NEW YORK (TheStreet) -- Berkshire Hathaway's (BRK.A) stock didn't beat the Standard & Poor's 500 Index in 2011, but its earnings did, reversing a trend of postcrisis underperformance for Warren Buffett's financial empire and setting up the "Oracle of Omaha" with a change of investing strategy.
Berkshire's earnings -- and the composition of its portfolio headed into 2012 -- signal that the legendary investor has put crisis-era investments to rest, setting up for more growth-oriented investment gains for years to come just as U.S. stock markets broach postrecession highs.
Berkshire Hathaway reported fourth-quarter net income of $3.05 billion, or $1,846 a share -- a 30% decline from 2010 earnings of $4.38 billion, or $2,656. Nevertheless, the investment company reported that its book value per share rose 4.6%, beating the 2.1% return of the S&P 500, including dividends, marking the first time since the crisis that Berkshire was able to outperform the index.
About management succession, Buffett highlighted confidence in the hirings of investment managers Todd Combs and Ted Weschler, who will manage pieces of Berkshire's portfolio in 2012."Each will be handling a few billion dollars in 2012, but they have the brains, judgment and character to manage our entire portfolio when Charlie and I are no longer running Berkshire," wrote Buffett in his annual letter to shareholders released on Saturday morning. The letter also revealed that the company's board has identified someone to succeed Buffett as CEO, saying this was "an individual to whom they have had a great deal of exposure and whose managerial and human qualities they admire." In December, Buffett told 60 Minutes that his son Howard Buffett will be an unpaid, nonexecutive "guardian" of Berkshire Hathaway's values after he dies. Still in characteristic form, Buffett, 81, indicated that he isn't showing signs of slowing anytime soon. "Do not, however, infer from this discussion that Charlie and I are going anywhere; we continue to be in excellent health, and we love what we do," he wrote. Berkshire's outperformance came as multibillion-dollar, crisis-era fixed-income investments in companies such as General Electric (GE) and Goldman Sachs (GS) expired. >>View Warren Buffett's Portfolio Overall, Goldman, GE and insurer Swiss Re paid Berkshire $12.8 billion to redeem fixed-income-like securities such as preferred shares, netting Berkshire $1.2 billion in pretax earnings. "That's a lot of income to replace, though our Lubrizol purchase did offset most of it," wrote Buffett. That sets up for his postcrisis strategy of large stock investments and a new focus on acquisitions as a way to put the firm's $37.3 billion in cash to work in a way that will outperform the S&P 500 over the long haul. As of 2011, Berkshire's compounded annual gain of 19.8% more than doubled the S&P 500's 9.2% gain, since the fund's inception in 1965, according to its letter.