You have liabilities here and you have assets over here, and the liability side finances the asset side. It’s very simple. And stockholders’ equity finances it, long-term debt finances it, and so on.
But stockholders’ equity is very expensive in a real sense. Long-term debt has been cheap for a while, but it can get expensive, and it can also become due eventually and it may not be available. But float is another item that’s a liability but hasn’t cost us anything.
And it can’t disappear in a hurry. And it finances the asset side in the same way as stockholders’ equity. And nobody else thinks of it much that way, but we’ve always thought of it that way, and it’s a build up over time. So, I show at the bottom what’s happened with cash and Treasury bills through March 31st.
And I will tell you that in the month of April, we’ve probably added about $7 billion to that factor. Now, part of that is because we didn’t buy as much stock, because that reduces cash and Treasury bills. We bought about $400 million worth of stock in the month of April.
That’s a minus in terms of cash available. And we, however, sold, net, some stock, which produced maybe $4 billion. And of course, we had operating earnings, probably $2.5 billion or something in that area. And my guess is we probably increased our cash and Treasury bills $6 billion and $7 billion in the month.
And I just want to give you a feel for how the cash flows at Berkshire. And then if we move to the final — I think it’s the final one. We should have the one up there, Class A equivalent shares outstanding. And you’ll notice that every year the number of our shares go down.
So, if we own more businesses, and the businesses make more money, your share as shareholders at Berkshire increases every year without you laying out any money. Now you’re laying out the alternative which you could receive in dividends. But the reason we’ve gotten to where we are is because we kept the money.
We did pay a dividend in 1967, $0.10 a share. It was a terrible mistake. (Laugh) And I always tell people that I’d for the men’s room and the directors voted while I was gone. But that isn’t true. I was there, I confess. (Laugh) But we’ve reinvested, and it’s produced the $500 billion plus of shareholders’ equity and the $30 billion plus of operating earnings.
And we’ll continue to follow that policy because it makes a great deal of sense. And with that, I think we’ve taken care of the preliminaries. The 10-Q is on the web page. And if you have a week or two vacation, you could spend it reading the 10-Q.
But that is the essence of Berkshire.