Highlights of Warren Buffett’s 2012 Letter to Shareholders

After the financial markets closed on March 1, Warren Buffett released his much anticipated Letter to Shareholders.

These are some of the highlights:

Warren Buffett was disappointed with Berkshire Hathaway’s (BRK) performance in 2012 for two reasons.  First, BRK’s book value per share rose at only 14.4% compared to the 16.0% achieved by the S&P 500 with dividends included.  This is the third time in the last four years that BRK has underperformed the S&P 500.  Second, BRK was unable to make a large acquisition (more than $10 billion).  (However, in February 2013, BRK was successful in investing $12 billion for a 50% ownership stake in Heinz.  3G Capital purchased the other 50% of Heinz in partnership with BRK.)

But, there was also a lot of good news in 2012.  The five most profitable non-insurance companies owned by BRK (BNSF, Iscar, Lubrizol, Marmon Group, and MidAmerican Energy) did extremely well.  In addition, BRK’s insurance operations, led by GEICO, had an outstanding year.  Insurance is BRK’s core operation and it is “the engine that has propelled our expansion over the years.”

BRK’s new investment managers, Todd Combs and Ted Weschler, each outperformed the S&P 500 by double-digit margins.  Warren Buffett stated:  ‘They left me in the dust as well”.  Combs and Weschler are now each managing about $5 billion.  Warren Buffett’s letter lists 15  BRK common stock investments that at year end 2012 had a market value of more than $1 billion.  One of these stocks, DIRECTV, is the first stock to be selected by Combs or Weschler to meet this threshold.  It is being held in the portfolios of both Combs and Weschler.

In 2012, BRK increased its ownership interest in its “Big Four” investments (Wells Fargo, Coca-Cola, IBM, and American Express).

Warren Buffett remains very optimistic.  Both American business and stocks will do fine over time.  “The risks of being out of the game are huge compared to the risks of being in it.”

Warren Buffett discussed his views on dividend policy.  Since BRK has had excellent opportunities to reinvest its retained earnings over its 48 year life, it has never paid a dividend.  Companies should be consistent with respect to dividend policy.  Either they should pay dividends every year, or they should not pay dividends at all.  They should not be paying dividends in some years and not in others.  An inconsistent dividend policy would confuse investors.

With respect to share buybacks, value is destroyed when purchases are made above intrinsic value.  Warren Buffett considers the book value of BRK to be a “significantly understated proxy” for its intrinsic value.

I am quoted in a Bloomberg article on the release of Warren Buffett’s Letter to Shareholders and BRK’s annual report:

Buffett, 82, uses index put options to speculate on long- term gains in stock-market indexes in the U.S., Europe and Japan. Those bets added $2 billion to profit in the fourth quarter before taxes as Japan’s Nikkei 225 (NKY) Stock Average rallied.

“The probability of Berkshire ever having to take a loss on these contracts is very low” because they won’t be settled for years, said David Kass, a professor at the University of Maryland’s Robert H. Smith School of Business, who has taken groups of students to visit Buffett in Omaha.

The entire article is available at:


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