Warren Buffett’s annual letter to Berkshire Hathaway shareholders came out this weekend — along with the annual report. Like last year, the Oracle of Omaha doesn’t have a lot of groundbreaking new info to share about Berkshire. A recent WaPo article says it’s the shortest letter in 44 years!
On page 6, Buffett takes a swipe at buyback restrictions. He criticizes the urge of an “economic illiterate or a silver-tongued demagogue” to crudely paint repurchases as always bad for business and society and preaches the benefits of buybacks to both selling and remaining shareholders.
What caught my eye even more were his strong words about GAAP on page 5, which he shares after providing the company’s non-GAAP “operating earnings” (this is defined as GAAP income exclusive of capital gains or losses from equity holdings and totaled a record $30.8 billion last year, whereas the GAAP figure was a $22.8 billion loss):
The GAAP earnings are 100% misleading when viewed quarterly or even annually. Capital gains, to be sure, have been hugely important to Berkshire over past decades, and we expect them to be meaningfully positive in future decades. But their quarter-by-quarter gyrations, regularly and mindlessly headlined by media, totally misinform investors.
This is also a commentary on long-term versus short-term results, as Buffett is famously in the “patient, long-term” camp. In addition, Buffett says that non-GAAP adjustments shouldn’t be taken too far. A couple of pages after talking about operating earnings, he reiterates his longstanding complaints about phony metrics. From page 7:
Finally, an important warning: Even the operating earnings figure that we favor can easily be manipulated by managers who wish to do so. Such tampering is often thought of as sophisticated by CEOs, directors and their advisors. Reporters and analysts embrace its existence as well. Beating “expectations” is heralded as a managerial triumph.
That activity is disgusting. It requires no talent to manipulate numbers: Only a deep desire to deceive is required. “Bold imaginative accounting,” as a CEO once described his deception to me, has become one of the shames of capitalism.
During the 58 years that Buffett has led Berkshire, he’s been well-regarded for this folksy, straight-shooting letter and approach to business. You get the sense he’s (still) frustrated with what feels like meddling by regulators in business decisions — not a unique view among execs! Unfortunately, as this part of the letter recognizes, fraudsters and profiteers have given the government and public plenty of reasons to be skeptical.
– Liz Dunshee, CompensationStandards.com, February 27, 2023