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Sunday, February 28, 2010

WALL STREET PIT: Warren Buffett’s 2009 Letter to Shareholders

By editor|Feb 27, 2010, 9:06 PM

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Warren Buffetts 2009 Letter to ShareholdersBerkshire Hathaway (BRK.A) (BRK.B) Chairman and CEO Warren Buffet wrote in his eagerly anticipated annual letter to shareholders, released Saturday, that the conglomerate’ s book value increased 19.8% last year, gaining $21.8 billion in net worth. Over the last 45 years (that is, since present management took over)
Berkshire’s book value has grown from $19 to $84,487, a rate of 20.3% compounded annually, the letter said. With Berkshire Class A shares closing on Friday at $119,800, the PPS is certainly trading above year end book value of $84,487. Buffet also wrote that the company had net income of $8.06 billion, or $5,193 per share in 2009.

In aggregate, our businesses are worth considerably more than the values at which they are carried on our books. In our all-important insurance business, moreover, the difference is huge. Even so, Charlie [Munger] and I believe that our book value – understated though it is – supplies the most useful tracking device for changes in intrinsic value.

Mr. Buffett made a specific comment to Berkshire’s property-casualty (P/C) insurance business, calling it “the engine behind Berkshire’s growth.”

“It has worked wonders for us”, he wrote. We carry our P/C companies on our books at $15.5 billion more than their net tangible assets, an amount lodged in our “Goodwill” account. These companies, however, are worth far more than their carrying value – and the following look at the economic model of the P/C industry will tell you why.

On the question of why Berkshire issued shares to pay for part of the Burlington Northern Santa Fe Corp. (BNI) acquisition, Buffett said that “the selling shareholders quite properly evaluated our offer at $100 per share.”

The cost to us, however, was somewhat higher since 40% of the $100 was delivered in our shares, which Charlie and I believed to be worth more than their market value. Fortunately, we had long owned a substantial amount of BNSF stock that we purchased in the market for cash. All told, therefore, only about 30% of our cost overall was paid with Berkshire shares.

In the end, Charlie and I decided that the disadvantage of paying 30% of the price through stock was offset by the opportunity the acquisition gave us to deploy $22 billion of cash in a business we understood and liked for the long term. It has the additional virtue of being run by Matt Rose, whom we trust and admire. We also like the prospect of investing additional billions over the years at reasonable rates of return. But the final decision was a close one. If we had needed to use more stock to make the acquisition, it would in fact have made no sense. We would have then been giving up more than we were getting.

Mr. Buffett also addressed in his letter — regarded as one of the most important and informative bodies of work ever written in the business and investing world — the fact that companies must develop harsh penalties for greedy executives who get into trouble with risky investments.

“In my view a board of directors of a huge financial institution is derelict if it does not insist that its CEO bear full responsibility for risk control”, Buffett wrote. “If he’s incapable of handling that job, he should look for other employment. And if he fails at it – with the government thereupon required to step in with funds or guarantees –the financial consequences for him and his board should be severe.

It has not been shareholders who have botched the operations of some of our country’s largest financial institutions. Yet they have borne the burden, with 90% or more of the value of their holdings wiped out in most cases of failure. Collectively, they have lost more than $500 billion in just the four largest financial fiascos of the last two years. To say these owners have been “bailed-out” is to make a mockery of the term.

The CEOs and directors of the failed companies, however, have largely gone unscathed. Their fortunes may have been diminished by the disasters they oversaw, but they still live in grand style. It is the behavior of these CEOs and directors that needs to be changed: If their institutions and the country are harmed by their recklessness, they should pay a heavy price – one not reimbursable by the companies they’ve damaged nor by insurance. CEOs and, in many cases, directors have long benefitted from oversized financial carrots ; some meaningful sticks now need to be part of their employment picture as well.


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NY TIMES: Buffett’s Bargain Shopping Spree

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America’s most famous investor, Warren E. Buffett, struck a confident note in his annual letter to the shareholders of his holding company on Saturday, as he described in characteristically colorful terms how his businesses had largely ridden out the calamity of the financial crisis.

Nati Harnik/Associated Press

Warren Buffett told investors, “When it's raining gold, reach for a bucket, not a thimble.”

