Berkshire illustration

Warren Buffett trailed the stock market last year for the seventh time in 20 years, but he said Saturday that his company’s advantages will keep it in the forefront of American corporations.

That’s especially true of Berkshire Hathaway Inc.’s flexible, two-sided growth formula, Buffett wrote in his annual letter to his shareholders. One side is Berkshire’s ability to buy up large businesses — his latest, Precision Castparts Corp., joined Berkshire just a month ago — and smaller companies, such as Duracell, one of 29 such small purchases in 2015.

The other is to own parts of other companies, like Wells Fargo and Phillips 66, by buying shares of stock and watching them pay dividends and grow.

Both streams of profit are fed by cash from Berkshire’s operating businesses, including insurance companies that invest the premiums they take in while waiting for claims to arrive.

The widely read letter, posted on Berkshire’s website, included views on the threat of nuclear attacks, climate change and America’s future from Buffett, chairman and chief executive of the Omaha-based conglomerate.

Russ Kaplan, head of Russ Kaplan Investments, with about $15 million under management, contended that Buffett’s report “glossed over too much, like about the stock was down 12.5 percent in 2015.” (The broader market lost about 2 percent.)

Kaplan also said he would like to have read specifics about the “dumb purchases” Buffett acknowledged in the letter.

Despite the stock price trailing the stock market in 2015, Berkshire recorded a 6.4 percent gain in its book value, compared with a 1.4 percent gain by the Standard & Poor’s index of 500 stocks. Book value is an accounting figure of the assets of a company minus its liabilities.

It was the first time since 2011 that Berkshire’s book value outperformed the S&P 500 and the fifth time in the past decade.

More important than book value, Buffett said in the letter, is the company’s “intrinsic value,” which he said far exceeds its book value because the dozens of companies it owns are not re-valued after they are purchased.

That’s why the market value of the company, reflected in its stock price, has risen faster than its book value over the past 25 years, Buffett said — and the gap is growing.

He praised the performance of BNSF Railway, saying the company boosted its profits and improved its service last year, earning a record profit of $6.8 billion, before taxes. That bucks the trend among U.S. railroads in 2015, when shipping volume declined and earnings weakened, Buffett said in the letter.

Buffett said Berkshire’s financial flexibility “gives us a significant edge over companies that limit themselves to acquisitions they will operate,” and “doubles our chances of finding sensible uses for Berkshire’s endless gusher of cash.”

He also said that unlike the “activist” investors who sometimes force companies unwillingly to cut costs or make other short-term changes, Berkshire seeks “friendly acquisitions. ... At Berkshire, we go only where we are welcome.”

Over the years, some investment groups have argued that Berkshire would be more valuable to its shareholders if it were split into separate companies. Activist investor groups may have stronger interest of late because Berkshire’s stock price has declined in recent months.

Cathy Seifert, an analyst with S&P Global Markets Intelligence, said that may be one reason Buffett mentioned activist investors and emphasized the combined strength of Berkshire’s growth strategies.

“Berkshire’s stock really hasn’t performed all that well,” Seifert said. “You have to wonder if, at some point, there may be someone who comes rattling their cage, saying the conglomerate discount is too great, it’s time to break it up.

“You could take this as a back-handed swat at those potential activists who may be at the gate.”

Among the strengths of Berkshire’s combination of companies and investments is the money held by its insurance companies, known as float, said Ted Bridges, principal at Bridges Investment Management of Omaha, which owns Berkshire shares among its $1.8 billion in managed assets.

“The stock is cheap and attractive long term, and the long-term outlook for the company in the context of the U.S. economy is good, tempered by slowing growth in insurance float and the ever-present risk of terrorism,” Bridges said.

Buffett, 85, also predicted — probably tongue-in-cheek — that when he turns 100 years old on July 30, 2030, he plans to announce that Berkshire’s Geico division has finally overtaken State Farm Mutual Insurance to become the nation’s No. 1 auto insurer.

He said this year’s crowd at the April 30 annual meeting of Berkshire shareholders in Omaha may “level off or modestly decrease” because, for the first time, the meeting will be live-streamed on the Web.

Besides reaching a wider audience — estimated at 75 million people rather than the 40,000 who have attended in person in recent years — the Internet version will give shareholders who can’t come to Omaha a live view of Buffett and Vice Chairman Charlie Munger, 92.

On a more serious note, Buffett warned that while he has built up Berkshire to avoid risks of big losses, he and Munger would be powerless against major cyber, biological, nuclear or chemical attacks on the United States.

