Source: Hong Kong Stock Decode

The shareholders' meeting held in Omaha this weekend has always been a trending event in the global investment community. After Munger's death last year, only 94-year-old Buffett was left to witness the ebb and flow of the global capital market.

Combining Buffett's comments at the 2024 Annual General Meeting of Shareholders with his investment flagship$Berkshire Hathaway-A (BRK.A.US)$/$Berkshire Hathaway-B (BRK.B.US)$As a result, Caihua News summarized the following investment characteristics of Berkshire under Buffett's presidency:

Safety over profit

In the past year, the best stock price performance was the AI core concept$NVIDIA (NVDA.US)$However, judging from Berkshire's US stock holdings at the end of 2023, it once again fell short. Undoubtedly, in terms of earnings, Nvidia was the biggest bully in the first quarter of 2023 and 2024. Furthermore, AI pioneers$Microsoft (MSFT.US)$It has also repeatedly refreshed the high market capitalization level, surpassing$Apple (AAPL.US)$Become a publicly traded company with the highest market capitalization in the world.

As the investment company with the best long-term investment performance in the world, Berkshire has not kept up with this wave of AI gains. The main reason is that in addition to Buffett's confidence in Apple's development prospects, Caihua believes that one reason is that Apple's cost is far lower than its holding value. Apple's “cash neutrality” policy gives back more financial resources to shareholders and creates value for shareholders in the long run. Therefore, Berkshire has a very thick “safety cushion” for Apple's investment — the difference between fair value and investment cost.

Take Berkshire's equity investment at the end of March 2024 as an example, as shown in the table below. Its fair value is far higher than the cost, and the net unrealized benefits are more than double its cost.

Another sign of Berkshire's pursuit of security is its prudence in investing. By investing$Occidental Petroleum (OXY.US)$For example, on the face of it, Buffett seems to be optimistic about the future of petrochemical energy and is investing heavily, but there is a way to do it.

Berkshire began buying Occidental Petroleum's common shares in 2022. Until now, its common equity interest in Occidental Petroleum has reached 28.2%. Based on the current market value of Occidental Petroleum's market value of US$57.079 billion, the market value of its holdings is about US$16.096 billion. It should be noted that Occidental Petroleum paid dividends of 24 million US dollars, 142 million US dollars, and 41 million US dollars for Berkshire in the first quarter of 2022, 2023, and 2024, respectively, for a total of 207 million US dollars, which is equivalent to 0.36% of the market value of its current positions.

More than that. Occidental's stock price at the beginning of 2022 was only 27.53 US dollars. The sharp rise in oil prices during the period, Buffett's continued increase in his fortune, his celebrity effect, and his own fundamentals have withstood verification. Now Occidental's stock price has soared to 64.39 US dollars, 2.34 times that of the beginning of 2022.

This is just Berkshire's common stock investment in Occidental Petroleum.

As early as 2019, Berkshire invested $10 billion to buy Occidental Petroleum's non-voting cumulative perpetual preferred shares and Occidental Petroleum's common stock options. Occidental's preferred shares have an annual dividend rate of 8%. Occidental can choose to redeem them starting in 2029. The redemption price is 105% of the liquidated value, plus the accumulated unpaid dividends.

In other words, by holding 10 billion US dollars of Occidental Preferred Stock, Berkshire can receive an annual dividend of 800 million US dollars. This dividend is preferred over common stock — in other words, after Occidental Petroleum distributes annual net profit to preferred shareholders, only the remaining shares can be distributed.

Over the past few years, Occidental Petroleum has continued to redeem this batch of preferred shares, but by the end of March 2024, Occidental Petroleum will be redeemed at a 5% premium by 2029. This return is relatively stable and safe to ensure Berkshire's return of 13%. In addition, it also comes with a batch of common stock options, which can only be exercised after the preferred shares are redeemed. The exercise price of $59.62 is 7.41% off Occidental Petroleum's current price of $64.39. In other words, if Berkshire exercises rights now, it can earn more than 7% of the pre-tax income.

It can be seen that Berkshire's large investment will not fight an uncertain battle. It has secured 8% of preferred stock earnings in advance, and then gradually raised the bet.

Furthermore, cash or liquidity has always been a source of security for investors. At a time when the Federal Reserve's interest rate hike cycle has reached a high level and is likely to take some time, Berkshire's cash holdings are also getting larger and larger. As of March 31, 2024, the total amount of cash, cash equivalents and US Treasury notes held by Berkshire was US$143.509 billion, an increase of US$21.664 billion over the end of 2023. The proportion of total investment in its insurance business increased from 24.75% at the end of 2023 to 29.35%, as shown in the chart below.

Berkshire said in its quarterly results that it will continue to hold a large amount of short-term investments, including short-term US bonds, and believes that it is important to have sufficient liquidity, and insist that safety is higher than return in terms of short-term investments.

