Saturday, February 28, 2009

Buffett Profit Plummets, Gives Bleak Outlook For 2009

The Tarrot 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 beoynd."

Here are some highlights from the 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.



Sphere: Related Content
Print this post

7 comments:

g. said...

Why no reference to Buffett's notion that the government's various plans and bailouts will cause inflation/depreciation?

Cathryn Mataga said...

"These once-unthinkable dosages will almost certainly bring on unwelcome aftereffects."

Inflation? I think this is it right here. Maybe better to be a little bit indirect about a prediction like this -- especially for someone of Buffet's stature. These days some people are just soooo sensitive...

Max Leverage said...

Cathryn:

The government can print all the money it wants, but if the businesses it gives the money to don't circulate it into the economy, there's no inflation.

If I were a bank, I'd have a really hard time justifying loaning money right now.

Anonymous said...

Maxy >> The government can print all the money it wants, but if the businesses it gives the money to don't circulate it into the economy, there's no inflation.

The question is not whether there is inflation now, but when it will and what asset bubble it will create.

Cathryn Mataga said...

You gotta' point there. I'm not sure what Buffet's reasoning is. My uneducated guess is that the inflation danger point comes as the stimulus kicks into high gear around 2011 or so, if the real economy is bottoming out at the same time.

Anonymous said...

The option on the sap 500 comes due in 10 years. If the market didn't go up or down from here, his cost of capital on the premium he received would be ~6.5% per annum...not a bad rate. Given the recent bond deals he's done, he should have no problem covering that.

g. said...

What if Treasuries fail to sell through? What if the Fed has to buy Treasuries? What if by doing so, the market figures the dollar is on the way out?

Wouldn't this create not merely a weakening of the dollar, but a full-on panic?

People are edgy enough as it is. The staggering amount of Treasuries that are being put on the market, coupled with the contraction of demand from all players, especially foreign central banks, can only bring about a sense that the dollar isn't a safe haven.

They keep talking about stress testing the banks. How about stress testing the currency...