Breaking news! The full text of Warren Buffett's 2024 letter to shareholders.

On February 24th, Berkshire Hathaway, owned by Buffett, released the 2023 fourth quarter and full-year earnings report and Buffett's annual letter to shareholders.

At the beginning of this year's letter, Buffett commemorated Charlie Munger, calling him the "architect" of Berkshire Hathaway and himself the "general contractor," working day by day to build his vision.

Buffett stated in the letter that given the current vast scale of Berkshire Hathaway's conglomerate, it is almost "impossible to achieve astonishing performance in the coming years," revealing the challenges his successor will face.

Currently, Berkshire Hathaway's GAAP (Generally Accepted Accounting Principles) net assets are the highest among U.S. companies, with record operating profits and a strong stock market performance leading to year-end net assets of $561 billion. In 2022, the net asset size of the other 499 companies in the S&P 500 was $89 trillion. Buffett said:

By this measure, Berkshire Hathaway currently holds nearly 6% of the market share. It is impossible to double our massive base within five years, especially since we are strongly against issuing stocks (which would immediately increase net worth).

Regarding investments in Japan, Buffett mentioned that Berkshire Hathaway continues to passively hold stakes in Japan's five major trading companies, each of which operates in a highly diversified manner similar to Berkshire Hathaway itself. Currently, Berkshire Hathaway holds approximately 9% of each of these five companies. Berkshire Hathaway has also committed to not purchasing more than 9.9% of each company's shares:

In some key aspects, Itochu, Marubeni, Mitsubishi, Mitsui, and Sumitomo, these five companies, follow shareholder-friendly policies, which are much better than the U.S. norms. Since we started acquiring Japanese stocks, these five companies have reduced the number of outstanding shares at attractive prices.

At the same time, the management of these five companies is far less aggressive in demanding their own compensation compared to U.S. companies. It is also worth noting that each of these five companies only uses about 1/3 of their earnings for dividends. The substantial funds retained by these five companies are used to expand their numerous businesses and to a lesser extent for share buybacks. Like Berkshire Hathaway, these five companies are also reluctant to issue stocks. Dear Berkshire Hathaway Shareholders,

With over three million shareholder accounts, I take the responsibility to write a letter every year, which is valuable to this diverse and ever-changing group of owners, many of whom are eager to learn more about their investments.

Charlie Munger has been my partner in managing Berkshire Hathaway for decades, and his view on this obligation aligns with mine. He hopes that this year, I can communicate with you in the usual manner. Our thoughts are in sync when it comes to the responsibility towards Berkshire Hathaway shareholders.

Writers often find it useful to personify the readers they seek, often aiming to attract a broad audience. At Berkshire Hathaway, our target audience is more specific: those who trust Berkshire Hathaway, entrust their savings to us, and do not expect to resell these shares in the future (similar in attitude to those who wish to buy farms or rent properties through savings, rather than those who prefer to buy lottery tickets or "hot" stocks with surplus funds).

Over the years, Berkshire Hathaway has attracted a significant number of such "lifetime" shareholders and their descendants. We value their presence and believe they have the right to hear from us annually, whether the news is good or bad, directly from their CEO, rather than from investor relations officials or communication consultants who always provide optimism and sugar-coated bullets.

Knowing the kind of people Berkshire Hathaway shareholders are, I am fortunate to have a perfect psychological model, my sister Bertie, let me introduce her to you.

Firstly, Bertie is intelligent, wise, and enjoys challenging my way of thinking. However, we have never had major arguments, and our relationship has never been strained, nor will it be in the future.

Furthermore, Bertie and her three daughters have invested a significant portion of their savings in Berkshire Hathaway's stock. Their holding period spans decades, and Bertie reads the letter I write every year. My job is to anticipate her questions and provide her with honest answers.

Like most of you, Bertie understands many accounting terms but is not ready to take the CPA exam. She follows business news, reads four newspapers daily, but does not consider herself an economic expert. She is rational, very rational, instinctively knowing that experts should always be ignored.

After all, if she could reliably predict the winners in life tomorrow, would she casually share her valuable insights and increase competitive purchases? It's like finding gold and then handing the map indicating the location of the gold to the neighbors.

Bertie understands the power of incentives (good or bad), human weaknesses, and the "information" that can be identified when observing human behavior. She knows who is "selling" and who can be trusted.

Warm regards,
Warren Buffett In short, she won't be fooled by anyone.

