Warren Buffett's Berkshire Hathaway's lackluster 2011

Even the best investors struggled in 2011. Shares in Warren Buffett's Berkshire Hathaway fell 5 per cent, even though the Oracle of Omaha himself effectively pronounced the stock was cheap.

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The year is coming to a close, so it's a great time to take a look back at the companies you own and how they fared in 2011, writes The Motley Fool.

For shareholders of Berkshire Hathaway, it wasn't a year to cheer about, as the stock trailed the performance of the S&P 500. The graph below says it all:



Source: Yahoo! Finance.

A quick look at Berkshire Hathaway

Market Capitalisation $189 billion
Total Year-to-Date Stock Return (5%)
1-Year Book Value Growth 6%
Book Value Multiple 1.18

But the performance of a company's stock doesn't always tell the full story when it comes to how the company fared. So let's dig in and take a closer look at the key developments for Berkshire in 2011.

What went down in 2011
Berkshire Hathaway is a lot of things. It's the investment vehicle of Warren Buffett. It's the proud owner of railroad operator Burlington Northern Santa Fe. It's the parent of dairy-delight slinger Dairy Queen. But in a very big way, it's an insurer.

Through a collection of insurance businesses, Berkshire covers a variety of risks including standard auto (GEICO), general reinsurance (the aptly named General Re), and catastrophe reinsurance (Berkshire Hathaway Reinsurance). Insurance in general is a cyclical business that goes through tougher times when there's a lot of capital chasing the risks to be insured. We're in that tougher part of the cycle now and it's putting pressure on the profits for insurance companies.

At the same time, insurance companies that cover catastrophes can be hit hard when there are unusually large disasters that take place. For 2011, the massive earthquake and tsunami in Japan was just that type of disaster.

One big drag
Add that all up and what you've got is a big drag on what makes up a lot of Berkshire's business. Obviously these aren't just Berkshire's issues — they're affecting the entire industry from QBE Insurance Group Limited (ASX: QBE),  Insurance Australia Group Limited (ASX:  IAG) to  Suncorp Group Ltd. (ASX: SUN).

At the same time, though, Berkshire isn't getting any help from a sluggish economy. With many of its non-insurance businesses — like Burlington Northern, manufacturer Marmon, and retailer RC Willey — dependent on a healthy economy for growth, the slowly creeping U.S economic recovery is an additional drag on the overall results.

All of this, however, may have been overshadowed in 2011 by a major announcement by Buffett and Berkshire. Back in September, Berkshire's board authorised the company to start buying back Berkshire stock.

When one of the best investors ever says buy…
While stock buybacks may be somewhat of a yawn for many companies — particularly since many companies don't do a great job buying back stock — this is a huge announcement for Berkshire. Widely considered one of the best investors of our time, Buffett doesn't take buying a stock lightly. In other words, if he's ready to buy back Berkshire's stock, it means that the stock is cheap. And not just cheap, really cheap.

Of course, that wasn't the only surprise from Buffett this year. Stepping out of his oft-repeated refrain of (I'm paraphrasing here) "I don't get tech, so I'm not going to invest in it," Buffett announced a significant investment in tech heavyweight IBM. We shouldn't expect to see tech making significant inroads in the Berkshire portfolio, but it certainly punches a big hole in the scepticism over old dogs and new tricks.

Boy, does he love dividends
Berkshire Hathaway doesn't pay a dividend. Shareholders likely believe that Warren Buffett does a darn good job reinvesting the company's cash. Interestingly, though, basically all of Berkshire's major investments — including Coca-Cola, IBM, and Wells Fargo — are dividend payers.

For investors who want to add an ASX growing dividend payer to their portfolio, our free special report — "The Motley Fool's Top Stock for 2012"  — is a great place to start. Grab a free copy of that report by clicking here.

More reading:

Billabong wipes out

Successful investing: Who cares?

Two small caps pursuing healthy growth

A version of this article, written by Matt Koppenheffer, was published on Fool.com. It has been updated. The Motley Fool has a proper disclosure policy. Article authorised by Bruce Jackson.

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