sional large-scale opportunity. Though the stock market is massively larger than it was in our early years， today’s active participants are neither more emotionally stable nor better taught than when I was in school. For whatever reasons， markets now exhibit far more casino-like behavior than they did when I was young. The casino now resides in many homes and daily tempts the occupants. One fact of financial life should never be forgotten. Wall Street – to use the term in its figurative sense – would like its customers to make money， but what truly causes its denizens’ juices to flow is feverish activity. At such times， whatever foolishness can be marketed will be vigorously marketed – not by everyone but always by someone. Occasionally， the scene turns ugly. The politicians then become enraged; the most flagrant perpetrators of misdeeds slip away， rich and unpunished; and your friend next door becomes bewildered， poorer and sometimes vengeful. Money， he learns， has trumped morality. One investment rule at Berkshire has not and will not change: Never risk permanent loss of capital. Thanks to the American tailwind and the power of compound interest， the arena in which we operate has been – and will be – rewarding if you make a couple of good decisions during a lifetime and avoid serious mistakes. I believe Berkshire can handle financial disasters of a magnitude beyond any heretofore experienced. This ability is one we will not relinquish. When economic upsets occur， as they will， Berkshire’s goal will be to function as an asset to the country – just as it was in a very minor way in 2008-9 – and to help extinguish the financial fire rather than to be among the many companies that， inadvertently or otherwise， ignited the conflagration. Our goal is realistic. Berkshire’s strength comes from its Niagara of diverse earnings delivered after interest costs， taxes and substantial charges for depreciation and amortization (“EBITDA” is a banned measurement at Berkshire). We also operate with minimal requirements for cash， even if the country encounters a prolonged period of global economic weakness， fear and near-paralysis. Berkshire does not currently pay dividends， and its share repurchases are 100% discretionary. Annual debt maturities are never material. Your company also holds a cash and U.S. Treasury bill position far in excess of what conventional wisdom deems necessary. During the 2008 panic， Berkshire generated cash from operations and did not rely in any manner on commercial paper， bank lines or debt markets. We did not predict the time of an economic paralysis but we were always prepared for one. Extreme fiscal conservatism is a corporate pledge we make to those who have joined us in ownership of Berkshire. In most years – indeed in most decades – our caution will likely prove to be unneeded behavior – akin to an insurance policy on a fortress-like building thought to be fireproof. But Berkshire does not want to inflict permanent financial damage – quotational shrinkage for extended periods can’t be avoided – on Bertie or any of the individuals who have trusted us with their savings. Berkshire is built to last. Non-controlled Businesses That Leave Us Comfortable Last year I mentioned two of Berkshire’s long-duration partial-ownership positions – Coca-Cola and American Express. These are not huge commitments like our Apple position. Each only accounts for 4-5% of Berkshire’s GAAP net worth. But they are meaningful assets and also illustrate our thought processes. American Express began operations in 1850, and Coca-Cola was launched in an Atlanta drug store in 1886. (Berkshire is not big on newcomers.) Both companies tried expanding into unrelated areas over the years and both found little success in these attempts. In the past – but definitely not now – both were even mismanaged. But each was hugely successful in its base business， reshaped here and there as conditions called for. And， crucially， their products “traveled.” Both Coke and AMEX became recognizable names worldwide as did their core products， and the consumption of liquids and the need for unquestioned financial trust are timeless essentials of our world. During 2023, we did not buy or sell a share of either AMEX or Coke – extending our own Rip Van Winkle slumber that has now lasted well over two decades. Both companies again rewarded our inaction last year by increasing their earnings and dividends. Indeed， our share of AMEX earnings in 2023 considerably exceeded the $1.3 billion cost of our long-ago purchase. Both AMEX and Coke will almost certainly increase their dividends in 2024 – about 16% in the case of AMEX – and we will most certainly leave our holdings untouched throughout the year. Could I create a better worldwide business than these two enjoy? As Bertie will tell you: “No way.” Though Berkshire did not purchase shares of either company in 2023, your indirect ownership of both Coke and AMEX increased a bit last year because of share repurchases we made at Berkshire. Such repurchases work to increase your participation in every asset that Berkshire owns. To this obvious but often overlooked truth， I add my usual caveat: All stock