So, what will Bertie be interested in this year?

Business Performance, Facts and Fiction

Let's start with the numbers. The official annual report starts with the K-1 report, spanning 124 pages. It's filled with a wealth of information - some important, some trivial.

In its disclosure, many owners and financial journalists will focus on page K-72. There, they will find the well-known "bottom line" labeled "Net Income (Loss)". These figures show that the net income for 2021 is $90 billion, for 2022 is $23 billion, and for 2023 is $96 billion.

What's going on here?

You seek guidance and are told that the procedure for calculating these "earnings" is established by a sober and qualified Financial Accounting Standards Board (FASB), authorized by a dedicated and diligent U.S. Securities and Exchange Commission (SEC), and audited by world-class professionals from Deloitte (D&T). On page K-67, Deloitte is unequivocal: "We believe _ that the financial statements present fairly, in all material respects _ (italicized) the financial position of the Company as of December 31, 2023, and the results of its operations for each of the three years in the period ended December 31, 2023."

After this sanctification, this useless "net income" figure quickly spreads worldwide through the internet and media. All parties believe they have done their job - legally speaking, they have.

However, we still feel uneasy. At Berkshire Hathaway, our view is that "earnings" should be a reasonable concept that Bertie may find somewhat useful, but only as a starting point for evaluating a company. Therefore, Berkshire Hathaway also reports to Bertie and you what we call "operating earnings". Here's the story they tell: $27.6 billion in 2021; $30.9 billion in 2022, and $37.4 billion in 2023.

The main difference between the preferred figures at Berkshire Hathaway and the mandated figures is that we exclude unrealized capital gains or losses that can sometimes exceed $5 billion per day. Ironically, our "preference" only became essentially a rule in 2018, when it was replaced by the mandated "improvement". The experience of Galileo centuries ago should have taught us not to change regulations arbitrarily from the top. But at Berkshire Hathaway, we may be quite stubborn.

The importance of capital gains is undeniable: I expect that in the coming decades, they will be a very important component of Berkshire Hathaway's value growth. Otherwise, why would we invest substantial amounts of money (just like I have invested my own money throughout my life) in stocks in the market? Since March 11, 1942 (the day I bought stocks for the first time), I can't recall a time when I didn't invest most of my net assets in stocks, specifically American stocks. So far, everything has been going smoothly. On that fateful day in 1942, when I "pulled the trigger," the Dow Jones Industrial Average dropped below 100 points. By the end of the school day, I had lost about $5. Soon after, the situation reversed, and now the index hovers around 38,000 points. For investors, the United States has always been an incredible country. All they need to do is sit quietly and not listen to anyone.

However, evaluating the investment value of Berkshire Hathaway based on "earnings" is very foolish because "earnings" include the unpredictable ups and downs of the stock market, even the fluctuations year after year. As Ben Graham taught me, "In the short run, the market is a voting machine, but in the long run, it is a weighing machine."

What We Do

Our goal at Berkshire Hathaway is simple: we aim to own all or part of economically sound, fundamentally strong, and enduring businesses. In capitalism, some companies will thrive in the long term, while others will prove to be bottomless pits. Predicting which companies will be winners and which will be big losers is much more difficult than you imagine. Those who claim to know the answer are either deluding themselves or charlatans.

At Berkshire Hathaway, we particularly favor rare businesses that can reinvest additional capital at high rates of return in the future. Owning such a company and then sitting quietly can create immeasurable wealth, sometimes even allowing the heirs to live a leisurely life for generations.

We also hope that these favored businesses are operated by capable and trustworthy managers, which is even harder to judge. Berkshire Hathaway has been disappointed in this regard as well.

In 1863, the first Comptroller of the United States, Hugh McCulloch, wrote a letter to all national banks. His instructions included a warning: "Never expect to outwit a scoundrel." Many bankers who thought they could "manage" this rogue problem have learned wisdom from McCulloch's advice, and I am no exception. People are not easy to see through; sincerity and sympathy can be easily faked, just as in 1863.

Over the years, Berkshire Hathaway has pursued a combination of two key criteria when looking for acquisition targets. At one point, we had a large number of candidates to evaluate, and if I missed one - and I missed many - another one would always come along.

