Buffett Profits Plummet, Predicts Bleak 2009 and Possibly Beyond

The Tarot Card Reader Of Omaha (and Charlie)'s Q4 net income fell 96% to $117 million, from $2.95 billion, for a fifth consecutive drop. Book value fell 9.1% of more than generally expected on declines in equity and fixed-income portfolios and writedowns in derivatives. Scary was the increase in liabilities on equity derivatives which increased 49% to $10 billion. It is likely that this number will keep growing as long as the market drops.

Key takehome "economy will be in shambles throughout 2009 - and, for that matter, probably well beyond."

Here are some highlights from the Berkshire Hathaway (BRK.A) letter (which is presented below):

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. … 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.
* * *
By yearend, investors of all stripes were bloodied and confused, much as if they were small birds that had strayed into a badminton game.
* * *
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.
* * *
This led to a dysfunctional credit market that in important respects soon turned non-functional. 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."
* * *
In poker terms, the Treasury and the Fed have gone 'all in.' Economic medicine that was previously meted out by the cupful has recently been dispensed by the barrel. These once-unthinkable dosages will almost certainly bring on unwelcome aftereffects.
* * *
Whatever the downsides may be, strong and immediate action by government was essential last year if the financial system was to avoid a total breakdown. Had that occurred, the consequences for every area of our economy would have been cataclysmic. Like it or not, the inhabitants of Wall Street, Main Street and the various Side Streets of America were all in the same boat.
* * *
Amid this bad news, however, never forget that our country has faced far worse travails in the past. … America has had no shortage of challenges.
* * *
This means that our $58.5 billion of insurance "float" -- money that doesn't belong to us but that we hold and invest for our own benefit -- cost us less than zero. In fact, we were paid $2.8 billion to hold our float during 2008. Charlie and I find this enjoyable.
* * *
Berkshire is always a buyer of both businesses and securities, and the disarray in markets gave us a tailwind in our purchases. When investing, pessimism is your friend, euphoria the enemy.
* * *
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.

Comments

[arlin:]

"America has faced far worse travails in the past"
WHEN?
Certainly not the last "Great Depression" when America was a manufacturing economy.and remember during the last Depression,only 20% or so af Americans were jobless,I think the real unemployment numbers today are a travesty,and much higher.
America didnt owe China over 1.6 trillion dollars or Russia,or Saudi Arabia trillions.
The American dollar wasnt the world currency back then and was backed by precious metals.The world wasnt awash in 10's of trillions of fiat dollars.
American politicans didnt go around the world begging for more time,to repay an impossible debt.
Nafta and "free trade" hadnt destroyed the American worker,or made slaves of third world countries......
Smuckers made real jam not something concocted with corn syrup so they could make a few extra pennies for Warren's form of capitalism
Today in America we have a political elite,and intitlement society. Dumbed down, expensive ,entitlement education,and beauracracies for evey pourpose..Farmers get paid not to farm,American car workers get paid overtime in the morning,and the ordinary guy ( who doesent qualify for any programs) gets ,penalized for making more then the new gov threshold 200k single.In a productive America today both parents work,one just to pay taxes.
No America has not faced anything like this in the past.

Mar 01 09:14 AM

[long_on_oil:]

I have been and am still a stock holder of BRK.b shares and I have always had to much faith in Warren Buffet. I have held my BRK shares despite the downfall because I believe in Buffet. In my opinion Buffets biggest mistake was placing to much faith in Obama. As we all know he was one of Obamas biggest supporters and that has really surprised me considering Buffets number one rule in buying any stock is management experience. Another big surprise is that the worlds number one investor is a socialist, yet he make his money being a capitalist.
Does anyone else see this contradiction? Could it be Warren is losing his killer instinct and letting his socialist ideas effect his investment philosophy?
He refuses to admit that Obamas rise to the presidency has taken down this market and will continue to do so. This market peaked when Obama became the clear choice of the Democrats and has not recovered since.
Obama is a poor manager and will fail just as poor management in a corporation fails.
Right or wrong, if I ever see BRK come back to my cost, I will be out for good. Buffets poor judgment in supporting Obama has convinced me that BRK will never be the company it once was.

Mar 01 10:03 AM

[Conan the B...:]

Buffet was not alone. Obama has that effect on people from all walks of life, Charismatic Orator, he promised everything to everyone and was supported by the Media.

Obama campaigned on the premise of Taxing the rich and Redistributing the Wealth, why is there surprise that Corporations hold the Wealth and the Rich include everyone who is not "poor"?

The Media never questioned how Obama could promise everyone a piece of the Pie. The people heard what they wanted to hear.

Afganistan, more troops when the field commanders don't believe more troops will improve the situation?