repurchases should be price-dependent. What is sensible at a discount to business-value becomes stupid if done at a premium. The lesson from Coke and AMEX? When you find a truly wonderful business， stick with it. Patience pays， and one wonderful business can offset the many mediocre decisions that are inevitable. This year， I would like to describe two other investments that we expect to maintain indefinitely. Like Coke and AMEX， these commitments are not huge relative to our resources. They are worthwhile， however， and we were able to increase both positions during 2023. At yearend， Berkshire owned 27.8% of Occidental Petroleum’s common shares and also owned warrants that， for more than five years， give us the option to materially increase our ownership at a fixed price. Though we very much like our ownership， as well as the option， Berkshire has no interest in purchasing or managing Occidental. We particularly like its vast oil and gas holdings in the United States， as well as its leadership in carbon-capture initiatives， though the economic feasibility of this technique has yet to be proven. Both of these activities are very much in our country’s interest. Not so long ago， the U.S. was woefully dependent on foreign oil， and carbon capture had no meaningful constituency. Indeed， in 1975, U.S. production was eight million barrels of oil-equivalent per day (“BOEPD”)， a level far short of the country’s needs. From the favorable energy position that facilitated the U.S. mobilization in World War II， the country had retreated to become heavily dependent on foreign – potentially unstable – suppliers. Further declines in oil production were predicted along with future increases in usage. For a long time， the pessimism appeared to be correct， with production falling to five million BOEPD by 2007. Meanwhile， the U.S. government created a Strategic Petroleum Reserve (“SPR”) in 1975 to alleviate – though not come close to eliminating – this erosion of American self-sufficiency. And then – Hallelujah! – shale economics became feasible in 2011, and our energy dependency ended. Now， U.S. production is more than 13 million BOEPD， and OPEC no longer has the upper hand. Occidental itself has annual U.S. oil production that each year comes close to matching the entire inventory of the SPR. Our country would be very – very – nervous today if domestic production had remained at five million BOEPD， and it found itself hugely dependent on non-U.S. sources. At that level， the SPR would have been emptied within months if foreign oil became unavailable. Under Vicki Hollub’s leadership， Occidental is doing the right things for both its country and its owners. No one knows what oil prices will do over the next month， year， or decade. But Vicki does know how to separate oil from rock， and that’s an uncommon talent， valuable to her shareholders and to her country. Additionally， Berkshire continues to hold its passive and long-term interest in five very large Japanese companies， each of which operates in a highly-diversified manner somewhat similar to the way Berkshire itself is run. We increased our holdings in all five last year after Greg Abel and I made a trip to Tokyo to talk with their managements. Berkshire now owns about 9% of each of the five. (A minor point: Japanese companies calculate outstanding shares in a manner different from the practice in the U.S.) Berkshire has also pledged to each company that it will not purchase shares that will take our holdings beyond 9.9%. Our cost for the five totals ¥1.6 trillion， and the yearend market value of the five was ¥2.9 trillion. However， the yen has weakened in recent years and our yearend unrealized gain in dollars was 61% or $8 billion. Neither Greg nor I believe we can forecast market prices of major currencies. We also don’t believe we can hire anyone with this ability. Therefore， Berkshire has financed most of its Japanese position with the proceeds from ¥1.3 trillion of bonds. This debt has been very well-received in Japan， and I believe Berkshire has more yen-denominated debt outstanding than any other American company. The weakened yen has produced a yearend gain for Berkshire of $1.9 billion， a sum that， pursuant to GAAP rules， has periodically been recognized in income over the 2020-23 period. In certain important ways， all five companies – Itochu， Marubeni， Mitsubishi， Mitsui and Sumitomo – follow shareholder-friendly policies that are much superior to those customarily practiced in the U.S. Since we began our Japanese purchases， each of the five has reduced the number of its outstanding shares at attractive prices. Meanwhile， the managements of all five companies have been far less aggressive about their own compensation than is typical in the United States. Note as well that each of the five is applying only about 1⁄3 of its earnings to dividends. The large sums the five retain are used both to build their many businesses and， to a lesser degree， to repurchase shares. Like Berkshire， the five companies are reluctant to issue shares. An additional benefit for Berkshire is the possibility that our investment may lead to opportunities for us to partner around the