Investment guru Warren Buffett has used his annual letter to shareholders of his investment company Berkshire Hathaway to confess he made several investment blunders in the last 12 months after Berkshire reported its worst-ever profit result.
The letter, which is closely read by investors who follow Buffett’s legendary business philosophies, contains the usual mix of economic commentary, market analysis and home-spun wisdom.
Not surprisingly, the theme of this year’s letter was the global financial crisis, which resulted in Berkshire Hathaway posting a 62% drop in net profit to $US4.99 billion in 2008, compared with $US13.21 billion in 2007.
“By year end, investors of all stripes were bloodied and confused, much as if they were small birds that had strayed into a badminton game.”
Buffett admits he did some “dumb things” in investments during 2008.
“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.”
The error that stands out is Buffett’s investment in oil producer Conoco-Phillips when oil prices neared their peak in the middle of last year. Since then, oil prices have fallen sharply and Conoco’s share price has tumbled.
Buffett says is other blunder was buying stakes in two Irish banks.
“We spent $US244 million for shares of two Irish banks that appeared cheap to me. At year end we wrote these holdings down to market: $US27 million, for an 89% loss. Since then, the two stocks have declined even further. The tennis crowd would call my mistakes ‘unforced errors’.”
Buffett also uses the letter to:
– Attack the use of derivatives. He describes them as dangerous and says they “have dramatically increased the leverage and risks in our financial system” and “made it almost impossible for investors to understand and analyse our largest commercial banks and investment banks”.
– Outline a solution for the housing crisis. “Home purchases should involve an honest-to-god downpayment of at least 10% and monthly payments that can be comfortably handled by the borrower’s income. That income should be carefully verified.”
– Praise the US Government’s actions to stabalise the economy in late 2008, but warned more organisations will be looking for Government support in the coming months. “Major industries have become dependent on federal assistance, and they will be followed by cities and states bearing mind-boggling requests. Weaning these entities from the public teat will be a political challenge. They won’t leave willingly.”
Buffett says the US economy “will be in shambles throughout 2009 – and, for that matter, probably well beyond” but he has sounded a positive note, pointing out that the US economy has survived two world wars, the Great Depression and a number of recessions in the past century.
“Though the path has not been smooth, our economic system has worked extraordinarily well over time. It has unleashed human potential as no other system has, and it will continue to do so. America’s best days lie ahead.”
Related articles:
– Inside the mind of Warren Buffett
– Meet Warren Buffett’s mentor
James was the editor and publisher of SmartCompany and LeadingCompany for five years. He is now the Australian Financial Review‘s companies & markets editor, and a former BRW editor.
