In his 2012 letter to Berkshire Hathaway shareholders, Warren Buffett says it was a subpar year for his firm, but that hasn’t dampened his optimism on the future of both Berkshire and the United States.
Buffett says that while many CEOs have been holding off on capital investment because of “uncertainty”, Berkshire has not, spending a record $9.8 billion on plant and equipment in 2012. “A thought for my fellow CEOs: Of course, the immediate future is uncertain; America has faced the unknown since 1776,” Buffett writes. “It’s just that sometimes people focus on the myriad of uncertainties that always exist while at other times they ignore them (usually because the recent past has been uneventful). American business will do fine over time. And stocks will do well just as certainly, since their fate is tied to business performance. Periodic setbacks will occur, yes, but investors and managers are in a game that is heavily stacked in their favor.”
The link between business performance and stock performance over the long haul are, as always, a topic Buffett speaks about at length. Last year was just the ninth in 48 years of his firm’s existence that Berkshire’s per-share book value — a measure of success he prefers over stock price gains — lagged the S&P 500’s gain. “Whatever Berkshire’s results, my partner Charlie Munger … and I will not change yardsticks,” Buffett said. “It’s our job to increase intrinsic business value — for which we use book value as a significantly understated proxy — at a faster rate than the market gains of the S&P. If we do so, Berkshire’s share price, though unpredictable from year to year, will itself outpace the S&P over time. If we fail, however, our management will bring no value to our investors, who themselves can earn S&P returns by buying a low-cost index fund.”
Buffett also addresses the issue of why Berkshire doesn’t pay a dividend. He says the firm’s “first priority with available funds will always be to examine whether they can be intelligently deployed in our various businesses.” The next option he looks at is increasing shareholder value through acquisitions. Buffett says that, while he’s made mistakes in terms of acquisitions, his overall track record indicates 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 or dividends.” Buffet also lays out a scenario showing how investors who want income would actually be better off not receiving dividends, and instead selling off a portion of their shares each year.
Other topics Buffett covers in the letter include his reasoning behind buying up a bunch of newspapers over the past year, the difference between intrinsic value and book value, and a re-examination of Berkshire’s owner-related business principles. To download a copy of the full letter and annual report, click here.