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The shareholders of Berkshire Hathaway may have been seeing glimpses into the future without Buffett for some time now. Most of the deals that Berkshire Hathaway made last year were not directly involving the 82-year-old billionaire investor. They either started with one of the two investment managers Buffett recently hired over the last few years, or they started with one of the subsidiaries. No matter what way you look at it, Berkshire Hathaway did quite well during 2012.

Buffett will release his annual letter to shareholders this Friday afternoon, which is later on today.

The author of Warren Buffett’s Successor: Who It Is and Why It Matters, Jeff Matthews, tells us that last year’s deals are very comforting because they show how Berkshire Hathaway could work once Buffett is no longer there.

“It’s very reassuring. This didn’t used to happen,” said Matthews.

The main thing shareholders will miss most about Warren Buffett is his fantastic judgment and excellent connections. Take the 23.3 billion dollar deal to purchase a portion of H.J. Heinz, a Pittsburgh-based company.

No matter what kind of deal is being made by Berkshire Hathaway, the annual letter written by Warren Buffett is possibly the best read document throughout the entire business world. This is all because of his incredible record of accomplishment and his excellent ability to explain complicated matters in plain English.

There’s no question that shareholders are wondering about the future of the former textile manufacturer known as Berkshire Hathaway. Buffett is getting up there in years. He also recently suffered from prostate cancer, although it wasn’t life-threatening and he seems to have gotten through it quite nicely.

Some of the biggest dollar value deals Berkshire Hathaway made last year are:

Repurchasing $1.2 billion worth of Berkshire Hathaway Class A shares and purchasing $1.5 billion in mortgage loans from Residential Capital.

They also made a $4 billion deal to cover CIGNA Corp.’s insurance losses, and received a $2.2 billion premium in exchange.

Other deals were made but the terms have not been disclosed. Analysts tell us that the Oriental Trading Co. acquisition, as well as the Prudential real estate network will not likely be a major boost to Berkshire Hathaway’s bottom line by themselves.

The only Berkshire Hathaway deals that Warren Buffett likely initiated are the share repurchase acquirement, the acquisition of Oriental Trading Co. and potentially the deal with CIGNA. The rest of the deals started elsewhere. But there’s no question that Warren Buffett signed off on each and every one of them.

Buffett seems to enjoy all of the speculation revolved around who will eventually run the company. Meyer Shields, KBW analyst, said that Buffett probably won’t help narrow down the competition because of his enjoyment of the speculation.

If you follow the company as an investor, you might look upon these four people as the strongest potential candidates: Greg Abel, CEO and President of MidAmerican; Burlington Northern Santa Fe CEO Matt Rose; Ajit Jain, head of the Berkshire Hathaway reinsurance division; and CEO of Geico, Tony Nicely.

Buffett told us that his son Howard, also a member of the Berkshire Hathaway board, is ideally suited as the company chairman.

Berkshire Hathaway also hired two hedge fund managers, Ted Weschler and Todd Combs, who will eventually be able to run the entire Berkshire Hathaway portfolio. They each manage portfolios worth around $4 billion. Buffett continues to make the majority of the investments on behalf of Berkshire Hathaway as he searches for large acquisitions.

On February 21, 2013, cofounder of Rap Genius Mahbod Moghadam started up a strange feud with Warren Buffett, billionaire investor, when he tweeted from his handle @rapgenius this extremely profane message: “WARREN BUFFETT CAN SUCK MY ____.” Sending out offending tweets to those people well known in the media is nothing new, but it is rather surprising when it comes from one of the creators of a largely popular website that just received a $15 million injection in venture capital. People will pay attention to these things.

Then just a few hours later, Moghadam announced that he is holding a Warren Buffett diss track contest on Rap Genius. The contestants have to post original lyrics that badmouth Berkshire Hathaway’s 82-year-old Chairman and CEO. The winner of the contest receives a Rap Genius T-shirt. It looks like a $15 million venture capital injection didn’t do anything to improve the contest prizes! Feel free to make fun of Mark Zuckerberg as much as you want for his horrible fashion sense. For whatever reason, Moghadam looks to have taken the role of the eccentric tech entrepreneur to a strange and uncomfortable new level.

Nitasha Tiku, writer for BetaBeat published a very thorough article in regards to the strange vendetta, where she included a Google chat interview with the eccentric entrepreneur, who says of Warren Buffett during the interview, “from a philosophical perspective I hate that fool… He brags about eating at mcdonalds [sic] I loathe him.”

