Stock of the Day
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Berkshire Hathaway (BRK.A)
Worst Year for Berkshire Hathaway Since 1965
On Saturday, Warren Buffett, the Chairman and CEO of Berkshire Hathaway, announced the company's annual results for fiscal year-ending 2008. Due to the economy and the financial crisis, net worth fell by 9.6 percent. In the past, his letter to shareholders (and non-shareholders) served as a barometer of the economy, as well as a forecast on what to expect in the subsequent year. In the latest one, the Oracle of Omaha stated that the economy "will be in shambles throughout 2009." With this kind of guidance, should investors expect something similar from the company this year?
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Probably not. The key thing to remember is that the economy is different from the stock market. Furthermore, a lot of the damage from the housing bubble has already been dealt making it difficult to imagine further losses stemming from the subprime mortgage mess. Lastly, Mr. Buffett arguably has the best track record out of any investor in history, and the company currently holds a solid portfolio of assets. Though book-value per share declined, it was slightly better than what some analysts were expecting. In addition, many of his actions in 2008 helped the company weather the financial crisis. For example, when he purchased preferred shares of Goldman Sachs (GS: Charts, News, Offers) following the collapse of Lehman Brothers, it established a stable cash flow for the company.
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With that said, further growth and success will be dependent on the performance of the stocks the company holds. With $25 billion in cash on-hand and confirmation from the CEO himself, a couple of large-scale purchases can be expected in the near future. During the advent of the financial crisis, Mr. Buffett increased his stake in Wells Fargo (WFC: Charts, News, Offers) in late September. He also arranged an ownership plan that gave him preferred shares of General Electric (GE: Charts, News, Offers). In late January of 2009, he acquired a 3 percent stake in Swiss Re, a reinsurance company based out of Zurich, Switzerland. However, little is known on what his plans are going forward. He did not state or insinuate which stocks would be potential candidates for investments in the future, only that he would be buying again soon.
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In early trading, the company's stock value declined by more than 5 percent, signaling that investors are concerned about future performance. They are right to be concerned too, considering the company experienced a 62 percent decline in their annual net income. Mr. Buffett also stated he made some bad decisions last year. For example, the purchase of ConocoPhillips' (COP: Charts, News, Offers) shares when oil prices were near their record highs. He also invested in two Irish banks that encountered troubles resulting in an 89 percent loss. Although nobody could have predicted the turn of events that led to those adverse outcomes, this just proves that nobody is invincible from the global recession. One other factor was his remarks on derivatives. He chastised the use of them and even gave examples on how they led to the collapse of many large financial institutions. Yet, he acknowledged and defended the company's use of them, citing reasons for why his are different. Ultimately however, he declared, "We have told you before that our derivative contracts, subject as they are to mark-to-market accounting, will produce wild swings in the earnings we report. The ups and downs neither cheer nor bother Charlie and me. Indeed, the "downs" can be helpful in that they give us an opportunity to expand a position on favorable terms." No matter how justified and different his company's derivatives may be, investors are still scarred from the effects that these instruments had as of late.
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Still, with everything said and done, things appear to be in Berkshire Hathaway's favor. The company's investing strategy has always been long-term, so there is little reason to believe that they will try to create a short-term blowout success. What is more realistic for investors is to expect the company to make decisions that could take longer than two years to prove profitable. Indeed, it has worked for Mr. Buffett before in the past, perhaps it will work again in the future.
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Profile |
Click here to view a detailed profile of Berkshire Hathaway.
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