Buffett letter has big audience as Berkshire bulges

NEW YORK (Reuters) - Unlike many corporate chiefs, Warren Buffett often plays down the prospects of his company Berkshire Hathaway Inc BRKa.NBRKb.N, while trying to keep investors focused on the long term.

Billionaire investor Warren Buffett laughs as he appears with Microsoft Corporation founder Bill Gates for a town hall style meeting with business students broadcast by financial television network CNBC at Columbia University in New York, November 12, 2009. REUTERS/Mike Segar

This year, he has many more investors to address.

Buffett will release his annual letter to shareholders of Omaha, Nebraska-based Berkshire on Saturday.

While Buffett speaks in public much more often than he used to, his letter -- typically more than 10,000 words -- is still read widely by those seeking wisdom about investing, finance, and the greedy or ignorant people who try to mess it all up.

Following Berkshire's stock split, purchase of railroad company Burlington Northern Santa Fe Corp, and admission to the Standard & Poor's 500 .SPX, far more investors will have a stake in the decisions of the world's second-richest person.

Buffett has estimated 700,000 investors will own stock in Berkshire directly. Millions more now own it indirectly through index mutual funds, which cannot sell out of the stock and thus help stabilize its price. Through Wednesday, Berkshire shares were up 20 percent this year.

“This isn’t just Omaha any more,” said Andrew Kilpatrick, author of the book “Of Permanent Value: The Story of Warren Buffett. “Berkshire is becoming a world company, and Buffett has become such a unique figure in the history of business that people want to read him.”


Attached to the letter will be Berkshire’s annual report. Results should be much improved from 2008, when the bottom line was marred by large paper losses on derivative contracts tied to stocks and junk bonds. These losses, as well as gains when they occur such as in 2009, must be reported with earnings.

Berkshire owns some 80 businesses in such areas as insurance, energy, food and home furnishings, and blue-chip stocks including Wells Fargo & Co WFC.N and Coca-Cola Co KO.N. Two weeks ago, it paid roughly $26.4 billon for Burlington Northern, its biggest takeover ever.

Nonetheless, with growing competition facing the Geico car insurance unit, and pressure on economically-sensitive businesses ranging from NetJets business aircraft to Acme Brick to Borsheims Fine Jewelry, operating profit could decline.

The economy and Burlington Northern in the last year cost Berkshire its “triple-A” ratings, though its perceived risk of default remains very low among corporate America. Moreover, prior to the railroad takeover, Berkshire units had shed roughly 24,000 jobs, or 10 percent, since the end of 2008.

“For us, the big thing is Buffett’s feedback on the economy and what he sees in Berkshire individual businesses,” said Jacques Elmaleh, director of investment research at Steinberg Global Asset Management Ltd in Boca Raton, Florida.

“It’s much bigger than it used to be, and with the law of large numbers it takes a bigger investment to move the needle,” he added. “But in the last couple of years, he invested large sums of money in investments that could have above average returns.” Steinberg Global owns Berkshire stock.

Indeed, Buffett made several investments in companies such as General Electric Co GE.N and Goldman Sachs Group Inc GS.N that throw off yields of 10 percent and more. Government debt, in contrast, mostly yields in the low single digits.

Analysts surveyed by Thomson Reuters I/B/E/S on average expect fourth-quarter operating profit at Berkshire of about $1.9 billion. That would be down 44 percent from a year earlier. Revenue could increase 11 percent.


At Berkshire’s annual meeting last May, Buffett said the company could still outperform benchmarks such as the S&P 500, but probably by less than it did when it was smaller.

How much of the potential outperformance Buffett will oversee is uncertain. Buffett is 79, and will enter his ninth decade in August. His vice chairman, Charlie Munger, is 86.

It is possible Buffett could refer to succession planning in his letter. He has said Berkshire has chosen a young enough successor as chief executive for when the need arises. Others would run Berkshire’s equity and fixed-income investments.

Analysts have said chief executive candidates could include David Sokol, who chairs the company’s MidAmerican Energy business, and Tony Nicely, who runs Geico. Nicely is in his mid-60s. Sokol is more than a decade younger.

“Succession, who knows?” Kilpatrick said. “It does seem Sokol has the pole position, but I wouldn’t necessarily say he is the pick. He has run a big company and there’s no question he is a savvy dealmaker. If something were to happen today, (Nicely) is a real contender.”

Buffett releases his letter and the annual report on Saturday so investors can absorb details without worrying about any immediate reaction in the market or in Berkshire’s stock.

Reporting by Jonathan Stempel