But those days are long gone; our size has put us in a predicament, and increased acquisition competition is also a factor. At present, Berkshire Hathaway's GAAP (Generally Accepted Accounting Principles) net assets are the highest among U.S. companies, with record operating profits and a strong stock market performance pushing Berkshire Hathaway's year-end net assets to $561 billion. In 2022, the net asset scale of the other 499 companies in the S&P 500 was $89 trillion. (The figures for 2023 have not been tallied yet, but it is unlikely to significantly exceed $95 trillion.)

By this measure, Berkshire Hathaway currently holds nearly a 6% share. It is impossible to double our massive base within five years, especially since we strongly oppose issuing stocks (which would immediately increase net worth).

During 2023, we did not buy or sell stocks of American Express or Coca-Cola, as the situation has changed significantly after 20 years of dormancy. Last year, these two companies once again rewarded our indifference by increasing profits and dividends. In fact, in 2023, the returns we received from American Express far exceeded the $1.3 billion cost we incurred long ago. In 2024, American Express and Coca-Cola are almost certain to increase dividends, with American Express at around 16%. We will definitely maintain our holdings unchanged throughout the year. Can I create a better global business than these two companies? As Bertie would tell you, "Impossible."

Although Berkshire Hathaway did not increase its holdings in these two companies in 2023, due to stock buybacks at Berkshire Hathaway, your indirect ownership in Coca-Cola and American Express slightly increased last year. These buybacks help increase your participation in each asset owned by Berkshire Hathaway. For this obvious but often overlooked fact, I must reiterate my consistent warning: all stock buybacks should be based on price. If stocks are repurchased at a price higher than their business value, a wise move can become foolish.

What do Coca-Cola and American Express teach us? When you find a truly outstanding company, stick with your investment. Patience always pays off, and choosing an excellent company can offset many inevitable bad decisions.

This year, I would like to introduce two more investments that we plan to maintain indefinitely. Like Coca-Cola and American Express, these investments are not huge relative to our resources. However, they are worthwhile, and we were able to increase our positions in these two investments in 2023. By the end of the year, Berkshire Hathaway held 27.8% of the common stock of Occidental Petroleum, as well as warrants. Over more than five years, we can choose to significantly increase our holdings at a fixed price.

While we greatly value our ownership and options, Berkshire Hathaway has no intention of acquiring or managing Occidental Petroleum. We are particularly optimistic about Occidental Petroleum's extensive oil and gas assets in the U.S., as well as its leading position in carbon capture, although the economic viability of this technology is still to be proven. These two activities are very much in line with our national interests. Not long ago, the United States was heavily reliant on foreign oil, and carbon capture technology had no significant supporters. In fact, in 1975, the U.S. oil production was only 8 million barrels of oil equivalent per day (BOEPD), which was far from sufficient to meet the country's needs. The U.S. energy situation once provided favorable conditions for the country's mobilization during World War II, but now, the U.S. energy situation has regressed, becoming heavily dependent on potentially unstable foreign suppliers. It is predicted that oil production may further decline, accompanied by an increase in future oil consumption.

In this country, only a few companies have the ability to truly change the situation of Berkshire Hathaway, and they have been reviewed by us and others repeatedly. Some we can evaluate, some we cannot. And if we can, their prices must be attractive. Outside the United States, Berkshire Hathaway basically has no meaningful candidates for capital allocation. In short, we cannot expect astonishing results.

Nevertheless, managing Berkshire Hathaway remains an interesting and always interesting endeavor. On the positive side, after 59 years of consolidation, we now own a part or 100% of various businesses, and the prospects of these businesses are slightly better than most large U.S. companies when weighted. With luck and courage, a few huge winners emerge from a large number of decisions. We now have a small group of managers who have served long term, and they never consider going elsewhere, viewing 65 as just another birthday.

Berkshire Hathaway benefits from an unusual, steadfast, and clear goal. While we emphasize treating our employees, communities, and suppliers well - who wouldn't want to do that? - we remain loyal to the country and our shareholders. We will never forget that even though your money and our money are together, it does not belong to us.

With this focus, along with our current business portfolio, Berkshire Hathaway should do slightly better than the average American company, and more importantly, should have a significantly reduced risk of permanent capital loss in operations. However, anything beyond "slightly better" is wishful thinking, and when Bertie invests in Berkshire Hathaway with all his might, such wishes have not yet been realized - but now they have.

