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As Berkshire Improves, Buffett Sings Praises of U.S.

Warren E. Buffett does not put a title on his annual letter. But if he did, this year’s dispatch might be headlined “God Bless the U.S.A.”

In the face of persistent worries about the American economy, the country’s most famous — and closely followed — investor struck a patriotic tone in his annual report to shareholders of his company, Berkshire Hathaway, writing that “money will always flow toward opportunity, and there is an abundance of that in America.”

Mr. Buffett said Berkshire last year spent more than $5 billion on property and equipment in the United States – more than 90 percent of the company’s total expenditure – and that the overwhelming part of the company’s future investment will be at home.

“The prophets of doom have overlooked the all-important factor that is certain: Human potential is far from exhausted, and the American system for unleashing that potential – a system that has worked wonders for over two centuries despite frequent interruptions for recessions and even a Civil War – remains alive and effective,” he wrote.

“Now, as in 1776, 1861, 1932 and 1941, America’s best days lie ahead.”

Dispensing financial observations in a folksy manner, the yearly dispatch from the 80-year-old Mr. Buffett has become something of a state of the union address for Wall Street and, more broadly, for the global economy.

But the letter also serves as an update for Mr. Buffett’s most important constituency – the shareholders in Berkshire, an investment holding company.

Mr. Buffett wrote that Berkshire had net income of $13 billion last year, about 61 percent higher than in 2009. The company also reported a 13 percent rise in book value.

Shares of Berkshire Hathaway, which peaked in late 2007 at more than $148,000 apiece, closed Friday at $127,550. They rose about 29 percent in 2010, more than double the performance of the broader stock market.

Mr. Buffett also highlighted smaller numbers in trumpeting the thrifty culture at Berkshire, which operates from modest offices in Omaha, Nebraska. He and his business partner, Charlie Munger, “treat your money as if it were our own,” he wrote to his shareholders.

“At Berkshire’s “World Headquarters” our annual rent is $270,212,” he wrote. “Moreover, the home-office investment in furniture, art, Coke dispenser, lunch room, high-tech equipment – you name it – totals $301,363.”

Beyond the flag-waving, the letter provides fodder for investors and business executives who look to Mr. Buffett for sage advice. In a two-page discussion of “intrinsic value” – a favorite security analysis concept of Mr. Buffett and his investment hero, Benjamin Graham – he emphasized the importance of having the right chief executive in place.

“The difference in outcome can be huge,” Mr. Buffett said. “A dollar of then-value in the hands of Sears Roebuck’s or Montgomery Ward’s C.E.O.’s in the late 1960s had a far different destiny than did a dollar entrusted to Sam Walton.”

Those looking for clear insights into Mr. Buffett’s succession plans, one of Wall Street’s favorite parlor games, will be disappointed. He praised the head of his large insurance business, Ajit Jain (“even kryptonite bounces off Ajit”); lamented the retirement of one potential successor, Lou Simpson (“one of the investment greats”); and praised a new hire, the unheralded hedge fund manager Todd Combs (hopefully “a two-year-old Secretariat”). But there was no specific mention of a succession plan.

Mr. Buffett has said that when he dies his job will be split into three positions: a chairman, a chief executive and a chief investment officer.

Though his letter was largely free of negativity, Mr. Buffett used the hiring of Mr. Combs – and his relatively modest compensation arrangement – to take a swipe at the hedge fund industry.

“The hedge-fund world has witnessed some terrible behavior by general partners who have received huge payouts on the upside and who then, when bad results occurred, have walked away rich, with their limited partners losing back their earlier gains,” he wrote. Mr. Buffett also mocked fund consultants who “like to require style boxes” — or investment categories — “such as ‘long-short,’ ‘macro,’ ‘international equities.’ At Berkshire our only style box is ‘smart.’”

Mr. Buffett addressed one of Berkshire’s most closely watched holdings on Wall Street, the $5 billion investment in Goldman Sachs made during the depths of the financial crisis. He explained that Goldman has the right to repurchase his preferred shares, which have sharply increased in value, on 30 days notice. Goldman, he wrote, “has been held back by the Federal Reserve (bless it!), which unfortunately will give Goldman the green light before too long.”

Mr. Buffett attributed much of the year’s success to his acquisition of Burlington Northern Santa Fe railroad, calling it the highlight of 2010. The $26 billion deal, he said, has increased his company’s earnings power by more than 30 percent. But Mr. Buffett also trumpeted the benefits of rail travel beyond profits.

“Railroads have major cost and environmental advantages over trucking, their main competitor,” said Mr. Buffett. “Our country gains because of reduced greenhouse emissions and a much smaller need for imported oil. When traffic travels by rail, society benefits.”

“However slow the economy, or chaotic the markets, our checks will clear,” he said.

Mr. Buffett also teased his shareholders – and Buffett-watchers – in writing that he was on the hunt for “more major acquisitions.”

“We’re prepared,” he wrote. “Our elephant gun has been reloaded, and my trigger finger is itchy.”