There is a slightly snarky (the only word for it) feeling to the deluge of reports and commentary surrounding news that Warren Buffett’s Berkshire Hathaway suffered its worst year ever in 2008 – even though the results, including a 96 per cent annual plunge in fourth-quarter net income – were surprisingly abysmal. Some commentators however go as far as to suggest that Buffet’s famed portfolio is back to its original cost basis.
But first the facts. As the FT reports on Monday:
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 turnround was imminent.
Net income dropped 59 per cent in 2008 from $12.2bn, or $8,548 a share, a year earlier to $4.99bn, or $3,224 a share. Revenue fell 8.8 per cent from $118.2bn to $107.8bn. Net income plunged 96 per cent in the fourth quarter, to $117m, or $76 a share, its fifth straight decline from the year earlier.
Berkshire’s class A shares tumbled 32 per cent last year. 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.
His annual letter to Berkshire shareholders was described in Jeff Matthews’ blog as “much of what you’d expect”:
… a self-confession or two, that old Mae West “Snow White” joke, one humorous new aphorism (“beware of geeks bearing formulas”) and a metaphor that associates derivatives with social diseases, not to mention a sober assessment of the world economy, one no-punches-pulled prediction on inflation, as well as plenty of cheerleading for Berkshire’s managers and businesses…
The FT adds that Buffett recounted how frozen credit markets dovetailed with tumbling home and stock prices to imperil many banks and produce “a paralysing fear that engulfed the country”.
Berkshire will stick with a strategy that has produced an annual compound growth in book value of 20.3 per cent, Buffett said. It would maintain its “Gibraltar-like” financial strength, improve the competitive position of its existing businesses and make new acquisitions that bolster earnings.
The real “shocker in the letter”, though, is not actually highlighted, or even mentioned, by Buffett, says Matthews:
The shocker is this: Berkshire Hathaway’s portfolio of equities—the stocks such as Coke and P&G and Washington Post that Warren Buffett himself, the “Oracle of Omaha,” famously purchased over the years at bargain prices—appears, as of yesterday’s market close, to be worth not much more than Buffett’s cost.
That’s right.
Based on the year-end portfolio presented in the letter (and it has changed only modestly over time, but now excludes two stocks, Burlington Northern and Moody’s, in which Berkshire owns 20% and must report its holdings under the equity method,) Berkshire’s entire equity portfolio, which had a $37 billion cost basis and a $49 billion market value at year-end 2008, was, as of yesterday’s market close, worth only about $37 billion.
Now, we know what you’re thinking: you’re thinking, “Warren doesn’t mind, so why should we?”
Indeed, Buffett doesn’t mind — he says so in this year’s letter, on page 5:
“Additionally, the market value of the bonds and stocks that we continue to hold suffered a significant decline along with the general market. This does not bother Charlie and me.
Indeed, we enjoy such price declines if we have funds available to increase our positions. Long ago, Ben Graham taught me that “Price is what you pay; value is what you get.” Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.”
Yet Buffett also disclosed what might go down as the second most surprising disclosure in today’s letter: he had to sell some of Berkshire’s stocks to make those headline-grabbing investments in GE, Goldman Sachs and Wrigley:
To fund these large purchases [GE, Goldman and Wrigley], I had to sell portions of some holdings that I would have preferred to keep (primarily Johnson & Johnson, Procter & Gamble and ConocoPhillips).
No, insists Matthews, “we’re not suggesting Buffett’s portfolio is any worse off than anybody else’s”.
Yet the fact is, the value of Berkshire’s equity portfolio is not only of enormous economic importance to Berkshire Hathaway and its shareholders, but to investors around the world who watch what Warren does and frequently imitate his moves.
And the fact that it appears to be right back to its cost basis — after decades of not — is startling.
Meanwhile, Fortune has a more sympathetic look at Berkshire’s results and concludes, like Buffett himself, that to put Berkshire’s “pile of cash to work at prices he … considered attractive”, Buffett he had to endure a terrible stock market that savaged many of the stocks the company already held. “He has always declared, though, that he is perfectly content to see Berkshire’s stocks fall in price, because that allows him to buy more of them cheaply”.
We at FT Alphaville are certainly not suggesting we feel sorry for Buffett, but it’s a classic case of “nowhere to go but down” for the Sage of Omaha. For any other investor (except perhaps someone like John Paulson), Berkshire’s performance in 2008 may have drawn little comment. But Buffett’s bar has been set very high. And even the slightest misstep draws the critics out howling and the commentators sneering.
But that’s only from some quarters. As the NYT notes on Monday, his letter was greeted with “sighs of relief” among some shareholders:
“I’m delighted,” said Janet Tavakoli, a derivatives expert and author of “Dear Mr. Buffett,” about the credit crisis of 2008. “Of course it was a tough year — the toughest year of his life. But I was concerned about the impact in operating earnings and I was prepared for much worse.”
Continuing its distinctly upbeat tone on the fortunes of Buffett and Berkshire, the NYT notes that despite its record losses, Berkshire still has about $25bn of cash on hand, and has been buying preferred shares of General Electric and Goldman Sachs, as well as the debt of companies like Harley-Davidson and Tiffany & Company. “Mr Buffett is shopping for bargains while the share prices of most companies are sliding — his own portfolio included”, it adds.
Well, for Jeff Matthews and all the other “shocked” or puzzled punters and critics out there, there is a new and neat way to question the Sage directly at this year’s annual shareholders’ meeting on May 3 in Omaha, Nebraska. NYT’s DealBook team has decided to join a small pool of reporters to convey readers’ questions directly to Buffet at the annual meeting (could this be a first for a big financial blog?).
Fortune explains the new procedure:
Three journalists will collect questions emailed to them by shareholders; choose the most interesting and important; and ask them of Buffett and Berkshire vice chairman Charles Munger, neither of whom will have been told what the questions will be.
The questions the journalists select will be alternated with others asked directly by shareholders chosen by a drawing held the morning of the meeting. Previously, all questions were asked by sleep-deprived shareholders who lined up at the meeting arena until the doors were opened and then raced to microphones to establish a priority position. Buffett said in his letter that he had concluded “sprinting ability” was not a good determinant for who should get to ask questions.
The three journalists are the writers of this article: Carol Loomis of FORTUNE (who, as previously noted, has long edited Buffett’s annual report letter — without pay, by the way); Becky Quick of CNBC; and Andrew Ross Sorkin of The New York Times.
Buffett said in his letter that the new system will ensure that at least half of the questions — those selected by the journalists — will be Berkshire-related, which too many have not been in the past.
DealBook, meanwhile, invites readers to send their questions – link here.
Related links:
Worst year for Buffett’s Berkshire – FT
Buffett’s annual letter to shareholders – Berkshire Hathaway
Berkshire equity portfolio back to its cost basis – Jeff Matthews
Ask Warren a question - DealBook
Buffett’s worst year – Fortune