Since Warren Buffett took over the management of Berkshire Hathaway in 1965, he has written an Annual Shareholder Letter outlining the progress of the company, setting goals, and discussing the culture and methodology of Berkshire Hathaway. And, while a good portion of each letter is devoted to a rundown of numbers for Berkshire Hathaway, scattered throughout each article is quite a bit of Buffett’s down-to-earth mentality and some fantastic financial advice.
In this series, I’m going to go through and highlight some of the best letters from 1965 through the present. There won’t really be that much of an order, and we won’t do every year, but inside you’ll find not only an interesting insight into Berkshire Hathaway, but also history and the mind of the Oracle of Omaha himself.
Today, we’re going to take a look at the Shareholder Letter from 2008. This letter comes from the heart of America’s most recent recession, which sets us up for great Buffett wisdom. But before we dive in to the letter, we’ll get some background on what was going on in Berkshire Hathaway that year.
Berkshire Hathaway in 2008
2008 was no walk in the park for Berkshire, or any other company really. It was the worst year of performance in 44 years, both for book value and the S&P 500 Index. Even then, Berkshire’s book value fell only 9.6%— $11.5 billion— when compared to the 37% fall of the S&P 500 Index. Even with the almost 10% fall, when compounded annually Berkshire’s growth remained 20.3%.
2008 Shareholder Letter Highlights
“In the 20th Century alone, we dealt with two great wars; a dozen or so panics and recessions; virulent inflation that led to a 21 1⁄ 2% prime rate in 1980; and the Great Depression of the 1930s, when unemployment ranged between 15% and 25% for many years. America has had no shortage of challenges.
Without fail, however, we’ve overcome them… 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.”
Even in 2008, with the great recession in full swing, Buffett didn’t lose a shred of his patriotism. Buffett is definitely pretty confident with the state of our economy; if you already have a prosperous economy, he believes it will naturally continue along the same path. It’s safe to say his thoughts on that haven’t changed; he reiterated this many times during last years election.
“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.”
Buffett is always one to own up to his mistakes. It’s part of what makes him so reputable, and why his company Berkshire keeps its pristine reputation. Later in the letter, Buffett explains his huge mistake of commission, which was paying peak prices for ConocoPhillips stock, right before the big fall. Obviously, Buffett wouldn’t have purchased the shares at such a high price if he had known, but the real highlight here is that Buffett owns it as his own, even stating that his partner, Charlie, was not involved— and that it would cost Berkshire several billion dollars. Part of what makes Buffett such a great manager, though, is being able to own up to his mistakes.
“On the plus side last year, we made purchases totaling $14.5 billion in fixed-income securities issued by Wrigley, Goldman Sachs and General Electric. We very much like these commitments, which carry high current yields that, in themselves, make the investments more than satisfactory. But in each of these three purchases, we also acquired a substantial equity participation as a bonus. To fund these large purchases, I had to sell portions of some holdings that I would have preferred to keep (primarily Johnson & Johnson, Procter & Gamble and ConocoPhillips).”
Even though the economy was crashing, and some of the company’s big holdings like Coca-Cola and ConocoPhillips suffered losses, Berkshire had a several billion dollars in cash but must have come up a little short. Quite a few people made note of the previously mentioned stock, which is probably one of the reason’s Buffett goes in to detail on it.
“Investors should be skeptical of history-based models. Constructed by a nerdy-sounding priesthood using esoteric terms such as beta, gamma, sigma and the like, these models tend to look impressive. Too often, though, investors forget to examine the assumptions behind the symbols. Our advice: Beware of geeks bearing formulas.”
Some could argue that Buffett was foreseeing the coming credit crisis, but I prefer to think Buffett is simply annoyed with the financial literacy of American’s, and more so how financial giants do nothing to help.
There are plenty more interesting tidbits in the letter, so if you’re interested, the full letter is definitely worth a read. You can find it here. All of the letters from 1977 to the present are archived on the Berkshire Hathaway website, but there was also a compilation published in book form. It is available on Amazon for around $35.