The tone of the letter contrasted sharply with Mr. Buffett’s report last year, in which he took himself to task for the company’s decline in book value, only the second such decline since he took control in 1965. This time he described how he had used the last 18 months to scoop up a string of assets — a buying spree that culminated at the end of last year with the agreement to buy the Burlington Northern Santa Fe Railway, his biggest bet yet.

Mr. Buffett wrote that his company, Berkshire Hathaway, had net income of $8.1 billion last year, or about $5,200 a share, 61 percent higher than in 2008. The company also reported a 19.8 percent rise in book value.

The crisis of 2007-8 led to the company’s first operating loss in the first quarter of last year, raising questions about Mr. Buffett’s exposure to consumer spending and the housing market. The company recovered strongly later in the year, however, helped by the rebound in the stock market, which strengthened his derivatives holdings.

In his letter, which accompanied the company’s annual report, Mr. Buffett laid out in detail how many of his holdings still depended on the vagaries of housing demand and consumer spending. But shares of the company, which peaked late in 2007 around $148,220 and fell to lows of around $73,195, have since rallied to close at $119,800 on Friday.

“We’ve put a lot of money to work during the chaos of the last two years,” he wrote. “It’s been an ideal period for investors: A climate of fear is their best friend.”

Mr. Buffett used his letter to crack jokes and issue more of his trademark aphorisms. The so-called Sage of Omaha, he is America’s most listened-to investor, and his annual letter is watched closely by investors for his assessment of his businesses and of the economy.

It has, however, taken on somewhat less importance in recent years as Mr. Buffett, 79, has raised his profile with more public speaking and interviews.

In characteristically blunt terms, he had harsh words for unnamed chief executives and directors who oversaw disasters at their companies during the crisis but “still live in a grand style.”

He said, “They should pay a heavy price,” and that there must be a reform of the way executives are rewarded for their performance. “C.E.O.’s, and in many cases, directors, have long benefited from oversized financial carrots; some meaningful sticks now need to be part of their employment picture as well.”

He also admitted mistakes of his own, saying he had closed a troubled credit card business, which had been his idea, and had given too much time to turn around the NetJets business, long a burden.

But he dwelt also on the lucrative positions he took in a string of companies over the last year and a half, pouring $15.5 billion into shares of companies like Goldman Sachs, General Electric and Wm. Wrigley Jr. Wishing he had taken greater advantage of the opportunities offered, he said, “When it’s raining gold, reach for a bucket, not a thimble.”

Burlington Northern Santa Fe was Mr. Buffett’s biggest purchase to date. Addressing that company’s 65,000 shareholders, he offered them a primer in his investment rules. But he warned all shareholders that the bigger size of Berkshire Hathaway would probably mean slower growth in the future.

“Huge sums forge their own anchor and our future advantage, if any, will be a small fraction of our historical edge,” he said.

Justin Fuller, the author of a blog about Mr. Buffett and a principal at Midway Capital Research in Chicago, said this company size was an important theme of the letter: “There was a lot of talk about size and maintaining a business and how size and bureaucracy can really hurt a business over time.”

Mr. Fuller said Mr. Buffett had also given insights into his investing strategy — many of his businesses are now in monopoly or near-monopoly industries like railroads and utilities.

Mr. Buffett told a long story about the wisdom of using a company’s own shares to buy another company — which was a veiled criticism of Kraft’s takeover of Cadbury, Mr. Fuller said, but also a justification of Mr. Buffett’s decision to issue shares to buy Burlington Northern Santa Fe. Mr. Buffett is a major investor in Kraft but has opposed its pending acquisition of Cadbury.

Mr. Buffett’s letter is watched closely for hints about when he may retire, but this year’s offered none. Talking of a time when he would be long gone, he said he was still tap-dancing to work at the end of his eighth decade.

He said he had sold shares in ConocoPhillips, Moody’s, Procter & Gamble and Johnson & Johnson, mainly to finance his railroad purchase. The shares of these companies were still likely to trade higher, he said.

Closing the letter, Mr. Buffett, ever the cheeky salesman, invited shareholders to his company’s annual meeting on May 1 in Omaha — promising to play table tennis for spectators and urging them to buy goods and services from his companies, and ending, “P.S. Come by rail.”