Our Not-So-Secret Weapon

Occasionally, the market and/or the economy can lead to significant mispricing of stocks and bonds of large companies with fundamentally sound businesses. Indeed, the market can and will malfunction or even disappear unpredictably, as it did for 4 months in 1914 and a few days in 2001. If you think American investors are now more stable than in the past, just remember the situation in September 2008. The speed of communication and technological miracles make it possible for instant paralysis worldwide, we have come a long way since smoke signals, and while such sudden panics do not happen often, they do occur. Berkshire Hathaway has the ability to quickly respond to market volatility with a large amount of capital and performance certainty, which may occasionally provide us with large-scale opportunities. Although the stock market is much larger than in our early years, today's active market participants are neither more emotionally stable nor better educated than I was in school. For whatever reason, the current market now resembles more of a casino than when I was younger, with this gambling mentality now present in many households, tempting residents every day.

One fact in financial activities should never be forgotten. Wall Street - metaphorically speaking - wants its clients to make money, but what truly excites its clients is the frenzy of activity. At such times, anything foolish that can be marketed will be aggressively promoted, not everyone does it, but there are always some who do.

Occasionally, the scene can turn ugly. Politicians are enraged; the most blatant criminals roam free, wealthy yet unpunished; and your next-door neighbor may become confused, impoverished, and sometimes seeking revenge. He realizes that money overwhelms morality.

One investment rule of Berkshire Hathaway has never changed and will not change: never risk permanent capital loss. Thanks to the tailwinds and compounding power of America, if you make a few right decisions in your lifetime, avoid serious mistakes, then the field we operate in has always been and will be rewarding.

I believe Berkshire Hathaway is capable of facing unprecedented financial disasters, and we will not give up this ability. When economic turmoil occurs, Berkshire Hathaway's goal will be to become an asset to the nation - just as it played a very small role in 2008-2009 and helped extinguish the financial fire, rather than being one of the many companies inadvertently or intentionally igniting the fire.

Our goals are realistic. Berkshire Hathaway's strength comes from its vast and diversified earnings after deducting interest costs, taxes, and significant depreciation and amortization expenses (EBITDA, a measure prohibited at Berkshire Hathaway). Our cash requirements are also low, even in the face of prolonged economic weakness, fear, or near paralysis.

Berkshire Hathaway currently does not pay dividends, and stock buybacks are 100% discretionary. Annual debt maturities are never important.

The amount of cash and U.S. Treasury bonds held by your company far exceeds the traditional view of necessary levels. During the panic of 2008, Berkshire Hathaway generated cash from operations without relying in any way on commercial paper, bank loans, or the bond market. We did not predict the exact timing of the economic crisis, but we were always prepared for it.

Extreme financial conservatism is the corporate commitment we make to those who join our Berkshire Hathaway ownership. In most years - in fact, over many decades - our caution is likely to be proven unnecessary behavior, much like an insurance policy on a fortress-like building considered fireproof. Berkshire Hathaway doesn't want to cause permanent financial losses to Bertie or any individual who trusts us - a long-term decline in returns is unavoidable.

Berkshire Hathaway hopes for enduring prosperity.

Let's Feel Comfortable with Uncontrolled Businesses

Last year, I mentioned that Berkshire Hathaway has long held two stocks, Coca-Cola and American Express. These two companies do not have as large a position in our portfolio as Apple, with each stock only accounting for 4-5% of Berkshire Hathaway's recognized accounting net worth. But they are valuable assets, which also reflects our thinking.

American Express began operating in 1850, while Coca-Cola was born in a pharmacy in Atlanta in 1886. (Berkshire Hathaway is not very fond of new companies). Over the years, both companies have tried to expand into unrelated areas, but without much success. In the past, but certainly not now, both companies even faced mismanagement.

However, both companies have achieved great success in their core businesses and have undergone restructuring as needed. Most importantly, their products have "gone global." The core products of Coca-Cola and American Express are well-known worldwide, and the ample cash flow and the demand for unquestionable financial trust are eternal necessities in our world.

During 2023, we did not buy or sell shares of American Express or Coca-Cola, continuing to hold them for 20 years. The situation has long since changed. Last year, these two companies once again rewarded our indifference by increasing profits and dividends. In fact, in 2023, the returns we received from American Express far exceeded the $1.3 billion cost we paid a long time ago. In 2024, American Express and Coca-Cola are almost certain to increase dividends, with American Express at around 16%. We will definitely maintain our holdings unchanged throughout the year. Can I create a better global business than these two companies? As Bertie would tell you, "impossible."

