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UPDATE 3-Buffett: Performance streak may end this year
March 1, 2013 / 9:46 PM / 5 years ago

UPDATE 3-Buffett: Performance streak may end this year

* Buffett: Plenty of cash on hand to make deals
    * Philosophy remains the same on paying dividend
    * Will buy more newspapers

    By Ben Berkowitz
    March 1 (Reuters) - Berkshire Hathaway may end a
long streak of outperforming the S&P 500 this year, Chief
Executive Warren Buffett warned shareholders on Friday, even as
he said he was still eagerly hunting for acquisitions to grow
the ice-cream-to-insurance conglomerate.
    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 underperform 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
underperformance, 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 underperform 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
    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). 

    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.
    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.

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