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The letter, however, quickly reveals Buffett's unique perspective. He was not comparing Berkshire's stock price to the S&P. Nor was he referring to the company's 45% drop in net income, even though that number understates the shortfall (Berkshire's 1999 net income results, at $1.557 billion, were down 67% from the combined 1998 income of Berkshire and its newly acquired subsidiaries, most notably the global insurance and reinsurance company General Re). Instead, Buffett was talking about Berkshire's book value, which increased 0.5%, far lower than its 24% annual growth under Buffett. Increasing Berkshire's value, not its price or earnings, is the Chairman's goal.
In fact, Buffett said in his 1998 letter that he would try to reduce the profit margins at the property/casualty insurer Geico. Buffett seeks to write insurance policies at a break-even rate, so that he can maximize the interest-free capital at his disposal. Geico performed in accordance with this goal, producing a 0.5% profit margin. The company will ramp up its marketing efforts in 2000. General Re, on the other hand, had a very bad underwriting year, losing over $1 billion, or 17% of its premiums earned.
Buffett, ever self-deprecating, blamed the results on his inferior capital allocation. He noted that his major holdings, which include Coca-Cola <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KO)") else Response.Write("(NYSE: KO)") end if %>, American Express <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AXP)") else Response.Write("(NYSE: AXP)") end if %>, and Gillette <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: G)") else Response.Write("(NYSE: G)") end if %>, have lagged the market. Berkshire's common stock portfolio lost less than 1% in 1999. Though it was not discussed, the letter revealed that Berkshire sold at least half of its position in Walt Disney Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DIS)") else Response.Write("(NYSE: DIS)") end if %>; it did not appear in the list of holdings valued more than $750 million. Buffett did talk about the latest addition to this group, MidAmerican Energy <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MEC)") else Response.Write("(NYSE: MEC)") end if %>, in which Berkshire has acquired a 76% stake, now worth about $1.5 billion.
Buffett voiced his distaste for the share-repurchase fad on Wall Street: "Repurchases are all the rage, but are all too often made for an unstated and, in our view, ignoble reason: to pump or support the stock price." He also noted that they can hurt the long-term shareholder, if the purchases are made above intrinsic value. He mentioned, however, that he had considered share repurchases when the A shares fell below $45,000, but said that the company decided to delay any decision until after the annual report was released, so that shareholders could have all the facts before deciding to sell. In an unrelated story, A shares traded up $3,700 to $45,000 this morning.
The letter also addressed critics, including David Gardner, who fault Buffett's aversion to tech stocks. "Our problem -- which we can't solve by studying up -- is that we have no insights into which participants in the tech field possess a truly durable competitive advantage," Buffett wrote. He went on to say, "If anyone starts explaining to you what is going on in the truly-manic portions of the "enchanted" market, you might remember still another line of song: 'Fools give you reasons, wise men never try.'"
As a Berkshire shareholder and a Fool, I disagree. I prefer to give the market the benefit of the doubt in its valuation of stocks. When it seems out of whack, I like to discuss reasons why. It is not enough, I think, simply to pronounce the market "manic" without offering some explanation. As it is, the Chairman sounded a little bitter in his dismissal of "Internet economics." Buffett also could have said a lot more about his recent equity moves, including his investment in, of all things, Microsoft <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %> preferred stock. He could have explained why he considered that "enchanted" stock worthy of purchase, while Disney had lost its magic.
That said, I'm happy that the Chairman knows his limitations. It's what makes him a great investor.
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