Over the last half-century, Warren E Buffett has built a reputation as a contrarian investor, betting against the crowd to amass a fortune estimated at $54 billion.
Buffett underscored that contrarian instinct in his annual letter to shareholders published yesterday. In a year when Buffett did not make any large acquisitions, he bought dozens of newspapers, a business others have shunned. His company, Berkshire Hathaway, has bought 28 dailies in the last 15 months.
"There is no substitute for a local newspaper that is doing its job," he wrote.
Those purchases, which cost Buffett a total of $344 million, are relatively minor deals for Berkshire, and just a small part of the giant conglomerate. And, Buffett has begun this year with a bang, announcing last month his takeover, along with a Brazilian investment group, of the ketchup maker H J Heinz for $23.6 billion.
Despite the Heinz acquisition, Buffett bemoaned his inability to do a major deal in 2012. "I pursued a couple of elephants, but came up empty-handed," he said, adding that "our luck, however, changed early this year" with the Heinz purchase.
Written in accessible prose largely free of financial jargon, Berkshire's annual letter holds appeal far beyond Wall Street. This year's dispatch contained plenty of Buffett's folksy observations about investing and business that his devotees relish. "More than 50 years ago, Charlie told me that it was far better to buy a wonderful business at a fair price than to buy a fair business at a wonderful price," Buffett wrote, referring to his longtime partner at Berkshire, Charlie Munger.
Buffett also struck a patriotic tone, directly appealing to his fellow chief executives "that opportunities abound in America." He noted that the United States gross domestic product, on an inflation-adjusted basis, had more than quadrupled over the last six decades. "Throughout that period, every tomorrow has been uncertain," he wrote. "America's destiny, however, has always been clear: ever-increasing abundance."
The letter provides more than entertainment value and patriotic stirrings, delivering to Berkshire shareholders an update on the company's vast collection of businesses. With a market capitalisation of $250 billion, Berkshire ranks among the largest companies in the United States.
Its holdings vary, with big companies like the railroad operator Burlington Northern Santa Fe and the electric utility MidAmerican Energy, and smaller ones like the running-shoe outfit Brooks Sports and the chocolatier See's Candies. All told, Berkshire employs about 288,000 people. The letter, once again, did not answer a question that has vexed Berkshire shareholders and Buffett-ologists: Who will succeed Buffett, who is 82, as chief executive?
Last year, he acknowledged that he had chosen a successor, but he did not name the candidate. He has said that upon his death, Berkshire will split his job in three, naming a chief executive, a nonexecutive chairman and several investment managers of its publicly traded holdings.
In 2010, he said his son, Howard Buffett, would succeed him as nonexecutive chairman. Berkshire's share price recently traded at a record high, surpassing its prefinancial crisis peak reached in 2007 and rising about 22 per cent over the last year.
The company reported net income last year of about $14.8 billion, up about 45 per cent from 2011. Yet, the company's book value, or net worth "Buffett's preferred performance measure" lagged the broader stock market, increasing 14.4 per cent, compared with the market's 16 per cent return.
Buffett lamented that 2012 was only the ninth time in 48 years that Berkshire's book value increase was less than the gain of the Standard & Poor's 500-stock index. But he pointed out that in eight of those nine years, the S & P had a gain of 15 per cent or more, suggesting that Berkshire proved to be a most valuable investment during bad market periods.
"We do better when the wind is in our face," he wrote.
For Berkshire's largest collection of assets, its insurance operations, the wind has been at its back. We "shot the lights out last year" in insurance, Buffett said.
He lavished praise on the auto insurer Geico, giving a special shout-out to the company's mascot, the Gecko lizard.
Investors also keep a keen eye on changes in Berkshire's roughly $87 billion stock portfolio. Its holdings include large positions in iconic companies like International Business Machines, Coca-Cola, American Express and Wells Fargo. He said Berkshire's investment in each of those was likely to increase in the future.
"Mae West had it right: 'Too much of a good thing can be wonderful,' " Buffett wrote.
He also heaped praise on two relatively new hires, Todd Combs and Ted Weschler, who now each manage about $5 billion in stock portfolios for Berkshire. Both men ran unheralded, modest-size money management firms before Buffett plucked them out of obscurity and moved them to Omaha to work for him.
He called the men "a perfect cultural fit" and indicated that the two would manage Berkshire's entire stock portfolio once he steps aside. "We hit the jackpot with these two," Buffett said, noting that last year, each outperformed the S&P by double-digit margins.
Then, sheepishly, employing supertiny type, he wrote: "They left me in the dust as well."
A former paperboy and member of the Newspaper Association of America's carrier hall of fame, Buffett devoted nearly three out of 24 pages of his annual report to newspapers.
While Buffett has been a longtime owner of The Buffalo News and a stakeholder in The Washington Post Company, he told shareholders four years ago that he wouldn't buy a newspaper at any price. But his latest note reflects how much his opinion has turned. His buying spree started in November 2011, when he struck a deal to buy The Omaha World-Herald Company, this hometown paper, for a reported $200 million. By May 2012, he bought out the chain of newspapers owned by Media General, except for The Tampa Tribune. In recent months, he continued to express his interest in buying more papers "at appropriate prices" and that means a very low multiple of current earnings."
"Papers delivering comprehensive and reliable information to tightly bound communities and having a sensible Internet strategy will remain viable for a long time," wrote Buffett.
Buffett said in a telephone interview last month that he would consider buying The Morning Call of Allentown, Pa, a paper that the Tribune Company is considering selling. But Buffett said he had not contacted Tribune executives.
"It's solely a question of the specifics of it and the price," he said about the Allentown paper. "But it's similar to the kinds of communities that we bought papers in." Buffett has plenty of cash to make more newspaper acquisitions. To cover his portion of the Heinz purchase, Buffett will deploy about $12 billion of Berkshire's $42 billion cash hoard. That leaves a lot of money for Buffett to continue his shopping spree for newspapers" and more major acquisitions like Heinz.
"Charlie and I have again donned our safari outfits," Buffett wrote, "and resumed our search for elephants."