Although Berkshire Hathaway did not increase its holdings in these two companies in 2023, due to stock buybacks at Berkshire Hathaway, your indirect ownership of Coca-Cola and American Express slightly increased last year. These buybacks help increase your participation in every asset owned by Berkshire Hathaway. For this obvious but often overlooked fact, I must reiterate my consistent warning: all stock buybacks should be based on price. If stocks are repurchased at a price higher than their business value, what was once a wise move becomes foolish.

What is the insight that Coca-Cola and American Express give us? When you find a truly outstanding company, stick with your investment. Patience always pays off, and choosing an excellent company can offset many inevitable bad decisions. This year, I would like to introduce two more investments that we plan to maintain indefinitely. Similar to our investments in Coca-Cola and American Express, these investments are not significant relative to the resources we possess. However, they are worthwhile, and we will be able to increase our positions in these two investments by 2023. By the end of the year, Berkshire Hathaway held 27.8% of the common stock of Occidental Petroleum, and also holds warrants, allowing us to significantly increase our stake at a fixed price over a period of more than five years.

While we greatly value our ownership and options, Berkshire Hathaway has no intention of acquiring or managing Occidental Petroleum. We are particularly optimistic about Occidental Petroleum's substantial oil and gas assets in the United States, as well as its leading position in carbon capture technology, although the economic viability of this technology is still to be proven.

Both of these activities are in line with our national interests. Not long ago, the United States heavily relied on foreign oil, and carbon capture technology had no significant supporters. In fact, in 1975, U.S. oil production was at 8 million barrels of oil equivalent per day ("BOEPD"), which was far from sufficient to meet the country's needs. The energy situation in the United States provided favorable conditions for the country's mobilization during World War II, but now, the energy situation has regressed, becoming heavily dependent on potentially unstable foreign suppliers. It is predicted that oil production may further decline, accompanied by an increase in future oil consumption.

For a long time, this pessimism seemed justified, and by 2007, production had dropped to 5 million barrels per day. Meanwhile, the U.S. government established the Strategic Petroleum Reserve ("SPR") in 1975 to alleviate the erosion of the country's self-sufficiency, although this issue could not be completely eliminated.

Then, hallelujah! The shale economy became viable in 2011, ending our dependence on energy. Now, U.S. oil production has exceeded 13 million barrels per day, and OPEC is no longer dominant. Occidental Petroleum's annual oil production in the U.S. is close to the entire inventory of the SPR each year. If domestic oil production in the U.S. had remained at 5 million barrels per day and heavily relied on non-U.S. oil sources, our country's resources would be very, very strained today. From this perspective, if foreign oil supplies were insufficient, the SPR would be depleted within a few months.

Under the leadership of Vicki Hollub (Occidental Petroleum's President and CEO), Occidental Petroleum is doing the right thing for the United States and its shareholders. No one knows how oil prices will change in the next month, year, or decade. But Vicki does know how to separate oil from rock, which is an extraordinary talent that is valuable to her shareholders and her country.

In addition, Berkshire Hathaway continues to passively hold stakes in the five major trading companies in Japan, each of which operates in a highly diversified manner, similar to Berkshire Hathaway's own operating style. Last year, after Greg Abel (Vice Chairman of Berkshire Hathaway) and I went to Tokyo to meet with the management of these five companies, we increased our holdings in these five companies.

Currently, Berkshire Hathaway holds approximately 9% of each of these five companies. (One small issue is that the way Japanese companies calculate outstanding shares is different from the United States.) Berkshire Hathaway has also committed to each company that it will not purchase more than 9.9% of their shares. Our total investment cost in these five companies amounts to 16 trillion yen, with a year-end market value of 29 trillion yen. However, due to the recent depreciation of the yen, our unrealized USD gains at year-end were 61%, equivalent to 8 billion USD.

Both Greg and I do not believe that we can predict the market prices of major currencies, nor do we believe that we can hire talent with such abilities. Therefore, Berkshire Hathaway provided funding for most of its positions in Japan by issuing 13 trillion yen in bonds. These bonds are very popular in Japan, and I believe that Berkshire Hathaway has more outstanding yen-denominated debt than any other American company. The depreciation of the yen brought Berkshire Hathaway a year-end gain of 1.9 billion USD, which, according to US GAAP, will be regularly recognized in the income for the period 2020-23.

