Warren Buffett’s 2023 Letter: A Theory of Capitalism

For six decades, Warren Buffett, now 92, has sent investors in his Berkshire Hathaway fund an annual letter containing his thoughts and observations about the business and its ecosystem.

I have just read his 2023 letter.  It is shorter and more spare than many of his prior ones.  This year, he focuses on data – fiscal results of investments and company business models.  He does so by looking back at the history of his investment decisions and their varying results.  He admits that some decisions were excellent, others mediocre and some just bad.

On balance, however, and that is a metric he uses – balance out the good, the bad and the ugly; track the trendlines instead of obsessing on the volatility highs and lows; separate sheep from goats, apples from oranges.

For his philosophical approach, he just mentions the obligation to do well for the people who trust him with their money and the reality that “the disposition of money unmasks humans”; that he is a business-picker, not a stock-picker.

He credits the secret sauce of success in investing as cash flow.  He struck gold when he invested in Coca Cola in August 1994 and with American Express in 1995.  Those two companies have  paid higher and higher dividends annually, as the earth has rotated around the sun ever since. Other companies did not pay good dividends, so their capital value to Berkshire dropped and dropped.  Conclusion: the weeds wither away as the flowers bloom.

Pick flowers, not weeds.

He notes that of the S&P 500 companies, in 2021, only 128 earned $3 billion or more, while 23 lost money.  Berkshire was the largest owner of 8 of these profitable giants.

Here, Buffett’s focus on data leads him to a theory, a theory of capitalism.  He understands that narratives do not drive facts.  Rather, facts drive conclusions about reality.  He writes: “Capitalism has two sides: the system creates an ever-growing pile of losers, while concurrently delivering a gusher of improved goods and services.”  It’s a mixed bag – some win and some lose.  On balance, however, capitalism delivers for everyone in gross, if not at the margin for some.

Buffett’s mindset is congruent with reality.  That should be a lesson for us.  Ideals and good intentions, the precise social engineering of equality and fairness, only intrude on a natural process and may not be integral to its system dynamics.  Our thinking and our wishing must partner with reality if well-being is to be experienced.  “If wishes were horses, beggars would ride,” was the old truth.  In a way, Buffett believes that the truth shall make you better off.

In line with this theory of real economic growth, Buffett admits that his profits have come from the working of a system that he does not control.  Rather, he knows his returns are only part of a giant stream of commerce, finance and industry, culture and governance flowing through history, driven by the decisions, preferences, fears and ambitions of millions of individuals.

He calls this stream the “American Tailwind,” as if he were only the pilot of a small plane being pushed forward (or backwards, as the case might be from time to time) by the force of a human system called the sovereign nation of the United States of America.  Buffet is proud of owning companies that are broadly aligned with America’s economic future.  He writes: “We count on the American Tailwind and though it has been becalmed from time to time, its propelling force has always returned.”

You can read the letter here.

May you invest as wisely as Warren Buffet has done.