By Justin Baer in New York
Berkshire Hathaway Annual Letter to Shareholders 2008 - Read the latest Berkshire Letter
Published: February 28 2009 20:18 | Last updated: February 28 2009 20:18
Warren Buffett conceded that his holding company, Berkshire Hathaway, turned in its worst performance on record as the financial crisis drew the world’s economy into a deepening recession, and gave investors little reason to believe a turnaround is imminent.
In his annual letter to Berkshire shareholders, Mr Buffett recounted how frozen credit markets dovetailed with tumbling home and stock prices to imperil many of the world’s biggest banks and produce “a paralyzing fear that engulfed the country.”
“By yearend,” he wrote, “investors of all stripes were bloodied and confused, much as if they were small birds that had strayed into a badminton game.”
The billionaire also urged his legions of followers to remember that the stock market usually rises – the Standard & Poor’s 500 Index has produced annual increases in 75 per cent of the past 44 years – and may do so again even if the downturn persists.
“We’re certain, for example, that the economy will be in shambles throughout 2009 – and, for that matter, probably well beyond – but that conclusion does not tell us whether the stock market will rise or fall,” he wrote.
Regardless, Mr Buffett wrote, Berkshire will stick with a strategy that has produced an annual compounded growth in book value of 20.3 per cent: maintaining its “Gibraltar-like” financial strength, improving the competitive position of its existing businesses and making new acquisitions that bolster earnings.
That mindset did not help Berkshire navigate the financial crisis unscathed. Net income dropped 59 per cent in 2008 to $4.99bn, or $3,224 a share, from $12.2bn, or $8,548, a year earlier. Revenue fell 8.8 per cent to $107.8bn from $118.2bn.
Net income plunged 96 per cent in the fourth quarter, to $117m, or $76 a share, its fifth-straight decline from the year-earlier period.
Berkshire’s class A shares tumbled 32 per cent. Its per-share book value, or total assets minus intangible assets and liabilities, fell 9.6 per cent, its worst drop in Mr Buffett’s tenure.
The company’s utilities businesses did show a 54 per cent increase in profit, to $1.85bn from $1.2bn, on strong performances by operations in the US Midwest and West.
Berkshire’s insurance units, which include General Re, BH Reinsurance and GEICO, reported an underwriting profit of $2.79bn in 2008, down 17 per cent from a year ago.
Insurance premiums fell 20 per cent to $25.5bn.
Its manufacturing, service and retail companies earned $2.28bn, down 3 per cent from 2007’s $2.35bn total, on revenue of $66.1bn.
Income at Clayton Homes, the largest maker of manufactured homes, fell 22 per cent to $787m.
Mr Buffett sought to capitalize on the downturn through a string of investments in respected companies, including General Electric, Goldman Sachs and Wrigley.
Mr Buffett’s annual letter often serves as an opportunity to share his views on a wide range of issues that affect more than just Berkshire’s results, and this year’s missive took aim at a root cause of the credit crisis: irresponsible home lenders and borrowers.
“The present housing debacle should teach home buyers, lenders, brokers and government some simple lessons that will ensure stability in the future,” he wrote. “Home purchases should involve an honest-to-God down payment of at least 10 per cent and monthly payments that can be comfortably handled by the borrower’s income.
“Putting people into homes, though a desirable goal, shouldn’t be our country’s primary objective. Keeping them in their homes should be the ambition.”
The crisis has transformed the investment world from one that underprices risk to one that overprices it, triggering a surge in yields on the debts of municipalities and high-quality companies.
“When the financial history of this decade is written, it will surely speak of the Internet bubble of the late 1990s and the housing bubble of the early 2000s,” Mr Buffett said. “But the US Treasury bond bubble of late 2008 may be regarded as almost equally extraordinary.”
Mr Buffett also reminded investors of his repeated warnings on the dangers of complex derivatives. The collapse of Fannie Mae and Freddie Mac, two of the most highly regulated companies, underscore the point that no level of transparency can adequately define the risks these securities pose on the financial system, he wrote.
Nevertheless, he explained, Berkshire owns 251 derivatives he believes were mispriced at their inception.
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