Berkshire Hathaway Looking For Another Elephant

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Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) released its annual report for 2013, and posted record profits for the year. However, the company’s per-share book-value was unable to keep up with the S&P 500 (INDEXSP:.INX)’s record profits this year. The company’s class A and class B stock rose 18.2%, compared to the S&P’s 30% returns.

Warren Buffett on Berkshire Hathaway stocks

In his annual letter to shareholders, Mr. Buffett stated that Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) stock has underperformed in only 10 out of its 49 years of existence, and nearly all of these shortfalls have occurred when the S&P breached 15% growth. He believed that Berkshire would outperform the S&P when it was moderately up or down.

Mr. Buffett also reiterated his belief in “elephants”, or large acquisitions as a means of growth. He spoke about his acquisition of H.J. Heinz Company (NYSE:HNZ) with 3G Capital, which he believes will be a viable blueprint for future acquisitions. From the letter:

“With the Heinz purchase, moreover, we created a partnership template that may be used by Berkshire in future acquisitions of size.”

He differentiated Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B)’s interest in acquisition from private equity transactions when he said, “Though the Heinz acquisition has some similarities to a “private equity” transaction, there is a crucial difference: Berkshire never intends to sell a share of the company.” In fact, he believes that Berkshire would be interested in increasing its ownership of Heinz by buying shares from 3G or exchanging some of its preferred shares for common shares.

Berkshire Hathaway’s increased stock purchases

Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) also increased its purchases of stocks in its “Big Four” investments – American Express Company (NYSE:AXP), The Coca-Cola Company (NYSE:KO), IBMInternational Business Machines Corp. (NYSE:IBM) and Wells Fargo & Co (NYSE:WFC). Mr. Buffett compared his ownership in these companies to having a “partial interest in the Hope diamond”, which would be better than owning all of a mediocre company.

Buffett also shared his philosophy of value investing. He believes that the frenetic pace of stock markets and the enormous chatter and noise surrounding them can confuse investors. However, the investor that can remain steady among the tidal waves of information is the one who will win out. He gives the example of a plot of property he purchased in New York City in 2008, just before the housing market crashed. Despite the ominous whispers of trouble brewing, he remained steady in his belief in its value, which ultimately tripled its earnings.

Mr. Buffett also shared some of the provisions of his will, providing a blueprint for all of those whose thoughts have turned to planning their own estates. A trustee will manage the cash that will be bequeathed to his wife, 10% of which which will be placed in short-term government bonds and 90% in a very low-cost S&P 500 index fund, possible Vanguard’s. All of his Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) shares will be fully distributed to philanthropic organizations.

By Saranya Kapur

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