Today is a fun day for every value investor out there — it’s the day Warren Buffett’s annual letter to shareholders comes out. So for God’s sake, don’t waste too much time with your friendly neighborhood Gumshoe if you haven’t read that one yet. You can get to it here if you’re curious, or check out all the past year’s issues here (along with some core books like Graham’s Intelligent Investor, Lynch’s One Up on Wall Street and Greenblatt’s Little Book that Beats the Market, I always suggest that beginning investors read a decade or so of Warren Buffett’s annual letters to Berkshire shareholders to get a good perspective on markets, investing, patience, and the importance of steady, cash-flow-generating businesses).
There’s rarely anything shocking in these annual letters from Uncle Warren, but they’re always interesting, frequently funny, and usually offer some good insight into the way Buffett values companies and views the economy. This time around, we get the reminder from Buffett that Berkshire is no longer, even when it has very good years like last year, going to shoot out the lights compared to the S&P 500 — Warren has tended to do best, on a relative basis, when the market does worst … or as he puts it, “We do better when the wind is in our face.”
So Berkshire Hathaway is on the verge of what might be their first five-year period of underperforming the S&P 500. Ever. That’s in terms of increasing book value, which is the rough yardstick Buffett uses — he consistently says that book value materially underestimates the intrinsic value of Berkshire Hathaway shares, which is almost certainly true (even if you don’t ascribe more value to Berkshire’s assets than they carry on the books, their $75 billion of free financing, the insurance float that doesn’t really belong to Berkshire but that generates investment returns for them, is worth something). So book value did not jump in this past quarter of the year, and the stock is still trading at roughly 1.3X book value. I picked up a few shares last week and I expect Berkshire to do at least as well as the broad market over time, with less volatility and with great opportunity to make excellent investments if we have any “dislocations” in the market.
The Heinz deal announced just recently, with Berkshire’s half equity interest in an ...