Berkshire Hathaway’s investors should be alarmed at, or at the very least, less than impressed with, the news emanating from the the annual shareholder gathering held over the weekend.
The Buffett faithful who make the yearly pilgrimage to Omaha for the so-called “Woodstock of capitalism” usually leave re-assured of the inherent rightness of the Sage’s investment strategy and so, of their place in the world.
The FT reports, for instance,
At a shareholder reception on the eve of the meeting, hundreds gathered outside of Borsheim’s jewellery store sitting on cubes of hay while sipping beer and listening to live music.
This year, however, investors should go home with a headache – and not just because they’re hungover.
Here are some of the more worrying disclosures made to the record 35,000 pilgrims shareholders who assembled in Omaha on Saturday, via the WSJ :The company has roughly $20 billion, down from about $25 billion in cash at the end of 2008. Mr. Buffett has frequently said he would never let his cash go below $10 billion, leaving Berkshire about $10 billion to put to work.
Operating profits declined to $1.7 billion from $1.9 billion a year earlier
“We will continue to do quite well in our insurance and utility operations. We won’t do well in other operations,” Mr. Buffett said.
And here’s Reuters on Berkshire’s foray into derivatives (emphasis ours):
Warren Buffett on Saturday said he believes the Berkshire Hathaway Inc derivatives contracts tied to equity stock indexes will probably make money, but those tied to the credit quality of junk bonds may end up in the red.
Berkshire at year end had 251 derivatives contracts, most of which are essentially bets on the long-term direction of stocks and junk bonds. They has [sic] accumulated billions of dollars of paper losses because stock prices have fallen, but Buffett has said these contracts differ from other derivatives he has called “financial weapons of mass destruction” in part because of the billions of dollars of premiums he collects upfront.
“I personally think that the odds are extremely good that on the equity put options, we will make money,” Buffett said at Berkshire’s annual meeting.
But he added that “we have run into far more bankruptcies in the last year than is normal,” and that on contracts tied to credit defaults, Berkshire will probably “lose money.”
“I would expect those contracts to show a loss before investment income, and perhaps after investment income.”
In case it’s not clear from the above, Berkshire Hathaway has been selling CDS protection, and given the recent rash of defaults and other credit events that have triggered these contracts, has had to make payments to the buyers of that protection.
But wait, there’s more – Bloomberg reports that none of the four candidates short-listed to replace Buffett as chief investment officer of Berkshire outperformed the S&P 500 last year. Recall: the S&P declined 38 per cent in 2008.
From Bloomberg:
“In terms of 2008 by itself, you would not say that they covered themselves with glory,” Buffett, 78, said yesterday during the annual meeting of Omaha, Nebraska-based Berkshire. “But I didn’t cover myself in glory either in 2008.”
While Buffett hasn’t changed his roster of potential investment heads after last year’s performance, he is “always looking for more people” to add to the list, he said.
Buffett also had some words for Moody’s, the rating agency which downgraded Berkshire in April. Buffett owns a chunk – about 15 to 20 per cent – of Moody’s.
MarketWatch reports:
Buffett said Saturday that he was irritated by Moody’s Investors Service’s decision to cut the company’s AAA rating.
The loss of Berkshire’s AAA rating won’t be material to the company’s performance in future, “but it still irritates me,” Buffett said during the Berkshire annual meeting…adding that he would like to have a AAA rating again.
Buffett’s deputy Charlie Munger was more diplomatic – and equally optimistic about the likelihood of Berkshire regaining its triple-A, according to MarketWatch (emphasis ours):
Moody’s downgrade shows the rating agency is independent, Berkshire Vice Chairman Charlie Munger said. Moody’s will likely upgrade Berkshire in future, because “we deserve a higher rating and they’re smart,” Munger added. “We deserve a higher rating and they’re smart”? Erm, no further comment.
Related links:
Berkshire followers’ devotion is buffeted by storms – FT
Pilgrims pay homage to Buffett – FT
Buffett’s 2008 shareholder letter – PDF
Derivatives and the wisdom of the Sage – FT Alphaville