Thoughts on Buffett's Annual Letter

04/01/2009 05:12 am ET | Updated May 25, 2011
  • Alan Schram Managing Partner of Wellcap Partners, LA-based hedge fund

The widely anticipated annual letter of Berkshire Hathaway, authored by its Chairman and CEO Warren Buffett, was out yesterday (

Here are some observations:

2008 was the worst year in Berkshire's history since present management took over in 1965, and amazingly, only the second year since then when equity value declined.

Buffett said the paralyzing fear and freefall in business activities were such as he's never seen before (and he is 78). He also warned of the pernicious side effects of the stimulus, although he called it necessary.

He did not reiterate his recommendation, made in October in a New York Times editorial, to buy American stocks, but did say America's best days are ahead, and that he was optimistic about the future and improving American standard of living over time. He also hinted that even if the economy remains in "shambles," that doesn't say anything about where the stock market goes from here.

Berkshire's manufacturing, service and retail businesses had a very tough year, but the regulated utility and insurance businesses showed decent performance. The cost of the insurance business float was a negative $2.8 billion, which means Berkshire was paid $2.8 billion last year to hold and invest for its benefit approximately $58 billion of someone else's cash.

Buffett did not anticipate the sharp decline in energy prices last year, but he thinks oil is likely to go higher in the future. He also lost most of his (small) investment in two Irish banks. In the many decades Buffett has been investing, that sort of total wipe out has been very rare.

Buffett made some interesting predictions. He said the U.S. treasuries are in a bubble, a warning that should be heeded by investors in this important and large market. He is also anticipating trouble for municipalities in this economy, and is concerned about their incentive to abandon their obligations to bond holders, knowing that their insurance company can take the financial hit.

Also noteworthy: half of Berkshire's 14 large equity positions are now below cost, and that was at year end---the S&P 500 is down another 18% since then. You can now buy stocks in companies Buffett made a large financial commitment to, at prices lower than he paid. This historically always proved to be a very good idea.

This is not the forum to analyze Berkshire's intrinsic worth, but Berkshire is now trading at around its year end book value, granting no credence to the long track record of management, the superior earning power and quality of the operating businesses or the likelihood of success for current and future investments.

Alan Schram is the Managing Partner of Wellcap Partners, a Los Angeles based investment firm. Email at