Warren Buffett calls Berkshire's $24 billion gain 'subpar'

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Posted: Friday, March 1, 2013 12:00 am

Online extra: Buffett's letter to shareholders, with noted highlights

Full report: Read Berkshire Hathaway's complete 2012 report (PDF)

More coverage: Buffett makes his case for no dividends

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Warren Buffett looked into the future Friday, expressing confidence for as much as a century ahead and saying his Omaha-based company, despite a “subpar” performance in 2012, would succeed when he's no longer around.

"American business will do fine over time," Buffett said in his annual letter to shareholders of Berkshire Hathaway Inc., the Omaha-based investment company of which he is chairman and CEO.

He said he and Charlie Munger, Berkshire's vice chairman, are still hunting for major acquisitions, corporate “elephants” to join the 288,500-employee company.

"Charlie and I have again donned our safari outfits and resumed our search," he wrote.

Although Berkshire gained $24 billion in value in 2012, its 14.4 percent gain fell short of the overall stock market's 16 percent advance. Unless Berkshire beats the market in 2013, Buffett said, Berkshire will for the first time have underperformed over a five-year period.

Since 1965, Berkshire's average annual gain has been 19.7 percent, compared with the market index's 10.3 percent average, but the gap has narrowed in recent years.

"It's harder for him to outperform when the market's red-hot," said Robert Hagstrom, chief investment strategist for Legg Mason Investment Counsel in Baltimore. "He will always outperform when the market's down, and when it's muddling back and forth he's going to be plus or minus."

Buffett said he expects Berkshire to outperform the rest of the stock market “by a small margin. We're confident of that because we have some outstanding businesses, a cadre of terrific operating managers and a shareholder-oriented culture.”

He praised Todd Combs and Ted Weschler, the company's new investment managers, saying they now manage nearly $5 billion each and “will be around to manage Berkshire's massive portfolio long after Charlie and I have left the scene. You can rest easy when they take over.”

Their investments handily beat the overall stock market, he said, adding in tiny type: “they left me in the dust as well.”

For the first time, the list of $1billion-plus investments included one he did not choose — DirecTV, the satellite broadcasting company. Weschler and Combs bought a combined 3.8 percent of the company, worth $1.15billion at the end of 2012.

Buffett's letter and annual financial report on Berkshire Hathaway have become essential reading not only for those interested in investing but also people wondering about the economy and other current issues.

Hagstrom said the latest letter seemed unusually forward-looking.

“He is starting to build the persona that Berkshire Hathaway will perpetually grow, build value and be around long past his time,” Hagstrom said.

“And I think he's not only talking about the future of the country. He's beginning to talk about the future of the next generation. I think he's more forward-looking at a time when people might be wondering what is the future of Berkshire. And I think that's all very positive.”

Buffett said he will continue to make huge investments in BNSF Railway, MidAmerican Energy and other businesses, using Berkshire's steady stream of capital from its insurance businesses.

“There was a lot of hand-wringing last year among CEOs who cried 'uncertainty' when faced with capital allocation decisions (despite many of their businesses having enjoyed record levels of both earnings and cash),” Buffett wrote. “At Berkshire, we didn't share their fears.”

The future is always uncertain, he said. Since he bought his first stock in 1942, he said, “the country's success since that perilous time boggles the mind,” with economic output per person more than quadrupling.

“Every tomorrow has been uncertain. America's destiny, however, has always been clear: ever-increasing abundance.”

Hagstrom said some people “think that Warren Buffett is a bull on the stock market.” That's not always true, the investor said, because the stock market ebbs and flows.

“But he is a positive bull on the United States,” Hagstrom said. “That's what's coming through on the letter. Then at the country's darkest hours, its most difficult times, you're a buyer.”

Take a closer look at Berkshire Hathaway's performance through the years.

Buffett said he and Munger like the potential earnings of MidAmerican and BNSF.

“A century hence, BNSF and MidAmerican Energy will continue to play major roles in the American economy,” he wrote.

“Our confidence is justified both by our past experience and by the knowledge that society will forever need massive investment in both transportation and energy.”

Government regulators must “treat capital providers in a manner that will ensure the continued flow of funds to essential projects. And it is in our self-interest to conduct our operations in a manner that earns the approval of our regulators and the people they represent.”

Alice Schroeder, a Bloomberg News columnist and Buffett biographer, said those comments indicate Buffett sees advantages — an economic “moat” — in businesses that require huge capital investments and are subject to government regulation.

“I think he's talking about why he's structuring Berkshire the way he is,” Schroeder said. “He is signaling that this is a good place to put money, a place where he'd like to allocate capital for a very long term.

“He's also signaling something about the economy, which is that businesses that are regulated and have a lot of government involvement are going to be a good investment.”

Investment adviser Wendy A. Jankoski of Wealth Architects in Englewood, Fla., said it's important that Buffett believes Combs and Weschler are fitting into Berkshire's culture. “His comfort level is good. That, as an investor, makes me happy.”

She said she favors adding more investment managers at Berkshire, however. “I think it's good to have multiple sources of talent, but so far, so good with these guys,” who have made some investments that Buffett probably wouldn't have touched, such as DirecTV.

Jankoski said she's not worried that Buffett discussed the possibility that Berkshire would underperform the stock market over a five-year period.

“He's harder on himself than anybody else is,” she said, and Berkshire stock provides protection especially when the stock market is down, as it did in 2008.

More important to investors, she said, is how long Buffett, 82, and Munger, 89, will continue running Berkshire. This year's letter didn't mention Berkshire's succession plan.