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REUTERS: Buffett: I goofed on Geico credit card

By Jonathan Stempel

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NEW YORK, Feb 27 (Reuters) - Warren Buffett is considered expert in many things in the financial world.

Credit cards apparently are not among them.

The world's second-richest person often admits when he gets things wrong. He did so on Saturday in his annual letter to shareholders of his Omaha, Nebraska-based insurance and investment company, Berkshire Hathaway Inc (BRKa.N) (BRKb.N).

Buffett had a brainstorm: create a credit card for customers of Geico Corp, the third-largest U.S. car insurer, which Berkshire has owned since 1996.

Though Geico underwriting profit fell 29 percent last year as loss claims increased, premiums earned grew 9 percent as it won new business in part through $800 million of advertising, many featuring a talking gecko.

Thanks to Geico chief Tony Nicely's leadership, Buffett said he is "more excited" about Geico now than he was when he first visited the company in 1951, as a 20-year-old student.

He's probably referring to the car insurance.

"For many years," Buffett wrote, "I had struggled to think of side products that we could offer our millions of loyal Geico customers. Unfortunately, I finally succeeded, coming up with a brilliant insight that we should market our own credit card. I reasoned that Geico policyholders were likely to be good credit risks and, assuming we offered an attractive card, would likely favor us with their business."

And they did -- but as at many traditional credit card lenders, it was the wrong type of business.

Buffett said Geico lost $6.3 million pretax on cards before he "finally woke up." It lost $44 million more when it sold a $98 million portfolio of card receivables, at 55 cents on the dollar.

"Your chairman closed the book on a very expensive business fiasco entirely of his own making," Buffett wrote.

"Geico's managers, it should be emphasized, were never enthusiastic about my idea," he went on. "They warned me that instead of getting the cream of Geico's customers we would get the -- well, let's call it the non-cream. I subtly indicated that I was older and wiser."

Buffett said he was half-right. "I was just older."

Buffett is 79. (Reporting by Jonathan Stempel)

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WALL STREET JOURNAL: Berkshire Improves But Economy Crimps Results

By SCOTT PATTERSON

Download the 2009 Warren Buffett Letter & 2009 Annual Report to Berkshire Hathaway Shareholders

Hundreds of thousands of fresh Berkshire Hathaway Inc. shareholders got an update Saturday on how their investment performed in 2009.

The news was mixed. While Berkshire's underlying returns rebounded strongly, helped by its vast stock holdings, pockets of weakness in several economically sensitive operating units crimped results.

In its annual shareholder letter, the conglomerate, which sells everything from ice cream to machine tools to house paint, reported that its book value gained 19.8% to $84,487 per share in 2009 from the prior year, based on a metric the company uses to track performance. In dollar terms, book value shot up $21.8 billion last year, a record.

Berkshire posted net income of $8.1 billion in 2009, up from $5 billion a year ago but down sharply from the $13.2 billion it earned in 2007. Revenue was $112 billion in 2009 from $108 billion in 2008.

Long a closely held company mostly for the wealthy, Berkshire in the past month vastly increased its shareholder base after it was included in the Standard & Poor's 500-stock index, held by millions of investors in index and mutual funds that closely track it.

Last year's gain–Berkshire's best since 2003–marks a strong rebound from 2008, when book value per share slid 9.6%, the biggest decline since Warren Buffett, the chairman, took over the company in 1965 when it was a family-run textile manufacturer on the East Coast.

The gain was less than the S&P 500's return of 26.5% in 2009, marking only the seventh time Berkshire has trailed the index under Mr. Buffett. But long-term investors aren't likely to be disappointed. Berkshire outperformed the index over the lion's share of the credit crisis, since losses in 2008 were far lower than the broader market's.

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Warren Buffett

"Our defense has been better than our offense, and that's likely to continue," Mr. Buffett wrote.

Berkshire's inclusion in the index against which he measures his own performance came after the company agreed to split its Class B shares as part of its acquisition of Burlington Northern Santa Fe, the railroad giant. According to S&P, about $1 trillion in assets is held by funds that directly track the S&P 500.

In the letter, Mr. Buffett seemed to address his new shareholders directly. In sections titled "How We Measure Ourselves" and "What We Don't Do," he provided guidelines for how to gauge the performance of his firm, how Mr. Buffett and his long-time partner, Charlie Munger, size up companies and how the various pieces of Berkshire work together at a whole.

