Berkshire Hathaway is controlled by Warren Buffett, who is chairman and chief executive of the company which owns a range of companies, including GEICO and NetJets, a substantial stake in Heinz, and has stakes in American Express, Procter & Gamble and IBM. The company is noted for outperforming the stock market under the leadership of Buffett, a value investor.
Buffett sets new goal after missing five-year target
Berkshire chairman says he can beat the S&P index over the course of stock market cycles
Bloomberg in New York
Warren Buffett says his performance at Berkshire Hathaway should be measured over the course of stock market cycles after missing a five-year target for the first time.
Berkshire's net worth failed to rise as much as the S&P 500 Index from the end of 2008 to last year, the company's annual report showed on Saturday. It is the only five-year period that has happened since Buffett took control in 1965.
Still, the billionaire Berkshire chairman and chief executive said he could beat the index over equity market cycles, like he did in the six-year period that ended in December last year.
"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."
Buffett has criticised other companies for altering how they evaluate performance when such changes make managers look better. Even as he predicted that Nebraska-based Berkshire would fall short of its goal last year, he wrote that he would not "change yardsticks". He has often said his focus is on long-term results and that he will do best against the index when equities slump.
Book value, the measure of assets minus liabilities that Buffett highlights, rose to US$134,973 a share at the end of December, 91 per cent more than where it stood five years earlier. The S&P 500 returned about 128 per cent during that period, including dividends, as stocks rallied from their lows during the financial crisis. The Berkshire number is an after-tax figure, while the index results are before taxes.
"He moved the goal post a little bit," said David Rolfe, the chief investment officer of Berkshire shareholder Wedgewood Partners. "For those that focus in on that, it may be disconcerting. Quite frankly, we never gave it much thought."
Apart from missing the five-year goal, Buffett said operations performed well last year. Berkshire reported fourth-quarter net income rose 9.6 per cent to US$4.99 billion, while annual profit jumped to a record US$19.5 billion on higher earnings at insurance units and railroad Burlington Northern Santa Fe.
Buffett's cash hoard climbed to US$48.2 billion on December 31 from US$47 billion a year earlier.
The number of Berkshire employees increased by more than 42,000 to 330,745 by the end of last year. That includes about 29,000 at HJ Heinz, the food company it bought last year with Jorge Paulo Lemann's 3G Capital.
Buffett said the Heinz deal could be a template for large acquisitions. Berkshire provided more than US$12 billion to help finance the deal, while 3G Capital oversees operations.
Berkshire is also seeking more acquisitions at its MidAmerican unit after buying NV Energy last year for US$5.6 billion to expand in Nevada. The utility business provided attractive ways to deploy capital and was less vulnerable than other industries in recessions, Buffett said.
"He's taking the money and reinvesting it in a smart way," said David Sims, a co-manager of the Eagle Capital Growth Fund. "It's difficult for any investors to be unhappy with that."