Warren Buffett's 2025 shareholder letter: "Betting on Japan, but still staying true to America"

WE2685% WE 2024WECome. However, in 2024, no "catastrophic" events occurred. One day, a truly astonishing insurance loss will happen - and there is no guarantee that it will only happen once a year.P/C business is crucial to Berkshire, so there will be further discussion in the letter later. Berkshire's railroad and utility operations - our two largest businesses outside of insurance - overall profit improved. However, there is still much work to be done in these two businesses. By year-end, we increased our stake in utilities from about 92% to 100%, at a cost of about $3.9 billion, with $2.9 billion paid in cash and the rest in Berkshire "B" shares. In 2024, we achieved operating profit of $47.437 billion. We have always - perhaps some readers may complain - emphasized this metric rather than profit reported on page K-68 based on GAAP requirements. Our metric excludes capital gains or losses on stocks and bonds we hold, whether realized or unrealized. In the long run, we believe that earnings are likely to prevail - otherwise why would we buy these securities? - even though the numbers fluctuate significantly each year and are difficult to predict. The time spans of these commitments are almost always far beyond one year. In many cases, our thinking involves decades. These long-term investments sometimes bring substantial returns. Here are the profit details for 2023-2024, as we see it. All calculations are done after depreciation, amortization, and taxes. EBITDA is a darling on Wall Street, but we do not agree. * Including certain companies in which Berkshire holds between 20% and 50% ownership, such as Kraft Heinz, Phillips 66, and Berkadia. ** Including foreign exchange gains of approximately $1.1 billion in 2024 and $211 million in 2023, which were derived from our use of non-dollar denominated debt. Surprising! An important American record was broken. Sixty years ago, the current management took over Berkshire. This move was a mistake - my mistake - that plagued us for twenty years. Charlie (Munger), I must emphasize, immediately saw my obvious mistake: despite the seemingly low price at which I bought Berkshire, its business - a large northern textile company - was destined to fail. The U.S. Treasury has received an ominous warning about Berkshire's fate. In 1965, the company did not pay a single penny in income taxes, a embarrassing situation that had lasted for a decade. Such financial behavior may be understandable for flashy startups, but if it occurs in a respected American industrial giant, it is a flashing yellow light. Berkshire was doomed to be thrown into the rubbish heap of history. Fast forward sixty years, imagine the Treasury's surprise when the same company - still operating under the name Berkshire Hathaway - paid more in corporate income taxes than the U.S. government received from any company - even mega-cap U.S. tech giants. Specifically, Berkshire paid the IRS four installments totaling $26.8 billion last year. This represents about 5% of the total amount paid by all U.S. companies. (Additionally, we paid significant income taxes to foreign governments and 44 states.) A key factor that allowed us to pay this record amount is this: from 1965-2024, Berkshire's shareholders have received only one cash dividend. On January 3, 1967, we distributed the only cash dividend - $101,755, or 10 cents per Class A share. (I can't remember why I proposed this action to the board. It seems like a nightmare now.) For sixty years, Berkshire shareholders have supported continuous reinvestment, allowing the company to build substantial taxable income. In the initial ten years, the cash income taxes paid to the U.S. Treasury were negligible, but now they have exceeded $101 billion... and continue to increase. Big numbers are difficult to visualize. Let me rephrase the $26.8 billion we paid last year. If Berkshire were to mail the Treasury a $1 million check every 20 minutes for the entire year of 2024 - imagine 366 days, because 2024 is a leap year - we would still owe the government a significant amount at the end of the year. In fact, it would not be until January that the Treasury would tell us we could have some rest, get some sleep, and prepare for tax payments for 2025. Where Your Money Is Berkshire's equity investments are two-pronged. On one hand, we control many companies, holding at least 80% of the shares in the investee. Usually, we own 100%. These 189 subsidiary companies share similarities with tradable common stocks, but they are not exactly the same. This collection is worth billions of dollars, including some rare gems, many decent but not outstanding businesses, and some disappointing laggards. We don't have any that are a major burden, but I certainly have some that we shouldn't have bought. On the other hand, we hold small stakes in about a dozen large and highly profitable companies, which are well-known brands such as Apple, American Express, Coca-Cola, and Moody's. Many of these companies have achieved very high returns on the net tangible equity required for operations. By year-end, the value of these partial stakes we hold was $272 billion. It is understandable that truly outstanding businesses are rarely sold in full, but small portions of these gems can be bought on the open market on Wall Street, occasionally at a discount. We are fair in choosing equity instruments, based on where we can best deploy your (and my family's) savings, investing them in any form. Most of the time, we see no convincing investment opportunities; but occasionally, we find ourselves in the "deep end of opportunity". Greg has vividly demonstrated his ability to act in