"We will never become dependent on the kindness of strangers," Mr. Buffett wrote. "Too-big-to-fail is not a fallback position at Berkshire," a reference to large financial institutions bailed out by the government after suffering billions in losses.

The investor boasted how Berkshire, fueled by its vast cash stockpile and protected by its aversion to overly risky bets, was able to pump cash into the financial system during the heat of the crisis. Berkshire "was a supplier of liquidity and capital to the system, not a supplicant," he wrote.

A Transforming Berkshire

Of interest to new and old shareholders alike, Mr. Buffett discussed how he has been transforming Berkshire in recent years into a capital-intensive industrial conglomerate with big holdings in railroads and utilities and less exposure to cash-generating financial operations such as insurance. He said that while he used to shun capital intensive businesses, his perspective has changed. Berkshire will continue to spit out large amounts of cash, he wrote, and cash-hungry firms like utilities and railroads are among the best outlets for those dollars.

Those companies will deliver solid earnings, "albeit at the cost of our investing many tens —yes, tens—of billions of dollars of incremental equity capital," he wrote.

The result, he said is that Berkshire's "ever-growing collection of good to great businesses should produce above-average, though certainly not spectacular, returns in the decades ahead."

Swings with the Market

Berkshire is distinct from some other big corporations in that it holds a substantial investment portfolio at the parent level whose success has a high influence on the company's performance.

Last year, a rising stock market helped results. Berkshire's huge stock portfolio, which includes blue-chip companies such as American Express Co., Johnson & Johnson and Wal-Mart Stores Inc., posted a strong gain last year, marking a sharp reversal from 2008 when stocks plunged.

A big boost came from Berkshire's investment in Chinese battery and car maker BYD Co. Its $232 million investment in the company in 2008—a deal advocated by Mr. Munger—surged to nearly $2 billion by the end of last year.

The letter was peppered with the usual mix of witticisms, hard-core investment advice and folksy wisdom. Mr. Buffett said he scooped up corporate and municipal bonds in 2009, which he called "ridiculously cheap." But, he wrote, "I should have done far more. Big opportunities come infrequently. When it's raining gold, reach for a bucket, not a thimble."

Derivatives Bright Spot

The company also got a boost from several derivatives contracts it entered into in recent years. The contracts are insurance policies against long-term declines in U.S. and foreign stocks and expire during the next two decades. Berkshire will have to pay money if the indexes are below where they were when it initially entered the contracts.

Broadly, Berkshire posted an after-tax gain in derivative contracts of $486 million in 2009, compared with a loss of $4.6 billion the previous year.

Muted Gains in Operations

Outside of Berkshire's investment-related gains, the picture was much-less positive. While many units in his vast conglomerate were in the black, its holdings in companies that make everything from mobile homes to carpets to machine tools have taken a big hit amid the economic turmoil.

Much of Berkshire's operations remained heavily exposed to the economy, a factor that will only get more pronounced with the purchase Burlington Northern. Berkshire's utilities and energy units gained $1.1 billion in 2009, down from $2.3 billion in 2008, results that included roughly $1 billion in one-time gains related to a failed merger with Constellation Energy Group Inc.

Earnings by its manufacturing, service and retailing operations slid to $1.1 billion from $2.3 billion the previous year. The 2009 results took a hit from Berkshire's jet-rental company NetJets, which posted a pretax loss of $711 million.

Its insurance businesses reported a net underwriting gain of $1 billion last year, down from $1.8 billion in 2008, as Berkshire pulled in its horns slightly in insurance amid lower premiums. For 2010, Mr. Buffett said growth in Berkshire's auto insurance giant Geico could slow due to weakening auto sales and high unemployment, which causes some drivers to forego auto insurance.

Berkshire's Class A shares gained just 3% in 2009. But its shares have been on a roll of late, gaining nearly 20% since early November, when the Berkshire said it planned to purchase Burlington.

Housing Outlook

Mr. Buffett didn't comment at length on his view on the broader economy, but he did drop one glimmer of hope. He said that "within a year or so residential housing problems should be largely behind us." If he's right, that should provide a boost to a number of Berkshire companies heavily exposed to housing, such as the paint company Benjamin Moore, and Shaw Industries, a carpet maker.

