Warren Buffett reminds shareholders that the book value per share figure is an after-tax number while the S&P 500 return is pre-tax. Apply a 20% tax to the index’s gains, and the percentage beat drops to 22 points — still significant, but not nearly as big a deal.
Furthermore, when you read page 13 in the 2012 shareholders letter, you will see that a huge gap of almost $5 billion exists between the intrinsic value of Berkshire’s 91.7% interest in Marmon Holdings (will go to 100% by March 2014) and the book value. GAAP accounting rules require that the company record its additional share purchases at far less than what it paid, creating a substantially lower book value than is reality.
While there aren’t too many cases like Marmon in the Berkshire cupboard, it simply illustrates that there are too many moving parts to definitively answer this question.
The Wall Street Journal’s Jan. 17 article pointing out that Berkshire investment managers Todd Combs and Ted Weschler have both beaten Warren Buffett as well as the S&P 500 the past two years should be taken with a grain of salt. The duo were managing about $14 billion compared to $86 billion for Warren Buffett. While they were buying less than $1 billion per stock, he was busy maintaining or building huge positions in companies like IBM (IBM).
The ability to buy in a stealth-like fashion is much easier when the dollar amounts are in the millions rather than billions.
I’d dare say Warren Buffett has done as well as the average large-cap money manager … and with a much more unwieldy portfolio.
The End of the Line
John Elway retired in 1999 on the back of two consecutive Super Bowl wins, erasing the pain of three previous losses in the big game (including a 42-10 drubbing at the hands of my beloved Redskins). He went out a big-time winner. Brett Favre, on the other hand, took a great career and almost ruined his legacy by staying on long after his god-given talent abandoned him. He’s a Hall of Famer for sure, but stops with the Jets and Vikings tarnished that image on and off the field.
The legacy of Warren Buffett is cemented in history along with his mentor, Ben Graham. He’s John Elway multiplied by 10. His long-term investment performance is second to none. He’s operating at an extremely high level of competence at an age at which many people are lucky if they can make it out for a game of golf every so often. Still looking to bag the elephant much like Bud Fox in the original Wall Street, Burlington Northern might turn out to be his last big hurrah.
But don’t think for a minute he has stopped trying.
In my opinion, the only way his greatness can truly be measured is if the entire company is sold off bit by bit in a controlled, measurable fashion. It’s at this point that the ultimate value of Berkshire Hathaway will be realized — far in excess of what anyone believes is its intrinsic value. By then, of course, Warren Buffett will be long gone — but never forgotten.
Go out like Favre? Not in a million years.
If anything, he’ll go out like Gehrig, a humble champion.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.