For Warren Buffett watchers – myself included – today is one of the most interesting days of the year.
Along with the Berkshire Hathaway (NYSE: BRK-A, BRK-B) annual general meeting in early May each year, many investors keenly anticipate the release of his fabled letter to the company's shareholders. The letter is in equal parts company update and investment master class, with some Buffett humour thrown in. His letters are always required reading, and this year's letter didn't disappoint.
44 billion reasons to pay attention
Warren Buffett is without peer as an investor – in a game where keeping score is easy, Buffett is the third richest man on the planet, and the single richest man to have earned his fortune through investing. According to Forbes magazine, in September of last year, Buffett was worth a cool US$44 billion – and Berkshire shares are up another 15% since then.
He has also become something of the standard bearer for capitalism and investment – happily doling out investment advice through his annual letters, media appearances and his marathon Q&A sessions at the company's annual meeting.
Missing the mark – for now
On the first page, as always, is Berkshire Hathaway's performance, comparing the growth of the company's book value with the growth in the US S&P 500 share index. Buffett's business lost out to the market last year – he called the year "subpar" – recording growth of "only" 14.4%, compared to a gain of 16.0% for the index.
As Buffett himself says, "we do better when the wind is in our face" – partly because Berkshire measures growth in the value of its businesses, whereas investor sentiment – particularly when the market gets excited – can leap ahead significantly.
On the hunt
The "Oracle of Omaha" also returned to his 'elephant gun' analogy, making clear that even after investing a cool US$12 billion to purchase a half-share of US ketchup-to-baked beans maker Heinz (NYSE: HNZ), Berkshire still has plenty of cash.
He is looking for another large 'elephant' of an acquisition, with Buffett joking that he and business partner Charlie Munger had "donned our safari suits and resumed our search for elephants".
As Berkshire-watchers would know, the company has selected two investment managers to take on steadily increasing proportions of Berkshire Hathaway's investment portfolio. The men, Todd Combs and Ted Weschler, now have almost US$5 billion each at their disposal. Impressively, Buffett says each man managed to beat the S&P 500 by "double-digit" margins in 2012 – not bad when the market growth was in the mid-teens.
No dividends… yet
Famously, Warren Buffett has eschewed paying dividends to the shareholders of Berkshire Hathaway, believing (correctly – by a huge margin – thus far) that he can compound returns for shareholders at a better rate by keeping the money inside the business. He has suggested in the past that shareholders needing the cashflow should instead sell a small proportion of their shareholdings.
He went one step further this year, demonstrating the difference between the two approaches – and seemingly putting to rest any thoughts of Berkshire paying a dividend any time soon. In doing so, however, he also laid out the rationale which will give his successors a Buffett-sanctioned yardstick for making the decision on the conditions under which a dividend might be justified – the company's ability to grow its net worth, and the relative price of its shares.
Embrace uncertainty
Buffett also addressed his fellow CEOs in his letter – a note that could equally apply to investors. In short: embrace uncertainty. While his example uses the US markets, the message is universal, and equally applies to Australian CEOs and investors. Buffett writes:
"…Of course, the immediate future is uncertain… 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).
"…business will do fine over time. And stocks will do well just as certainly… investors and managers are in a game that is heavily stacked in their favor. (The Dow Jones Industrials advanced from 66 to 11,497 in the 20th Century, a staggering 17,320% increase that materialized despite four costly wars, a Great Depression and many recessions. And don't forget that shareholders received substantial dividends throughout the century as well.)
"Since the basic game is so favorable, Charlie and I believe it's a terrible mistake to try to dance in and out of it based upon the turn of tarot cards, the predictions of "experts," or the ebb and flow of business activity. The risks of being out of the game are huge compared to the risks of being in it."
Foolish takeaway
It's a mantra we couldn't agree with more at The Motley Fool – and one that has stood Warren Buffett in good stead over the past 48 years at Berkshire Hathaway – despite many, many claims that he has lost his touch or that "it's different this time".
He hasn't, it isn't – and investors ignore The Sage of Omaha at their peril.
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The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Motley Fool analyst Scott Phillips own shares in Berkshire Hathaway.
