Buffett's Berkshire Hathaway Inc failed to beat S&P 500 in 2011

Warren Buffett, the billionaire investor who has highlighted his record of beating the market when stocks languish, oversaw a decline last year as the Standard & Poor's 500 Index ended unchanged.

Buffett's Berkshire Hathaway Inc slipped 4.7 per cent in 2011. It was the second time since 1990 that the Omaha, Nebraska-based firm underperformed an S&P 500 that had either declined for the year or rose less than five per cent. Berkshire gained 17-fold in the 21-year period, while the index has quadrupled.

"There's going to be a big asterisk by this year," said David Rolfe, chief investment officer of Berkshire investor Wedgewood Partners Inc. "In tough markets, it's a strong performer. There's no doubt it has broken the mould this year," he said in an interview last month.

 

Buffett's personal holdings of Berkshire lost about $2 billion last year. In September, the 81-year-old Buffett initiated the first share-repurchase programme in four decades as Berkshire's chief executive officer. On a quarterly average basis, the stock price slipped in the three months ended September 30 to the lowest relative to book value in 20 years.

The firm faced a surge in insurance claims tied to natural disasters and losses on a portfolio of speculative derivatives. The resignation of Berkshire manager David Sokol in March raised questions about succession for Buffett.

"Berkshire stock went to a price we never thought," vice-chairman Charles Munger said on July 1 after the firm slipped 3.6 per cent in the first six months of the year compared with a 5 per cent rise in the S&P.

Insurance losses
Munger cited Berkshire's insurance losses tied to the March earthquake and tsunami in Japan. Jay Gelb, an analyst with Barclays Plc, said in May that "succession risk is elevated" following Sokol's exit. On August 9, Gelb raised his rating on Berkshire stock to "overweight" from "neutral," saying the stock slide provided a buying opportunity. The shares have gained 5.2 per cent since.

Berkshire was one-thirtieth the size it is now, based on book value, when in 1990 it dropped 23 per cent, compared with the 6.6 per cent slide in the S&P 500. Since then, the S&P 500 has posted five annual losses and three advances of less than five per cent. Berkshire beat the index in each of those eight years, except for 2005 when the company gained less than one per cent compared with a three per cent rise in the S&P 500.

"Our defense has been better than our offense," Buffett said in the letter accompanying the 2009 annual report. Buffett, who highlights book value as a measure of performance rather than stock gains, said his firm has "consistently done better than the S&P" in years when the index has fallen.

Book value
Berkshire's book value, a measure of assets minus liabilities, rose 1.7 per cent to $160 billion in the nine months ended September 30, helped by the Burlington Northern Santa Fe railroad and units like toolmaker Iscar Metalworking Cos. The price-to-book ratio was about 1.2 on December 31, higher than the third-quarter average of 1.1, according to data compiled by Bloomberg. Book value was $5.3 billion at the end of 1990.

Berkshire is the biggest shareholder of Wells Fargo & Co and New York-based American Express Co, both of which posted fourth-quarter gains. Wells Fargo, the San Francisco-based bank that is the biggest US mortgage lender, fell 22 per cent in the first nine months of the year, wiping $2 billion off of the market value of Berkshire's stake.

Buffett, who built Berkshire through stock picks and insurance sales, has transformed the company by buying whole companies and adding businesses with large infrastructure like the railroad and a power producer. The shift, Buffett said in 2007, has made Berkshire's book value less sensitive to declines in equity markets.

Expect to outperform
"We, therefore, expect to outperform the S&P in lacklustre years for the stock market and under-perform when the market has a strong year," Buffett said in Berkshire's 2006 annual report, adding an entry to his list of business principles included in every year-end edition.

The earthquake and tsunami that struck Japan on March 11 contributed to $1.3 billion of after-tax catastrophe costs in the first nine months of the year, compared with about $500 million a year earlier. Losses on derivatives, used to bet on long-term stock gains and the creditworthiness of borrowers, widened 23 per cent to $2.36 billion.

Buffett, who runs Berkshire with a staff of about 20 people at the company's headquarters, has told investors the firm has a list of candidates capable of succeeding him at CEO. Sokol, a former chairman of Berkshire's MidAmerican Energy Holdings, was seen by some, including Buffett biographer Andrew Kilpatrick, as a possible successor before he resigned.