Berkshire Hathaway published its long awaited annual report on Saturday. Warren Buffett, CEO of Berkshire, penned the first 20 pages or so. For those who haven’t read the letter yet, we encourage you to take a look as it provides Buffett’s thoughts on a host of issues, including the performance of Berkshire, the mistakes Buffett made last year, his outlook for the economy and other things.
Link: Berkshire’s 2008 Annual Report & Letter
While the major media reports focus on Berkshire’s actual 2008 results, which was the firm’s worst year since 1965, we’ve tried to identify a few points from the letter that are not being very actively discussed.
1 – Buffett continues to hunt for acquisitions. In a continuation of last year’s letter, Buffett makes it clear that he wants to be the buyer of businesses and believes that most of Berkshire’s future returns will be driven by the profits from the operating businesses of Berkshire, not investment returns like Buffett’s early days. At the end of the letter, there is a page that outlines what Buffett is looking for with future acquisitions.
2 – Buffett, a long-term optimist, says that the economy will probably worsen in 2009 and believes that states and municipalities will likely have funding problems during the downturn. But, he also points out that the US has been through many crises over the last 75 years and we’ve always emerged stronger, and just because the economy is souring doesn’t mean that the stock market will follow suit. According to Buffett, “America’s best days lie ahead.”
3 – of the 15 publicly traded holdings over $500m in value that Berkshire owns, 8 of them are now trading at market values below their original cost basis. Said another way, over 50% of Buffett’s largest holdings are below the price he purchased them at. But according to Buffett, lower prices don’t bother him and he quotes the great Ben Graham taught Buffett that “Price is what you pay, value is what you get.”
4 – Buffett is quick to mention that he made some mistakes last year, but he’s not apologizing for Berkshire’s 32% loss in 2008 or for selling J&J or PG or writing his “Buy America” op-ed piece in The New York Times. Instead, he talks about the purchase of two Irish banks, which have lost a significant amount of their value, and the stake he took in ConocoPhillips, when oil prices were near all time highs.
In our studying of Buffett, his investment philosophy, and Berkshire’s returns, it’s interesting to note that 2008 was only the second year for Berkshire where the firm saw its per-share book value record a loss (the other year was 2001 after the insurance costs associated with the 9/11 attacks). One thing investors may find encouraging is the performance of Berkshire after periods of underperformance of the stock or the per-share book value. Below is the performance of Berkshire Hathaway after those periods. For a less-than-optimistic view on Berkshire’s outlook, see TheStreet.com’s article from Doug Kass.
Bear ending Oct. 7, 1966
Berkshire gains 17.6% in 1967
Berkshire gains 85.0% in 1968.
Bear ending May 26, 1970
Berkshire gains 76.9% in 1971
Bear ending Oct. 3, 1974
Berkshire loses 5.0% in 1975
Berkshire gains 134.2% in 1976
Bear ending Aug. 12, 1982
Berkshire gains 69% in 1983
Bear ending Dec. 4, 1987
Berkshire gains 59.3% in 1988
Berkshire gains 84.6% in 1989
Bear ending Oct. 10, 1990
Berkshire gains 35.6% in 1991
Berkshire gains 29.8% in 1992
Bear ending Oct. 9, 2002
Berkshire gains 15.8% in 2003
Berkshire gains 4.3% in 2004
