Why Warren Buffett needs to Tap Dance to a new tune

There has been wide coverage today of Warren Buffet’s 2012 annual shareholder letter. It was full of useful tips and advice, but what it failed to mention shocked me to my core.The famous investor and author of “Tap Dancing to Work” ends his letter with: “I truly do feel like tap dancing to work every day.” After reading his letter, I couldn’t disagree more.

A quick primer on Berkshire Hathaway:

· 2012 was a “sub-par” year for Berkshire with 14.4% annual gain for a total gain of $24.1B (yep, that’s B for Billion). That 14.4% was less than the S&P 500’s annual increase of 16%, which Buffett points out with a full 1st page table covering last 47 years of operations. However, the compounded annual gain over that time period is 19.7% for Berkshire and 9.4% for the S&P.

· Berkshire core subsidiaries include: Insurance (GEICO), Infrastructure and Utilities (MidAmerica electric), Manufacturing / Service / Retail (from Wells Fargo to latest Heinz), and Finance (CORT furniture rental)

· Investments in public companies not fully owned by BH include the following with BH’s current market value and ownership percentages: AMEX ($8.7B / 13%), Coca-Cola ($14.5B 8.9%), ConocoPhillips ($1.3B / 2%), IBM ($13B / 6%), Phillips 66 ($1B / 3.3%), Wal-Mart ($3.7B / 1.6%), and the aforementioned Wells Fargo ($15.6B / 8.7%)

With that disclaimer over, let me get to the root of my frustration after reading Buffet’s latest annual report to BH shareholders for 2012: It doesn’t say the word “climate” once! It also fails to mention: “global warming,” “carbon emissions,” “cap and trade”, and many more. This is with a BH core insurance business that has Buffet proudly stating: “When I count my blessings, I count GEICO twice.”

The word “environment” is used once (more on that later), but not in the context of Hurricane Sandy. Here is everything in the letter related to Sandy:

“GEICO earned its underwriting profit, moreover, despite the company suffering its largest single loss in history. The cause was Hurricane Sandy, which cost GEICO more than three times the loss it sustained from Katrina, the previous record-holder. We insured 46,906 vehicles that were destroyed or damaged in the storm, a staggering number reflecting GEICO’s leading market share in the New York metropolitan area.”

Let’s assume an average cost of $20,000 for a replacement car, that’s $1B for just cars from Sandy, and I’m curious as to what the homeowner policies added. But, GEICO still managed to turn a GAAP profit of $680mm in 2012 (albeit an operating profit even better because of a $410 accounting only charge). I’m not sure what that says. GEICO is obviously a very well run and profitable company, I’m curious how much the company WOULD have earned if there was not a Sandy. What happens if there are 1-2 Sandy’s per year? You’re telling me that that doesn’t matter to Buffett?

BTW, here is the single sentence on “environment”: “BNSF also moves its cargo in an extraordinarily fuel-efficient and environmentally friendly way, carrying a ton of freight about 500 miles on a single gallon of diesel fuel.”

Surely there is more about renewables you might ask? You are correct; the next bullet point has all the beginnings of a great one…

“In addition, we are the leader in renewables: first, from a standing start nine years ago, we now account for 6% of the country’s wind generation capacity. Second, when we complete three projects now under construction, we will own about 14% of U.S. solar-generation capacity.”

That’s great! Were you curious as to why there is such a need for renewables? Or what advantage solar and wind have over coal or oil? Don’t hold you breath (unless you’re in a bad air day in China).

“Projects like these require huge capital investments. Upon completion, indeed, our renewables portfolio will have cost $13 billion. We relish making such commitments if they promise reasonable returns – and on that front, we put a large amount of trust in future regulation.”

So you’re telling me you’ve spent a lot of money on renewable energy, but that you’re counting on the government to work it’s way out of the political stand-off between the Democrats, Republicans, and Tea Party? Super! Let me hear more:

“Our confidence is justified both by our past experience and by the knowledge that society will forever need massive investment in both transportation and energy.”

Totally agree, but what’s that investment going to be?

“Our managers must think today of what the country will need far down the road. Energy and transportation projects can take many years to come to fruition; a growing country simply can’t afford to get behind the curve.”

It creates the natural question for anyone: If Buffett doesn’t care enough about climate change to include it in his letter (especially as it relates to energy independence and “insurance”) – then why should I care? Yes, he is an investor (and a great one), not a scientist, but the economic impacts of events like Sandy are things he highlights yet dismisses? That’s my point. Without our top leaders focused on changing the way we treat the dangers of climate change, the world will continue to be lost…and we will continue a great moral hazard for generations to come.

Full text of the letter: http://www.berkshirehathaway.com/letters/2012ltr.pdf