It turns out that Moghadam’s hatred of Warren Buffett started a few years back when Berkshire Hathaway took back their internship offer when they discovered that Moghadam wrote a blog post belittling one of their clients. And another thing, Warren Buffett is friends with his ex-girlfriend’s mother, which could also have been part of the reason he landed the internship to begin with.

This contest definitely has the sense of a public relations stunt, but it certainly feels like the bad blood is for real. There have been commenters on the message boards defending Warren Buffett because he supports higher taxes for the rich. Then again, others have bashed Moghadam because he’s a “bad publicity troll.”

So far, only a few entries have been made into the diss track contest, and all of the entries are poor. Take a look at one entry courtesy of a Rap Genius commenter going by the name jewlove: “the wizard of Omaha? Ha ha/Creating economic blizzards/and a buzzard feasting off the cadavers/of the common folk, with geico.” I can only imagine that the Notorious B.I.G. and Tupac Shakur both rolling over in their graves.

Far as I can tell, this is the first hip-hop beef Warren Buffett has been involved in. Although he does have a tendency to show up in rap lyrics every once in a while. He hasn’t responded to this as of yet, most likely because he’s so busy acquiring H.J. Heinz Co., using the ketchup company as leverage and generally being an all-around nice guy. But if Warren buffet does choose to reply, it might be in his best interest to let Jamie Dimon take over as his hype man and have Fed Chairman Ben Bernanke officiate a charitable rap battle.

Moghadam probably thinks that his hip-hop fans are going to give him massive credit for bashing the billionaire investor in this crazy contest. But let’s not forget that he’s up against a guy who threw up the diamond sign when Jay-Z’s 40/40 club opened. If you don’t know, now you know.

There is no question that Warren Buffett is actually the best investor the world has ever known. He started out with only a few hundred dollars in the year 1956, yet he managed to transform that money into $20 million in 1969 when he liquidated Buffett Partnership Limited. By this point in time, his entire net worth was tied up in Berkshire Hathaway stock, which was a small textile mill that he transformed into a diversified business conglomerate.

After reading many SEC filings and checking out the letters to shareholders, we have noticed an interesting trend in Berkshire Hathaway’s long-term investments. It is most notable that Warren Buffett has focused his investing in companies that can grow their income without having to invest additional capital. This is very possible if the company you invest and has strong pricing power, because the consumers are currently addicted to the brand name product or the company possesses another strong type of competitive advantage. Purchasing See’s Candies in 1972 is an excellent example. Warren Buffett mentioned the following in his 2007 letter to his shareholders:

“We bought See’s for $25 million when its sales were $30 million and pre-tax earnings were less than $5 million. The capital then required to conduct the business was $8 million.

Last year See’s sales were $383 million, and pre-tax profits were $82 million. The capital now required to run the business is $40 million. This means we have had to reinvest only $32 million since 1972 to handle the modest physical growth – and somewhat immodest financial growth – of the business. In the meantime pre-tax earnings have totaled $1.35 billion. All of that, except for the $32 million, has been sent to Berkshire (or, in the early years, to Blue Chip). After paying corporate taxes on the profits, we have used the rest to buy other attractive businesses.”

It is quite evident that Warren Buffett likes to invest in companies that need minimal capital, and they utilize their profits in order to purchase other businesses. This is very similar to what a typical dividend investor does – they accumulate distributions and then reinvest them in other high quality long-term opportunities.

In reality, the See’s Candies investment in 1972 is producing incredible yields on cost at this time. The same holds true for American Express, Coca-Cola and the Washington Post, which have all resulted in double and sometimes triple digit yields on cost.

During the year 1973, Warren Buffett opened a position in the Washington Post in the amount of $10,628 million. The effective cost basis of those shares are $6.15 per share. Since they are currently at an annual dividend of $9.80 per share, Berkshire Hathaway enjoys a 159% yield on cost.

Between the years 1991 and 1994, Warren Buffett picked up over 151,670, 700 million shares of the company American Express for a total cost of $1.287 billion. This amount, when translated, is $7.96 per share. When he initially invested in the company, it was by purchasing preferred shares which he could convert into ordinary shares at a fixed price, plus additions to his holdings. With the current annual dividend of $.80 per share, his yield on cost is over 10%.

Between the years 1988 and 1994, Berkshire Hathaway picked up over 400 million split-adjusted shares of Coca-Cola four $1.30 billion. The average cost per share of this purchase is in the neighborhood of approximately $3.25 per share.

