By SERENA NG And ERIK HOLM
Berkshire Hathaway Inc. Chairman Warren Buffett, in his widely followed annual letter to shareholders, said he expects a better business climate this year as the conglomerate on Saturday reported a 61% gain in 2010 net income.
The Omaha, Neb., company's book value, a measure of assets minus liabilities that is a rough gauge of the company's performance, grew 13% in 2010, versus last year's 15.1% return of the Standard & Poor's 500 stock-index, a benchmark Berkshire has outperformed for much of the last four-plus decades.
Mr. Buffett called Berkshire's $26 billion purchase of Burlington Northern Santa Fe railroad "the highlight of 2010," saying it is working out even better than he expected. The railroad business, he wrote, would increase Berkshire's "normal" earnings power by over 30% on an after-tax basis.
Berkshire's Annual Report
He said he expects "more major acquisitions," to help expand the company. "We're prepared. Our elephant gun has been loaded, and my trigger finger is itchy," he wrote. At the end of 2010, Berkshire's cash hoard had grown to over $38.2 billion.
In 2010, Burlington generated net earnings of $2.5 billion, making up a chunk of Berkshire's $13 billion in net earnings, which were also derived from insurance, utilities and myriad other businesses. Net earnings from Berkshire's manufacturing, service and retailing operations more than doubled from a year ago to $2.5 billion in 2010 as the businesses rode the recovering economy.
Mr. Buffett said an "overwhelming" part of the company's future investments would be in the U.S. Of $8 billion in capital spending for 2011, Berkshire will spend all of the $2 billion increase in the U.S., he said.
Mr. Buffett, who turned 80 last August, also touched on succession planning in his letter. Besides being Berkshire's chief executive and chairman, Mr. Buffett is also its chief investment officer with responsibility for the company's over $150 billion investment portfolio. He has said that when he dies, his job will be split into three, with a separate chairman, chief executive, and one or more chief investment officers.
Berkshire recently hired former hedge fund manager Todd Combs as an investment manager following a lengthy search for candidates that could potentially step into Mr. Buffett's role as Berkshire's chief investment officer.
Mr. Buffett said the 40-year-old would initially manage funds in the range of $1 billion to $3 billion, and while Mr. Combs's focus will be on stocks, he isn't restricted to that type of investment.
Mr. Buffett said Berkshire may, over time, add one or two investment managers "if we find the right individuals," and the managers' compensation will be tied to their performance.
He also indicated he has no plans to relinquish his multiple jobs. "As long as I am CEO, I will continue to manage the great majority of Berkshire's holdings, both bonds and equities." He said that when he and Berkshire vice-chairman Charlie Munger, 87, are no longer around, Berkshire's investment managers will have responsibility for the entire portfolio in a manner then set by Berkshire's CEO and board of directors. The board, he added, will make the call on any major acquisition.
Mr. Buffett continued to emphasize that Berkshire's results in the future won't be what they once were. Noting Berkshire's "now only satisfactory" performance against the S&P in recent years, Mr. Buffett wrote: "The bountiful years, we want to emphasize, will never return. The huge sums of capital we currently manage eliminate any chance of exceptional performance."
He said Berkshire strives for "better-than-average results," and shareholders should expect that from the company.
Last year was the eighth time in Mr. Buffett's 46 years of running Berkshire that the company's book value change didn't beat the S&P 500, of which Berkshire is now a component following last year's B-share stock split purchase of Burlington Northern. The billionaire investor has said the "intrinsic value" of Berkshire's businesses is far more than their book value.Share Investor LinksDownload the 1977 - 2010 Warren Buffett Letter's to Berkshire Hathaway Shareholders
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