Buffett: Board 'Enthusiastic' About Mystery Successor

Warren Buffett writes in his annual letter to shareholders that the company's board is "enthusiastic" about a person it has chosen to eventually take over as CEO of Berkshire Hathaway.

But Buffett does not name that person, saying only that it's "an individual to whom they have had a great deal of exposure and whose managerial and human qualities they admire."  There are also "two superb back-up candidates."

Previously Buffett has said there were three internal candidates for the job and that the board knew who it would go to if Buffett, 81-years old, suddenly died or became incapacitated. 

Buffett predicts that "when a transfer of responsibility is required, it will be seamless, and Berkshire's prospects will remain bright."  He doesn't expect this to happen 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."

Buffett implies that new portfolio managers Todd Combs and Ted Weschler will eventually take over Buffett's role as chief investment officer, writing that they have "the brains, judgment and character to manage our entire portfolio when Charlie (Munger) and I are no longer running Berkshire."

Housing in 'Depression'

Warren Buffett says America's housing sector "remains in a depression of its own" but will eventually recover as America continues to create "more households than housing units."

In the meantime, however, Buffett writes that the company's housing-related units continue to "sputter."

He admits that his prediction a year ago that housing's recovery would probably begin within "a year or so" was "dead wrong."

Buffett writes that the housing market's continued weakness is "the major reason a recovery in employment has so severely lagged the steady and substantial comeback we have seen in almost all other sectors of our economy."

Admits 'Big' Mistake

In his letter, Buffett admits to making a "big mistake" when he spent about $2 billion "a few years back" buying Energy Future Holdings bonds.  It's a Texas electric utility with "prospects tied to the price of natural gas, which tanked shortly after our purchase and remains depressed."

Berkshire wrote down that investment by $1 billion in 2010 and another $390 million in 2011 and may wind up wiping out almost all of the remaining $878 million in carrying value.

Buffett writes that "in tennis parlance, this was a major unforced error by your chairman."

Share Repurchases

Buffett says Berkshire's previously announced share buyback plan resulted in just $67 million of purchases over a few days in September, as the stock price quickly topped its pre-determined upper limit of 110 percent of book value.

Buffett writes that "given the opportunity, we will likely repurchase stock aggressively at our price limit or lower" but "we have no interest in supporting the stock and our bids will fade in particularly weak markets."

Wants IBM Shares to 'Languish'

Buffett devotes several paragraphs to one of his favorite themes: investors who will be buying in the future should be happy, not sad, when stock prices fall.

"When Berkshire buys stock in a company that is repurchasing shares, we hope for two events: First, we have the normal hope that earnings of the business will increase at a good clip for a long time to come; and second, we also hope that the stock underperforms in the market for a long time as well. A corollary to this second point: 'Talking our book' about a stock we own — were that to be effective — would actually be harmful to Berkshire, not helpful as commentators customarily assume."

Buffett uses Berkshire's stake in IBM [IBM  Loading...      ()   ] as an example.  He says the company will probably spend $50 billion or so over five years to repurchase shares.  As a result, "We should wish for IBM's stock price to languish" over that time period.

"The logic is simple: If you are going to be a net buyer of stocks in the future, either directly with your own money or indirectly (through your ownership of a company that is repurchasing shares), you are hurt when stocks rise. You benefit when stocks swoon. Emotions, however, too often complicate the matter: Most people, including those who will be net buyers in the future, take comfort in seeing stock prices advance. These shareholders resemble a commuter who rejoices after the price of gas increases, simply because his tank contains a day’s supply."

He admits, however, that he and Munger "don't expect to win many of you over to our way of thinking — we've observed enough human behavior to know the futility of that."

His personal revelation came after reading Chapter Eight of Ben Graham's The Intelligent Investor.  "Picking up that book was one of the luckiest moments of my life."

Todd and Ted

Buffett says new portfolio manager Todd Combs built a $1.75 billion portfolio (at cost) in 2011, and Ted Weschler, who joined Berkshire shortly after the end of the year, will "soon create one of similar size."  He apparently wants the two men to work as a team, revealing that each of them "receives 80% of his performance compensation from his own results and 20% from his partner's."

Buffett also notes, as he has in the past, that when Berkshire's quarterly portfolio filings show "relatively small holdings, they are not likely to be buys I made (although the media often overlook that point) but rather holdings denoting purchases by Todd or Ted."