In some important aspects, Itochu, Marubeni, Mitsubishi, Mitsui, and Sumitomo, these five companies, all follow shareholder-friendly policies, which are much better than the US conventions. Since we started acquiring Japanese stocks, these five companies have reduced the number of outstanding shares at attractive prices.

At the same time, the demands of the management of these five companies for their own compensation are far less aggressive than those of American companies. It is also worth noting that each of these five companies only uses about one-third of their earnings for dividends. The substantial funds retained by these five companies are used to establish their numerous businesses and to a lesser extent for stock buybacks. Like Berkshire Hathaway, these five companies are also reluctant to issue new shares.

Another benefit that Berkshire Hathaway has gained is that our investments may bring us opportunities to collaborate with these five well-managed and respected large companies globally, whose network of interests is much broader than ours. Moreover, the CEOs of Japanese companies are also pleased to know that Berkshire Hathaway will always have significant liquidity, and regardless of the size of these partners, they can immediately access these resources.

We started buying Japanese stocks on July 4, 2019. Given the current size of Berkshire Hathaway, establishing positions through open market purchases requires great patience and a "friendly" price period. This process is like turning a battleship, a significant disadvantage that Berkshire Hathaway did not encounter in its early days.

2023 Scorecard

Every quarter, we release a press release to report our operating income (or loss) in a summary format similar to the chart below. Here is the annual summary:

At the Berkshire Hathaway annual shareholders meeting on May 6, 2023, I presented the first-quarter performance released earlier that day. Subsequently, I briefly summarized the outlook for the year:

• In 2023, the profits of most of our non-insurance businesses are expected to decline.
• The strong performance of our two largest non-insurance businesses, the railroad business (BNSF) and the energy business (BHE), will mitigate this decline, with these two companies accounting for over 30% of operating income in 2022.
• Our investment income is expected to increase significantly as Berkshire Hathaway's substantial holdings of U.S. Treasury bonds have finally begun to yield returns far higher than expected, compared to the previously meager returns.
• The insurance business may perform well as underwriting income in the insurance industry is not correlated with income in other sectors of the economy, and property insurance prices have strengthened.

The insurance business passed the assessment as expected, but my expectations for BNSF and BHE were incorrect. Let's take a closer look at each.

Railroads are crucial to the future of the U.S. economy. In terms of cost, fuel usage, and carbon intensity, railroads are clearly the most efficient way to transport heavy materials to distant destinations. While trucking excels in short-haul transportation, what Americans need is to transport many goods to customers hundreds or even thousands of miles away. The country's development is inseparable from railroads, and the railroad industry's capital needs have always been enormous. In fact, compared to most American companies, the railroad industry is very capital-intensive.

BNSF is the largest of the six railroad systems covering North America, with our railroad having 23,759 miles of main track, 99 tunnels, 13,495 bridges, 7,521 locomotives, and various other fixed assets, with a value of up to $70 billion on the balance sheet. However, I estimate that replicating these assets would cost at least $500 billion, and completing this task would take several decades.

BNSF's annual expenditures must exceed depreciation expenses to maintain the current level of operations. This reality is unfavorable to owners regardless of the industry they invest in, but particularly detrimental to capital-intensive industries.

Since being acquired 14 years ago, BNSF's total spending exceeding GAAP depreciation expenses has reached a staggering $22 billion, or over $1.5 billion annually. This gap means that unless we regularly increase the railroad company's debt, the dividends paid to its owner Berkshire Hathaway will often be significantly lower than the earnings reported by BNSF, but we do not intend to do so. Therefore, Berkshire Hathaway's acquisition price has yielded an acceptable return, despite appearing to be less on the surface, and the asset reset value is also low. Neither I nor the Berkshire Hathaway board is surprised by this, which also explains why we were able to acquire BNSF in 2010 for a small portion of its reset value.

The long-haul railway system in North America transports a large amount of coal, grains, automobiles, imports, and exports in one direction, often facing revenue issues with the return trips. Extreme weather conditions frequently hinder or even obstruct the use of tracks, bridges, and equipment. Floods are a nightmare, and all of this is not surprising. Although I sit in a comfortable office, railway transportation is an outdoor job, with many employees working in challenging, sometimes dangerous conditions.

An evolving issue is that more and more Americans are unwilling to engage in arduous and solitary work in certain railway operations. Engineers must face the fact that in a population of 335 million in the United States, some destitute or mentally unstable Americans will choose to lie in front of a 100-car heavy freight train to commit suicide, a train that cannot stop within less than a mile or longer. Do you want to be that helpless engineer? In North America, this trauma occurs daily; in Europe, it is even more common and will continue to accompany us.