world with five large， well-managed and well-respected companies. Their interests are far more broad than ours. And， on their side， the Japanese CEOs have the comfort of knowing that Berkshire will always possess huge liquid resources that can be instantly available for such partnerships， whatever their size may be. Our Japanese purchases began on July 4, 2019. Given Berkshire’s present size， building positions through open-market purchases takes a lot of patience and an extended period of “friendly” prices. The process is like turning a battleship. That is an important disadvantage which we did not face in our early days at Berkshire. The Scorecard in 2023 Every quarter we issue a press release that reports our summarized operating earnings (or loss) in a manner similar to what is shown below. Here is the full-year compilation: At Berkshire’s annual gathering on May 6, 2023, I presented the first quarter’s results which had been released early that morning. I followed with a short summary of the outlook for the full year: (1) most of our non-insurance businesses faced lower earnings in 2023; (2) that decline would be cushioned by decent results at our two largest non-insurance businesses， BNSF and Berkshire Hathaway Energy (“BHE”) which， combined， had accounted for more than 30% of operating earnings in 2022; (3) our investment income was certain to materially grow because the huge U.S. Treasury bill position held by Berkshire had finally begun to pay us far more than the pittance we had been receiving and (4) insurance would likely do well， both because its underwriting earnings are not correlated to earnings elsewhere in the economy and， beyond that， property-casualty insurance prices had strengthened. Insurance came through as expected. I erred， however， in my expectations for both BNSF and BHE. Let’s take a look at each. Rail is essential to America’s economic future. It is clearly the most efficient way – measured by cost， fuel usage and carbon intensity – of moving heavy materials to distant destinations. Trucking wins for short hauls， but many goods that Americans need must travel to customers many hundreds or even several thousands of miles away. The country can’t run without rail， and the industry’s capital needs will always be huge. Indeed， compared to most American businesses， railroads eat capital. BNSF is the largest of six major rail systems that blanket North America. Our railroad carries its 23,759 miles of main track， 99 tunnels， 13,495 bridges， 7,521 locomotives and assorted other fixed assets at $70 billion on its balance sheet. But my guess is that it would cost at least $500 billion to replicate those assets and decades to complete the job. BNSF must annually spend more than its depreciation charge to simply maintain its present level of business. This reality is bad for owners， whatever the industry in which they have invested， but it is particularly disadvantageous in capital-intensive industries. At BNSF， the outlays in excess of GAAP depreciation charges since our purchase 14 years ago have totaled a staggering $22 billion or more than $1 2 billion annually. Ouch! That sort of gap means BNSF dividends paid to Berkshire， its owner， will regularly fall considerably short of BNSF’s reported earnings unless we regularly increase the railroad’s debt. And that we do not intend to do. Consequently， Berkshire is receiving an acceptable return on its purchase price， though less than it might appear， and also a pittance on the replacement value of the property. That’s no surprise to me or Berkshire’s board of directors. It explains why we could buy BNSF in 2010 at a small fraction of its replacement value. North America’s rail system moves huge quantities of coal， grain， autos， imported and exported goods， etc. one-way for long distances and those trips often create a revenue problem for back-hauls. Weather conditions are extreme and frequently hamper or even stymie the utilization of track， bridges and equipment. Flooding can be a nightmare. None of this is a surprise. While I sit in an always-comfortable office， railroading is an outdoor activity with many employees working under trying and sometimes dangerous conditions. An evolving problem is that a growing percentage of Americans are not looking for the difficult， and often lonely， employment conditions inherent in some rail operations. Engineers must deal with the fact that among an American population of 335 million， some forlorn or mentally-disturbed Americans are going to elect suicide by lying in front of a 100-car， extraordinarily heavy train that can’t be stopped in less than a mile or more. Would you like to be the helpless engineer? This trauma happens about once a day in North America; it is far more common in Europe and will always be with us. Wage negotiations in the rail industry can end up in the hands of the President and Congress. Additionally， American railroads are required to carry many dangerous products every day that the industry would much rather avoid. The words “common carrier” define railroad responsibilities. Last year BNSF’s earnings declined more than I expected， as revenues fell. Though fuel costs