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Be Greedy When Others Are Fearful: Berkshire Hathaway

It is always fun for me to read Warren Buffett's Letters to Berkshire Shareholders. I enjoy both the style and the content of the letters. I also find them instructive for both corporate and money managers.

Sometimes I like to do an exercise: I think to a particular point in time in recent history (say for example years 1999/2000, at the peak of financial exuberance) and search for the financial articles (FT, WSJ, you name it) that were written in that period. Then I put it into perspective comparing what was the prevalent "street view" on the events happening at the time with what really happened afterwards. And finally I go through Warren Buffett's Letters of the period and I read them. I found it a very powerful exercise to do: the general public have the tendency to lose the big picture and to be dragged into short time issues, Warren Buffett seems to be impermeable to such flaw.

This Saturday I happened to do the same exercise, but the other way round. I was in fact reading the Berkshire Hathaway Annual Report which just came out few days ago. On page 40 and 41, there is a section dedicated to "Other investments" in the section "Notes to Consolidated Financial Statements". The majority of these investments were made in 2009. During those days Berkshire bought positions in non-traded securities of Dow Chemical, General Electric, Goldman Sachs, Swiss Re and Wrigley with an aggregate cost of $21.1 billion. These holdings delivered Berkshire an aggregate of $2.1 billion annually in dividends and interest, this not counting the significant equity potential they provide.

I also quote Buffett contrarian thinking at the time: "Things also went well on the capital-allocation front last year. 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."

If I think about 2009, I was at business school in NYC, I have clear in my mind the image of classmates walking into the school building and stopping in front of the screens at the entrance showing the Dow Jones Index falling below 7,000. The Wall Street Journal published a story that wondered "How low can stocks go?", it even made a case that the Dow Jones industrial average could fall to 5,000.

The Dow now trades at 14,000+.

I am leaving for the next article a more detailed analysis of Buffett "Other investments" which I find fascinating.

Disclosure: I am long BRK.A, BRK.B. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.