Billionaire Warren Buffett is confident that Berkshire Hathaway will be a mainstay of the US economy for the next 100 years, regardless of whether it sometimes underperforms bull market runs, like it did last year.
In his annual letter to shareholders released on Saturday, Buffett did not disclose any new information on Berkshire’s plans for succession once the 83-year-old someday leaves the helm.
Yet he emphasized that the company he has led for 49 years is built on a “rock-solid foundation” and will endure long after he has gone.
“A century hence, BNSF [Burlington Northern Santa Fe] and MidAmerican Energy will still be playing major roles in our economy,” Buffett wrote. “Insurance will concomitantly be essential for both businesses and individuals — and no company brings greater human and financial resources to that business than Berkshire.”
“Think of all the admired investors out there. How many ever refer to something they owned or investments they’re making and talk about how well they’re going to be doing a century from now?,” Smead Capital Management founder Bill Smead said.
Last year, Berkshire spent about US$18 billion to buy NV Energy and about half of foodmaker H.J. Heinz, and paid US$3.5 billion to buy out the rest of two manufacturing firms, Marmon and Iscar. Subsidiaries committed to spend US$3.1 billion on 25 other smaller acquisitions.
Berkshire now sits on about US$48 billion in cash and owns eight businesses big enough to be part of the Fortune 500 if they were separate companies.
“Only 491 to go,” Buffett quipped.
Buffett said he and vice chairman Charlie Munger will continue to look for other investments and acquisitions that allow them to bet on the future of the US economy.
“Charlie and I have always considered a bet on ever-rising US prosperity to be very close to a sure thing,” Buffett wrote. “Indeed, who has ever benefited during the past 237 years by betting against America?”
He suggested that the Heinz deal, which Berkshire bought along with private equity firm 3G Capital, could prove to be a model for some future acquisitions. Typically in the past, Berkshire has bought entire companies itself.
Andy Kilpatrick, author of Of Permanent Value: The Story of Warren Buffett, notes that Buffett also mentioned winding down several complex investments, such as selling off Energy Future Holdings bonds after losing US$873 million on them.
Buffet is also trusting Berkshire’s two other investment managers, Todd Combs and Ted Weschler, with their own US$7 billion portfolios and helping Berkshire subsidiaries make their own acquisitions.
“I think he’s really cleaning it up to hand it off,” Kilpatrick said.
Berkshire’s net income surged 31 percent to US$19.48 billion last year on total revenue of US$182.15 billion. Buffett touted performance gains at auto insurer Geico and in its “Powerhouse Five” — a group of non-insurance businesses, including BNSF railroad and electric utility MidAmerican Energy that posted pretax earnings of US$10.8 billion for last year, up nearly US$760 million year-over-year.
In total, Berkshire owns about 80 subsidiaries, including clothing, furniture and jewelry firms. It also has major investments in such companies as Coca-Cola Co and Wells Fargo & Co.
“On the operating front, just about everything turned out well for us last year — in some cases very well,” Buffett wrote.
However, Buffett’s preferred measure of Berkshire’s performance has traditionally been growth in book value — its assets minus liabilities — though he says the company’s intrinsic value is much higher.
Berkshire’s book value gained a substantial 18.2 percent last year, but could not match the S&P 500’s 32.4 percent run-up.
That marks the fourth year out of the past five years that the company has underperformed the S&P.
Since Buffett took over the Berkshire textile mill in 1965, the company has only fallen short of the S&P 500 in 10 of those years.
However, in his letter, Buffett noted that over the latest full six-year market cycle — which would include S&P’s rock-bottom market year of 2008 when it lost 37 percent — the company outperformed the benchmark index.
“Through full cycles in future years, we expect to do that again,” Buffett wrote.
“If we fail to do so, we will not have earned our pay. After all, you could always own an index fund and be assured of S&P results,” he said.