If you base this on an annual dividend of $1.02 per share, Berkshire Hathaway has a stunning yield on cost of 31.40% per year. This simply means that by accumulating the dividends for over three years, Berkshire Hathaway is capable of accumulating its entire investment and fully recovering the total amount. But the beauty is they still retain the ownership of their Coca-Cola shares, and can gather future dividend distributions. This is what Warren Buffett said in his 2010 letter to shareholders:

“Coca-Cola paid us $88 million in 1995, the year after we finished purchasing the stock. Every year since, Coke has increased its dividend. In 2011, we will almost certainly receive $376 million from Coke, up $24 million from last year. Within ten years, I would expect that $376 million to double. By the end of that period, I wouldn’t be surprised to see our share of Coke’s annual earnings exceed 100% of what we paid for the investment. Time is the friend of the wonderful business.”

As Berkshire Hathaway group bigger and had to allocate their billions of dollars on a monthly basis, it’s unfortunate that Warren Buffett had to focus mostly on large-cap elephant sized acquisitions. A prime example is the 2010 acquisition made by Berkshire Hathaway when purchasing Burlington Northern Santa Fe railroad.

It’s interesting to note that the majority of the businesses purchase by Warren Buffett, such as FlightSafety International, Geico, and Wesco Financial also achieved either dividend champions or dividend achiever status. He likes to purchase wide moat companies of quality that are growing in earnings, that they large and rising dividends.

These dividend payments are often reinvested into other businesses, which expand Berkshire Hathaway’s cash flow availability to dramatically reinvest. This is a very good strategy, and it’s one used by many dividend growth investors to this very day.

Since the end of 2011, Berkshire Hathaway added around 17,000 employees to their payroll. CEO and chairman Warren Buffett expanded their retail, media, manufacturing and insurance businesses.

In total, Berkshire Hathaway and over 80 subsidiaries employ roughly 288,000 people. We learned this through a Berkshire Hathaway regulatory filing yesterday. The total amount of employees is 6.3% higher than the disclosed 270,858 people mentioned in the 2011 annual report.

Berkshire Hathaway has reduced their reliance on insurance companies as they started to invest in a multitude of industries. This willingness has made the company one of the largest employers in the United States. Over the last five years, companies that strictly sell insurance like Chubb Corp. and Travelers Cos. have actually reduced their staff throughout the end of 2011 and returned the added capital to their shareholders. Berkshire Hathaway doesn’t pay a dividend and they did not buy back shares for decades until very recently.

Warren Buffett has decided to focus on “hard assets and older fashion businesses,” like manufacturing and railroads, Meyer Shields says, who is an analyst for Stifel Nicolaus & Co.

The Berkshire Hathaway workforce has soared from a decade ago when it was only 147,000 people. Since then, Warren Buffett and Berkshire Hathaway have made some of their biggest acquisitions including the purchase of Burlington Northern Santa Fe during 2010 for $26.5 billion. They also added Lubrizol Corp. in 2011 for another $9 billion.

“When you’re buying a company with a market value in the billions or tens of billions, then you’re going to get a significant headcount associated with that,” said Shields.

Buffett has also granted power to deputies in order to make deals to expand their businesses. Managers of a Berkshire Hathaway, including Lubrizol CEO James Hambrick and Victor Mancinelli, leader of CTB Inc., the farm product unit, both announced deals last year that will expand their operations throughout Europe and the United States. These bolt on purchases cost Berkshire Hathaway around $1.8 billion during a nine-month period ending on September 30.

Party Supplies

Warren Buffett also purchased 60 newspapers, including the Richmond Times Dispatch, and he also bought the company Oriental Trading Co., which sells party supplies. Buffett has stated that he would rather buy a company outright then purchase their stock.

All of this expansion shows us that Berkshire Hathaway now employs many US workers. According to the Labor Department data, there were roughly 134,000,000 US employees on non-farm payrolls throughout the end of the year. We can compare this to 130.2 million just 10 years earlier.

The US economy grew by 1.4% last year, and this matched the total gain of 2011. This was the best back-to-back reading since the years 2005 through 2006.

Berkshire Hathaway stock has risen by 9.3% this year in New York trading. It beat out the Standard & Poor’s 500 index, which only made a gain of 5.7%. Last year, Warren Buffett’s company rose 17% and the S&P 500 only went up 13%.

Real Estate

The residential real estate market in the United States has rebounded, and this has certainly helped some of the subsidiaries of Berkshire Hathaway, including the companies that make bricks, sell carpet, put in insulation and sell other building products. Housing starts rose to a 954,000 annual pace this past December, and it is the largest level since 2008 according to Commerce Department figures.

