The "Bible" of the investment community will be updated tonight What are the highlights of Buffett's annual shareholder letter?

Cai Lian News, February 25 (Editor Shi Zhengcheng) Just as the US inflation data in January once again hit market confidence, the annual shareholder letter of the "Omaha Prophet" is about to continue a new chapter tonight.

According to Berkshire Hathaway's announcement this week, the company will release Buffett's annual shareholder letter and annual report at 8 a.m. local time (21 p.m. Beijing time) on the 25th. This year's offline shareholders' meeting will be held on May 6, local time.

(Source: Berkshire Hathaway)

Although according to the convention, Buffett is likely to repeat old stories such as "Apple's repo magic", but after just experiencing sharp market fluctuations, the possibility of "new tricks" this year has also increased sharply.

Point 1: How Buffett views rapid interest rate hikes

U.S. Treasury yields rose across the board on Friday, with two-year yields hitting their highest points since 2007, and shorter 6-month and 1-year yields both breaking 5%. Behind this is the market's prediction of the Fed's "more, higher and more durable" interest rate hikes this year.

Buffett himself said at a 2013 shareholder meeting that interest rates are to stock prices what gravity is to Apple. This means that when interest rates are higher, the value of stocks is also under great pressure.

In this regard, David Cass, a professor of finance at the University of Maryland, commented that after fifteen years of abnormal and historically low interest rates, short-term interest rates are now more normal. Buffett himself has said that interest rates are the determining factor in stock prices, so Cass expects discussions about interest rates in shareholder letters.

It is worth mentioning that Berkshire's (last year) fourth quarter U.S. stock position report released this month showed a lot of downward movements, in addition to the sharp reduction of TSMC, which triggered a heated discussion of "selling fly", but also reduced its holdings in financial stocks such as Bank of New York Mellon and United Bank. At the same time, since most of the hundreds of billions of cash piled up on Berkshire's books have bought U.S. bonds, his evaluation of the volatility of U.S. Treasury yields is also worth looking forward to.

Highlight 2: Is it a buyback this year, or is it crazy again?

Because Berkshire has hundreds of billions of cash on its books, Buffett's attitude towards big acquisitions is also worth paying attention to, as soaring interest rates weigh on asset prices. Professor Cass said that PE in the market now has to bear the cost of higher borrowing rates if they want to make big acquisitions, but Berkshire has no such concerns at all.

As a background, Buffett spent $11.6 billion last year to buy insurance holding company Alleghany, Berkshire's biggest deal since it bought Precision Castings for $37 billion in 2016, and it was the biggest deal in Buffett's life to date.

In addition, Berkshire's buyback transaction is also a regular hot spot in shareholder letters.

Berkshire repurchased a total of $5.25 billion worth of its own stock in the first three quarters of last year, an order of magnitude smaller than the $27 billion repurchases in 2021.

However, Buffett also mentioned at last year's shareholder meeting that if the opportunity is right, he is more inclined to buy other businesses than to buy back his own stock.

Point 3: Are you still optimistic about oil?

Berkshire increased its large holdings in Occidental in the first three quarters of last year, and the deal was accompanied by rising oil prices, which made the stock god very profitable. But as oil prices began to fall back in the fourth quarter, Berkshire neither bought nor sold its Western oil holdings in the fourth quarter of last year.

(WTI Crude Oil Futures Weekly Chart, Source: TradingView)

In August, Berkshire also disclosed that it had received regulatory approval to acquire at least 50 percent of the company's shares, sparking speculation about a wholly-owned acquisition. At the end of last quarter, Berkshire held a 21.38 percent stake in Occidental Petroleum. Boosted by the "Buffett concept" and rising oil prices, Occidental shares rose 119% last year.

For investors around the world, whether Buffett is willing to buy Occidental oil at double the price will be a matter of concern. At the same time, in Berkshire's holdings, multinational energy giant Chevron is also the third largest position after Apple and Bank of America.

Point 4: Talk about the economy through the insurance business?

Although Buffett is known for speculating in stocks, Berkshire is essentially an insurance company, so it is certainly indispensable to describe the underlying business in the annual report. So it makes sense to expect Buffett to talk about the impact of economic fluctuations on the business.

For Berkshire, GEICO, the company's wholly-owned insurance business, has been losing money continuously, and shareholders are eager to see that change. Caherine Seifert, a researcher at Berkshire who covers CFRA research, said in the research note that many of GEICO's peers are responding to adverse trends by raising premium rates, so will Berkshire take action? And what actions will be taken?

Point 5: Berkshire's future

Buffett has made it clear that Greg Abel, Berkshire's vice chairman in charge of non-insurance operations, will be his successor. Berkshire investors are also looking forward to how the stock god will change his tricks this year and praise his successor.

At the same time, the real "stock god successors" - Berkshire's investment managers Ted Wescherer and Todd Coombs - are currently in charge of about 10% of Berkshire's $350 billion stock position. Theoretically, someday in the future, they will have the opportunity to take over the entire position. By the way, Buffett, who does not understand smartphones, bought Apple shares under the influence of these two people.

(Interview with the three in 2017, source: Yahoo)

In a 2019 TV interview, Buffett said that since they joined the company, "investment performance has slightly underperformed the S&P 500 index." So in the context of the sharp decline of many Berkshire positions in 2022, the performance of these two is also particularly curious.

Point 6 BYD

According to a previous report by CaiLian News Hong Kong Stock Channel, Berkshire has repeatedly disclosed that it has reduced its holdings of BYD shares H shares since August last year, and its shareholding ratio has also fallen from 20.04% to 11.87%. However, apart from selling shares, the stock god himself did not say much about this, so the annual shareholders' letter is a potential opportunity to systematically discuss the viewpoint.

Based on past experience, once Buffett reduces his long-term holdings of individual stocks, this process is likely to continue. In Berkshire's 2022 annual report, BYD ranked among the company's top ten positions.

(Cai Lian News Agency, Shi Zhengcheng)