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Warren Buffett is looking for a new chief investment officer -- to replace himself.
He already has three people who might replace him as chief executive of Berkshire Hathaway (BRK.A, news, msgs), he wrote in the giant conglomerate's annual report, released today. But Buffett wears two hats, and, as he put it in the report, "We are not as well-prepared on the investment side of the business."
The perfect candidate -- perhaps more than one person will be hired -- must be younger; Buffett is 76. And he doesn't want somebody who can simply run a large portfolio of investments.
"There is far more to successful long-term investing than brains and performance that has recently been good," he writes.
The importance of temperament
Here's what the Oracle of Omaha means by far more to successful long-term investing:"Over time, markets will do extraordinary, even bizarre, things. A single, big mistake could wipe out a long string of successes. We therefore need someone genetically programmed to recognize and avoid serious risks, including those never before encountered. Certain perils that lurk in investment strategies cannot be spotted by use of the models commonly employed today by financial institutions.
"Temperament is also important. Independent thinking, emotional stability, and a keen understanding of both human and institutional behavior is vital to long-term investment success. I’ve seen a lot of very smart people who have lacked these virtues."
- Video: CNBC's Liz Claiman discusses Buffett's letter to shareholders.
Plus Berkshire has what Buffett calls a special problem: the ability to keep the candidate. "Being able to list Berkshire on a resume would materially enhance the marketability of an investment manager. We will need, therefore, to be sure we can retain our choice, even though he or she could leave and make much more money elsewhere."
Not that Buffett is going anywhere. "At 76, I feel terrific and, according to all measurable indicators, am in excellent health," he writes. "It’s amazing what Cherry Coke and hamburgers will do for a fellow."
Buffett's letter to shareholders always has lots to say besides how well Berkshire Hathaway did in the past year.
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In 2006 it did exceedingly well. The company's net worth rose in value by $16.9 billion, which might be the biggest gain ever reported by a company not involved in a merger. Buffett admitted that a huge amount of that gain was luck.For one thing, there were no hurricanes to hit Berkshire's big stable of insurance businesses. "Last year, the red ink from this activity turned black -- very black."
Stock Charts (Year)
Berkshire Hathaway
While the American appetite is colossal, the propensity to consume everything in sight in excess of income is forcing the nation to hock its future.
"Our citizens will also be forced every year to ship a significant portion of their current production abroad merely to service the cost of our huge debtor position. It won’t be pleasant to work part of each day to pay for the over-consumption of your ancestors. I believe that at some point in the future U.S. workers and voters will find this annual 'tribute' so onerous that there will be a severe political backlash."
And, he added, "How that will play out in markets is impossible to predict -- but to expect a 'soft landing' seems like wishful thinking."
The Pampered Chief on how to stop the pampering
The world's second-richest man had some thoughts on big CEO pay packages for mediocre results. "Much less well-advertised is the fact that America’s CEOs also generally live the good life. Many, it should be emphasized, are exceptionally able, and almost all work far more than 40 hours a week. But they are usually treated like royalty in the process."And what one CEO gets, the next one wants. " 'All the other kids have one' may seem a thought too juvenile to use as a rationale in the boardroom. But consultants employ precisely this argument, phrased more elegantly of course, when they make recommendations to comp committees."
Buffett believes in giving management good, smart incentives. He also cheerfully admits he enjoys the perks. ("Berkshire owns The Pampered Chef; our wonderful office group has made me The Pampered Chief.") But he has a prescription on how to break the cycle of ever-larger, undeserved CEO compensation packages:
"Compensation reform will only occur if the largest institutional shareholders -- it would only take a few -- demand a fresh look at the whole system. The consultants’ present drill of deftly selecting 'peer' companies to compare with their clients will only perpetuate present excesses."
Some additions to the portfolio
A year ago, Buffett's annual report disclosed major holdings ($700 million or more ) in 11 stocks and some smaller investments.In the past year, Buffett has substantially cut his big position in Ameriprise Financial (AMP, news, msgs) and added seven major positions in a portfolio Berkshire Hathaway valued at $61.5 billion at the end of 2006. The original cost of the portfolio: about $23 billion.
There were two stocks he didn't list, with a market value of about $1.9 billion, because Berkshire is still buying them. "I could, of course, tell you their names," Buffett notes. "But then I would have to kill you."
Only one of the 17 stocks listed shows a losing position at the end of 2006 -- Wal-Mart Stores (WMT, news, msgs) -- but a rough calculation of the stake as of Friday shows a small gain. The PetroChina holdings are "H" shares, and current market data are not available.
Here's how the portfolio changed.
| Company | Business | Market value * | Cost |
|---|---|---|---|
| New holdings | |||
| ConocoPhillips (COP, news, msgs) | Integrated oil | $1.29 billion | $1.07 billion |
| Johnson & Johnson (JNJ, news, msgs) | Pharmaceuticals | $1.41 billion | 1.25 billion |
| PetroChina (PTR, news, msgs) | Oil, China | $3.31 billion | $499 million |
| POSCO (PKX, news, msgs) | Steel, Korea | $1.15 billion | $572 million |
| Tesco (TSCDY, news, msgs) | Supermarkets, U.K. | $5.81 billion | $1.34 billion |
| US Bancorp (USB, news, msgs) | Banking | $1.12 billion | $969 million |
| USG Corp. (USG, news, msgs) | Building materials | $936 million | $536 million |
| Existing holdings | |||
| American Express (AXP, news, msgs) | Finance | $9.2 billion | $1.29 billion |
| Anheuser-Busch (BUD, news, msgs) | Beverages | $1.79 billion | $1.76 billion |
| Coca-Cola (KO, news, msgs) | Beverages | $9.65 billion | $1.3 billion |
| M&T Bank (MTB, news, msgs) | Banking | $820 milloni | $103 million |
| Moody's (MCO, news, msgs) | Corporate services | $3.31 billion | $499 million |
| Procter & Gamble (PG, news, msgs) | Consumer products | $6.43 billion | $940 million |
| Wal-Mart Stores (WMT, news, msgs) | Retailing | $921 million | $942 million |
| Washington Post Co. (WPO, news, msgs) | Media | $1.29 billion | $11 million |
| Wells Fargo (WFC, news, msgs) | Banking | $7.76 billion | $3.7 billion |
| White Mountains Insurance (WTM, news, msgs) | Insurance | $999 million | $369 million |
| Smaller holdings | $8.3 billion | $5,9 billion | |
| 2006 total | $61.5 billion | $23 billion | |
| 2005 total | $46.7 billion | $15.9 billion |
According to Gurufocus.com, Buffett has added positions in UnitedHealth Group (UNH, news, msgs) and Ingersoll-Rand (IR, news, msgs).
He cut positions in Comcast (CMCSA, news, msgs), H&R Block (HRB, news, msgs) and Pier 1 Imports (PIR, news, msgs), and sold positions in OSI Restaurant Partners (OSI, news, msgs), Sealed Air (SEE, news, msgs) and Target (TGT, news, msgs).
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