Buffett underperformed the S&P last year

March 2, 2013, 2:03 AM UTC
Warren Buffett and Charlie Munger, still hunting elephants.

FORTUNE — Berkshire Hathaway reported after the stock market’s close that its book value per share rose in 2012 by 14.4%, helped especially by excellent results in insurance; strong business for BNSF and Marmon in transporting oil; higher prices for the company’s huge stock portfolio; and reduced liabilities for its derivatives portfolio.

In his annual letter to shareholders, CEO Warren Buffett put one new company, DIRECTV, on his yearly list of Berkshire’s largest investments.  (But was Buffett the buyer of that stock? No.)

Buffett also supplied fresh details about Berkshire’s (BRKA) upcoming investment in H.J. Heinz and described the purchase as a piece of luck after his failing to make an “elephant” acquisition in 2012. But Buffett said he and Berkshire vice-chairman Charles Munger still have plenty of cash and want to spend it:  “Charlie and I have again donned our safari outfits and resumed our search for elephants.”

Overall, Buffett emerged from 2012 disappointed because the competition did better than Berkshire’s 14.4% rise in per-share book value. The competition in this case is the total return of the S&P 500 (SPX), which for 2012 was 16%. That indicator is what Buffett always hopes to beat.

The point is, said Buffett in his letter, that investors in Berkshire should expect their stock to rise over time along with book value (which he says significantly understates intrinsic value). If book value fails to beat the percentage increase of the S&P — again, over time — then a Berkshire shareholder, Buffett says, would be better off owning an S&P index fund.

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Buffett uses book value as a marker because it includes all of Berkshire’s capital gains, whether realized or unrealized. The more commonly used indicator, earnings per share, does not include unrealized gains (of which Berkshire had a huge $46 billion at yearend 2012). Berkshire’s earnings per Class A share actually leaped in 2012, to $8,997, up 44% from the year before. A main reason for that big swing was derivatives results moving from a pretax loss of $2.1 billion in 2011 to a nearly $2 billion pretax profit in 2012.

Over the long term, the performance of Berkshire’s book value has beaten the S&P in 39 out of the 48 years in which Buffett has run Berkshire — and he indeed says in the letter that he still expects the company’s stock to best the S&P over time. But the S&P has had a good run of it lately: four plus years in a row, three of them (all but 2011) surpassing Berkshire’s book-value performance.

In this competition, the S&P is helped in certain years by the fact that it’s pure stock market, while Berkshire is heavily into owning and operating whole companies (which is indeed where Buffett wants it to be). The S&P results are also pre-tax, whereas Berkshire’s gains are after-tax (including both paid and deferred taxes).

So a good year for the stock market is bad for Buffett the Competitor  — which is powerfully strange, considering that we are talking about the man generally called the world’s greatest investor.

Even so, increases in the prices of Berkshire’s own huge investments did their considerable bit to raise the company’s book value. What Buffett calls Berkshire’s  “Big Four” — in descending order by market value, Coca-Cola (KO), IBM (IBM), Wells Fargo (WFC), and American Express (AXP) — all rose in price during the year.  Wells and American Express were the leaders by far, with the stock price of each jumping by more than 20%.

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One might think that the next big consumer name to go on Buffett’s annual investment list would be H.J. Heinz, which Berkshire is scheduled to buy — by way of a holding company for Heinz — in a 50-50 partnership with investment company 3G Capital.  But Heinz (HNZ) will be a Berkshire “investee,” a category of company that does not make the list. Berkshire’s share of the holding company’s earnings will simply flow into Berkshire’s earnings.

In the meantime, Buffett’s letter presents some previously undisclosed details about the $8 billion in 9% redeemable preferred stock Berkshire will get as a part of the Heinz deal. The preferred, says Buffett, has two features that “materially increase its value.” First, the stock will ultimately be redeemed at a premium price. Second, there are warrants attached to the preferred that allow Berkshire to buy 5% of the holding company at what Buffett calls a “nominal” price.

As for DIRECTV (DTV) making the investment list: That tabulation got a makeover this year, in that from now on it will include certain investments made by Todd Combs and Ted Weschler — the two men recently hired by Berkshire to be investment sidekicks to Buffett. If either, or the two together, have positions that reach the dollar threshold for the list — that’s $1 billion this year — their holdings will be noted.

And the first company making the list is indeed DIRECTV, which both Combs and Weschler own in their portfolios. The combined market value of their stakes in the company at the end of 2012 is listed as $1.2 billion.

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But that is money Buffett considers to have been held at the corporate level. Combs and Weschler also invest money for some pension funds of Berkshire’s subsidiaries, and Buffett does not include those holdings in the annual report list. They turn up, however, in Berkshire’s quarterly 13-F filings to the SEC. The data reported there show that at the end of 2012, Berkshire’s total stake in DIRECTV was about $1.7 billion.

Similarly, the 13-F filings indicate that Berkshire then held a position in Davita (which runs kidney dialysis centers) that was $1.5 billion in size but then was not mentioned in the annual report. The implication is that either Combs or Weschler, or both, have that stock in their portfolios and that some of the money committed to the stock came from the pension funds of Berkshire subsidiaries.

Weschler seems a sure bet to be a holder of Davita in his portfolio. Before coming to Berkshire, he ran hedge fund Peninsula Capital Advisors, whose largest holding was Davita (DVA). Then, after Weschler came to Berkshire, Davita promptly appeared in Berkshire’s 13-F filings.

None of that rules out Combs also holding Davita. As the DIRECTV facts show, the two men sometimes both like the same stock.  And part of their Berkshire pay arrangement — the aim here is collegiality — is that each shares to an extent in the portfolio performance of the other.

In his shareholder letter, Buffett is lavish in his praise of Combs and Weschler, saying, “They have proved to be smart, models of integrity, helpful to Berkshire in many ways beyond portfolio management, and a perfect cultural fit.”

In investments, they’re also getting the ultimate reward: more money to manage. As 2012 began, Combs and Weschler were each running a portfolio about $3 billion in size.  But Buffett says he is raising the amount to almost $5 billion because the two have proved to be such excellent additions to the Berkshire team.

Both men, Buffett reports, outperformed the S&P by double-digit margins. And then he adds in tiny type, “They left me in the dust as well.” Previously that size of type has been used for other sheepish admissions, the best known being Buffett’s acknowledgment that in 1986 he had bought a plane for Berkshire.

Fortune senior editor-at-large Carol Loomis, the writer of this article, is a longtime friend of Warren Buffett’s, the pro bono editor of his annual shareholders’ letter, and a shareholder in Berkshire Hathaway.