In a plainspoken mea culpa to shareholders, Berkshire Hathaway Chairman Warren Buffett on Friday admitted disappointment in his company’s 2012 performance, including the bad news that Berkshire stock underperformed the benchmark S&P 500 index.
Berkshire Hathaway’s per-share stock value fell 1.6% below the S&P 500 to end 2012 14.4% higher versus the stock index’s 16.0%. Of course, the company’s total gain for shareholders— and increase in net worth of $22.8 billion for the year—was nothing to sneeze at. And Berkshire’s overall gain, from 1964 when Buffett took over the company through 2012, totaled 586,817% versus 7,433% for the S&P 500.
“When the partnership I ran took control of Berkshire in 1965, I could never have dreamed that a year in which we had a gain of $24.1 billion would be subpar,” Buffett wrote in his 21-page letter to shareholders within Berkshire’s annual report for 2012. “But subpar it was. For the ninth time in 48 years, Berkshire’s percentage increase in book value was less than the S&P’s percentage gain (a calculation that includes dividends as well as price appreciation). In eight of those nine years, it should be noted, the S&P had a gain of 15% or more. We do better when the wind is in our face.”
As of Monday’s market prices, investors with $152,500 kicking around can buy one Class A share of Berkshire Hathaway stock (NYSE: BRK.A). The Class B shares were selling for $101.64 in midafternoon trading on Monday, down about $0.41, or 0.4%, from Friday’s close.
No Elephants Bagged in 2012
The billionaire businessman’s second big disappointment last year was his inability to make a major acquisition, and he expressed that disappointment in his trademark folksy style that only a handful of CEOs can pull off.
“I pursued a couple of elephants, but came up empty-handed,” he wrote, adding that he and his partner Charlie Munger’s luck changed early in 2013 when Berkshire Hathaway agreed to buy 50% of a holding company that will own all of H.J. Heinz.
The other half is owned by a group of investors led by a longtime friend of Buffett's, Jorge Paulo Lemann, a Brazilian businessman and philanthropist. Berkshire’s total investment of about $12 billion will soak up much of what Berkshire earned last year.
“But we still have plenty of cash and are generating more at a good clip,” Buffett said. “So it’s back to work; Charlie and I have again donned our safari outfits and resumed our search for elephants.”
And Now for Some Good News
To read through Buffett’s entire 21-page letter is to understand just how deep the Oracle of Omaha’s optimism runs. The letter may begin by acknowledging Berkshire’s subpar performance, but Buffett uses twice as many pages to lay out his good news from 2012.
So although he failed to land a major acquisition last year, Buffett enthuses over a record year for bolt-on purchases, with $2.3 billion spent on 26 companies that were melded into existing businesses.
“These transactions were completed without Berkshire issuing any shares,” Buffett bragged (and the italics were his). “Charlie and I love these acquisitions: Usually they are low-risk, burden headquarters not at all, and expand the scope of our proven managers.”
Even more to the point, Buffett lauded the performance of Berkshire’s “powerhouse five” companies, meaning its five most profitable companies outside the insurance sector, saying that BNSF, Iscar, Lubrizol, Marmon Group and MidAmerican Energy had earned as he had predicted, with profits of $10.1 billion, about $600 million more than in 2011.
Hints of a Successor?
The 82-year-old Buffett also hints around about who might lead Berkshire Hathaway after he and Munger are gone. Although he has been silent on who his successor might be at company headquarters, which employs only 24 people, Buffett in his letter name-checks new investment managers Todd Combs and Ted Weschler, calling the former hedge fund managers “smart models of integrity, helpful to Berkshire in many ways beyond portfolio management, and a perfect cultural fit.”
After saying “we hit the jackpot with these two,” Buffett notes that in 2012 Combs and Weschler outperformed the S&P 500 by double-digit margins and adds in small typeface: “They left me in the dust as well.”
In a note on acquisitions that follows Buffett’s letter in the annual report, the chairman reveals his strategy for purchasing companies after noting that Berkshire is eager to hear from principals or their representatives about buy-out opportunities.
- Large purchases of at least $75 million
- Demonstrably consistent earning power
- Businesses with good earnings and no debt
- Simple businesses: “If there’s lots of technology, we won’t understand it”
- An offering price: “We don’t want to waste our time or that of the seller by talking, even preliminarily, about a transaction when price is unknown”
He especially likes to buy businesses, and can give those proposing a sale his answer within five minutes of checking out an offer. But Buffett will not engage in unfriendly takeovers and he doesn’t participate in auctions.
Cocker Spaniels and Root Beer Floats
“Charlie and I frequently get approached about acquisitions that don’t come close to meeting our tests,” Buffett writes. “We’ve found that if you advertise an interest in buying collies, a lot of people will call hoping to sell you their cocker spaniels. A line from a country song expresses our feeling about new ventures, turnarounds or auction-like sales: ‘When the phone don’t ring, you’ll know it’s me.’”
Oh, and one more thing: Omaha restaurants Gorat’s and Piccolo’s will again be open exclusively for Berkshire shareholders on Sunday, May 5, when both will serve until 10 p.m. These are Buffett’s favorite restaurants, and he will eat at both of them that Sunday evening.
“Remember,” Buffett advises, “to make a reservation at Gorat’s, call 402-551-3733 on April 1 but not before and at Piccolo’s call 402-342-9038. At Piccolo’s, order a giant root beer float for dessert. Only sissies get the small one. (I once saw Bill Gates polish off two of the giant variety after a full-course dinner; that’s when I knew he would make a great director.)”
Read Buffett’s Gift Tops 13 Biggest Donations of 2012 at AdvisorOne.