Berkshire Hathaway Annual Letter to Shareholders 2008 - Read the latest Berkshire Letter
Oracle of Omaha takes some blame for bad investment decisions
Pension underfunding will be a significant contributor to the economic troubles of local and state governments this year, Warren E. Buffett, chairman and CEO of Berkshire Hathaway, Omaha, said today in his annual letter to Berkshire shareholders.“Many cities and states were surely horrified when they inspected the status of their funding at year-end 2008,” Mr. Buffett, 78, wrote in the letter, which was released on the company’s website. (Click here to read the entire letter.) “The gap between assets and a realistic actuarial valuation of present liabilities is simply staggering.”
The annual letter, widely anticipated by investors around the globe, detailed how Berkshire Hathaway, a conglomerate that owns business in the insurance, retail, home building, utility and other industries, suffered a decrease in net worth last year of $11.5 billion. That decline reduced the per-share book value of Berkshire stock by 9.6%, the worst performance in the 44 years since Mr. Buffett took control of the company and only the second year over that period in which the company posted negative results. Still, the company outperformed the S&P 500 stock index, which fell 37% last year, including dividends.
Turning to the housing crisis and its genesis, Mr. Buffett said too many Wall Street salesmen and investors relied on past history as a guide when purchasing securitized products based on housing prices.
“Investors should be skeptical of history-based models,” Mr. Buffett wrote. “Constructed by a nerdy-sounding priesthood using esoteric terms such as beta, gamma, sigma and the like, these models tend to look impressive. Too often, though, investors forget to examine the assumptions behind the symbols. Our advice: Beware of geeks bearing formulas.”
Mr. Buffett acknowledged some mistakes he made in investing last year, namely buying a stake in oil company ConocoPhillips when oil prices were peaking, and acquiring stakes in two unnamed Irish banks for a total of $244 million. As for the ConocoPhillips investment, even if oil prices rise, “the purchase has cost Berkshire several billion dollars,” Mr. Buffett wrote. He said the company wrote the Irish bank holdings down to market at the end of 2008 for an 89% loss.
“The tennis crowd would call my mistakes ‘unforced errors,’” Mr. Buffett wrote.
Underpricing risk to overpricing risk
Amid the financial crisis, the investment world has gone from underpricing risk to overpricing it, Mr. Buffett said, adding that yields available today on “good-grade” municipal bonds or corporate bonds would have seemed “unthinkable” just a few years ago.
Still, he warned: “Clinging to cash equivalents or long-term government bonds at present yields is almost certainly a terrible policy if continued for long. Holders of these instruments, of course, have felt increasingly comfortable – in fact, almost smug – in following this policy as financial turmoil has mounted.”
As for Berkshire’s current investments, Mr. Buffett said he has continued to add to the firm’s equity put portfolio, which offers downside protection.
He said the company’s put contracts – spread across four major stock market indexes including the S&P 500, the FTSE 100, the Euro Stoxx 50 and the Nikkei 225 – total $37.1 billion at current exchange rates. The company received premiums of $4.9 billion for the contracts in 2008 but recorded a year-end liability of $10 billion, for a mark-to-market loss of $5.1 billion.
Last year, the company began to write credit default swaps on individual companies and at the end of the year had a total of $4 billion in CDS contracts covering 42 companies.
“We are unlikely to expand this business to any extent because most buyers of this protection now insist that the seller post collateral, and we will not enter into such an arrangement,” Mr. Buffett wrote.
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