In a year when Berkshire Hathaway saw sizzling results, the "Oracle of Omaha" turns his thoughts to choosing a successor—and addressing the U.S. trade gap
The world's most famous stock picker, Warren Buffett, is hanging out the "help wanted" sign, hunting a younger chief investment officer who is "genetically programmed to recognize and avoid serious risks" while continuing Berkshire Hathaway's stunning run of investing success.
Conceding his age yet again, the 76-year-old Buffett said on Mar. 1 that he may work with several candidates to groom his successor.
"Over time, markets will do extraordinary, even bizarre, things," Buffett wrote in his annual letter to shareholders, released Mar. 1. "A single, big mistake could wipe out a long string of successes. We therefore need someone genetically programmed to recognize and avoid serious risks, including those never before encountered. Certain perils that lurk in investment strategies cannot be spotted by use of the models commonly employed today by financial institutions."
Buffett's letter accompanied a robust quarterly and full-year financial performance for his Omaha (Neb.) holding company, which had net income of $11 billion in 2006, up from $8.5 billion in 2005. Revenue grew to $98.5 billion from $81.7 billion the previous year. The results were buoyed by benign weather that limited Berkshire's insurance losses. "Our most important business, insurance, benefited from a large dose of luck: Mother Nature, bless her heart, went on vacation," Buffett wrote. "After hammering us with hurricanes in 2004 and 2005—storms that caused us to lose a bundle on super-cat [catastrophic] insurance—she just vanished. Last year, the red ink from this activity turned black—very black."
When Hurricane Katrina blasted New Orleans and large sections of the Gulf Coast in the summer of 2005, Berkshire ended up paying heavily for damages and its insurance units lost more than $1.4 billion for the year. But as reinsurance businesses, fearful of the prospect of more and fiercer hurricanes, began assessing higher premiums to accept risk, the meteorologically calm 2006 turned into a stellar year for the industry. Berkshire netted a $2.2 billion profit from its General Re and B-H Reinsurance underwriting operations.
"Enjoy the view, because you won't soon see another like it," Buffett wrote in his annual report. He added that it would be naive to consider Katrina anything close to a worst-case weather event. If the hurricane seasons of 2004-05 weren't aberrations, but the planet's first warning that the climate of the 21st century is going to change, 2006 will soon be perceived as a misleading period of calm preceding devastating storms, he wrote.
For the fourth quarter, Berkshire earned $3.58 billion, down 30% from $5.13 billion in the same period of 2005, when the company had a $3.3 billion gain from its large stake in Gillette, which was acquired by Procter & Gamble (PG). Berkshire's stake was exchanged for P&G shares. Beyond its core insurance and reinsurance properties, Berkshire Hathaway counts more than five dozen companies among its holdings, including Coca-Cola (KO), Anheuser-Busch (BUD), NetJets, American Express (AXP), Wells Fargo (WFC), and the Washington Post Co. (WPO)
Also in his letter, Buffett announced that Yahoo's (YHOO) chief financial officer, Susan Decker, will join Berkshire's board in May.
In Buffett's latest missive, which is widely read for its mix of straightforward business doctrine, folksy charm, and prophetic asides, the investor again took up his cudgel against U.S. spending habits and the transfer of assets to foreign lenders.
"Already the prediction I made last year about one fall-out from our spending binge has come true: The 'investment income' account of our country—positive in every previous year since 1915—turned negative in 2006. Foreigners now earn more on their U.S. investments than we do on our investments abroad. In effect, we've used up our bank account and turned to our credit card. And, like everyone who gets in hock, the U.S. will now experience 'reverse compounding' as we pay ever-increasing amounts of interest on interest."
Buffett also has earned vast sums for his shareholders betting in currency plays that the U.S. dollar will continue its gradual weakening—and he continues to hold that position, basing his view on the country's large trade imbalances.
"I fervently believe in real trade—the more the better for both us and the world. We had about $1.44 trillion of this honest-to-God trade in 2006. But the U.S. also had $.76 trillion of pseudo-trade last year—imports for which we exchanged no goods or services. (Ponder, for a moment, how commentators would describe the situation if our imports were $.76 trillion—a full 6% of GDP—and we had no exports.) Making these purchases that weren't reciprocated by sales, the U.S. necessarily transferred ownership of its assets or IOUs to the rest of the world. Like a very wealthy but self-indulgent family, we peeled off a bit of what we owned in order to consume more than we produced," he wrote. "The U.S. can do a lot of this because we are an extraordinarily rich country that has behaved responsibly in the past. The world is therefore willing to accept our bonds, real estate, stocks and businesses. And we have a vast store of these to hand over."
Investors bid up Berkshire's Class B (BRK.B) shares nearly 1%, or $31, to 3,554 on Mar. 1 on the New York Stock Exchange. The company's thinly traded Class A (BRK.A) shares gained $410 to close at 106,600.