Buffett Reveals Warts Preparing Annual Letter

Warren Buffett bought oil stocks near the peak of an energy boom, declined to spend $35 million on a growing television station and swapped a Berkshire Hathaway Inc. (BRK/A) stake for a shoe company he later said was worthless.

In each case, shareholders of Omaha, Nebraska-based Berkshire were charged or deprived of at least $1 billion. And in each case, Buffett apologized in writing.

“A friend once asked me: If you’re so rich, why aren’t you smart?” Buffett, Berkshire’s chairman, said in a letter accompanying the 1996 annual report. The billionaire, describing a bet on USAir, told readers at the time, “You may conclude he had a point.”

Buffett’s self-criticism is part of a leadership style that has helped him build a company with 270,000 workers and draw crowds of more than 20,000 to hear him speak. Buffett, 81, who’s scheduled to release his annual shareholder letter tomorrow, relies on his public persona as well as his record to set standards for Berkshire staff and retain investors in good years and bad.

“He doesn’t hesitate to point this stuff out, and it’s not just for the shareholders,” said James Armstrong, president of Berkshire investor Henry H. Armstrong Associates. “It’s also for the employees and managers of Berkshire. It’s sending the message: Admit your mistakes, don’t pretend they didn’t happen.”

Coca-Cola, Geico

Buffett, a former hedge-fund manager, boosted Berkshire with stock picks like Coca-Cola Co. (KO) and takeovers including insurer Geico Corp. Berkshire shares soared about 38-fold in the last 24 years and Buffett’s fortune surged to third-biggest in the world. The company trades at about 1.2 times book value, indicating that investors believe the firm is worth more than its net assets.

The Class A shares slipped 4.7 percent last year amid a surge in insurance catastrophe costs and questions about Berkshire’s succession planning. Berkshire’s profit declined 16 percent to $7.2 billion in the nine months ended Sept. 30, and Buffett was criticized in the media for his handling of the resignation of former manager David Sokol.

Buffett claimed responsibility for losses when his bet on oil producer ConocoPhillips contributed to more than $3 billion of impairments in 2009. He blamed himself for decades of missed profits because he refused to pay $35 million for a Dallas-Fort Worth NBC station. The cost of his 1993 purchase of shoemaker Dexter rose to $3.5 billion, Buffett said in 2008, because he paid the $433 million price in Berkshire stock.

‘A Big Mistake’

Buffett was pressured into admitting an error last year regarding his oversight of Sokol, who left in April and was subsequently accused by Berkshire of violating the firm’s insider-trading rules.

“I made a big mistake” by not pressing Sokol for details about his Lubrizol Corp. stock trades before Berkshire bought the engine-additives maker, Buffett said at the 2011 shareholders’ meeting. That was a reversal from a statement a month earlier that didn’t include an apology and said he would answer no questions on the matter.

“The initial response was to circle the wagons,” said Meyer Shields, an analyst with Stifel Nicolaus & Co. “To his credit, he does acknowledge some of these issues. But I don’t think we get the entire picture,” Shields said of Buffett’s self-criticism.

Buffett frames the investor discussion with his annual letter, which tends to be about 20 to 25 pages long and has been read by shareholders around the world. Berkshire’s annual 10-K filing to the Securities and Exchange Commission, typically released a few days after the letter, gives investors about 100 pages of information.

An Expensive Fiasco

Buffett said two years ago that Geico’s foray into credit- card lending was “a very expensive business fiasco” and his own fault. In 1999, he told shareholders his stock transactions were so bad investors would have been better off if he’d gone to the movies during market hours. Even with a winning bet -- Berkshire’s investment in Coca-Cola in 1988 and 1989 -- Buffett made light of himself for not getting there sooner.

“I believe I had my first Coca-Cola in either 1935 or 1936,” Buffett said in 1990. “I carefully avoided buying even a single share, instead allocating major portions of my net worth to street railway companies, windmill manufacturers, anthracite producers, textile businesses, trading-stamp issuers, and the like.”

Coca-Cola more than doubled in the four years through the end of 1987, and has risen more than 14-fold since. Buffett invested about $1 billion in the world’s biggest soft-drink maker by the end of 1989 and made purchases of almost $300 million in 1994. Berkshire, Coca-Cola’s largest shareholder, has a stake now valued at almost $14 billion.

Buffett’s Record

“Agonizing over errors is a mistake,” Buffett said in 2001. “But acknowledging and analyzing them can be useful, though that practice is rare in corporate boardrooms.”

The assessment of Buffett’s performance may change over time. In 1998, the year he said he would have been better off at the movies because he sold stocks including McDonald’s Corp. (MCD), Buffett was in the process of divesting a holding in Freddie Mac that had climbed to more than $3 billion. Those sales were substantially completed in 2000, eight years before the mortgage-finance company entered government conservatorship. McDonald’s has more than doubled since 1998.

“It’s a humbling business,” said David Rolfe, chief investment officer of Berkshire shareholder Wedgewood Partners Inc. Buffett’s self-criticism “has served him well over the years.”

To contact the reporter on this story: Andrew Frye in New York at afrye@bloomberg.net.

To contact the editor responsible for this story: Dan Kraut at dkraut2@bloomberg.net.

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