Tags: warren buffett | berkshire hathaway | profit | earnings

Buffett Stays Optimistic After Berkshire Falls Short of Goal

Saturday, 01 March 2014 11:45 AM

Warren Buffett, the billionaire chairman and chief executive officer of Berkshire Hathaway Inc., changed the standard by which he measures performance after falling short of his target for the first time in decades.

A gauge of Berkshire’s net worth failed to rise as much as the Standard & Poor’s 500 Index in the five years ended 2013, Berkshire’s annual report showed. It was the first time that happened since he took control of the company in 1965.

Still, Buffett said that he and Vice Chairman Charles Munger created more value for investors in the six-year stock market cycle through Dec. 31.

“Through full cycles in future years, we expect to do that again,” Buffett wrote in the report. “If we fail to do so, we will not have earned our pay.”

Editor’s Note: 5 Shocking Reasons the Dow Will Hit 60,000

Buffett, 83, has long criticized other companies for altering how they evaluate their performance when such changes make managers’ efforts look better. Even as he predicted that Omaha, Nebraska-based Berkshire would fall short of its goal last year, he wrote that he and Munger wouldn’t “change yardsticks.”

Book value, the measure of assets minus liabilities that Buffett highlights, rose to $134,973 a share at the end of December, 91 percent more than where it stood five years earlier. The S&P 500 returned about 128 percent during that period, including dividends, as stocks rallied from their financial crisis lows.

Intrinsic Value

Missing the mark in the last five-year period highlights how difficult the billionaire’s task has gotten with his company’s expansion. Takeovers and stock picks have built Berkshire into a business with dozens of operating units and equity investments valued at more than $115 billion. That means future gains have to be bigger in absolute terms to increase book value by the percentage amounts of years past.

Buffett highlights the comparison with the S&P 500 as a way for shareholders to evaluate his performance against a low-cost fund that tracks the index. He has said that book value per share understates his company’s true or intrinsic value, which relies on some subjective analysis.

On an annual basis, Berkshire has failed to beat the index only 10 times during his tenure, and nine of those occurred when the S&P 500’s annual gain exceeded 15 percent, Buffett wrote. The index returned 32 percent last year.

“I believe both Berkshire’s book value and intrinsic value will outperform the S&P in years when the market is down or moderately up,” he wrote. “We expect to fall short, though, in years when the market is strong — as we did in 2013.”

Record Profit

Apart from missing the goal, Buffett said Berkshire’s operations performed well last year. The company reported that fourth-quarter net income rose 9.6 percent to $4.99 billion on better results at insurance units, while full-year profit hit a record $19.5 billion.

“He’s taking the money and reinvesting it in a smart way,” said David Sims, co-manager of the Eagle Capital Growth Fund, which holds Berkshire shares. “It’s difficult for any investors to be unhappy with that.”

Buffett’s long-term track record is among the best in investing and responsible for making many of his early backers wealthy. Book value stood at $19 a share when he took over and had compounded at almost 20 percent annually through 2013. That compares with 9.8 percent for the benchmark.

Editor’s Note: 5 Shocking Reasons the Dow Will Hit 60,000

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Warren Buffett, the billionaire chairman and chief executive officer of Berkshire Hathaway Inc., changed the standard by which he measures performance after falling short of his target for the first time in decades.
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2014-45-01
Saturday, 01 March 2014 11:45 AM
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