Berkshire Hathaway record $19.5bn profit

Warren Buffet’s investment company Berkshire Hathaway reported record profits of $19.5bn for 2013, compared to $14.8 billion the year before. Even so, in the S&P 500 share index it underperformed for the fifth successive year.

Buffet wrote:

“We expect to fall short… in years when the market is strong – as we did in 2013. We have underperformed in 10 of our 49 years, with all but one of our shortfalls occurring when the S&P gain exceeded 15%.”

The book value of Berkshire Hathaway was 18.2% last year. A company’s book value is its assets minus its liabilities.

Buffet expects Berkshire Hathaway to outperform the stock market

Between 2007 and 2013, the Berkshire Hathaway fund had performed better than the stock market. Buffet expects it to do so again over a full six-year cycle. The company would not have earned its pay if it does not do so, he said.

Buffet admitted to making some “small blunders” last year.

Buffet added, in a letter to shareholders:

“On the operating front, just about everything turned out well for us last year – in certain cases very well. We completed two large acquisitions, spending almost $18 billion to purchase all of NV Energy and a major interest in H. J. Heinz. Both companies fit us well and will be prospering a century from now.”

“With the Heinz purchase, moreover, we created a partnership template that may be used by Berkshire in future acquisitions of size. Here, we teamed up with investors at 3G Capital, a firm led by my friend, Jorge Paulo Lemann. His talented associates – Bernardo Hees, Heinz’s new CEO, and Alex Behring, its Chairman – are responsible for operations.”

The company performed especially well in its energy (MidAmerican Energy), rail (Burlington Northern Santa Fe) and insurance (Geico, General Reinsurance) businesses, the main drivers of last year’s bumper profits.

Buffet increase the company’s stake in Coca-Cola, Wells Fargo, IBM and American Express, and reduced its shareholding in UK supermarket chain Tesco, from 5.2% to 3.7%.

Buffet acknowledges mistakes

Mr Buffet admitted to making some investment mistakes in the retail, service and manufacturing sectors, which produced very disappointing returns.

He said rather than being misled, “I simply was wrong in my evaluation of the economic dynamics of the company or the industry in which it operated. Fortunately, my blunders usually involved relatively small acquisitions. Our large buys have generally worked out well and, in a few cases, more than well. I have not, however, made my last mistake in purchasing either businesses or stocks. Not everything works out as planned.”

According to Forbes, Warren Buffet is the fourth richest person in the world, with a net worth of $58.2 billion. The richest is Bill Gates ($76 billion), Carlos Slim ($72 billion) is the second wealthiest, followed by , and Amancio Ortega (64 billion).