Book Value

Buffett reports that Berkshire's per-share book value increased by 4.6 percent in 2011, outperforming the S&P's 2.1 percent gain, including dividends.

He uses book value as a "useful, though considerably understated, proxy" for intrinsic business value, his way of measuring his performance.

Berkshire's stock price underperformed the S&P's, excluding dividends, with a 4.7 percent drop last year.  The benchmark stock index was flat.

Current Berkshire stock prices:

Class B: [BRK.B  Loading...      ()   ]

Class A: [BRK.A  Loading...      ()   ]

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Sprint Board Rejects MetroPCS Deal at Last Minute

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Wynn Aims to Kick Okada Off Macau Board on Friday

Casino mogul Steve Wynn will convene an emergency meeting of the directors of Wynn Macau on Friday with the goal of kicking his former friend and partner Kazuo Okada off the board, according to two sources familiar with the matter.

The growing battle between Wynn Resorts [WYNN  Loading...      ()   ] CEO Wynn and co-founder Okada is set to escalate another notch, after both billionaires traded accusations in past weeks about improper payments to foreign gambling regulators. 
The nine-person Macau board — which includes five members with ties to Wynn — can take unilateral action to drop Okada from among their ranks, according to the two people with knowledge of the impending meeting. 
The Macau unit can take action on its own, both sources said. But parent company Wynn Resorts cannot remove Okada from its 12-person board without first convening a special shareholders' meeting, said one of the two people. 
Wynn spokesman Paul Kranhold had no comment on the Macau meeting. James Golden, a spokesman for Okada's Universal Entertainment, said he had no information on the meeting and could not comment. 
Wynn Resorts on Sunday announced it had forcibly re-purchased Okada's nearly 20 percent stake in the company, saying  an internal investigation headed by former FBI Director Louis Freeh uncovered dozens of instances over a three-year period in which Okada and associates "engaged in improper activities for their own benefit in apparent violation of U.S. anti-corruption laws."
Okada responded by accusing Freeh of "a rushed investigation that lacks absolute findings," and has since threatened to file suit in Las Vegas for a temporary restraining order to block the company's action.
Okada, an engineer by training, helped bankroll Steve Wynn's empire, today worth an estimated $14 billion. His dispute with Wynn erupted into the open in January when Okada filed suit against his partner of 12 years for blocking access to financial documents related to a $135 million company donation to the University of Macau. 
That lawsuit has prompted the U.S. Securities and Exchange Commission to start an informal inquiry into Wynn.  
Postponement Puzzle   
Okada's lawsuit over the Macau donation had been due to go back to court on Thursday, with a U.S. judge deciding whether the Asian investor should get access to those records. But the hearing was abruptly postponed without reasons given, with no word on when it would proceed.  
Wynn Macau's [1128.HK  Loading...      ()   ] nine person board includes Steve Wynn himself, two of his former employees, and current Wynn board member Allan Zeman, who is also vice-chairman of the Macau operation, according to Wynn Macau's internet site.  
Ian Michael Coughlan, Wynn Macau's executive director, previously was director of the parent company's worldwide hotel operations.  
Wynn's complaint against Okada this week — which accompanied the announcement of the forced buyback and the release of Freeh's full internal report — sought to paint a picture of a rogue board member  pursuing a private agenda.

It comes at an inopportune time for Okada, who has mostly been careful to maintain a low profile while exploring and developing projects from the Philippines — where he is pushing a $2 billion casino — to North America.   
Okada, said by Forbes magazine to be worth $2.1 billion in 2011, made his fortune in pachinko: a uniquely Asian game that  mixes slot machine style gambling with pinball that rakes in about 20 trillion yen ($250 billion) annually. He was Wynn Resorts' largest shareholder, holding more than double the stake of its eponymous chairman.

But the envisioned Philippine mega-casino, due for completion in 2014, may have engendered his subsequent falling-out with Wynn. The project marks the Japanese tycoon's first foray into developing a casino, rather than making the pachinko and slot machines that go into them.  
Wynn has said he declined to get involved in the Philippine venture and that it puts the two in direct competition.    
Shares in Wynn Resorts slid 1.4 percent on Wednesday.

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