March 21, 2013

Unconventional Wisdom: Warren Buffett’s 2013 Shareholder Letter

The topics below were most often cited in social media posts three days after the release of Warren Buffett’s 2013 shareholder letter:

  1. Buffett’s acquisition of local newspapers (40.3% of posts)
  2. Berkshire’s “sub-par year (16.7% of posts)
  3. CEOs who use “uncertainty” as an excuse not to invest (9.7% of posts)
  4. Choosing Doug Kass to argue the bear’s case at the 2013 annual meeting (6.9%)

So this is what the “herd” saw. Call it conventional wisdom. But what did bloggers outside the herd pick up? They saw Buffett’s unconventional wisdom, like these nuggets:

Succession Progress (5.5% of posts): Worried about succession at Berkshire? Be comforted by Todd Combs’ and Ted Weschler’s 2012 performance. They were handpicked by Buffett in 2010 and 2012, respectively, to put Berkshire’s growing cash flow to work. How did the two former hedge fund managers do? Buffett wrote that “each outperformed the S&P 500 by double-digit margins.” In addition, the duo “proved to be smart, models of integrity, helpful to Berkshire in many ways beyond portfolio management and a perfect cultural fit.” Still bigger praise was given when Buffett added $2 billion to their portfolios – now at $5 billion each.

Derivatives (4.3% of posts): The blogosphere went “crazy” when one post compared the derivatives Buffett initiated in 2008 to the billion dollar losses produced by JPMorgan’s “Whale.” Buffett’s defenders described how he personally manages these investments and updates us on their performance in his annual letters. In 2012, Buffett forecast that the “credit protection derivatives” expiring at the end of 2013 could produce “an overall pre-tax profit of about $1 billion.” In contrast, the “stock indices-based derivatives” had an unrealized liability of about $3.9 billion. But when they expire between 2018 and 2026, Buffett expects the liability to be “considerably less.” Name one other CEO who discloses details like this.

Berkshire’s Streak May End (4.3% of posts): Sure, Berkshire’s “A” stock was up over 30% in 2012 versus the S&P 500′s 11.3% total return. But Buffett didn’t boast. Instead, he hammered home the underperformance of Berkshire’s book value growth versus the S&P 500. A year earlier, he had written that in the past 47 years, there was never a five year period when the company did not do better than the S&P 500. In fact, Berkshire’s book value growth outperformed the S&P 500 in 39 of the past 48 years. Impressive? You bet. But five of the nine misses occurred in the past 10 years, including 2012. In his letter, Buffett predicted that if the market advances in 2013, “our streak of five-year wins will end.”

Did his prediction rattle the blogosphere? No way. With markets at record highs, investors don’t want to miss a good party and are racing to invest. They gleefully look out the rear-view mirror imagining the future will repeat the past. Once again, they forget that Buffett is looking at the future straight ahead, through the windshield.