Widely viewed by investors, The Berkshire Hathaway (BRK.A, BRK.B) shareholder letter for 2012 was released by Warren Buffett on Friday. His preferred method for evaluating his performance (although one he claims is a significantly understated proxy) against the benchmark S&P 500 Index showed a rare underperformance in a year from Berkshire, as Berkshire's per-share book value rose 14.4% vs.16.0% for the S&P 500. His compounded annual gain since 1965 currently sits at 19.7% vs. 9.4% for the S&P 500. This is extremely good performance, however, since the turn of the century, he has seen growth much less than before, albeit, still excellent.
Per Share BV Annual Change
S&P500(Dividends Included)Annual Change
Buffett states that of the 9 years since 1965 which have seen underperformance, 8 of them were during years the S&P 500 rose more than 15%. Alluding to his famous "it is only when the tide goes out that you learn who has been swimming naked" quote, he states that Berkshire does better when "the wind is in its face."
In addition to this yearly underperformance, a complaint he also offered was his failure to make a major acquisition during 2012, a complaint he recently assuaged with his purchase of Heinz (HNZ) early this year, although he claims to still be looking for more.
Among the major highlights include:
- Float increased $2.5 billion, when it was anticipated to level off or slightly decline
- Insurance float (called "free money to invest with" by Buffett) has grown 262% since 2000
- Ten consecutive years of underwriting profits
- Underwriting profits expected to continue into the future
- "Big 5" (BNSF, Lubrizol, Marmon Group, MidAmerican Energy) beat $10 billion pre-tax earnings goal
- $10.1 billion pre-tax earnings is a 600 million increase from 2011
- Claims railroads in country have never been in better shape
- Expects "Big 5" to continue to produce substantial results moving forward
Common Stock Investments
He speaks highly of his "big 4" investments in American Express (AXP), Wells Fargo (WFC), IBM (IBM) and Coca-Cola (KO), which together make up almost 60% of his 87 billion dollar market value common stock investments. His interest in all 4 increased during the year; Wells Fargo and IBM had additional shares purchased, while share buybacks at the other two were responsible for his increased ownership percentage. Going forward, he expects his interest in the companies to increase further still.
Nothing but kind words come from him regarding both Todd Combs and Ted Weschler, whose portfolios both beat Buffett's performance as well as that of the S&P 500. While they don't have a long track record at Berkshire, their performance so far should help cool some worries about the company after Warren is gone, because it has been excellent thus far. They both now have portfolios of $5 billion to invest. Their biggest single contribution to the portfolio is with DirecTV (DTV).
A rather large portion was dedicated to newspapers, something that has left some people scratching their heads. During the past 15 months, 28 were acquired at a total cost of $344 million. He admits the circulation is sure to decline, and they fail to meet his usual size requirement for a purchase. Buffett admits many of the shortfalls inherent to newspapers in general with the rise of the internet, but insists they still reign supreme for local news, and are a different, more protected entity. By examining different payment strategies in association with online content, Buffett hopes to derive value. Many still will not see things the way he does, but his involvement monetarily remains miniscule in comparison to other endeavors.
I mentioned in my last article that some shareholders have voiced concern over the lack of dividends the company pays, and I see Buffett as unlikely to capitulate in this area. He dedicated a large portion of the letter to this topic, and still maintains no dividend will be paid, as there are still large acquisitions Buffett is looking at hunting for his Berkshire, and he needs the cash more than ever for this.
Buffett remains bullish on the American economy in general, chastising those with short-term concerns which he feels have always more or less existed, while the future will show us fighting through them to higher ground. He even states:
If you are a CEO who has some large, profitable project you are shelving because of short-term worries, call Berkshire. Let us unburden you.
Overall, despite the fact that Buffett declares his $24.1 billion gain in shareholder value to be subpar, it was a solid year for the company. The news about Combs and Weschler remains among the most promising for the future leadership of the company. The company stated it remains dedicated to increasing intrinsic value per share via 5 ways:
- Improved earning power of subsidiaries
- Increasing bolt on acquisitions for subsidiaries(2.3 billion for 26 companies in 2012)
- Repurchasing shares when at a meaningful discount (previously done when share price was less than 1.1X book value per share)
- Participating in growth of investees
- Looking for large acquisitions
Among the most anticipated and guessed at topics in the investing community in the immediate future will be the last point. If you're fortunate enough to guess right, you could get a nice instantaneous 20% rise in value for your shares, as was the case with Heinz; unfortunately though, you will be losing a wonderful company with much more upside in the long-run if Buffett decides he wants it.
Disclosure: I am long WFC.