Warren E. Buffett, the billionaire investor known for his record of beating the market when stocks languish, oversaw a decline in his company's value last year as the S&P 500 ended unchanged.
Shares of his Berkshire Hathaway Inc. (BRKA) slipped 4.7% last year. It was the second time since 1990 that the company's stock underperformed an S&P 500 that had either declined for the year or rose less than 5%.
Berkshire Hathaway gained about seventeenfold in the 21-year period, while the index nearly quadrupled.
“In tough markets, it's a strong performer,” said David Rolfe, chief investment officer of Berkshire Hathaway investor Wedgewood Partners Inc. “There's going to be a big asterisk by this year.”
The value of Mr. Buffett's personal holdings of Berkshire Hathaway declined by about $2 billion last year. In September, he initiated the first share repurchase program in his four decades as Berkshire Hathaway's chief executive.
On a quarterly average basis, the stock price slipped in the three-month period ended Sept. 30 to the lowest relative to book value in more than 20 years.
The company faced a surge in insurance claims tied to natural disasters and losses on a portfolio of speculative derivatives.
“Berkshire stock went to a price we never thought,” vice chairman Charles Munger said July 1 after shares of the firm slipped 3.6% in the first six months of the year, compared with a 5% rise for the S&P 500.
INSURANCE LOSSES
He cited the insurance losses Berkshire Hathaway sustained as a result of the March earthquake and tsunami in Japan.
On Aug. 9, Jay Gelb, an analyst with Barclays PLC, raised his rating on Berkshire Hathaway's stock to “overweight,” from “neutral,” saying that the stock slide provided a buying opportunity. The shares have gained about 5.2% since.
Berkshire Hathaway was one-thirtieth the size it is now, based on book value, when in 1990 it dropped 23%, compared with a 6.6% slide in the S&P 500. Since then, the S&P 500 has posted five annual losses and three advances of less than 5%.
Berkshire Hathaway beat the index in each of those eight years, except for 2005, when the company gained less than 1%, compared with a 3% rise for the index.
“Our defense has been better than our offense,” Mr. Buffett said in a letter accompanying the 2009 annual report.
Mr. Buffett, who highlights book value as a measure of performance rather than stock gains, said that his firm has “consistently done better than the S&P” in years when the index has fallen.
Berkshire Hathaway's book value, a measure of assets minus liabilities, rose 1.7% to $160 billion in the nine-month period ended Sept. 30, helped by the Burlington Northern Santa Fe railroad and units such as toolmaker Iscar Metalworking Cos.
The price-book ratio was about 1.2 on Dec. 31, higher than the third-quarter average of 1.1, according to data compiled by Bloomberg.
Berkshire Hathaway is the biggest shareholder of American Express Co. and Wells Fargo & Co., both of which posted fourth-quarter gains. Wells Fargo, the biggest U.S. mortgage lender, fell 22% in the first nine months of the year, wiping more than $2 billion off of the market value of Berkshire Hathaway's stake.
Mr. Buffett, who built Berkshire Hathaway through stock picks and insurance sales, transformed the company by buying whole companies and adding businesses with large infrastructure such as the railroad and a power producer. The shift, he said in 2007, has made Berkshire Hathaway's book value less sensitive to declines in equity markets.
“We, therefore, expect to outperform the S&P in lackluster years for the stock market and underperform when the market has a strong year,” Mr. Buffett said in Berkshire Hathaway's 2006 annual report.
NATURAL DISASTERS
The earthquake and tsunami that struck Japan on March 11 contributed to $1.3 billion of after-tax catastrophe costs in the first nine months of the year, compared with about $500 million a year earlier. Losses on derivatives, used to bet on long-term stock gains and the creditworthiness of borrowers, widened 23% to $2.36 billion.
Mr. Buffett, who runs Berkshire Hathaway with a staff of about 20 people at the company's headquarters in Omaha, Neb., has told investors that the firm has a list of candidates capable of succeeding him as chief executive. The issue was raised in March when David Sokol, a former chairman of Berkshire Hathaway's MidAmerican Energy Holdings and a potential successor, resigned.