Buffett has raised the specter of a nuclear attack in the past, but this year’s warning was especially grim, saying that the long-run chance of such an attack “approaches certainty.”

“The added bad news is that there will forever be people and organizations and perhaps even nations that would like to inflict maximum damage on our country. Their means of doing so have increased exponentially during my lifetime. ‘Innovation’ has its dark side,” he wrote.

Otherwise, Buffett’s letter was upbeat, arguing that Berkshire’s future is bright and that America’s best days are in the future, regardless of what some political candidates are saying.

Buffett devoted two pages of his 30-page letter to details on Clayton Homes, the manufactured housing company Berkshire has owned since 2004, and the housing market in general.

Last year Clayton was criticized in a series of news stories alleging that its lending practices are predatory and discriminatory.

“It was an extremely vigorous defense of Clayton Homes,” said David Kass, a business professor at the University of Maryland and owner of Class B shares.

Kass said Buffett took pains to point out that Clayton owns in perpetuity all of the mortgages it writes as opposed to selling them, as other lenders do, ostensibly meaning the company would do its best to keep borrowers from defaulting and getting repossessed.

Buffett didn’t mention the criticism specifically in the letter, writing that Clayton has made home ownership affordable for thousands of people — 34,397 last year — who otherwise would be renting.

Clayton is not a predatory lender because it keeps the loans it makes, Buffett wrote.

“When we make mistakes in granting credit, we therefore pay a price — a hefty price that dwarfs any profit we realized upon the original sale of the home,” he wrote, giving Clayton a strong incentive to make loans it believes borrowers can repay.

The company lost $157 million last year when it foreclosed on 8,444 manufactured-home loans, he said, out of $13 billion in mortgage loans.

Yet Clayton borrowers kept up their mortgage payments better than many people with higher incomes during the Great Recession, he said.

He said Clayton’s lending is closely regulated by federal and state authorities and over the past two years has paid $38,200 in fines and $704,678 in refunds, with 95.4 percent of its borrowers current on their payments at the end of 2015.

Berkshire’s report also showed that Wells Fargo & Co. remains its largest stock holding with a market value up more than threefold in the past 10 years, from $7.6 billion in 2006 to $27 billion at the end of 2015.

Berkshire also added to its holdings of Minneapolis-based U.S. Bancorp by 5 percent to 102 million shares.

Other notable changes in the list of the largest stock holdings:

» Berkshire trimmed its stake in New York investment bank Goldman Sachs by 13 percent to 11.3 million shares and its Walmart Stores stake by 6.2 percent to 63.5 million shares.

» Holdings in farm implement maker Deere & Co. increased by almost 40 percent to 22.1 million shares.

» In 2015, the number of shares remained steady in American Express, Coca-Cola, DaVita Healthcare, Moody’s, Procter & Gamble, and drugmaker Sanofi.

All told, Berkshire’s stock portfolio had a year-end market value of $112 billion, down 4.2 percent from a year earlier.

Kaplan, the Omaha financial manager, owns and recommends Berkshire shares to clients, and said he is “positive on banking. The sector is trading at or close to book value. It is down because commodity prices are down, and this will change in the future.”

Meanwhile, Precision Castparts is now part of Berkshire’s “powerhouse six” large operating businesses, a group that also includes Berkshire Hathaway Energy, BNSF Railway, Marmon Industries, Lubrizol Corp. and International Metalworking Companies, formerly Iscar.

Buffett said Precision Castparts adds 30,500 employees to Berkshire’s 360,000-person workforce and will use Berkshire’s money to make acquisitions in the aerospace industry.

He said Berkshire wouldn’t have acquired Precision Castparts without Todd Combs, the Berkshire money manager who first bought shares in the Portland, Oregon-based company and recommended buying it.

Combs and Ted Weschler manage $9 billion in Berkshire’s investments, Buffett said. “Hiring these two was one of my best moves.”

Seifert, the S&P analyst, also said Berkshire’s diverse holdings have made it a “microcosm of the broader economy.”

While Buffett argued that Berkshire can adjust to problems related to climate change, Geico in particular may face added risks of high auto accident claims.

People are driving more because of low gasoline prices, auto sales are booming and people seem to be texting and talking on smartphones more than ever — a dismal combination for auto safety and companies that insure drivers, she said.

“I’m a little disappointed he didn’t speak more to some of the risk at Geico,” she said. “It’s unbelievable.”

World-Herald staff writers Russell Hubbard and Brad Davis contributed to this report.

Berkshire Hathaway Inc. owns the Omaha World-Herald.

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

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