Warren Buffett

Notes from the 2009 Berkshire Hathaway Annual Report

March 3, 2010

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Warren Buffett’s annual Letter to Shareholders is always worth reading even if you are not a shareholder in Berkshire Hathaway (BRK.A, BRK.B). The letters provide valuable insight into the major industries that BRK is operating in — insurance, regulated utilities, retail and services — all delivered in Mr. Buffett’s trademark folksy and witty language. Also Mr. Buffett throws his insight into the investment themes of the day. The 2009 letter to shareholders, released over the weekend and available on the Berkshire Hathaway website, did not disappoint. Here are some of the highlights:

  1. Berkshire Hathaway acquired Burlington Northern Sante Fe (BNSF), a railroad operator, in 2009. As part of the acquisition was paid in BRK stock, Berkshire now has tens of thousands of new shareholders. Mr. Buffett explains why he measures Berkshire’s business results through changes in per-share book value. He also clarifies what new investors can expect him not to do. (Pages 3-5).
  2. The next few pages cover Berkshire’s business results for 2009. Mr. Buffett thinks the residential housing problems should be largely over within a year or so because housing starts in the US are running at a rate far below household formation.
  3. Berkshire’s investment holdings are discussed in pages 14-15. It includes this quote: “When it’s raining gold, reach for a bucket, not a thimble”.
  4. Mr. Buffett calls attention to “an inconvenient truth”: management paying a premium to acquire another company while paying for it with its own undervalued stock. Clearly, he is explaining why the BNSF acquisition was partially paid for in BRK stock, while at the same time, he publicly criticized the price that Kraft paid in acquiring Cadbury (part of which was paid in KFT stock). Pages 16-18.

Warren Buffett’s letters to Berkshire Hathaway shareholders going back to 1977 are available here. You can read Michael James’ take here. It is not often that you read columns that are critical of Buffett but there were two recently: David Olive of The Star says Buffett doesn’t practice what he preaches and Ian McGugan calls out what he says are Mr. Buffett’s “minor sins”.

No Green Shoots says Warren Buffett

September 15, 2009

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In a chat with Fortune magazine’s Poppy Harlow (available here), Warren Buffett noted that he is not seeing any green shoots in the seventy-odd businesses that Berkshire Hathaway is involved in. But he isn’t seeing any deterioration either. Still, Buffett says he is buying stocks: “We are buying stocks this morning, I can tell you that… I’m not buying based on whether we are coming out of the recession in three months or six months or a year. I’m buying them because I think we are getting good value over time. And I think it’s a mistake for investors to focus on business forecasts instead of looking at the intrinsic value of a business.”

Asked if even the Oracle of Omaha has learned an investment lesson in all this, Buffett replied: “Well, it’s always a terribly interesting thing obviously to watch… but, the dangers of leverage, the dangers of everybody getting a belief of some huge asset class that can do nothing but go up… you know… the dangers of joining the crowd just because the crowd made money yesterday and the week before… all of those things they just recur throughout history. So, you’ve seen an extreme version in certain aspects of the economy but there is really nothing new”.

Notes from the 2008 Berkshire Hathaway Annual Report

March 1, 2009

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I must admit that I don’t always thoroughly read the annual reports of the stocks I actually own, but I religiously read the annual report of Berkshire Hathaway as soon as it is published. With all the turmoil in the financial markets, I was anticipating this year’s report more eagerly than usual and Warren Buffet did not disappoint. You can find the entire report here and I strongly encourage you to read it in its entirety (it is only 25 pages long and lucidly written, as always).

  • Buffet acknowledges that we are facing unprecedented economic times and Government did not have an option – it had to take action on a massive scale. If you recall, the intervention came for criticism over bailouts but Buffet reminds us: “Like it or not, the inhabitants of Wall Street, Main Street and the various Side Streets of America were all in the same boat.”
  • He suspects that the intervention will “almost certainly bring on unwelcome aftereffects” with inflation a likely consequence.
  • Buffett is optimistic that America will overcome the latest obstacle like it has done many times before. “America’s best days like ahead.”
  • He cautions readers from leaping to conclusions about stock market returns based on current economic conditions. “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.”
  • “Beware of geeks bearing formulas”, Buffet often likes to say. The huge losses in mortgage-backed securities are a direct result of investors, rating agencies and Wall Street extrapolating the loss experience of a past housing market with modest price appreciation and negligible speculation to a diametrically different market.
  • Buffett calls his purchase of ConocoPhillips when oil and gas prices were at a peak “a major mistake of commission”. Berkshire purchased fixed-income securities in Wrigley, Goldman Sachs and General Electric and sold some of investments in Johnson & Johnson, Proctor & Gamble and ConocoPhilips.
  • From underpricing risk, the market has swung completely the other way and is now overpricing it. In fact, Buffett goes as far as calling a bubble in US treasuries and reiterates the point he made in a New York Times Op-ed: “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. They regard their judgment confirmed when they hear commentators proclaim “cash is king,” even though that wonderful cash is earning close to nothing and will surely find its purchasing power eroded over time.”
  • Buffett shows that the Black-Scholes formula for pricing options can produce absurd results if it is applied to extended time periods.

The entire archive of Buffet’s letter to shareholders is available here.