“The question is, will this type of compounding continue if they're not at the helm for whatever reason?” she said. “That's the big concern people have. I'll worry about it when it happens.”

She said she won't recommend selling Berkshire when Buffett is no longer CEO, “but over time I will watch very carefully what's happening with the company.”

Buffett writes the 13,500-word letter himself, with some editing by Carol Loomis, a Fortune magazine editor and longtime friend. Some college professors use excerpts from the letters in their business classes because of Buffett's plain-language explanations of complex economic or financial issues.

Other highlights of the Buffett letter:

» Berkshire's insurance companies carry $73.1 billion in “float,” or cash that can be invested while waiting for insurance claims, an increase of $2.5 billion from last year. Over the past decade, the insurance business has made an $18.6 billion profit on its coverage alone, not counting money made from investing the float.

» If the property insurance business suffers a $250 billion loss in a catastrophe, three times anything that has happened before, Berkshire would still make a significant profit, while other major insurers would have losses that would make some insolvent.

» BNSF will invest $4 billion in its rail system this year, more than any other railroad has spent in a single year.

» HomeServices, Berkshire's real estate broker, handled $42 billion in home sales last year, up one-third from 2011. “As the housing market continues to strengthen, we expect earnings to rise significantly.”

Excerpts from Buffett's letter


Berkshire's insurance operations “shot the lights out last year,” Warren Buffett wrote in his annual shareholder letter. Below are some of his other comments about insurance and then other topics:

While giving Berkshire $73billion of free money to invest, they also delivered a $1.6 billion underwriting gain, the 10th consecutive year of profitable underwriting. This is truly having your cake and eating it too.

GEICO led the way, continuing to gobble up market share without sacrificing underwriting discipline.

... The credit for GEICO's extraordinary performance goes to Tony Nicely and his 27,000 associates. And to that cast, we should add our Gecko. ... When I count my blessings, I count GEICO twice.

Superstorm Sandy

GEICO earned its underwriting profit ... despite the company suffering its largest single loss in history. The cause was Hurricane Sandy, which cost GEICO more than three times the loss it sustained from Katrina, the previous record-holder. We insured 46,906 vehicles that were destroyed or damaged in the storm, a staggering number reflecting GEICO's leading market share in the New York metropolitan area.


Berkshire's year-end employment totaled a record 288,462, up 17,604 from last year. Our headquarters crew, however, remained unchanged at 24. No sense going crazy.

The “Big Four”

Berkshire's “Big Four” investments — American Express, Coca-Cola, IBM and Wells Fargo — all had good years. Our ownership interest in each of these companies increased during the year. ... Berkshire's ownership interest in all four companies is likely to increase in the future. Mae West had it right: “Too much of a good thing can be wonderful.”


During the past fifteen months, we acquired 28 daily newspapers at a cost of $344 million. ...

Charlie and I love newspapers and, if their economics make sense, will buy them. ... Wherever there is a pervasive sense of community, a paper that serves the special informational needs of that community will remain indispensable to a significant portion of its residents.

Even a valuable product, however, can self-destruct from a faulty business strategy. ... It's only been in the last year or so that ... papers, including Berkshire's, have explored pay arrangements (for online content). Whatever works best — and the answer is not yet clear — will be copied widely.

Charlie and I believe that papers delivering comprehensive and reliable information to tightly bound communities and having a sensible Internet strategy will remain viable for a long time. We do not believe that success will come from cutting either the news content or frequency of publication. ... The individual papers ... will be independent in their news coverage and editorial opinions. (I voted for Obama; of our 12 dailies that endorsed a presidential candidate, 10 opted for Romney.)

Shareholders meeting

The annual meeting will be held on Saturday, May 4, at the CenturyLink Center Omaha. Doors will open 7 a.m., and at 7:30 we will have our second International Newspaper Tossing Challenge. ... At 8:30, a new Berkshire movie will be shown. An hour later, we will start the question-and-answer period, which (with a break for lunch at the CenturyLink's stands) will last until 3:30 p.m. After a short recess, Charlie and I will convene the annual meeting at 3:45.

If you decide to leave during the day's question periods, please do so while Charlie is talking.

The best reason to exit, of course, is to shop. We will help you do so by filling the 194,300-square-foot hall that adjoins the meeting area with products from dozens of Berkshire subsidiaries.

First-ever run

On Sunday at 8 a.m., we will initiate the “Berkshire 5K,” a race starting at the CenturyLink. ... Regretfully, I will forgo running; someone has to man the starting gun.

I should warn you that we have a lot of homegrown talent. Ted Weschler has run the marathon in 3:01. Jim Weber, Brooks' dynamic CEO, is another speedster with a 3:31 best. Todd Combs specializes in the triathlon but has been clocked at 22 minutes in the 5K.

That, however, is just the beginning: Our directors are also fleet of foot (that is, some of our directors are). Steve Burke has run an amazing 2:39 Boston marathon. (It's a family thing; his wife, Gretchen, finished the New York marathon in 3:25.) Charlotte Guyman's best is 3:37, and Sue Decker crossed the tape in New York in 3:36.

Charlie did not return his questionnaire.

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2012 Buffett letter coverage

Buffett: 'I'm on the prowl'

Buffett still optimistic on housing rebound

Board 'enthusiastic' about successor, Buffett says

Read the 2012 shareholders letter

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Contact the writer: 402-444-1080, steve.jordon@owh.com, twitter.com/buffettOWH

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