Saturday, February 28, 2009

Warren Buffett's Annual Letter to Investors (Synopsis)

The following are the highlights from Warren Buffett's annual letter to shareholders.
  • Book value per share, fell 9.6% in 2008, its biggest decline since Mr. Buffett took over the company in 1965.
  • Only the second year in more than 40 years that Berkshire posted negative results.
  • Berkshire still outperformed the Standard & Poor's 500-stock index which fell 37% last year, including dividends.
  • Berkshire's fourth-quarter net income was $117 million, a whopping 96% decline from last year's $2.9 billion fourth-quarter income.
  • This is the fifth straight year over year quarterly decline in net income.
Mr. Buffett predicted the economy "will be in shambles throughout 2009 -- and, for that matter, probably well beyond."

"By the fourth quarter, the credit crisis, coupled with tumbling home and
stock prices, had produced a paralyzing fear that engulfed the country. A
freefall in business activity ensued, accelerating at a pace that I have never
before witnessed. The U.S. -- and much of the world -- became trapped in a
vicious negative-feedback cycle. Fear led to business contraction, and that in
turn led to even greater fear."

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"As the year progressed, a series of life-threatening problems within many
of the world's great financial institutions was unveiled. This led to a
dysfunctional credit market that in important respects soon turned
nonfunctional. The watchword throughout the country became the creed I saw on
restaurant walls when I was young: "In God we trust; all others pay cash."


"Most of the Berkshire businesses whose results are significantly affected
by the economy earned below their potential last year, and that will be true in
2009 as well. Our retailers were hit particularly hard, as were our operations
tied to residential construction."


"During 2008 I did some dumb things in investments. I made at least one
major mistake of commission and several lesser ones that also hurt. I will tell
you more about these later. Furthermore, I made some errors of omission,
sucking my thumb when new facts came in that should have caused me to
re-examine my thinking and promptly take action.

"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."


"Home ownership is a wonderful thing. My family and I have enjoyed my
present home for 50 years, with more to come. But enjoyment and utility should
be the primary motives for purchase, not profit or refi possibilities. And the
home purchased ought to fit the income of the purchaser.

"The present housing debacle should teach home buyers, lenders, brokers and
government some simple lessons that will ensure stability in the future. Home
purchases should involve an honest-to-God down payment of at least 10 percent
and monthly payments that can be comfortably handled by the borrower's income.
That income should be carefully verified.

"Putting people into homes, though a desirable goal, shouldn't be our
country's primary objective. Keeping them in their homes should be the


"Our long-avowed goal is to be the 'buyer of choice' for businesses --
particularly those built and owned by families. The way to achieve this goal is
to deserve it. That means we must keep our promises; avoid leveraging up
acquired businesses; grant unusual autonomy to our managers; and hold the
purchased companies through thick and thin (though we prefer thick and

"Our record matches our rhetoric. Most buyers competing against us,
however, follow a different path.

"For them, acquisitions are 'merchandise.' Before the ink dries on their
purchase contracts, these operators are contemplating 'exit strategies.' We
have a decided advantage, therefore, when we encounter sellers who truly care
about the future of their businesses."


"As we view GEICO's current opportunities, Tony (Nicely) and I feel like
two hungry mosquitoes in a nudist camp. Juicy targets are everywhere."


"From year to year, Ajit (Jain)'s business is never the same. It features
very large transactions, incredible speed of execution and a willingness to
quote on policies that leave others scratching their heads. When there is a
huge and unusual risk to be insured, Ajit is almost certain to be called.

"Ajit came to Berkshire in 1986. Very quickly, I realized that we had
acquired an extraordinary talent.

"So I did the logical thing: I wrote his parents in New Delhi and asked if
they had another one like him at home. Of course, I knew the answer before
writing. There isn't anyone like Ajit."


"At that time, much of the industry employed sales practices that were
atrocious. Writing about the period somewhat later, I described it as involving
'borrowers who shouldn't have borrowed being financed by lenders who shouldn't
have lent.'

"To begin with, the need for meaningful down payments was frequently
ignored. Sometimes fakery was involved. ('That certainly looks like a $2,000
cat to me' says the salesman who will receive a $3,000 commission if the loan
goes through.) Moreover, impossible-to-meet monthly payments were being agreed
to by borrowers who signed up because they had nothing to lose. The resulting
mortgages were usually packaged ('securitized') and sold by Wall Street firms
to unsuspecting investors. This chain of folly had to end badly, and it did."


"When faced with large revenue shortfalls, communities that have all of
their bonds insured will be more prone to develop 'solutions' less favorable to
bondholders than those communities that have uninsured bonds held by local
banks and residents. Losses in the tax-exempt arena, when they come, are also
likely to be highly correlated among issuers. If a few communities stiff their
creditors and get away with it, the chance that others will follow in their
footsteps will grow. What mayor or city council is going to choose pain to
local citizens in the form of major tax increases over pain to a far-away bond

"Insuring tax-exempts, therefore, has the look today of a dangerous
business -- one with similarities, in fact, to the insuring of natural
catastrophes. In both cases, a string of loss-free years can be followed by a
devastating experience that more than wipes out all earlier profits. We will
try, therefore, to proceed carefully in this business, eschewing many classes
of bonds that other monolines regularly embrace."


"Without urging from Charlie or anyone else, I bought a large amount of
ConocoPhillips (COP.N: Quote, Profile, Research) stock when oil and gas prices were near their peak. I in
no way anticipated the dramatic fall in energy prices that occurred in the last
half of the year. I still believe the odds are good that oil sells far higher
in the future than the current $40-$50 price. But so far I have been dead
wrong. Even if prices should rise, moreover, the terrible timing of my purchase
has cost Berkshire several billion dollars.

"I made some other already-recognizable errors as well. They were smaller,
but unfortunately not that small. During 2008, I spent $244 million for shares
of two Irish banks that appeared cheap to me. At yearend we wrote these
holdings down to market: $27 million, for an 89% loss. Since then, the two
stocks have declined even further. The tennis crowd would call my mistakes
'unforced errors.'"


"Derivatives are dangerous. They have dramatically increased the leverage
and risks in our financial system. They have made it almost impossible for
investors to understand and analyze our largest commercial banks and investment
banks. They allowed Fannie Mae and Freddie Mac to engage in massive
misstatements of earnings for years. So indecipherable were Freddie and Fannie
that their federal regulator, OFHEO, whose more than 100 employees had no job
except the oversight of these two institutions, totally missed their cooking of
the books."

Berkshire's Annual Letter to Shareholders

Bob DeMarco is a citizen journalist, blogger, and Caregiver. In addition to being an experienced writer he taught at the University of Georgia , was an Associate Diretor and Limited Parther at Bear Stearns, CEO of IP Group, and is a mentor. He currently resides in Delray Beach, FL where he cares for his mother, Dorothy, who suffers from Alzheimer's disease. Bob has written more than 500 articles with more than 11,000 links to his work on the Internet. The content ha been syndicated by Reuters, the Wall Street Journal, Fox News, Pluck, BlogCritics, and a growing list of newspaper websites. Bob is actively seeking syndication and writing assignments.

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