such situations, just like Charlie. For publicly traded stocks, it's easier to make adjustments when I make a mistake. It must be emphasized that Berkshire's current size has weakened this valuable flexibility. We cannot enter and exit at any time.Sometimes it may take a year or even longer to establish or liquidate an investment. In addition, when we only hold a small percentage of equity, we may not be able to change the management or control the capital flow if we are not satisfied with the decisions made by the management. reFor the small amount of insurance profits. We have estimated for "accidents", and so far, these estimates have been sufficient.We are not discouraged by the significant increase in losses we incur from our activities. (When I write this article, I think of the California wildfires.) It is our job to price in and absorb these losses, and to calmly withstand the impact when accidents occur. It is also our job to oppose "out-of-control" rulings, baseless lawsuits, and blatant fraudulent behavior. Under Ajit's leadership, our insurance business has grown from an obscure Omaha company to a world leader, known for its risk appetite and Gibraltar-like financial strength. In addition, Greg, our directors, and I personally have significant investments in Berkshire relative to any compensation we receive. We do not use options or other one-sided forms of compensation; if you lose, we lose as well. This approach encourages caution, but does not guarantee foresight. The growth of P/C insurance depends on the increasing economic risks. No risk, no need for insurance. Just think, only 135 years ago, there were no cars, trucks, or airplanes in the world. Today, just in the United States, there are 300 million cars, a massive fleet that causes huge losses every day. The property losses from hurricanes, tornadoes, and wildfires are huge, constantly growing, and their patterns and ultimate costs are becoming increasingly unpredictable. It is foolishsome would say crazyto cover these risks with ten-year policies, but we believe that one-year risk taking is usually manageable. If we change our mind, we will change the contracts we offer. In my lifetime, auto insurance companies have often abandoned one-year policies in favor of six-month policies. This change reduces float, but allows for wiser underwriting. No private insurance company is willing to take on the level of risk that Berkshire can offer. Sometimes, this advantage is crucial. But we also scale back when prices are inadequate. We must never underprice policies to stay in the game. It is corporate suicide. Correct pricing of P/C insurance is part art, part science, definitely not a business for optimists. Mike Goldberg, a Berkshire executive recruited by Ajit, puts it best: "We want our underwriters to come to work every day anxious, but not paralyzed." Overall, we like the P/C insurance business. Berkshire can financially and psychologically withstand extreme losses without blinking an eye. We do not rely on reinsurance companies, which provides us with important and enduring cost advantages. Finally, we have outstanding managers (not optimists) and are adept at using the substantial funds generated by P/C insurance for investments. In the past twenty years, our insurance business has achieved $32 billion in after-tax underwriting profit, earning approximately 3.3 cents of after-tax profit for every dollar of insurance sold. Meanwhile, our float has grown from $46 billion to $171 billion. The float may gradually increase over time and, with prudent underwriting (and a little luck), has a reasonable chance of remaining costless. Berkshire increases investment in Japan Our investment strategy is centered around the United States, but there is a small but important exception: our increasing investment in Japan. Berkshire has been buying stocks of five Japanese trading companies for nearly six years now, companies that are successful in their own way and very similar to Berkshire itself. These five companies, in alphabetical order, are Itochu, Marubeni, Mitsubishi, Mitsui, and Sumitomo. Each of these large companies has interests in numerous other companies, many operating in Japan but also many operating around the world. In July 2019, Berkshire first purchased stocks of these five companies. We were surprised by the low prices of their stocks after reviewing their financial records. As time has passed, our admiration for these companies has grown. Greg has met with them multiple times, and I regularly monitor their progress. Both of us appreciate their capital allocation, management, and attitude towards investors. Each of these five companies will increase dividends when appropriate, repurchase their own stock when it makes sense, and their executives are far less aggressive in their compensation plans compared to their American counterparts. Our holdings in these five companies are long-term, and we have committed to supporting their boards. From the beginning, we agreed to keep Berkshire's ownership below 10% of each company's shares. But as we approached this limit, these companies agreed to moderately expand the limit. Over time, you may see Berkshire's ownership in these five companies increase. As of the end of the year, Berkshire's total cost (in USD) was $13.8 billion, and the total market value of our Japanese stocks held totaled $23.5 billion. In addition, Berkshire has been increasing its borrowings denominated in yen but not based on any formula. All borrowings are at fixed rates, with no "floating rates." Greg and I have no opinion on the future movements of exchange rates, so we seek a roughly currency-neutral position. However, under GAAP rules, we are required to periodically recognize