Berkshire Hathaway is expected to release its 2011 Annual report and it will be scrutinized by every major news outlet, value investor and Berkshire shareholder out there. It is bar the most anticipated annual report out there. So what can we expect?
David Sokol fiasco...
2011 was the first time an individual threatened Berkshire Hathaway's reputation as insider trading allegations arose due to some trades former NetJets Chairman and CEO made prior to making a bid for now acquired Lubrizol. In previous annual reports, Warren Buffett praised Sokol for turning NetJets into a profitable operation and saving Buffett from another airline investment in which he loses money in. An audit committee was eventually set up and a reportrevealed that Sokol committed several violations such as Breach of the Duty of Candor, Usurpation of Corporate Opportunity, and Federal Insider Trading. While the media attention has pretty much died, the case was never officially closed and was left as "Berkshire board and audit committee are considering whether to pursue “possible legal action against Mr. Sokol to recover any damage the company has sustained, or his trading profits,” the report says.
The IBM investment and European Stocks
2011 was also the year Warren Buffett finally found an elephant. Of all places, it was in the Tech jungle as Berkshire Hathaway took a $10 billion investment in International Business Machines or simply known as IBM. Buffett bought IBM's stock pretty much throughout the year and continued to buy shares even after it was reported he had already owned 5% of the company. IBM is now Berkshire's second largest equity position (behind Coca-Cola) and represents 17% of Berkshire Hathaway's portfolio. In the interview he did with CNBC, Warren Buffett gave some hints as to why he purchased IBM but he wasn't exactly keen on releasing more details about the purchase "yet". I expect (and hope) Buffett goes into a bit more detail in his IBM investment as this type of large investment is rare from Buffett. In addition to IBM, in late 2011 Warren Buffett admitted to CNBC that he is purchasing a European stock "today". While it is a bit of a long shot Buffett will disclose the firm's name, as he may or may not completed his stake in the unnamed company, releasing the name will make his interview with CNBC on Monday morning a lot more interesting.
I expect Warren Buffett to touch on the performance on Berkshire Hathaway's Co-Portfolio managers Ted Weschler and Todd Combs. Judging from some of the recent additions to Berkshire's portfolio, both of them have started putting some of their allocated money to work and might have agreed on a stock in DirecTV (DTV). Yet, there is one position yet to be filled, the future Chief Executive Officer. David Sokol was to be a leading candidate to take over the driver's seat but the insider trading fiasco immediately put him out of the running. Several names that have been mentioned include GEICO"S CEO Tony Nicely, Grady Rosier, who heads the McLane food distribution business, and Vic Mancinelli who leads CTB Inc., a farm-products business. One thing we know for sure, Warren Buffett's son, Howard Buffett would be in charge of safeguarding would safeguard Berkshire's culture as non-executive chairman.
In the 2010 Annual Report, Buffett touched on this subject a bit and stated:
“Investors can be sure that the principles we have employed to date in running Berkshire will continue to guide the managers who succeed me and that our unusually strong and well- defined culture will remain intact,” Buffett said in the letter. “Lest we end on a morbid note, I also want to assure you that I have never felt better.”
Walter Schloss and Ed Anderson...
In the past couple of weeks Warren Buffett and the value investing world lost two great individuals (and outstanding investors) that were highlighted in theSuperinvestors of Graham and Doddsville,Walter Schloss and Ed Anderson. Expect Warren Buffett to pay tribute to individuals who were close friends of his.
Focus on Financials
Personally, I will focus a bit more on the financials and questions along the lines of:
- How is Burlington performing?
- How are companies with a close tie to the housing market performing?
- How much cash is coming in and how much cash does Warren have on the books to take advantage of new opportunities or repurchase shares?
A fun exercise would be calculate Berkshire Hathaway Intrinsic Valueand see how much it increased or decreased. Finally, do not be in a rush to read it right after its release. Berkshire's website usually slows down and it can become a bit frustrating. I promise you, the 2011 annual report will be there on Sunday and for the rest of the year.