On Management

In discussing management of his operations, Mr. Buffett maintained that he and Mr. Munger did not want to be micromanagers but instead wanted decisions made "at the operating level.''

But he also indicated the approach doesn't always succeed. Calling NetJets "the major problem for Berkshire last year," he said "It's clear that I failed you in letting NetJets descend into this condition.'' He said the unit was on the mend with his appointment of David Sokol, chairman of MidAmerican Energy Holdings Co., to its helm.

He also took responsibility for the "fiasco" of a Geico-issued credit card.

Geico's "managers, it should be emphasized, were never enthusiastic about my idea,'' he wrote. "They warned me that instead of getting the cream of GEICO's customers we would get the——well, let's call it the non-cream. I subtly indicated that I was older and wiser. I was just older."

Mr. Buffett didn't hesitate to dish some heat out as well. He said CEOs of failed companies "have largely gone unscathed" even as shareholders suffered massive losses. "Their fortunes may have been diminished by the disasters they oversaw," he writes, "but they still live in grand style." Mr. Buffett has said CEO compensation packages should include onerous terms that would wipe out their -- and their spouses -- net wealth if their firm required a government bailout.

Post Script

In a nod to its massive acquisition of Burlington Northern, in the section on preparations for Berkshire's annual shareholder meeting in May, Mr. Buffett closed with this postscript:

P.S. Come by rail.

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ASSOC PRESS: Excerpts from Warren Buffett's annual letter

By The Associated Press (AP) – 2 hours ago

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Investor Warren Buffett released his annual letter to Berkshire Hathaway Inc. shareholders Saturday morning. The Berkshire chairman and chief executive spent a large part of the letter explaining the guiding principles he and Vice Chairman Charlie Munger follow in running the Omaha-based company.

Here's a sample of what Buffett had to say:

___

BERKSHIRE'S FINANCIAL STABILITY:

"We will never become dependent on the kindness of strangers," Buffett wrote. "Too-big-to-fail is not a fallback position at Berkshire. Instead, we will always arrange our affairs so that any requirements for cash we may conceivably have will be dwarfed by our own liquidity. Moreover, that liquidity will be constantly refreshed by a gusher of earnings from our many and diverse businesses.

"When the financial system went into cardiac arrest in September 2008, Berkshire was a supplier of liquidity and capital to the system, not a supplicant. At the very peak of the crisis, we poured $15.5 billion into a business world that could otherwise look only to the federal government for help."

___

HOUSING MARKET

Buffett said there were three ways to cure the nation's oversupply: "(1) blow up a lot of houses, a tactic similar to the destruction of autos that occurred with the "cash-for-clunkers" program; (2) speed up household formations by, say, encouraging teenagers to cohabitate, a program not likely to suffer from a lack of volunteers or; (3) reduce new housing starts to a number far below the rate of household formations.

"Our country has wisely selected the third option, which means that within a year or so residential housing problems should largely be behind us, the exceptions being only high-value houses and those in certain localities where overbuilding was particularly egregious. Prices will remain far below "bubble" levels, of course, but for every seller (or lender) hurt by this there will be a buyer who benefits. Indeed, many families that couldn't afford to buy an appropriate home a few years ago now find it well within their means because the bubble burst."

___

GOLDEN OPPORTUNITIES

"We told you last year that very unusual conditions then existed in the corporate and municipal bond markets and that these securities were ridiculously cheap relative to U.S. Treasuries," Buffett wrote. "We backed this view with some purchases, but I should have done far more.

"Big opportunities come infrequently. When it's raining gold, reach for a bucket, not a thimble."

___

USING STOCK FOR ACQUISITIONS

Buffett warned companies to be careful about using their own stock to make acquisitions unless they evaluate the value of the stock they would be giving away. Buffett said that in 50 years of serving on corporate boards he has heard plenty of presentations by investment bankers pitching deals, but the bankers never discuss the true value of the stock being given away in the deal.

"When stock is the currency being contemplated in an acquisition and when directors are hearing from an advisor, it appears to me that there is only one way to get a rational and balanced discussion. Directors should hire a second advisor to make the case against the proposed acquisition, with its fee contingent on the deal not going through. Absent this drastic remedy, our recommendation in respect to the use of advisors remains: 'Don't ask the barber whether you need a haircut.'"