Bin Laden will be captured because his location is known, Obama will use it to enhance his popularity and passage of whatever he wants will be ensured. IMO

Mar 01 12:39 PM

[Augustus:]

The reason that Obama was successful was that he promised everyone exactly what they wanted to believe he promised. All he did was to say that he would bring "Change" to Washington. Never made anything clear as to what that change would be. so you could believe it would be the change you wanted, maybe very different from what someone else would expect. The guy has been a charlatan from the beginning.


On Mar 01 12:39 PM paultaut wrote:

> Buffet was not alone. Obama has that effect on people from all walks
> of life, Charismatic Orator, he promised everything to everyone and
> was supported by the Media.
>
> Obama campaigned on the premise of Taxing the rich and Redistributing
> the Wealth, why is there surprise that Corporations hold the Wealth
> and the Rich include everyone who is not "poor"?
>
> The Media never questioned how Obama could promise everyone a piece
> of the Pie. The people heard what they wanted to hear.
>
> Afganistan, more troops when the field commanders don't believe more
> troops will improve the situation?
>
> Bin Laden will be captured because his location is known, Obama will
> use it to enhance his popularity and passage of whatever he wants
> will be ensured. IMO

Mar 01 01:58 PM

[Dave Shafer:]

Did anyone actually read the Berkshire Report?
Buffett admitted to a couple of mistakes, but overall they did very well compared to "the market."

As to the Obama thing, I guess it never surprises me the ability of folks to allow ideology to rule their minds. Obama is responsible for the movement of the stock market??????? Couldn't have been the recession or sub-prime mortgage foreclosures, or profits (lack of) now could it????

Mar 01 05:12 PM

[CaptainJJack:]

I am a Berkshire A and B holder. I read the report, and I absolutely agree with you. I was truly impressed with how well his businesses are doing.

There is only one reason BRK is substantially worse than last year: the derivative bets. You take out the gains from last year and the loss from this year, and the profits are pretty flat.

Anybody that understands the derivative bets he made should feel pretty comfortable with where things will be in a few years. If the market improves AT ALL from here, he's going to be reporting gains again, and the only way that these contracts would not be profitable is if the world economy never recovers.

So, if it sells off tomorrow, I am going to be buying more even though it PAINS me to buy in this market.

As for Obama and Buffet, Warren has been pretty clear that he is looking at things from an investor perspective. He believes that the $3 trillion deficit and the lax regulations of the Bush administration caused this mess, and the only reason he supports more stimulus is that, as he puts it, the patient is in cardiac arrest.

On "Meet the Press" this morning, they put up a running total of total new US obligations JUST since February, 2008. I believe the number is now up to 7 TRILLION, of which Obama owns $787 Billion and the Bush administration spent the rest.

But as Obama himself has said, he is following the advice of the smartest guys he knows, and he now owns the economy. If he does not make significant progress, he will not be re-elected.


On Mar 01 05:12 PM Dave Shafer wrote:

> Did anyone actually read the Berkshire Report?
> Buffett admitted to a couple of mistakes, but overall they did very
> well compared to "the market."
>
> As to the Obama thing, I guess it never surprises me the ability
> of folks to allow ideology to rule their minds. Obama is responsible
> for the movement of the stock market??????? Couldn't have been the
> recession or sub-prime mortgage foreclosures, or profits (lack of)
> now could it????

Mar 01 05:37 PM

[Conan the B...:]

Dave: Yes, Buffet did well relative to the Market. I, for one, expected Negative earnings and said so before the report.

I was wrong, earnings were down only 96%. The stock itself is unchanged from 1998.

The Oracle? this is the title given. Relative to all standards, the Record for BRK.A is found wanting.

Where is the Vaunted Infallibility?

Mar 01 05:41 PM

[jrhc:]

To the Obama bashing commentators: so W and GOP have nothing, but nothing to do with the mess we're in now? Let me laugh on your laughable comments...

Mar 01 06:27 PM

[Conan the B...:]

jrhc: The Obama Bashing commentators are also Bush and GOP bashing commentators. You wouldn't be making your comment if you had read material prior to Obama's Inauguration.

Laugh all you want but what has Obama done other than surround himself with All of the Same Old Cronies that were active in previous administrations. Is this Change?

Oh, I forgot, He has tried to put Known Tax evaders into positions of power...that certainly was a Change.

Laugh away.

Mar 02 06:59 AM

[campbell:]

BRK-A closed at $78,000 today. The close in June 1998 was about this value. This appears to indicate that an investor in BRK-A in June 1998 would now(about 11 years later) have no gain and in fact have a loss equal to inflation during that time which I guess could be significant.

Mar 03 12:56 AM