Most companies would undoubtedly be thrilled with the results Warren Buffett called “subpar” at Berkshire Hathaway because his company’s value trailed the overall market.
But the fact that Buffett wasn’t satisfied with the 45 percent jump in profit his company reported Friday is part of why he’s built such a remarkable record.
Buffett sounded optimistic about both the economy and his company in an annual letter to shareholders that was released Friday. Buffett urged other businesses to either invest in the future or sell their profitable ventures to Berkshire.
“Charlie and I love investing large sums in worthwhile projects, whatever the pundits are saying,” Buffett said in reference to Berkshire Vice Chairman Charlie Munger.
So it didn’t really matter much that 2012 was only the ninth time in the past 48 years that Berkshire’s book value per share failed to outpace the S&P 500’s 16 percent growth. Berkshire’s value — calculated by subtracting liabilities from assets — still grew by 14.4 percent.
The legendary investor also confessed that the two investment managers he hired over the last few years left Buffett in their dust largely because he didn’t make a big acquisition last year.
Berkshire’s chairman and CEO had considerably more good news than bad to offer, and Buffett offered more explanation about the company’s recent newspaper purchases and its opposition to paying derivatives.
Berkshire’s net income soared in 2012 to $14.8 billion, up from $10.3 billion the previous year, but most of the increase came from paper gains on its investments and derivative contracts.
Without those gains, Berkshire’s operating earnings advanced 17 percent to $12.6 billion, up from the previous year’s $10.8 billion. Nearly all of its major business groups performed well in 2012, with the insurance units that include Geico and General Reinsurance leading the way because of significantly fewer natural disasters in the year.
“Berkshire really did pretty well,” said Jeff Matthews, who wrote “Warren Buffett’s Successor: Who It Is and Why It Matters.”
Buffett said Berkshire’s acquisition luck turned last month when he agreed to work with the 3G Capital investment fund to buy the H.J. Heinz Co. for $23.3 billion.
Berkshire will own half the company, receive nine percent dividends on $8 billion, and get warrants to buy another five percent of Heinz. But Buffett and Munger won’t be satisfied by the ketchup deal.
“We still have plenty of cash and are generating more at a good clip,” Buffett wrote. “So it’s back to work; Charlie and I have again donned our safari outfits and resumed our search for elephants.”
Andy Kilpatrick, who wrote “Of Permanent Value: The Story of Warren Buffett,” said the warrants make it likely that Heinz will one day be entirely owned by Berkshire.
And Buffett said Berkshire finished 2012 with nearly $47 billion on hand, so he does have plenty to work with even if he insists on keeping about $20 billion around in case of emergencies.
Many of the companies Berkshire owns outright — including MidAmerican Energy, Lubrizol chemicals and HomeServices of America — together made 26 smaller acquisitions for $2.3 billion last year.
Kilpatrick said he was impressed with the report because for the first time in several years, it looks like all parts of Berkshire are performing well, and it looks like the 82-year-old Buffett is doing well after a cancer scare last year.
“He looks to be in terrific health, and the company looks to be in terrific health,” Kilpatrick said.
In the letter, Buffett did not offer any new details on the plan to eventually replace him. He has said Berkshire’s board plans to split Buffett’s job into three roles: CEO, chairman and investment management. The board knows whom it would choose immediately to succeed him as CEO.
The investment piece seems set with the recent hiring of hedge fund managers Todd Combs and Ted Weschler. They manage portfolios worth about $5 billion while Buffett continues to make most of Berkshire’s investment decisions. Buffett praised both on Friday.
“Todd Combs and Ted Weschler, our new investment managers, have proved to be smart, models of integrity, helpful to Berkshire in many ways beyond portfolio management, and a perfect cultural fit. We hit the jackpot with these two,” Buffett said.
In his letter, Buffett defended the newspaper investments he made last year. But mostly, his comments just elaborated on what he’s said previously, that newspapers that are the primary source of information about their communities will continue delivering decent returns.
Berkshire will own 28 daily newspapers in small and mid-sized cities once its acquisition of the Tulsa World is complete. Berkshire bought 63 Media General newspapers last year for $142 million.
“Wherever there is a pervasive sense of community, a paper that serves the special informational needs of that community will remain indispensable to a significant portion of its residents,” Buffett said.
Berkshire owns roughly 80 subsidiaries, including railroad, clothing, furniture and jewelry firms, but its insurance and utility businesses typically account for more than half of the company’s net income. The Omaha, Neb., company employs more than 288,000 and holds major investments in such companies as Coca-Cola Co., IBM and Wells Fargo & Co.