Warren Buffett writes in his annual letter to shareholders that the company's board is "enthusiastic" about a person it has chosen to eventually take over as CEO of Berkshire Hathaway.
But Buffett does not name that person, saying only that it's "an individual to whom they have had a great deal of exposure and whose managerial and human qualities they admire." There are also "two superb back-up candidates."
Previously Buffett has said there were three internal candidates for the job and that the board knew who it would go to if Buffett, 81-years old, suddenly died or became incapacitated.
Buffett predicts that "when a transfer of responsibility is required, it will be seamless, and Berkshire's prospects will remain bright." He doesn't expect this to happen soon: "Do not, however, infer from this discussion that Charlie and I are going anywhere; we continue to be in excellent health, and we love what we do."
Buffett implies that new portfolio managers Todd Combs and Ted Weschler will eventually take over Buffett's role as chief investment officer, writing that they have "the brains, judgment and character to manage our entire portfolio when Charlie (Munger) and I are no longer running Berkshire."
Housing in 'Depression'
Warren Buffett says America's housing sector "remains in a depression of its own" but will eventually recover as America continues to create "more households than housing units."
In the meantime, however, Buffett writes that the company's housing-related units continue to "sputter."
He admits that his prediction a year ago that housing's recovery would probably begin within "a year or so" was "dead wrong."
Buffett writes that the housing market's continued weakness is "the major reason a recovery in employment has so severely lagged the steady and substantial comeback we have seen in almost all other sectors of our economy."
Admits 'Big' Mistake
In his letter, Buffett admits to making a "big mistake" when he spent about $2 billion "a few years back" buying Energy Future Holdings bonds. It's a Texas electric utility with "prospects tied to the price of natural gas, which tanked shortly after our purchase and remains depressed."
Berkshire wrote down that investment by $1 billion in 2010 and another $390 million in 2011 and may wind up wiping out almost all of the remaining $878 million in carrying value.
Buffett writes that "in tennis parlance, this was a major unforced error by your chairman."
Share Repurchases
Buffett says Berkshire's previously announced share buyback plan resulted in just $67 million of purchases over a few days in September, as the stock price quickly topped its pre-determined upper limit of 110 percent of book value.
Buffett writes that "given the opportunity, we will likely repurchase stock aggressively at our price limit or lower" but "we have no interest in supporting the stock and our bids will fade in particularly weak markets."
Wants IBM Shares to 'Languish'
Buffett devotes several paragraphs to one of his favorite themes: investors who will be buying in the future should be happy, not sad, when stock prices fall.
"When Berkshire buys stock in a company that is repurchasing shares, we hope for two events: First, we have the normal hope that earnings of the business will increase at a good clip for a long time to come; and second, we also hope that the stock underperforms in the market for a long time as well. A corollary to this second point: 'Talking our book' about a stock we own — were that to be effective — would actually be harmful to Berkshire, not helpful as commentators customarily assume."
Buffett uses Berkshire's stake in IBM as an example. He says the company will probably spend $50 billion or so over five years to repurchase shares. As a result, "We should wish for IBM's stock price to languish" over that time period.
"The logic is simple: If you are going to be a net buyer of stocks in the future, either directly with your own money or indirectly (through your ownership of a company that is repurchasing shares), you are hurt when stocks rise. You benefit when stocks swoon. Emotions, however, too often complicate the matter: Most people, including those who will be net buyers in the future, take comfort in seeing stock prices advance. These shareholders resemble a commuter who rejoices after the price of gas increases, simply because his tank contains a day’s supply."
He admits, however, that he and Munger "don't expect to win many of you over to our way of thinking — we've observed enough human behavior to know the futility of that."
His personal revelation came after reading Chapter Eight of Ben Graham's The Intelligent Investor. "Picking up that book was one of the luckiest moments of my life."
Todd and Ted
Buffett says new portfolio manager Todd Combs built a $1.75 billion portfolio (at cost) in 2011, and Ted Weschler, who joined Berkshire shortly after the end of the year, will "soon create one of similar size." He apparently wants the two men to work as a team, revealing that each of them "receives 80% of his performance compensation from his own results and 20% from his partner's."
Buffett also notes, as he has in the past, that when Berkshire's quarterly portfolio filings show "relatively small holdings, they are not likely to be buys I made (although the media often overlook that point) but rather holdings denoting purchases by Todd or Ted."
Book Value
Buffett reports that Berkshire's per-share book value increased by 4.6 percent in 2011, outperforming the S&P's 2.1 percent gain, including dividends.
He uses book value as a "useful, though considerably understated, proxy" for intrinsic business value, his way of measuring his performance.
Berkshire's stock price underperformed the S&P's, excluding dividends, with a 4.7 percent drop last year. The benchmark stock index was flat.
Current Berkshire stock prices:
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