also fell， wage increases， promulgated in Washington， were far beyond the country’s inflation goals. This differential may recur in future negotiations. Though BNSF carries more freight and spends more on capital expenditures than any of the five other major North American railroads， its profit margins have slipped relative to all five since our purchase. I believe that our vast service territory is second to none and that therefore our margin comparisons can and should improve. I am particularly proud of both BNSF’s contribution to the country and the people who work in sub-zero outdoor jobs in North Dakota and Montana winters to keep America’s commercial arteries open. Railroads don’t get much attention when they are working but， were they unavailable， the void would be noticed immediately throughout America. A century from now， BNSF will continue to be a major asset of the country and of Berkshire. You can count on that. Our second and even more severe earnings disappointment last year occurred at BHE. Most of its large electric-utility businesses， as well as its extensive gas pipelines， performed about as expected. But the regulatory climate in a few states has raised the specter of zero profitability or even bankruptcy (an actual outcome at California’s largest utility and a current threat in Hawaii). In such jurisdictions， it is difficult to project both earnings and asset values in what was once regarded as among the most stable industries in America. For more than a century， electric utilities raised huge sums to finance their growth through a state-by-state promise of a fixed return on equity (sometimes with a small bonus for superior performance). With this approach， massive investments were made for capacity that would likely be required a few years down the road. That forward-looking regulation reflected the reality that utilities build generating and transmission assets that often take many years to construct. BHE’s extensive multi-state transmission project in the West was initiated in 2006 and remains some years from completion. Eventually， it will serve 10 states comprising 30% of the acreage in the continental United States. With this model employed by both private and public-power systems， the lights stayed on， even if population growth or industrial demand exceeded expectations. The “margin of safety” approach seemed sensible to regulators， investors and the public. Now， the fixed-but-satisfactory-return pact has been broken in a few states， and investors are becoming apprehensive that such ruptures may spread. Climate change adds to their worries. Underground transmission may be required but who， a few decades ago， wanted to pay the staggering costs for such construction? At Berkshire， we have made a best estimate for the amount of losses that have occurred. These costs arose from forest fires， whose frequency and intensity have increased – and will likely continue to increase – if convective storms become more frequent. It will be many years until we know the final tally from BHE’s forest-fire losses and can intelligently make decisions about the desirability of future investments in vulnerable western states. It remains to be seen whether the regulatory environment will change elsewhere. Other electric utilities may face survival problems resembling those of Pacific Gas and Electric and Hawaiian Electric. A confiscatory resolution of our present problems would obviously be a negative for BHE， but both that company and Berkshire itself are structured to survive negative surprises. We regularly get these in our insurance business， where our basic product is risk assumption， and they will occur elsewhere. Berkshire can sustain financial surprises but we will not knowingly throw good money after bad. Whatever the case at Berkshire， the final result for the utility industry may be ominous: Certain utilities might no longer attract the savings of American citizens and will be forced to adopt the public-power model. Nebraska made this choice in the 1930s and there are many public-power operations throughout the country. Eventually， voters， taxpayers and users will decide which model they prefer. When the dust settles， America’s power needs and the consequent capital expenditure will be staggering. I did not anticipate or even consider the adverse developments in regulatory returns and， along with Berkshire’s two partners at BHE， I made a costly mistake in not doing so. Enough about problems: Our insurance business performed exceptionally well last year， setting records in sales， float and underwriting profits. Property-casualty insurance (“P/C”) provides the core of Berkshire’s well-being and growth. We have been in the business for 57 years and despite our nearly 5,000-fold increase in volume – from $17 million to $83 billion – we have much room to grow. Beyond that， we have learned – too often， painfully – a good deal about what types of insurance business and what sort of people to avoid. The most important lesson is that our underwriters can be thin， fat， male， female， young， old， foreign or domestic. But they can’t be optimists at the office， however desirable that quality may generally