Read Warren Buffett’s Letter to the Shareholders of Berkshire Hathaway Inc. Here is part of the WSJ account of yesterday’s speech.
(…) In its annual shareholder letter, the conglomerate, which sells everything from ice cream to machine tools to house paint, reported that its book value gained 19.8% to $84,487 per share in 2009 from the prior year, based on a metric the company uses to track performance. In dollar terms, book value shot up $21.8 billion last year, a record.
Berkshire posted net income of $8.1 billion in 2009, up from $5 billion a year ago but down sharply from the $13.2 billion it earned in 2007. Revenue was $112 billion in 2009 from $108 billion in 2008.
Long a closely held company mostly for the wealthy, Berkshire in the past month vastly increased its shareholder base after it was included in the Standard & Poor’s 500-stock index, held by millions of investors in index and mutual funds that closely track it.(…)
The gain was less than the S&P 500′s return of 26.5% in 2009, marking only the seventh time Berkshire has trailed the index under Mr. Buffett. But long-term investors aren’t likely to be disappointed. Berkshire outperformed the index over the lion’s share of the credit crisis, since losses in 2008 were far lower than the broader market’s.
"Our defense has been better than our offense, and that’s likely to continue," Mr. Buffett wrote.(…)
A Transforming Berkshire
Of interest to new and old shareholders alike, Mr. Buffett discussed how he has been transforming Berkshire in recent years into a capital-intensive industrial conglomerate with big holdings in railroads and utilities and less exposure to cash-generating financial operations such as insurance. He said that while he used to shun capital intensive businesses, his perspective has changed. Berkshire will continue to spit out large amounts of cash, he wrote, and cash-hungry firms like utilities and railroads are among the best outlets for those dollars.
That could be because interest rates are so low. It is better to put cash to use and leverage than to leave it in banks or in Treasuries.
Those companies will deliver solid earnings, "albeit at the cost of our investing many tens —yes, tens—of billions of dollars of incremental equity capital," he wrote.
The result, he said is that Berkshire’s "ever-growing collection of good to great businesses should produce above-average, though certainly not spectacular, returns in the decades ahead." (…)
A big boost came from Berkshire’s investment in Chinese battery and car maker BYD Co. Its $232 million investment in the company in 2008—a deal advocated by Mr. Munger—surged to nearly $2 billion by the end of last year.
The letter was peppered with the usual mix of witticisms, hard-core investment advice and folksy wisdom. Mr. Buffett said he scooped up corporate and municipal bonds in 2009, which he called "ridiculously cheap." But, he wrote, "I should have done far more. Big opportunities come infrequently. When it’s raining gold, reach for a bucket, not a thimble." (…)
Muted Gains in Operations
Outside of Berkshire’s investment-related gains, the picture was much-less positive. While many units in his vast conglomerate were in the black, its holdings in companies that make everything from mobile homes to carpets to machine tools have taken a big hit amid the economic turmoil.
Much of Berkshire’s operations remained heavily exposed to the economy, a factor that will only get more pronounced with the purchase Burlington Northern. Berkshire’s utilities and energy units gained $1.1 billion in 2009, down from $2.3 billion in 2008, results that included roughly $1 billion in one-time gains related to a failed merger with Constellation Energy Group Inc.
Earnings by its manufacturing, service and retailing operations slid to $1.1 billion from $2.3 billion the previous year. The 2009 results took a hit from Berkshire’s jet-rental company NetJets, which posted a pretax loss of $711 million.
Its insurance businesses reported a net underwriting gain of $1 billion last year, down from $1.8 billion in 2008, as Berkshire pulled in its horns slightly in insurance amid lower premiums. For 2010, Mr. Buffett said growth in Berkshire’s auto insurance giant Geico could slow due to weakening auto sales and high unemployment, which causes some drivers to forego auto insurance.
Housing Outlook
Mr. Buffett didn’t comment at length on his view on the broader economy, but he did drop one glimmer of hope. He said that "within a year or so residential housing problems should be largely behind us." If he’s right, that should provide a boost to a number of Berkshire companies heavily exposed to housing, such as the paint company Benjamin Moore, and Shaw Industries, a carpet maker.
On Management
In discussing management of his operations, Mr. Buffett maintained that he and Mr. Munger didn’t want to be micromanagers but instead wanted decisions made "at the operating level.”
But he also indicated the approach doesn’t always succeed. Calling NetJets "the major problem for Berkshire last year," he said "It’s clear that I failed you in letting NetJets descend into this condition.” He said the unit was on the mend with his appointment of David Sokol, chairman of MidAmerican Energy Holdings Co., to its helm.
He also took responsibility for the "fiasco" of a Geico-issued credit card.
Geico’s "managers, it should be emphasized, were never enthusiastic about my idea,” he wrote. "They warned me that instead of getting the cream of GEICO’s customers we would get the——well, let’s call it the non-cream. I subtly indicated that I was older and wiser. I was just older."
Mr. Buffett didn’t hesitate to dish some heat out as well. He said CEOs of failed companies "have largely gone unscathed" even as shareholders suffered massive losses. "Their fortunes may have been diminished by the disasters they oversaw," he writes, "but they still live in grand style." Mr. Buffett has said CEO compensation packages should include onerous terms that would wipe out their—and their spouses—net wealth if their firm required a government bailout.(…)
View Berkshire’s portfolio at December 31, 2009.
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