Buffett admits 'dumb' mistakes in '08, Berkshire's worst year
The recession and financial crisis swatted Berkshire and the markets alike, Buffett wrote in his annual letter to Berkshire shareholders. "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," he said.
Berkshire's net worth nosedived, falling by $11.5 billion, according to its annual report, released March 1. Its shares have taken a beating in the past year. Since peaking at $151,000 a share in December 2007, it has fallen to $78,600, a decline of 48 percent. The S&P 500 has dropped 49 percent over the same period.
By Buffett's preferred measure of performance -- book value per share -- Berkshire fell 9.6 percent in 2008. Annual profit fell by 62 percent, to $5 billion. Earnings per share dropped to $3,224 from $8,548 last year.
"I made at least one major mistake of commission and several lesser ones that also hurt," Buffett wrote in his letter to shareholders. "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 biggest of those mistakes, Buffett wrote: buying a huge stake in ConocoPhillips (COP) last year while oil prices and energy stocks were surging. "I in no way anticipated the dramatic fall in energy prices that occurred in the last half of the year," he said. "Even if prices should rise, moreover, the terrible timing of my purchase has cost Berkshire several billion dollars."
Buffett also took the blame for a bad bet on $244 million worth of stock in a pair of unnamed Irish banks, admitting Berkshire had to write that investment down by 87 percent at the end of 2008.
But he said he felt good about buying preferred shares of Goldman Sachs (GS), General Electric (GE) and Wrigley, regretting only that he had to sell holdings in Johnson & Johnson (JNJ), Procter & Gamble (PG) and ConocoPhillips to raise the money to fund the transactions.
Berkshire's stock and bond holdings were mostly responsible for the company's dismal performance, according to the report. But it also boasts dozens of subsidiaries including big insurance companies like Geico and General Re as well as several energy businesses. It also owns familiar consumer brands including Benjamin Moore, Dairy Queen and Fruit of the Loom. Profit from those businesses fell just four percent, compared with a 14 percent drop in earnings from investments.
The economy undoubtedly played a big part in those results. Buffett doesn't appear to expect an improvement any time soon."The economy will be in shambles throughout 2009 – and, for that matter, probably well beyond," he wrote.
The shock therapy administered by the U.S. Treasury and Federal Reserve to revive the economy "will almost certainly bring on unwelcome aftereffects," Buffett wrote. "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."
Also see from BloggingStocks, "Seven things investors can learn from Warren Buffett's annual report."