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Warren Buffett's shareholder letter to Berkshire Hathaway Inc. (NYSE: BRK.A, BRK.B) investors was full of the Oracle of Omaha's market wisdom and one-liners, plus some hints about what Berkshire will pursue in 2013.
Here's a look at what Buffett discussed in the March 1 letter.
Warren Buffett's Shareholder Letter: 2012 Highs and Lows
Despite a $24.1 billion increase in Berkshire's net worth in 2012, Buffett called the gain "subpar."
"When the partnership I ran took control of Berkshire in 1965, I could never have dreamed that a year in which we had a gain of $24.1 billion would be subpar. But subpar it was," Buffett said.
The Omaha, NE-based company's value grew 14% in 2012 and pretax earnings rose $10.1 billion. That represents a $600 million rise year-over-year, but those gains trailed the Standard & Poor 500 Index's rise of 16%.
"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," Buffett 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."
Meanwhile, Berkshire portfolio managers Todd Combs and Ted Weschler both beat the S&P 500 last year. Buffett increased the funds managed by each to almost $5 billion.
Berkshire's ballooning size has made it increasingly difficult to keep up with the market, something Buffett has long cautioned about. That's why acquisitions are so important.
At the heart of what Buffett considers an "uninspiring" performance was the company's failure to make a major acquisition in 2012. That left Berkshire holding a pile of non-working cash.
"I pursued a couple of elephants, but came up empty-handed," Buffett said, ending 2012 with $47 billion on hand.
But Berkshire still managed to rake in billions of dollars in merger activity.
"Though I failed to land a major acquisition in 2012, the managers of our subsidiaries did far better," explained Buffett. "We had a record year for "bolt-on' purchases, spending about $2.3 billion for 26 companies that were melded into our existing businesses. These transactions were completed without Berkshire issuing any shares. [Vice Chairman Charlie Munger] and I love these acquisitions. Usually they are low risk, burden headquarters not at all, and expand the scope of our proven managers."
Trigger-ready Buffett spent $23.4 billion last month to buy H.J. Heinz (NYSE: HNZ) in a deal with Brazilian buyout firm 3G Capital. He remains on the prowl.
"Charlie and I have again donned our safari outfits and resumed our search for elephants," Buffett said.
Berkshire increased its stake in four of its mainstays in 2012 and is likely to boost stakes further in American Express Inc. (NYSE: AXP), Coca-Cola Co. (NYSE: KO), International Business Machines Corp. (NYSE: IBM) and Wells Fargo & Co. (NYSE: WFC).
Explaining the hefty and growing positions, Buffett wrote, "Mae West had it right: Too much of a good thing can be wonderful."
At year's end, Berkshire held 151,610,700 shares of AXP, representing 11.97% of the portfolio; 400 million shares of KO for 19.25%; 68,115,484 shares of IBM for 17.32%; and 439,857,861 shares of WFC, its largest holding, amounting to a 19.96% position.
The insurance arm of Berkshire "shot the lights out last year," generating $73 billion of free money for the company to invest.
"GEICO led the way, continuing to gobble up market share without sacrificing underwriting discipline. This is truly having your cake and eating it too. When I count my blessings, I count Geico twice," Buffett wrote.
Another bright spot was BNSF Railway Co. (Burlington Northern Sante Fe).
"BNSF carries about 15% (measured by ton-miles) of all inter-city freight, whether it is transported by truck, rail, water, air, or pipeline. Indeed, we move more ton-miles of goods than anyone else, a fact making BNSF the most important artery in our economy's circulatory system," Buffett shared.
BNSF, along with Iscar, Lubrizol, Marmon Group and MidAmerican Energy – Berkshire's five largest non-insurance companies – delivered $9.7 billion in annual earnings. The gains were accompanied by "only minor dilution" satisfying the company's goal "of not simply growing but rather increasing per-share results."
Buffett snapped up a few newspaper companies last year.
In January, he acquired the Omaha World Herald, his hometown paper. In May, he bought dozens more in a $142 million deal. Over the past 15 months, Berkshire has purchased 28 daily newspapers for $344 million.
While these deals are much smaller in size than the typical Berkshire deal, Buffett (a newspaper delivery boy in his youth) and Munger are big fans of newspapers and will continue buy them "if their economics make sense."
"News, to put it simply, is what people don't know that they want to know. And people will seek their news – what's important to them – from whatever sources provide the best combination of immediacy, ease of access, reliability, comprehensiveness and low cost. The relative importance of these factors varies with the nature of the news and the person wanting it," Buffett wrote.
Buffett outlined the five guidelines he and Munger will use:
"In summary, Charlie and I hope to build per-share intrinsic value by (1) improving the earning power of our many subsidiaries; (2) further increasing their earnings through bolt-on acquisitions; (3) participating in the growth of our investees; (4) repurchasing Berkshire shares when they are available at a meaningful discount from intrinsic value; and (5) making an occasional large acquisition. We will also try to maximize results for you by rarely, if ever, issuing Berkshire shares."
Buffett chided CEOs who cited "uncertainty" for not investing in projects.
"At Berkshire, we didn't share their fears, instead spending a record $9.8 billion on plant and equipment in 2012, about 88% of it in the United States," Buffett said.
Further poking nervous CEOs, Buffett said in the letter, "Of course, the immediate future is uncertain: America has faced the unknown since 1776. It's just that sometimes people focus on the myriad uncertainties that always exist while at other times they ignore them.
"If you are a CEO who has some large, profitable project you are shelving because of short-term worries, call Berkshire. Let us unburden you."
Seeing boundless opportunities in America, Buffett concluded, "We will keep our foot to the floor and will almost certainly set still another record for capital expenditure in 2013."
To hear why Warren Buffett shelled out billions of dollars for ketchup maker H.J. Heinz Co., check out this interview with our Capital Wave Strategist Shah Gilani.
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2012 Shareholder Letter