"We're prepared. Our elephant gun has been reloaded, and my trigger finger is itchy," the billionaire investor said in the letter accompanying Berkshire's annual report.
The company's 2010 net income of $13 billion received a big boost from railroad operator Burlington Northern Santa Fe, which Berkshire acquired for roughly $27 billion last February. In his letter, Mr. Buffett called the deal "the highlight of 2010" and said it is working out "even better" than he had expected, The railroad business generated $4.5 billion in operating earnings last year and $2.5 billion in net earnings, up about 40% from 2009.
While Omaha, Nebraska-based Berkshire has spent tens of billions of dollars on capital-intensive businesses like railroads and utility operators in recent years, its other businesses, such as insurance, are still generating large amounts of cash for Mr. Buffett to invest in financial assets and to acquire more businesses. At the end of 2010, Berkshire's pile of cash and cash equivalents stood at $38 billion, the highest year-end amount since 2007. Berkshire's businesses,
Mr. Buffett noted, are now earning about $1 billion a month.
As Berkshire tries to keep growing from an ever-expanding base, Mr. Buffett has to find more avenues to invest to achieve his long-stated goal of increasing the company's value faster than the rate of growth in the Standard & Poor's 500-stock index.
Berkshire's book value, a measure of assets minus liabilities that is a rough proxy for the company's actual, or "intrinsic," value, grew 13% in 2010 to $95,453 per share, versus last year's 15.1% total return in the S&P 500. It was the second year in a row, and only the eighth time in Mr. Buffett's 46 years of running Berkshire, that the company's book value change didn't beat the index, whose returns include dividends. Berkshire is now a component of that index following last year's B-share stock split and purchase of Burlington Northern.
Mr. Buffett repeated a refrain from past years, stating that Berkshire's future performance is unlikely to replicate its past. Noting the company's "now only satisfactory" performance against the S&P in recent years, Mr. Buffett wrote: "The bountiful years, we want to emphasize, will never return. The huge sums of capital we currently manage eliminate any chance of exceptional performance."
Mr. Buffett said if Berkshire over time outperforms the market, as shareholders should expect from the company, it will likely be from producing better relative results in bad years for the stock market while suffering poorer results in stronger years.
Shareholders last year weren't disappointed. Berkshire's Class A shares, which don't pay dividends, gained 21% in 2010, besting the S&P and giving the company a market value of roughly $200 billion at year end. The shares are up nearly 6% this year, closing at $127,550 on Friday.
Berkshire's book value, which grew $26.2 billion in 2010, was boosted by the continuing recovery of stocks in Berkshire's giant investment portfolio. Wells Fargo & Co. and Coca-Cola Co., Berkshire's largest equity positions, each rose 15% last year, and each holding is now valued at more than $11 billion.
Stocks and Burlington Northern weren't the only part of the portfolio that delivered.
A host of Berkshire-owned businesses that had suffered from declining sales and shrinking profits amid the recession now appear to be recovering. Mr. Buffett heralded improvements at units including Fruit of the Loom Inc., Israel-based toolmaker Iscar Ltd. and electronic-components distributor TTI Inc.
Net earnings from Berkshire's manufacturing, service and retailing operations more than doubled from a year earlier to $2.5 billion in 2010 as the businesses rode the recovering economy. The company's annual report said it anticipates that "general economic conditions will continue to gradually improve, albeit unevenly, over time."
Mr. Buffett said an "overwhelming" part of the future investments of Berkshire's businesses would be in the U.S. Of $8 billion in capital spending slated for 2011, which his letter called a record amount, Berkshire will spend all of the $2 billion increase from last year in the U.S. He said the U.S. offers "an abundance" of opportunity.
Berkshire's insurance units give Mr. Buffett money to invest until the premiums collected are needed to pay claims years in the future. Mr. Buffett calls these funds "float," and he reported Saturday that the pool of funds swelled to about $66 billion from $63 billion a year earlier. Investment income from the insurance operations was about $5.2 billion, compared with $5.5 billion in 2009.
In the letter, Mr. Buffett discussed what he and Berkshire Vice Chairman Charlie Munger would regard as a "normal year" for Berkshire. That would be one with a general business climate better than last year's, but weaker than 2005 or 2006, and one without a large catastrophic event that could trigger large payouts from its insurance business. In such a year, Berkshire's assets could expect to earn about $17 billion in pretax and $12 billion in after-tax earnings, excluding capital gains or losses, he said.