be in life. Surprises in the P/C business – which can occur decades after six-month or one-year policies have expired – are almost always negative. The industry’s accounting is designed to recognize this reality， but estimation mistakes can be huge. And when charlatans are involved， detection is often both slow and costly. Berkshire will always attempt to be accurate in its estimates of future loss payments but inflation – both monetary and the “legal” variety – is a wild card. I’ve told the story of our insurance operations so many times that I will simply direct newcomers to page 18. Here， I will only repeat that our position would not be what it is if Ajit Jain had not joined Berkshire in 1986. Before that lucky day – aside from an almost unbelievably wonderful experience with GEICO that began early in 1951 and will never end – I was largely wandering in the wilderness， as I struggled to build our insurance operation. Ajit’s achievements since joining Berkshire have been supported by a large cast of hugely-talented insurance executives in our various P/C operations. Their names and faces are unknown to most of the press and the public. Berkshire’s lineup of managers， however， is to P/C insurance what Cooperstown’s honorees are to baseball. Bertie， you can feel good about the fact that you own a piece of an incredible P/C operation that now operates worldwide with unmatched financial resources， reputation and talent. It carried the day in 2023. What is it with Omaha? Come to Berkshire’s annual gathering on May 4, 2024. On stage you will see the three managers who now bear the prime responsibilities for steering your company. What， you may wonder， do the three have in common? They certainly don’t look alike. Let’s dig deeper. Greg Abel， who runs all non-insurance operations for Berkshire – and in all respects is ready to be CEO of Berkshire tomorrow – was born and raised in Canada (he still plays hockey). In the 1990s， however， Greg lived for six years in Omaha just a few blocks away from me. During that period， I never met him. A decade or so earlier， Ajit Jain， who was born， raised and educated in India， lived with his family in Omaha only a mile or so from my home (where I’ve lived since 1958). Both Ajit and his wife， Tinku， have many Omaha friends， though it’s been more than three decades since they moved to New York (in order to be where much of the action in reinsurance takes place). Missing from the stage this year will be Charlie. He and I were both born in Omaha about two miles from where you will sit at our May get-together. In his first ten years， Charlie lived about a half-mile from where Berkshire has long maintained its office. Both Charlie and I spent our early years in Omaha public schools and were indelibly shaped by our Omaha childhood. We didn’t meet， however， until much later. (A footnote that may surprise you: Charlie lived under 15 of America’s 45 presidents. People refer to President Biden as #46, but that numbering counts Grover Cleveland as both #22 and #24 because his terms were not consecutive. America is a very young country.) Moving to the corporate level， Berkshire itself relocated in 1970 from its 81 years of residence in New England to settle in Omaha， leaving its troubles behind and blossoming in its new home. As a final punctuation point to the “Omaha Effect，” Bertie – yes that Bertie – spent her early formative years in a middle-class neighborhood in Omaha and， many decades later， emerged as one of the country’s great investors. You may be thinking that she put all of her money in Berkshire and then simply sat on it. But that’s not true. After starting a family in 1956, Bertie was active financially for 20 years: holding bonds， putting 1⁄3 of her funds in a publicly-held mutual fund and trading stocks with some frequency. Her potential remained unnoticed. Then， in 1980, when 46, and independent of any urgings from her brother， Bertie decided to make her move. Retaining only the mutual fund and Berkshire， she made no new trades during the next 43 years. During that period， she became very rich， even after making large philanthropic gifts (think nine figures). Millions of American investors could have followed her reasoning which involved only the common sense she had somehow absorbed as a child in Omaha. And， taking no chances， Bertie returns to Omaha every May to be re-energized. So what is going on? Is it Omaha’s water? Is it Omaha’s air? Is it some strange planetary phenomenon akin to that which has produced Jamaica’s sprinters， Kenya’s marathon runners， or Russia’s chess experts? Must we wait until AI someday yields the answer to this puzzle? Keep an open mind. Come to Omaha in May， inhale the air， drink the water and say “hi” to Bertie and her good-looking daughters. Who knows? There is no downside， and， in any event， you will have a good time and meet a huge crowd of friendly people. To top things off， we will have available the new 4th edition of Poor Charlie’s Almanack. Pick up a copy. Charlie’s wisdom will improve your life as it has mine. February 24, 2024 Warren E. Buffett Chairman of the Boardlg...
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