Wage negotiations in the railway industry may ultimately be in the hands of the president and Congress. Additionally, American railway companies need to transport many hazardous products daily, which the industry strives to avoid, and the term "common carrier" defines the railway's responsibility.

Last year, due to declining revenue, BNSF's profit decline exceeded my expectations. Although fuel costs have also decreased, the wage increases mandated by Washington far exceeded the national inflation target, a difference that may reappear in future negotiations.

Although BNSF carries more goods than the other five major railway companies in North America and incurs more capital expenditures, its profit margin has declined relative to all five major railway companies since our acquisition. I believe that our vast service area is top-notch, so the profit margin can and should improve.

I am particularly proud of BNSF's contribution to the nation and of those working outdoors in sub-zero temperatures in North Dakota and Montana in winter to keep America's commercial arteries flowing. Railways do not receive much attention when they are operational, but if they fail to operate, the entire United States will immediately take notice of the issue.

A century later, BNSF will still be an important asset for the United States and Berkshire Hathaway, and you can trust in this.

Last year, our second and even more serious mistake was being disappointed in BHE's earnings. Most of the company's large-scale power business and extensive natural gas pipeline operations performed as expected, but regulatory environments in some states brought shadows of zero profits or even bankruptcy (this is the actual outcome for California's largest utility company and the current threat facing Hawaii). In a jurisdiction like this, the profits and asset values of what was once considered one of the most stable industries in the United States are also difficult to predict.

For over a century, power companies have raised huge amounts of capital through the fixed stock return rates promised by various states (sometimes with small bonuses for outstanding performance) to fund the development of the company. In this way, a large amount of investment is used for the capacity that may be needed in the coming years. This forward-looking provision reflects a reality that the construction of power generation and transmission assets by utility companies often takes many years. BHE's extensive multi-state transmission project in the West was launched in 2006 and will take several more years to complete. Ultimately, it will serve 10 states, covering 30% of the continental United States.

Both private and public power systems operate on this model, ensuring that even if population growth or industrial demand exceeds expectations, electricity supply will not be interrupted. Regulators, investors, and the public view this "safety margin" approach as wise. Now, this "fixed but satisfactory return" model has been broken in several states, and investors are beginning to worry that this rupture will spread. Climate change has exacerbated their concerns. Underground transmission may be necessary, but who would have been willing to pay the high costs for such construction decades ago?

At Berkshire Hathaway, we have made the best estimate of the amount of losses incurred. These losses are caused by forest fires, and if severe storms become more frequent, the frequency and intensity of forest fires will increase, and are likely to continue to do so.

It will take many years to know the final statistics of BHE's forest fire losses and make wise investment decisions in the fragile western states in the future. It remains to be seen whether the regulatory environment elsewhere will change.

Other power companies may face survival issues similar to Pacific Gas and Electric Company and Hawaiian Electric Company. Resolving the current issues through confiscation would obviously have a detrimental effect on BHE, but both the company and Berkshire Hathaway itself are structured to handle adverse contingencies. Our core product is risk assumption, and our insurance business often encounters such situations, as do other businesses. Berkshire Hathaway can withstand financial surprises, but we will not intentionally spend good money on bad things.

Regardless of Berkshire Hathaway's situation, the ultimate outcome for the utility industry may not be good: some utility companies may no longer attract savings from American citizens and may be forced to adopt a public power model. Nebraska made such a choice in the 1930s, and there are many public power companies across the country. Ultimately, voters, taxpayers, and users will decide which model they prefer.

When all is said and done, the demand for electricity in the United States and the accompanying capital expenditures will be staggering, and neither I nor the two partners at Berkshire Hathaway in BHE anticipated or even considered the adverse developments in regulatory returns, and I made a costly mistake. Last year, our insurance business performed exceptionally well, setting records in sales, underwriting loss, and underwriting profit. Property and Casualty (P/C) insurance is the core of Berkshire Hathaway's well-being and growth. We have been in this business for 57 years, with our business volume growing nearly 5000 times, from $17 million to $83 billion. We still have significant room for growth in the future.

In addition, we have learned - often painfully - which types of insurance businesses and individuals to avoid. The most important lesson is that our underwriters can be thin, fat, male, female, young, old, foreign, or domestic. But in the office, they cannot be optimists, no matter how desirable this quality may be in life.

