In his annual letter to investors, Buffett opened up with a caution that this year, for the first time, the growth in Berkshire's book value per share may under perform the growth in the S&P 500 when measured over a five-year period. "To date, we've never had a five-year period of under performance, having managed 43 times to surpass the S&P over such a stretch," he wrote. "But the S&P has now had gains in each of the last four years, outpacing us over that period.
If the market continues to advance in 2013, our streak of five-year wins will end." Buffett said he expects the growth in Berkshire's intrinsic business value will over time exceed the S&P's returns by small margins. But at the same time, he said the firm would continue to under perform in a strong market like this year. Long-time Berkshire investors said they detected almost a sense of frustration in this year's letter.
"He's gotten away from some of the things that used to just matter to him so much," said Bill Smead, chief investment officer of Smead Capital Management in Seattle. "He has so much capital I don't think he can just rely on a stock portfolio the way he used to."Just last month, Berkshire struck a deal to put $12 billion of that capital toward the $23 billion cash buyout of ketchup maker H.J. Heinz Co. Buffett said he and vice chairman Charlie Munger were not done. "But we still have plenty of cash and are generating more at a good clip. So it's back to work; Charlie and I have again donned our safari outfits and resumed our search for elephants," Buffett said in the annual letter. Berkshire reported $47 billion of cash on hand at Dec. 31. Backing out the Heinz deal, and even with Buffett's preferred $20 billion cash cushion intact, that would leave Berkshire at least $15 billion to spend.
Another long-term Buffett investor said he was perfectly content with Berkshire's returns precisely because of all that cash generation. "It was an accurate assessment on his part in terms of performance, but I'll tell you as a shareholder I'm not terribly disappointed," said Michael Yoshikami, chief executive and chairman of the investment committee at Destination Wealth Management in Walnut Creek, California. "We buy it because it's a cash flow oriented position.
If I get outperformance it's a win." Buffett did not hint at what sort of companies he would like to acquire, except note that one thing he will buy more of are newspapers. Despite a years-long aversion to the business, Berkshire has of late been buying up papers in smaller communities across the country. Buffett said Friday he will continue to do so."At appropriate prices - and that means at a very low multiple of current earnings - we will purchase more papers of the type we like," he said.
He also noted that Berkshire would keep buying papers even if they did not meet the firm's stated investment criteria for other companies, as long as the economics of any deal made sense.Berkshire employs more than 288,000 people worldwide in dozens of business. Buffett serves as chairman, chief executive and chief investment officer. When he leaves, at least four people will replace him in those various roles.
Buffett's annual shareholder letter is one of the most closely read public statements by any investor or executive in corporate America. It often comes out early on a Saturday morning, and Buffett devotees have been known to set aside an entire weekend to read and digest it. (It was released Friday night this time for scheduling reasons related to SEC filing deadlines).
TO CONTINUE DIVIDEND POLICY
Buffett also offered a lengthy treatise on the upside - and downside - of companies paying dividends to shareholders, by way of explaining why Berkshire would continue its policy of not paying one out. Buffett devoted three full pages from the 24-page letter to explaining his philosophy. Destination Wealth's Yoshikami suggested that was a nod to the recent attention on companies like Apple Inc with huge cash piles.
"I think investors aren't necessarily clamoring for dividends, they just want clarity on what you're doing with your cash," he said. Buffett, in his treatise, made the basic argument that Berkshire has always prioritized using cash to expand its businesses and will continue to do so, particularly if it can find blockbuster deals like the BNSF railroad.
"I have made plenty of mistakes in acquisitions and will make more. Overall, however, our record is satisfactory, which means that our shareholders are far wealthier today than they would be if the funds we used for acquisitions had instead been devoted to share repurchases or dividends," he wrote. Buffett is asked every year at Berkshire's annual meeting in Omaha about a payout, and most investors have been content to accept his reasoning against one. Smead said he understood Buffett's position but said his philosophy was easier said than followed for most of the investing public."I'm a long-term Buffett fan and I don't agree because I know what happens in the lives of most investors and most investors need some cash flow from these wonderful companies that they own," he said.
PROFIT UP ON DERIVATIVES
Berkshire also reported earnings on Friday, posting a larger fourth-quarter profit on derivative gains. The company posted a profit of $4.56 billion, or $2,757 per Class A share, compared with a profit of $3.05 billion or $1,846 per Class A share, a year earlier. Year-end book value, Buffett's preferred measure of the stock's worth, rose 14 percent to $114,214 per share. Earnings were boosted by $1.4 billion in derivative gains during the quarter. Berkshire has in the past sold derivatives to provide credit protection on corporate bonds, and also long-term puts on international stock indexes.
Buffett said Friday that Berkshire continues to wind down that portion of its portfolio, given an aversion to posting collateral if it took on new risks. Berkshire reported 15 common stock investments that were worth $1 billion or more at year's end. For the first time, this year's list includes not only purchases by Buffett, but by Todd Combs and Ted Weschler, the investment managers Buffett brought in to help oversee Berkshire's portfolio. Their one investment that met the threshold was the satellite TV operator DirecTV. Each man is now managing about $5 billion, Buffett said Friday. "Todd and Ted are young 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," he wrote.