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CNBC: Warren Buffett: "When It's Raining Gold, Reach For a Bucket"

Published: Saturday, 27 Feb 2010 | 8:22 AM ET

Warren Buffett has a new nugget of pithy advice for investors in his new letter to Berkshire shareholders: "When it's raining gold, reach for a bucket, not a thimble."

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Warren Buffett

Buffett recalls that last year's letter called corporate and municipal bonds "ridiculously cheap" compared to U.S. Treasuries. And we says Berkshire did "back" that view by making some purchases, but "I should have done far more. Big opportunities come infrequently."

Still, it's not all regrets. Buffett writes, "We've put a lot of money to work during the chaos of the last two years. It's been an ideal period for investors: A climate of fear is their best friend. Those who invest only when commentators are upbeat end up paying a heavy price for meaningless reassurance."

Berkshire ended 2009 with $30.6 billion in cash, down from $44.3 billion at the beginning of 2008. Of that roughly 30 billion, $8 billion was "earmarked" for its then-pending acquisition of Burlington Northern Santa Fe.

Buffett reports the market value of Berkshire's common stock portfolio stood at $59.0 billion at the end of 2009. That's a gain of just over 70 percent from the $34.6 billion purchase price of those securities.

Berkshire also has positions in non-traded securities of Dow Chemical, General Electric (CNBC's parent company), Goldman Sachs, Swiss Re, and Wrigley. All were bought in the last 18 months. Carrying value: $26.0 billion vs. an aggregate cost of $21.1 billion. Buffett says they generate a total of $2.1 billion a year in dividends and interest, while also providing a "significant equity potential."

Buffett notes that Berkshire's largest sales in 2009, ConocoPhillips, Moody's, Procter & Gamble, and Johnson & Johnson, helped pay for the Dow, Swiss Re, and BNSF purchases.

Those sales were not motivated by a belief the stocks would fall in price. "Charlie (Munger) and I believe that all of these stocks will likely trade higher in the future."

"A PAINFUL CONFESSION"

In his letter, Buffett admits to what he calls "a very expensive business fiasco entirely of his own making."

Thinking that GEICO policyholders would be good credit risks, Buffett "unfortunately" came up with the "brilliant insight" that the insurance company should market its own credit card.

Buffett writes:

GEICO’s managers, it should be emphasized, were never enthusiastic about my idea. They warned me that instead of getting the cream of GEICO’s customers we would get the – – – – – well, let’s call it the non-cream. I subtly indicated that I was older and wiser. I was just older.

Total losses: $50.3 million. Almost $100 million of troubled receivables were sold for 55 cents on the dollar.

BERKSHIRE'S STRONG 2009 UNDERPERFORMS STOCK MARKET

Berkshire Hathaway had a strong 2009, but not strong enough to outperform the benchmark S&P 500 stock index.

In his letter, Buffett reports the company's net worth increased by $21.8 billion last year.

That increased the company's per-share book value by 19.8 percent to $84,487.

But the S&P, including dividends, jumped 26.5 percent in 2009. That's 6.7 percentage points better than Berkshire's gain.

It's the first year since 2004 that Berkshire has underperformed the S&P.

Last year, Berkshire's per-share book value fell 9.6 percent, but that was much better than the S&P's 37.0 percent plunge.

Berkshire has underperformed the S&P in just seven calendar years since Buffett took over in 1965.

BUFFETT ON RESIDENTIAL HOUSING

In his discussion of Berkshire subsidiary Clayton Homes, Buffett predicts that "within a year or so residential housing problems should be largely behind us, the exceptions being only high-value houses and those in certain localities where overbuilding was particularly egregious."

He credits the nation's "wise" decision to reduce new housing starts "to a number far below the rate of household formations." (Much better than blowing up a lot of existing houses or speeding up household formations by "encouraging teenagers to cohabitate, a program not likely to suffer from a lack of volunteers.")

He does complain that Clayton, and other manufactured housing companies, are being hurt by "the punitive differential in mortgage rates between factory-built homes and site-built homes."

Even so, he believes Clayton will "operate profitably in coming years, though well below its potential."

