Buffett Makes the Grade

If he graded himself a D last year what does the Oracle of Omaha deserve for his performance in 2000?

If there were a grade above A+, legions of Warren Buffett's faithful would lobby for the premier rating for their exalted investment chieftain. After all, since this time last year, Buffett's Berkshire Hathaway (BRK.A:NYSE) has gained more than 60% compared to a decline in the S&P 500 of nearly 15% and a Nasdaq Composite that has been chopped in half.

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How did he do it? At least part of his success is likely to be revealed in the Berkshire annual report due to be released Saturday at 9 a.m. EST. (You can find it by going to www.berkshirehathaway.com.) The annual report includes Buffett's much-anticipated annual letter to shareholders, where he spells out the company's performance, his thoughts on the economy and the markets, and a list of Berkshire's major equity holdings.

Last year Buffett's letter revealed Berkshire reduced positions in Disney (DIS Quote - Cramer on DIS - Stock Picks), Wells Fargo (WFC Quote - Cramer on WFC - Stock Picks) and Freddie Mac (FRE Quote - Cramer on FRE - Stock Picks). Buffett's reputation as a savvy investor means his positions are closely watched and changes in the Berkshire portfolio can have an impact on how other investors view companies. At the end of 1999 Berkshire's largest common stock positions were Coca-Cola (KO Quote - Cramer on KO - Stock Picks), American Express (AXP Quote - Cramer on AXP - Stock Picks) and Gillette (G Quote - Cramer on G - Stock Picks).

Buffett's read of the market will be closely watched. While many doubted his aversion to technology would provide market-scorching returns, last year's analysis proved prescient. "Equity investors currently seem wildly optimistic in their expectations about future returns," he wrote in last March's letter, focusing intently on the New Economy "bubble." "If anyone starts explaining to you what is going on in the truly manic portions of this 'enchanted' market, you might remember still another line of a song: 'Fools give you answers, wise men never try.' "

Buffett isn't likely to gloat about Berkshire's staggering outperformance last year. Rather, he has a history of tempering rampant enthusiasm and reminding shareholders that his goal is simply to generate returns that "modestly" outperform the S&P 500 over time. "For Berkshire, truly large superiorities over that index are a thing of the past," he proclaimed last year.

This year's letter probably will focus on the continued growth of Berkshire's portfolio of operating businesses. Last year, Berkshire made six acquisitions, many in the construction and home improvement industry, including Justin Industries (brick and tile) Shaw Industries (carpet), Benjamin Moore (paint), and Johns Manville (building materials). Buffett has indicated that Berkshire's portfolio of operating businesses continues to grow in importance as the company's size increases. A transition from a focus on Berkshire's common stock investments to its stable of wholly owned subsidiaries is well underway.

Buffett might also address Berkshire's entrance into the electric power business with the 1999 acquisition of Mid-American Energy, an electric utility and power generator. Buffett last year said it was possible Berkshire would make "additional commitments" in the power space and they "would be large." With a dynamic CEO like David Sokol at the head of Mid-American and Berkshire's capital, don't look for Buffett to remain silent in this business for much longer.

Tomorrow morning, Buffett speaks.

Our special coverage of Berkshire's annual report will continue Saturday with analysis of Buffett's letter to shareholders. Also, join me and Robert Hagstrom, author of The Warren Buffett Way and The Warren Buffett Portfolio for an exclusive RealMoney.com/TheStreet.com chat on Tuesday at 4 p.m. EST. We'll take your questions about the report, Berkshire and Buffett. For more, go to our chat page