Year after year, investors excitedly await the annual letter to shareholders from none other than Warren Buffett. While shareholders of his company, Berkshire Hathaway, are anxious to learn what the Oracle of Omaha has to say about a variety of issues, investors in general hope to gleam some pearls of wisdom from the writing.
They all might be surprised Buffett began this year's letter, released Friday, with an apology.
“A number of good things happened at Berkshire last year, but let's first get the bad news out of the way," writes Buffett. "When the partnership I ran took control of Berkshire in 1965, I could have never dreamed that a year in which we had a gain of 24.1 billion would be subpar. But subpar it was.
"For the ninth time in 48 years, Berkshire's percentage increase in book value was less than the S&P's percentage gain," he continued. "In eight of those nine years, it should be noted, the S&P had a gain of 15 percent or more. We do better when the wind is in our face."
To be sure, 2012 was not a bad year for Buffett and Berkshire. His portfolio of publicly traded companies and private investments appreciated by 14.4 percent, slightly below the 16.0 percent return of the S&P 500 stock index.
Buffett should not be apologetic for a subpar year now and then. In the 48 years he has directed Berkshire as a publicly traded company, the investment portfolio has appreciated an astounding 586,817 percent. That overwhelms the return on the S&P 500 in the same period of 7,433 percent.
But, Buffett never likes finishing second, so he takes the fact he did not beat the benchmark index as a personal setback. He also regrets, in his letter, the inability to make a major acquisition.
“I pursued a couple of elephants, but came up empty-handed,” wrote Buffett.
He did acknowledge Berkshire Hathaway has already made a major acquisition in 2013, teaming with a major Brazilian investor to purchase H.J. Heinz. But he does not plan to stop there as he and his investment partner, Charlie Munger, keep looking for value, saying, “Charlie and I have again donned our safari outfits and resumed our search for elephants.”
What Buffett did do in 2012 was beef up ownership in what he calls Berkshire's “Big Four” investments — American Express, Coca-Cola, IBM and Wells Fargo.
“Berkshire's ownership interests in all four companies is likely to increase in the future. Mae West had it right: Too much of a good thing can be wonderful,” added Buffett.
According to the Berkshire Hathaway 2012 letter, the portfolio includes 456 million shares of Wells Fargo, 400 million shares of Coca-Cola, 151 million shares of American Express, and 68 million shares of IBM. With the exception of IBM, Buffett is the largest shareholder in each of the companies.
Buffett also used his letter to address one of the biggest criticisms he receives from some shareholders, the decision not to pay a dividend from the billions of dollars in free cash held by the company.
“It puzzles them that we relish the dividends we receive from most of the stocks that Berkshire owns, but pay out nothing ourselves,” he writes and then explains his role in managing the company.
“Even after we deploy hefty amounts of capital in our current operations, Berkshire will regularly generate a lot of additional cash. Our next step, therefore, is to search for acquisitions unrelated to our current businesses. Here is our simple test: Do Charlie and I think we can effect a transaction that is likely to leave our shareholders wealthier than they were prior to the acquisition?
"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 and dividends,” concludes Buffett.
For most investors, especially those who have been riding the Berkshire train for many years, it would be hard to argue the success of Buffett's disciplines.
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