BERKSHIRE'S DERIVATIVES

Buffett repeats his expectation that Berkshire's derivative contracts will be profitable over their multi-year lifetimes. The "wild swings" in the carrying value of those contracts "neither cheer nor bother Charlie and me."

Buffett once famously referred to derivatives as "weapons of mass financial destruction." That's led some to criticize him for using derivatives.

Buffett replies:

The dangers that derivatives pose for both participants and society – dangers of which we’ve long warned, and that can be dynamite – arise when these contracts lead to leverage and/or counterparty risk that is extreme. At Berkshire nothing like that has occurred – nor will it. It’s my job to keep Berkshire far away from such problems. Charlie and I believe that a CEO must not delegate risk control. It’s simply too important.

A 'paper' gain of $1.052 billion on Berkshire's derivatives helped lift fourth quarter net income to $3.06 billion, or $1,969 per Class A share. That's up from $117 million, or $76/share.

Revenue increased about 23 percent to $30.2 billion.

Operating profit for 2009's fourth quarter fell 40 percent to $2.03 billion ($1.308 per share) from $3.37 billion ($2,175 per share.)

QUESTIONS FOR THE ANNUAL MEETING

The letter ends with a pitch for Berkshire's annual meeting, to be held on Saturday, May 1 at the Qwest Center in Omaha.

With 500,000 existing shareholders and the addition of at least 65,000 more from the BNSF deal, Buffett expects attendance to top last year's estimated 35,000. "There will be no change, however, in our enthusiasm for having you attend. Charlie and I like to meet you, answer your questions and - best of all - have you buy lots of goods from our businesses."

Along with answering questions from shareholders selected in a drawing Saturday morning, Buffett and Munger will also respond to selected questions submitted by email to three financial journalists, including CNBC's Becky Quick. (BerkshireQuestions@cnbc.com).

Please remember that Buffett will also be answering your questions during a live, three-hour appearance on CNBC's Squawk Box this coming Monday, March 1 at 6a ET and it will be available at EWB shortly after.

Suggested questions for that event should be submitted by clicking on the 'Submit Your Questions' button below. We especially encourage questions related to Buffett's letter to shareholders.

Submit your question hereWarren Buffet Watch

I encourage you to read the entire text of that letter, since a summary of the highlights (as I perceive them) cannot do it full justice. The letter features what Buffett calls a "review (of) some of the basics of our business, hoping to provide both a freshman orientation session for our BNSF newcomers and a refresher course for Berkshire veterans."

It's posted here on Shareinvestorforum.com website, along with an archive of letters (1977 - 2009) from previous years.

Current stock prices:

Berkshire Class A: [BRK.A 119800.00 1000.00 (+0.84%) ]

Berkshire Class B: [BRK.B 80.13 0.45 (+0.56%) ]

Dow Chemical: [DOW 28.31 -0.01 (-0.04%) ]

General Electric: [GE 16.06 0.14 (+0.88%) ]

Goldman Sachs: [GS 156.35 -0.09 (-0.06%) ]

Swiss Re: [SWCEY 44.95 0.20 (+0.45%) ]

ConocoPhillips: [COP 48.00 -0.30 (-0.62%) ]

Moody's: [MCO 26.62 -0.24 (-0.89%) ]

Procter & Gamble: [PG 63.28 -0.42 (-0.66%) ]

Johnson & Johnson: [JNJ 63.00 -0.28 (-0.44%) ]



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The Essays of Warren Buffett: Lessons for Corporate America, Second EditionThe Essays of Warren Buffett: Lessons for Corporate America, Second Edition by Warren E. Buffett
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COLUMBUS DISPATCH: Buffett says he was 'bailed out' of NetJets losses by new CEO

Saturday, February 27, 2010 10:43 AM

In his annual letter to shareholders released this morning, billionaire Warren Buffett singled out Columbus-based private jet company NetJets for both negative and positive attention.

Buffett called NetJets "the major problem for Berkshire last year," as Berkshire overall reported a 61 percent increase in net income compared to 2008 but lagged the Standard and Poor's average in its per-share book value increase.

"In the eleven years that we have owned the company (NetJets), it has recorded an aggregate pre-tax loss of $157," Buffett said in his letter. "Moreover, the company's debt has soared from $102 million at the time of purchase to $1.9 billion in April of last year. Without Berkshire's guarantee of this debt, Net Jets would have been out of business. It's clear that I have failed you in letting NetJets descend into this condition."

