Billionaire investor Warren Buffett said on Saturday that he was “dead wrong” with a prediction that the US housing market would begin to recover by now, but he remains optimistic about the nation’s economy.
In his annual letter to Berkshire Hathaway shareholders, Buffett said he is sure housing would recover eventually and help bring down the nation’s unemployment rate. However, he did not predict when that would happen.
Investors eagerly await the letter from Buffett, 81, the so-called “Oracle of Omaha,” who built a roughly US$44 billion fortune by following a steadfast, no-nonsense investing strategy.
Buffett said housing “remains in a depression of its own,” but he predicted, in typical plainspoken style, that the housing market would come back because some human factors cannot be denied forever.
“People may postpone hitching up during uncertain times, but eventually hormones take over,” he wrote. “And while ‘doubling-up’ may be the initial reaction of some during a recession, living with in-laws can quickly lose its allure.”
The housing prediction proved painful for Berkshire Hathaway. It owns more than 80 subsidiaries, including the Geico insurance company and See’s Candy, and five of them rely heavily on construction activity.
Those businesses, which include Acme Brick, Clayton Homes and Shaw carpet, generated pre-tax profits of US$513 million last year. That’s well off the US$1.8 billion those companies added to Berkshire in 2006.
Berkshire’s insurance companies took US$1.7 billion in catastrophe losses last year, including from the earthquake and tsunami in Japan. Berkshire reported only US$154 million in underwriting profit, down from US$1.3 billion the previous year.
However, several of Berkshire’s larger non-insurance businesses — Burlington Northern Santa Fe railroad, MidAmerican Energy, Marmon Group, Lubrizol and Iscar — all generated record earnings last year.
That helped Berkshire as a whole to generate US$10.3 billion in net income, or US$6,215 per Class A share, last year, down from nearly US$13 billion, or US$7,928 per share, in 2010.
A Class A share of Berkshire stock, which has never been split by the company, traded for US$120,000 on Friday. Its more affordable Class B shares traded for about US$80.
Stockbroker Andy Kilpatrick, who wrote Of Permanent Value: The Story of Warren Buffett, said Buffett managed to outperform the overall market in a tough year for Berkshire’s insurance and housing-related subsidiaries.
“It was not a great year, but he still beat the S&P. It’s still an incredible moneymaking machine,” Kilpatrick said.
Buffett on Saturday reassured Berkshire shareholders that the company has someone in mind to replace him eventually, but did not name the successor. He emphasized that he has no plans to leave.
Glenn Tongue, a managing partner at T2Partners investment firm, said he was struck by the fact that Buffett chose to deal with the succession topic as one of the first items in his letter.
“I think this was a forceful and stronger attempt to put this issue to bed,” Tongue said.
Buffett offered a couple of details about Berkshire’s succession planning in this year’s letter. Investors have long worried about who would replace Buffett as Berkshire chairman and CEO.
Buffett said the Berkshire board is enthusiastic about the executive it has picked and said there are two good back-up candidates.