any gains or losses on our yen borrowings in earnings, and as of the end of the year, we have recognized $2.3 billion in after-tax gains due to the strength of the dollar, $850 million of which occurred in 2024. I expect Greg and his successor to hold this Japanese position for decades, and Berkshire will find other ways to engage in productive partnerships with these five companies in the future. The mathematical results of our current yen balance strategy are also satisfactory. As of the time I write this article, the estimated annual dividend income from the 2025 Japanese investments is approximately $812 million, while the interest cost of our yen-denominated debt is estimated to be around $135 million. Annual Omaha Meeting I hope you can join us for our gathering in Omaha on May 3. This year our schedule has changed slightly, but the basic content remains the same. Our goal is to answer many of your questions, allow you to gather with friends, and leave with a positive impression of Omaha. The city is looking forward to your visit.Your presence.We will have the same group of volunteers as in previous years to offer you a variety of Berkshire products that will lighten your wallet and brighten your mood. As usual, we will be open from 12 pm to 5 pm on Fridays, offering cute Squishmallows, Fruit of the Loom underwear, Brooks running shoes, and many other enticing items. Similarly, we will only be selling one book. Last year, we sold out of "Poor Charlie's Almanack" quickly all 5,000 copies were gone before market close on Saturday. This year, we will be releasing "Berkshire Hathaway 60 Years". In 2015, I asked Carrie Sova (who has many responsibilities at Berkshire, including managing most activities at the annual meeting) to try writing a light-hearted history book about Berkshire. I gave her full freedom to use her imagination, and she quickly created a book that impressed me immensely its creativity, content, and design were all very impressive. Afterwards, Carrie left Berkshire to start her family, and she now has three children. But every summer, the Berkshire office team gathers to watch the Omaha Storm Chasers play a baseball game against a Triple-A team. I would invite some former employees to join, and Carrie would usually bring her family as well. At this year's event, I shamelessly asked her if she would be willing to create a 60th anniversary edition, including photos, speeches, and some rarely shared stories about Charlie. Despite taking care of three young children, Carrie readily agreed. So, we will have 5,000 new books for sale on Friday afternoon and Saturday from 7 am to 4 pm. Carrie refused to accept any payment for the extensive work she did for this "Charlie" special. I suggested that she and I sign 20 books together to donate to any shareholder who donates $5,000 to the Stephen Center in South Omaha. The Stephen Center has been supporting homeless adults and children for many years. The Kizer family, starting with my long-time friend and Carrie's grandfather Bill Kizer Sr., has been a strong supporter of this admirable institution. I will personally oversee the management of every penny raised from selling these 20 signed books. Becky Quick will be responsible for reporting on the adjustments we have made for this year's meeting. Becky is very familiar with Berkshire and always manages to arrange interesting interviews with managers, investors, shareholders, and occasionally celebrities. She and her CNBC team not only broadcast our meeting worldwide but also archive a lot of Berkshire-related information. Thanks to our director Steve Burke for the archiving idea. We will not have a movie screening this year, and the meeting will start at 8 am. I will give some opening remarks, and then we will quickly move into a Q&A session, where Becky and the audience will take turns asking questions. Greg and Ajit will join me in answering questions, and we will take a half-hour break at 10:30 am. After resuming at 11:00 am, only Greg and I will be on stage together. This year, we will end the meeting at 1:00 pm, but the exhibition hall will remain open for shopping until 4:00 pm. You can find detailed information about weekend activities on page 16. Pay special attention to the popular Brooks running event on Sunday morning. (I will be sleeping that day.) My smart and beautiful sister Bertie (whom I mentioned in last year's letter) will be attending this meeting, along with her two daughters, who are also very beautiful. Everyone agrees that these charming genes only flow in the family's women. (Sigh.) Bertie is now 91 years old, and we talk on the phone every Sunday. We discuss the joys of old age and some exciting topics, like the pros and cons of our canes. In my case, the cane is only for preventing falls. But Bertie always outsmarts me. She claims that a cane has an additional benefit: when a woman uses a cane, men no longer "pursue" her. Bertie explains that men have strong egos, and it is apparently not appropriate to pursue an elderly woman with a cane. I currently have no data to refute her claim. But I have my doubts. At the meeting, I cannot see much from the stage, so I hope you all can keep an eye on Bertie. If her cane really works, please let me know. My guess is she will still be surrounded by men. For those of a certain age, this scene may remind them of Scarlett O'Hara and her suitors in "Gone with the Wind". The Berkshire directors and I are looking forward to your visit to Omaha. I think you will have a great time and maybe make some new friends. February 22, 2025 Warren E. Buffett Chairman of the Board This article is reprinted from "Wall Street See the News" and is written by Pan Lingfei and Bu Shuqing; edited by GMTEight: Chen Xiaoyi.