Accidents in the accident insurance business are almost always negative, and these accidents may not surface until months or even decades after the policy expires. The industry's accounting is designed to recognize this reality, but estimation errors can be severe. Detection of fraudsters is often slow and costly. Berkshire Hathaway always strives to accurately estimate future loss payments, but inflation (including monetary and "legal" inflation) remains an unknown.

I have talked about our insurance business many times before, so I just want to guide new readers to page 18. Here, I just want to reiterate that if Ajit Jain had not joined Berkshire Hathaway in 1986, our position would not be what it is today. Before that fortunate day, apart from a nearly unbelievable wonderful experience that began with GEICO in early 1951, I had been wandering in the wilderness, striving to build our insurance business.

The achievements Ajit has made since joining Berkshire Hathaway have been supported by a large number of talented insurance executives in our various property and casualty businesses. Most media and the public do not know their names and faces. However, the lineup of fund managers at Berkshire Hathaway in property and casualty is like Cooperstown winners in baseball.

Bertie (Buffett's sister), you can take pride in being part of an incredible insurance company that currently operates globally, with unparalleled financial resources, reputation, and talent, carrying the flag in 2023.

What's Happening in Omaha this Year?

Come join the Berkshire Hathaway Annual Shareholders Meeting on May 4, 2024! On stage, you will see three managers who now bear the primary responsibilities of managing the company. You might wonder, what do these three have in common? They certainly don't look alike, let's delve deeper into that. Greg Abel, in charge of all non-insurance businesses at Berkshire Hathaway, seems well-prepared to become the CEO of Berkshire Hathaway in the future from all aspects. In the 1990s, Greg lived just a few blocks away from me in Omaha for six years, but I never saw him during that time.

About ten years ago, Ajit Jain, who was born, raised, and educated in India, and his family lived just about a mile away from my house. Ajit and his wife Tinku have many friends in Omaha, even though they have been living in New York for over 30 years (New York being the main hub for the reinsurance industry).

This year, Charlie will be absent. Both he and I were born in Omaha, roughly two miles away from the annual shareholders meeting in May. In the first ten years after his birth, Charlie lived only half a mile away from Berkshire Hathaway's long-standing office. Both Charlie and I spent our childhood in Omaha's public schools, leaving an indelible impact on us. However, we didn't meet until much later. (A footnote that might surprise you: among the 45 U.S. presidents, Charlie has lived through 15 of them. People refer to President Biden as the 46th president, counting Grover Cleveland as both the 22nd and 24th president due to his non-consecutive terms. The U.S. is a very young country.)

On a corporate level, Berkshire Hathaway relocated from New England to Omaha in 1970 after 81 years, leaving behind troubles and thriving in its new home.

As a final touch to the "Omaha Effect," Bertie - yes, Bertie - spent her formative years in a middle-class neighborhood in Omaha and decades later became one of America's greatest investors.

You might think she invested all her money in Berkshire Hathaway and then lived off the dividends. But that's not the case. After starting a family in 1956, Bertie remained active in finance for 20 years: holding bonds, investing one-third of her funds in listed mutual funds, and trading stocks. Her potential remained untapped.

In 1980, at the age of 46, Bertie decided to move despite her brother's advice. Over the next 43 years, she held onto mutual funds and Berkshire Hathaway, refraining from any new trades. During this time, she became very wealthy, even after making substantial charitable donations (in the nine figures).

Millions of American investors could have followed her reasoning, which only involved common sense absorbed during her childhood in Omaha. Bertie took no risks and recharged in Omaha every May. So what's the deal here? Is it the water in Omaha? Is it the air in Omaha? Is it some strange planetary phenomenon, similar to Jamaica producing sprinters, Kenya producing marathon runners, or Russia producing chess experts? Do we have to wait until artificial intelligence one day gives us the answer to this puzzle?

Keep an open mind. Come to Omaha in May, breathe the air, drink the water, and say hello to Berti and her beautiful daughters. Who knows? There's no harm in it, and anyway, you'll have a great time and meet a bunch of friendly people.

Most importantly, we will launch the fourth edition of the "Poor Charlie's Almanack". Pick up a copy, Charlie's wisdom will improve your life, just like it changed mine back in the day.

Warren Buffett

Chairman of the Board

2024.2.24

Translated and compiled by Ge Jiaming, Zhao Ying, Ye Zhen.