Critics, Fans Are Expected to Comb Buffett's Message
Published Friday
March 10, 2000
BY STEVE JORDON, WORLD-HERALD STAFF WRITER
Warren Buffett's annual letter to shareholders - due to be unveiled about 7 a.m. Saturday at www.berkshirehathaway.com on the Internet - may be met with uncharacteristic scrutiny.
In the past, investors have applauded Berkshire Hathaway Inc.'s rising stock price and a long string of beating the overall stock market with its gains in net worth. But now, the stock price is down more than 40 percent from year-ago levels, and in 1999, the Omaha conglomerate failed to outgain the Standard & Poor's 500 index for the first time since 1980.
Many shareholders may expect Buffett, the company's chairman and chief executive and a man revered as one of the world's most brilliant investors, to explain what happened. More importantly, they want to know what he intends to do about it.
"I think it'll be a very interesting report because it's been a very difficult year for Berkshire," said John M. Roberts, a vice president with Hilliard-Lyons Inc., an affiliate of PNC Bank of Pittsburgh.
The price of the company's class A stock closed Thursday at $42,300, its lowest level since September 1997. Berkshire's class B shares closed at $1,400. All this on a day that the Nasdaq composite index broke through to close above 5,000 mark for the first time. The Nasdaq is now up 24 percent since the beginning of the year.
Analysts cite a combination of reasons for the decline: false rumors that Buffett, 69, was in poor health; poor earnings among auto insurers, which might affect Berkshire's insurance operations; and investors' fascination with high-technology stocks, which have posted dramatic price gains in recent months.
Roberts said he expects Buffett to write about Berkshire's stock price and about the performances of its equity holdings, including large blocks of stock in Coca-Cola Co. and Gillette Co.
In the past, Buffett has called those companies "the inevitables" because their market dominance and strong brand names virtually guarantee consistent profitability and strong stocks. "They haven't been very inevitable in the past year," Roberts said. "Value stocks are out of favor, growth stocks are in favor."
But Roberts said he doesn't expect Buffett to change his philosophy. "He's a long-term investor, and this was a short-term trend," he said. "His type of stocks and his stock in particular are out of favor. Most investors are looking at the dot-coms."
Self-effacing and honest, Buffett's annual letter to shareholders is a model of clarity for investors, laying out the company's performance and occasional failures in simple terms. The language is so down-to-earth that the U.S. Securities and Exchange Commission once asked him to help publicly traded companies cut through the financial jargon that baffles so many investors.
And Buffett doesn't pull punches when he's made a mistake. From last year's report: "Here, I need to make a confession (ugh): The portfolio actions I took in 1998 actually decreased our gain for the year. In particular, my decision to sell McDonald's was a very big mistake. Overall, you would have been better off last year if I had regularly snuck off to the movies during market hours."
Views about the upcoming report vary.
"I'll tell you what Warren Buffett should say when he releases his statement to shareholders - 'I'm sorry!' - that's what," said Harry Newton, publisher of Technology Investor Magazine. "I can't understand it. How did Buffett miss the silicon, wireless, DSL, cable and biotech revolutions?"
But Buffett still has fans who are rallying around him, saying the worst seems to be over.
"I'm not selling any of my Berkshire stock, and my friends are buying," said Tom Knapp, 79, an old college friend of Buffett's who retired as a partner from Tweedy, Browne & Knapp, a New York City brokerage firm.
George Morgan, a vice president with Kirkpatrick Pettis Investments in Omaha and a longtime Buffett watcher, said that this year, Buffett didn't make any mistakes that caused Berkshire's price drop.
Buffett may point out that the usual connection between a company's value and its stock price disappeared over the past year, causing Berkshire's market price to decline even though its investments are still good for the long term.
Morgan said he expects no bombshells, such as a change in the basic principles behind Berkshire Hathaway. Buffett may write about the concept of a "new economy" represented by technology-based stocks, versus the "old economy" and its blue-chip stocks, Morgan said.
Morgan said it would be uncharacteristic of Buffett to discuss the market price of Berkshire's shares, but he realizes shareholders who come to the company's annual meeting April 29 at the Omaha Civic Auditorium will want to know his views.
"I imagine that it's an issue that at some point in time has to be addressed," Morgan said, possibly through a general discussion of how a company's basic value should influence its stock price.
One topic, Morgan said, might be Buffett's new interest in the rapidly deregulating electrical power industry. Berkshire is leading a $9 billion purchase of MidAmerican Energy Holdings Co., a Des Moines-based energy company that intends to take advantage of deregulated markets in the United States and other nations.
MidAmerican, whose chairman is Omahan David Sokol, may have access to Berkshire's capital, which would give it a cost advantage in newly competitive electricity markets, Morgan said.
Buffett probably will discuss the property-casualty insurance industry in general and add specific comments about General Re Corp., Geico Corp. and Berkshire's other insurance holdings.
"We all know that there has been and there is somewhat of a cycle in the property-casualty business that in all probability is not going to go away," Morgan said. "The insurance business has always been one he is interested in and knows how to make money in."
If Buffett comments on his health, Morgan said, it may be an off-the-cuff, humorous reference. He has said a number of times that he plans to manage the business after he dies by giving his directors a Ouija board.
More seriously, some news reports have said Geico executive Louis A. Simpson is a possible successor, although Simpson is only six years younger than Buffett.
Any mention of Berkshire's recent acquisition of Microsoft Corp. shares will be brief, Morgan said, because that $17 million investment is not significant in relation to Berkshire's other holdings.
Buffett also may write about the SEC's decision to require Berkshire and other investment companies to report most of their stock trades quarterly rather than keeping them confidential for a year or more to protect their trading strategies.
One possible impact of the report: Berkshire's stock price may rise. In recent years, news coverage of the report and the company's annual meeting has boosted the stock price. Morgan said that effect may be blunted this year because the declining price over the past several months may have depleted the number of stockholders who are willing to sell.
"Eventually, those people have to run out of shares," Morgan said.
Berkshire has about 250,000 shareholders, and company Vice President Marc Hamburg said the number of shareholders apparently has increased slightly over the past year, based on orders for the annual report.
Newsday contributed to this report.
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