Buffett and Berkshire Hathaway had to cut this workforce during 2009 by over 20,000 jobs during the recession because of a slump in manufacturing and retail.

“We will be adding people at some point, but we won’t do it until we see the demand come back,” said Buffett in a 2009 interview with the CEO of Business Wire. This is a unit of Berkshire Hathaway that posts corporate press releases. “It’ll be a little slow because we don’t want to go through what we did before. Although, I will guarantee you that three years from now, our brick companies, our carpet company, and our insulation company will all be employing far more people than now.”

The latest company disclosure, related to a filing tied into debt issuance, did not break down the employment numbers by unit. Last February, when they issued the 2011 annual report, showed us that 39,000 workers were employed at the railroad, Fruit of the Loom employed over 27,000, Geico employed about 26,000 and Shaw Carpet employed 22,650 people.

During this past December, Geico mentioned that they plan to hire 4000 new employees during 2013. They expanded their payroll by about 20% over the last five years.

As far as the stock market is concerned, and stock market returns, it’s no surprise that Berkshire Hathaway is probably the most successful stock investment firm to ever exist. For the past 44 years in a row, Berkshire Hathaway has grown its book value by a whopping 20.3% compounded, and made their shareholders quite rich along the way. This massive feat is about double what the S&P 500 was capable of doing within the same time period.

But this article is about running it’s insurance business, and we’re starting to realize that Warren Buffett might not even be smarter than the cavemen that he likes to put in his GEICO commercials. We are basing this off of a recent report that talks about the insurance industry advertising spending.

Are Cavemen Really Not That Thrifty? 

SNL Financial recently released some business intelligence that says that GEICO, which is Buffett’s insurance subsidiary, is the biggest spender as far as advertising is concerned throughout the entire industry in insurance. GEICO actually spent a grand total of $993.8 million on their commercials that we all know and love during 2011. These commercials star lizards, Neanderthals and all kinds of other trademarked critters such as the money stack with googly eyes. The funny thing is that this insurance advertising layout is as big as the combined layouts of three really large insurance firms such as Liberty, Progressive and Travelers. Their combined total is only a little bit over $1 billion.

Since Berkshire Hathaway is basically outspending their rivals at a rate of 3 to 1, you would think that this would drive them to grab the bulk of the insurance market in America. The funny thing is if you look at the complete saturation of GEICO ads on TV, you probably think that GEICO already owned the majority of the market. But the real truth is that you would actually be wrong in this assessment.

So you have to wonder what has Warren Buffett actually achieved by spending all this money on insurance ads? We know that he has made the Mad Men on Madison Avenue quite happy, but their commercials really haven’t achieved all that much besides this. Since Berkshire Hathaway took over GEICO in 1996, they have steadily increased the amount they spent on ads as a way to hopefully grab more market share. Since the effort hasn’t been entirely fruitless, you could understand why they continue to go down this road. Their customer base is about a steady 7 to 8% annually based on the total US market. But the reality is that over the last 16 years, GEICO has only grown in market share by a total of 8.5%.

Can Money Truly Buy Market Share? 

Unfortunately, it can’t. The truth is that there are a lot of insurance companies out there that get much less media exposure then GEICO, and yet these companies are actually running circles around the company.

Let’s take a closer look at Travelers, Liberty Mutual and Progressive. Their combined market share is actually twice the size of GEICO, even though the combined amount of advertising spend between the three companies is on the same level as GEICO’s. So each company is basically spending about a third of what GEICO spends, but they have twice the market share. Progressive actually has about the same market share as GEICO, and they only spend a fraction of what GEICO does in advertising revenue.

The undisputed champion for auto insurance is still State Farm. They actually own a grand total of 18.7% of this market, and that’s over twice what GEICOs share is. But the thing is that State Farm actually spends 18% less of the advertising costs over GEICO. So State Farm is obviously doing something right, and GEICO really might need to start rethinking their strategy.

What Does This Mean to You?

The main thing that all car insurance customers need to get out of this is that GEICO could waste a lot of money buying commercial air time, but it hasn’t made them the dominant player in the market even though they’ve been trying for the last 16 years. But what’s the reason behind this? Most people probably don’t take their ads seriously, and they really don’t believe them for what they are at face value. These cute commercials obviously aren’t selling insurance all that much, since there are other companies out there who are offering better prices and better service.

So consider doing a little bit of research before you sign on the dotted line of any insurance company, GEICO included.