Buffett set to fall short

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IOL BR Buffett  3771 Bloomberg Warren Buffett.

Warren Buffett probably missed his target last year for the first time in 44 years.

Berkshire Hathaway, his $292 billion (R3.1 trillion) company, is poised to report that it failed to increase net worth more rapidly than the Standard & Poor’s (S&P) 500 index during the past five years, analysts estimate. It would be the first time the billionaire investor fell short of the goal since his 1965 takeover of the Omaha, Nebraska-based firm.

Buffett, 83, highlights the comparison as a way for shareholders to evaluate his performance against a low-cost fund that tracks the index. The S&P 500 has returned 128 percent including dividends since the end of 2008, fuelled by the US Federal Reserve’s stimulus efforts and higher corporate profits. Berkshire’s book value per Class A share, Buffett’s yardstick, rose 80 percent to $126 766 starting at the same point until September 30, the latest data available.

“He’s been awfully honest” by keeping the goal the same, said Tom Russo, a partner at Berkshire investor Gardner Russo & Gardner. “He didn’t pick it because it was an easy benchmark.”

Analysts predict Buffett probably did not narrow the gulf much in the final quarter of last year. Barclays predicts Berkshire’s book value rose to $131 005 a share, or 86 percent more than it was five years earlier. Keefe, Bruyette & Woods estimates an 83 percent gain.

Book value, a measure of assets minus liabilities, is often presented on a per-share basis to help investors compare a company’s net worth with its trading price. Buffett has said that if he can add value more quickly than the S&P 500 rises, Berkshire shares should outperform the benchmark index over time.

 

Buffett’s long-term track record is among the best in investing and is responsible for making many of his early backers wealthy. Berkshire’s book value stood at just $19 a share when he took over and had compounded at almost 20 percent annually through 2012. That compares with 9.4 percent for the benchmark.

Buffett, Berkshire’s chief executive and chairman, did not respond to a request for comment. The company has not announced a date for reporting 2013 results.

For the past half-decade, the S&P 500 has posted double-digit returns every year except 2011, when the debt crisis in Europe overshadowed optimism about a rebound in the US. That was the only year from 2009 through 2012 that growth in Berkshire’s book value a share outperformed the index.

The fact was not lost on Buffett, who said in a letter to shareholders in March last year that he and Berkshire vice-chairman Charles Munger would probably fall short of their goal if the S&P 500 continued its rally.

“We do better when the wind is in our face,” he wrote.

One of Buffett’s recent picks has not helped. A $10.9bn investment in IBM in 2011 has lagged behind the index.

Buffett makes the benchmark harder to beat by comparing his performance to pretax returns for the S&P 500. Berkshire’s book value a share is an after-tax number.

Adjusting for that discrepancy would have caused a “substantial” lag in the index’s performance during the past five decades, he has written in reports to shareholders.

Missing the mark in the latest five-year period would highlight how difficult the billionaire’s task has become with his company’s expansion.

Takeovers and stock picks have built Berkshire into a business with dozens of operating units and equity investments valued at more than $100bn. That means future gains have to be bigger in absolute terms to increase book value by the same percentage amounts as years past.

Meyer Shields, an analyst at KBW, said that if the record of outperformance was broken, investors were unlikely to abandon the stock because Buffett had delivered such good results for shareholders over his career. Berkshire’s Class A shares climbed 33 percent last year, compared with 30 percent for the S&P 500.

“There’s been a gradual recognition that, as good as Berkshire is, it’s going to get tougher,” Shields said. – Noah Buhayar from Bloomberg



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