Buffett said he had been "bailed out" by David Sokol, whom he appointed CEO of NetJets in August after the abrupt resignation of longtime CEO Richard Santulli.

Buffett praised Santulli for instituting "top-of-the-line standards for safety and service" at the company that are being continued, but said the leadership of Sokol who is chairman of Berkshire-owned MidAmerican Energy, and considered one of Buffett's likely successors has been "transforming: Debt has already been reduced to $1.4 billion, and, after suffering a staggering loss of $711 million in 2009, the company is now solidly profitable."

Buffett echoed what Sokol has said about NetJets, that it is "likely to operate at a profit in 2010, assuming there is no further deterioration in the U.S. economy or negative actions directed at the ownership of private aircraft." For 2009, NetJets posted a $711 million loss. The losses were largely due to write-downs on the value of aircraft, with a smaller amount attributable to the cost of laying off workers.

For the full text of Buffett's letter to investors, go to: http://www.berkshirehathaway.com/letters/2009ltr.pdf


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The Snowball: Warren Buffett and the Business of LifeThe Snowball: Warren Buffett and the Business of Life by Alice Schroeder
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WALL STREET JOURNAL: Buffett’s Letter: Quips and Zingers

By Matt Phillips

Download the 2009 Warren Buffett Letter & 2009 Annual Report to Berkshire Hathaway Shareholders

It’s no secret that people love reading America’s most-beloved billionaire’s letters to shareholders. But it’s not just because it offers dry insights on Ben Graham’s doctrine of value investing. It’s also because it’s sort of like hanging out with your corny — and sometimes bawdy or scatological — uncle over the holidays. Make that your incredibly rich uncle. Anyway here are some of this year’s quips.

On Country Music:

Sing a country song in reverse, and you will quickly recover your car, house and wife.

On the fact that Berkshire issued stock as part of its BNSF acquisition:

Charlie and I enjoy issuing Berkshire stock about as much as we relish prepping for a colonoscopy.

On the upside potential for its longtime holding Geico:

An old Wall Street joke gets close to our experience:

Customer: Thanks for putting me in XYZ stock at 5. I hear it’s up to 18.

Broker: Yes, and that’s just the beginning. In fact, the company is doing so well now,
that it’s an even better buy at 18 than it was when you made your purchase.

Customer: Damn, I knew I should have waited.

A story on how a once-staid bank Berkshire owned stock in got an acute of deal fever:

Its managers – fine people and able bankers – not unexpectedly began to behave like teenage boys who had just discovered girls.

The small-bank owner was being wooed by other large banks in the state and was holding out for a price close to three times book value. Moreover, he wanted stock, not cash. Naturally, our fellows caved in and agreed to this value-destroying deal. “We need to show that we are in the hunt. Besides, it’s only a small deal,” they said, as if only major harm to shareholders would have been a legitimate reason for holding back. Charlie’s reaction at the time: “Are we supposed to applaud because the dog that fouls our lawn is a Chihuahua rather than a Saint Bernard?”

The seller of the smaller bank – no fool – then delivered one final demand in his negotiations. “After the merger,” he in effect said, perhaps using words that were phrased more diplomatically than these, “I’m going to be a large shareholder of your bank, and it will represent a huge portion of my net worth. You have to promise me, therefore, that you’ll never again do a deal this dumb.”

A closing nod to its massive acquisition of BNSF, in the section on preparations for Berkshire’s annual shareholder meeting

Come by rail.

Share Investor Links

Share Investor Blog - Stockmarket & Business commentary
Discuss this topic @ Share Investor Forum - Register free

Download the 2009 Warren Buffett Letter & 2009 Annual Report to Berkshire Hathaway Shareholders

Recommended Amazon Reading

The Essays of Warren Buffett: Lessons for Corporate America, Second EditionThe Essays of Warren Buffett: Lessons for Corporate America, Second Edition by Warren E. Buffett
Buy new: $25.91 / Used from: $20.00
Usually ships in 24 hours
The Snowball: Warren Buffett and the Business of LifeThe Snowball: Warren Buffett and the Business of Life by Alice Schroeder
Buy new: $13.60 / Used from: $10.34
Usually ships in 24 hours




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