The continuation of the Fed's interest rate hike cycle may suppress overall economic activity and slow down the performance of listed companies, but this is a delayed process that may be reflected in future stock market performance. It is much safer for Berkshire to hold cash at this time than to open positions at a high level, and holding cash (especially short-term treasury bonds) can benefit from the impact of the Federal Reserve's high interest rates and bring in higher interest income. This is far safer and more secure than investing in the stock market.

In summary, when it comes to safety, Berkshire's approach is:

1) Don't chase high influencer stocks, but leave enough safety pads for yourself;

2) Set a safe threshold for your own investments;

3) Review the current situation and ensure liquidity reasonably.

Investing in the US

At the shareholders' meeting, Buffett emphasized his insistence on “investing in America.” In fact, in his letter to shareholders, he explains this point of view every year. The main reason is that in addition to patriotism, the most important reason is that the US is the world's largest economy, has the most active consumer base, and the US dollar is the most commonly used settlement currency. Joining forces with powerful people, the chances of success are at least half as high.

Berkshire's consolidated main business in the performance report, including American insurance companies, railway companies, energy and utility companies, consumer companies, etc., involving all aspects of American life.

More importantly, Buffett emphasized his willingness to pay more taxes. This is because there are plenty of taxes, which can guarantee the smooth operation of America's public system, the country is rich and strong, and by having a voice in taxes, Berkshire can have a greater voice or political and economic bargaining.

One target I'm optimistic about is a stud

Unlike the diversified risk diversification concept advocated over and over again by investment studies, Buffett is confident in his investment research and is optimistic about an industry or company. He is used to using a stud rather than diluting risk through other investments. Investing in Apple is an example.

As of March 31, 2024, the market value of Berkshire's holdings with Apple reached US$135.4 billion, accounting for 40.31% of its total equity investment holdings.

Many years ago, Buffett said that if you think a company has the highest potential return, you don't need to buy other smaller investments to amortize your return on investment.

Of course, the prerequisite for doing this is that you must have Buffett's courage and ability to select stocks to be foolproof.

Look at the first few steps

Investing is a discipline you must understand. At the very least, you need to understand macroeconomics, know how the world is developing, and what currency, inflation, and economic development cycle it is currently in before you know whether to pay or release. And the global economy is inseparable from politics. For example, the geographical situation affects the trend of oil prices, a country's financial burden may affect economic health, the placement of medical systems and social security systems will affect the development of specific industries, and trade barriers will increase the pressure on domestic residents and cause inflation...

Buffett's investment layout pays great attention to this, and often discovers opportunities earlier than the market. For example, when tourists from around the world realized that the exchange rate of the yen was low and they went to Japan to buy goods, Buffett had already laid out Japanese stocks, and the layout was all big giants. Without exception, the industry supported by Japan's Ministry of Industry — is a comprehensive enterprise whose main business is mining.

Japan is a country with relatively poor mineral resources, but at the same time, Japan is also an important industrial country. To develop industry, it is inseparable from mineral resources. The five giants Buffett invests in are all capital giants with mines and mining capabilities overseas, and the industries they work in will not be without markets. On the other hand, the industries of these giants spread all over the world and all walks of life, and can benefit from the global economy.

In addition to sweeping Japanese stocks, Berkshire also took advantage of the low exchange rate of the yen to issue Japanese yen bonds, making both interest spreads and foreign exchange spreads. It is a very smart capital operation. Without a forward-looking vision and rich knowledge, Berkshire can only eat “tail water” with low returns and cannot earn rich rewards by simply following the trend.

Flexible use of funds

Berkshire is also good at “leveraging power” and using other people's funds to make money. For example, Berkshire has always used surplus funds from the insurance business to invest.

Its insurance underwriting business can maintain a healthy operating profit, which means that Berkshire “borrows money to trade stocks”, not only does not need to pay interest, but also earns profits.

As shown in the chart below, Berkshire's insurance underwriting business generated positive shareholders' share of profits for most quarters.

In fact, after years of accumulation and return, the fair value of Berkshire's current portfolio far exceeds that of floating funds. On March 31, 2024, Berkshire's floating deposit was US$168 billion, while the amount of insurance investment capital at the end of the period reached US$489 billion, which is 2.91 times its floating deposit.

Furthermore, Berkshire's main consolidated business is mainly utilities, which can generate stable cash flow without fear of economic cycles. The current fixed investment in the railway business is relatively stable, and at the same time, it can generate stable income and share the dividends of the expansion of the US economy. Consumer stocks, on the other hand, can take into account the various needs of consumers. No matter how AI changes the way people live and work, humans still have to consume and buy snacks. Berkshire holds a large number of consumer stocks, and can meet its future investments through the stable cash flow generated by these shares.

Editor/jayden