In his 2013 Berkshire Hathaway Annual Letter, Warren Buffett explains that Berkshire Hathaway’s intrinsic value far exceeds its book value, a gap that has widened over time. This justified a 2012 decision allowing share repurchases at 120% of book value, as such buybacks benefit shareholders by securing shares below intrinsic value.
However, no shares were repurchased in 2013 due to price constraints. Buffett, alongside Charlie Munger, expects Berkshire to outperform the S&P during down or moderately up markets but to underperform when the market rises strongly. Despite occasional shortfalls, Buffett remains confident that Berkshire will continue to exceed the S&P over full market cycles.
Here’s an excerpt from the letter:
As I’ve long told you, Berkshire’s intrinsic value far exceeds its book value. Moreover, the difference has widened considerably in recent years. That’s why our 2012 decision to authorize the repurchase of shares at 120% of book value made sense.
Purchases at that level benefit continuing shareholders because per-share intrinsic value exceeds that percentage of book value by a meaningful amount. We did not purchase shares during 2013, however, because the stock price did not descend to the 120% level.
If it does, we will be aggressive.
Charlie Munger, Berkshire’s vice chairman and my partner, and I believe both Berkshire’s book value and intrinsic value will outperform the S&P in years when the market is down or moderately up.
We expect to fall short, though, in years when the market is strong — as we did in 2013. We have underperformed in ten of our 49 years, with all but one of our shortfalls occurring when the S&P gain exceeded 15%.
Over the stock market cycle between yearends 2007 and 2013, we overperformed the S&P. Through full cycles in future years, we expect to do that again. If we fail to do so, we will not have earned our pay. After all, you could always own an index fund and be assured of S&P results.
You can find a copy of the letter here:
2013 Berkshire Hathaway Annual Letter
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