Warren Buffett's Annual Letter

Warren Buffett - Warren Buffett's Annual Letter to Shareholders

Legendary investor Warren Buffett aka the Oracle of Omaha, which some people prefer to spell Warren Buffet but which is wrong, had his worst year ever and was highly critical of both himself and the business world at large in his Warren Buffett annual letter to shareholders. One thing he didn't mention was his ice cream consumption, it is a well-known fact the Mr Buffett is partial to ice cream so I'm sure he would be interested to learn how to make his own ice cream - Ice Cream Makers

Berkshire Hathaway, reported a 62% fall in net income for 2008 and had negative results for only the second time since 1965. The book value of Berkshire Hathaway (NYSE: BRK.A), fell by 9.6%.

Mr. Buffett blamed himself for some of the poor decisions, saying he “did some dumb things,” but he also expressed his anger at decisions made elsewhere in the financial world and said the stock market would be a "shambles" through 2009 and possible beyond.

In his usual frank and witty language, he mentioned “a series of life-threatening problems within many of the world’s great financial institutions.” His heaviest criticism being meted out to heads of mortgage issuers and private equity firms.

But he nevertheless found reasons to be cheerful (he is still a billionaire after all), saying that he and his company CEO “feel like two hungry mosquitoes in a nudist camp. Juicy targets are everywhere.”

The lending branch of Clayton Homes, a subsidiary of Berkshire Hathaway that sells manufactured homes managed to keep foreclosure rates at below 4%, even for subprime borrowers, or those with poor credit ratings.

In an attack on the jargon-riddled culture that seems to dominate in any sector where it is important that nobody understands what is going on he criticized the practice of jargon uberspeak saying Americans have fallen in love with “a nerdy-sounding priesthood, using esoteric terms such as beta, gamma, sigma and the like.”

His advice “Beware of geeks bearing formulas.”

Mr. Buffett was equally critical of derivatives, of which his friend and colleague Charlie Munger once said "to compare derivatives to sewage is to do a disservice to sewage".

The danger with derivatives he explained was not merely that it is difficult in to assess their value but that there is also a “web of mutual dependence” created among financial institutions.

“Participants seeking to dodge troubles face the same problem as someone seeking to avoid venereal disease: It’s not just whom you sleep with, but also whom they are sleeping with.”

Mr. Buffett was not immune from derivaties however as Berkshire Hathaway own some, and lost $5.1 billion, adter adjustment. He explained that the way they were structured required counterparties to make payments to Berkshire when the contracts were agreed, providing Berkshire with a float of $8.1 billion.

“This float," he said "is similar to insurance float. If we break even on an underlying transaction, we will have enjoyed the use of free money for a long time.”

The report was greeted howeve with some relief as some people were expecting a lot worse “I’m delighted,” said Janet Tavokoli, a derivatives expert ..... 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.”

Warren Buffet drew attention to his own mistakes, such as buying ConocoPhillips shares when oil and gas prices were at the top, the cost will probably be several billion dollars.

He also bought $244 million of shares in two Irish banks which have since fallen by more than 89%, which he categorized as "unforced errors".

He says however that risks, which were formerly under-appreciated, are now being overpriced. And as this corrects itself, shares in Berkshire Hathaway could benefit.

In one section of his letter Warren Buffett goes out of his way to praise Ajit Jain who handles the reinsurance division leading some (Expressbuzz.com) to speculate that he may be Warren Buffett's successor. Buffet states that "there is no one like him and added that his business is never the same."

"Ajit came to Berkshire in 1986. Very quickly, I realised 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."

"From year to year, Ajit'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," Buffett pointed out.

Some people have come out criticizing Warren Buffet for his mistakes, which we here at the Oracle of Omaha find a little odd. The financial markets are going through their worst time in 80 years at least, it would be very strange if Warren Buffett was totally immune from the turmoil, but he is still one of the richest men in the world and probably the most successful investor ever.
If Warren Buffett's critics had been able to outperform him over the last 60 years then their criticisms would have more validity, to us it would be like criticizing Tiger Woods because he doesn't win every golf tournament.

See also - The Secret Millionaires Club

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Homte : Warren Buffett