Sunday, March 01, 2009

Warren Buffett's latest Newsletter.....

“......the credit crisis, coupled with tumbling home and stock prices, had produced a paralyzing fear that engulfed the country. ....A freefall in business activity ensued, accelerating at a pace that I have never before witnessed. The U.S. - and much of the world - became trapped in a vicious negative-feedback cycle. Fear led to business contraction, and that in turn led to even greater fear.” - Warren Buffett, 27 Feb 2009.

Newsletter is found here: [Link]

Warren Buffett once said 'be fearful when others are greedy and greedy when others are fearful'. But in yesterday's newsletter, he expressed the same fears that have spooked investors in 2008. 2008 was a year in which being greedy when others were fearful produced catastrophic results. Buffett admitted to many mistakes he made in 2008 including buying ConocoPhillips when oil prices were near the peak and selling puts on Nikkei, FTSE, S&P. Buffett broke his own rule selling those derivatives and liabilities on those have grown to US$9B - the maximum loss possible if every market index collapses to 0 in 2019 is US$37B....if everything goes wrong he can lose close to that (I'll explain this a little later). Well, at least he didn't call his mistakes "long term investments" unlike some other people in the same business. Net earnings of Berkshire fell by 96% after taking into account these losses but book value is down only 9.6%. Berkshire's stock which is subject to market sentiment was down 44% for 2008. This is they worse year for Buffett since 1965 when he took over Berkshire. However, even with such a bad year, if you have invested with Buffett since 1965, $1 would have grown to $3600.

Buffett uses a value investing strategy in which he figures out the intrinsic value of a company and buys them at a deep discount to this. If you look at Buffett's investment record, there was only one time
he exited big time from the market - that was during the go-go years of the 1960s when stocks became grossly overvalued. He re-entered the market sometime in the mid-70s when stocks fell to the bargain basement levels he was waiting for. Since then, he has remained mostly invested....he was out for a short period(?) prior to the 1987 collapse but was back in because the 1987 fall brought stocks prices back in line within one day. Given Buffett's success, value investing has gained a large following - it is just common sense buy something when it is cheap relative to its real (intrinsic) value and sell it when it becomes expensive. Sometime in 2008 while this crisis was unfolding, I got interested in how and when value investing will fail. Not that it will fail - we don't know yet....Buffett can well chalk up large gains 3 years from now. Before Buffett, there was this guy called Graham who is known as the father of value investing. He wrote 2 seminal books on value investing - Securities Analysis and The Intelligent Investor. Graham did very well in the early 1920s but lost his money during the Great Depression. Many value oriented investors entered the market after the market dropped 60% during the Great Depression thinking stocks were cheap. The market had a brief rebound and fell 75% from where they entered. According to a number of economists, the odds of a depression has grown to 20%[Link]. Think about it - why would anyone buy puts from Warren Buffett....taking a bet against the world's greatest investor. The only reason has to be they have information that gives them conviction that a long lasting economic slump is in the works. These puts can only make money if the market ends up lower in 2019 then they were in the middle to end of last year. When Buffett puts in such a bad performance, one has to wake up and re-examine the underlying assumptions of value investing one of which is that the economy is only sick and can recover....


Anonymous said...

A few things I am curious about. That 9.6% in book value also includes unrealized losses in their contracts. The question is whether the 44% drop or the 9.6% drop is a better indication of BRK.A's value.

The second thing is that Benjamin Graham did lose money in 1929-1932 however if I am not mistaken he did recover in 1935. So I think to say that he lost money in the period 1930s to early 1940s (great depression) is not exactly true. Infact, he recovered much earlier than the overall market recovery in the 1950s.

Lucky, I also think I should mention another value investor who is right now in vogue (economics) but often overlooked as a value investor. John Maynard Keynes.

If you check the link, which has a graph, you could see his returns during the depression period which was wow. All the more spectacular, because he did not reinvest his returns.

Maybe it worked because it occured during a period in history where it was conducive and now it is not. The only way to settle the question is to let nature take its course and see the final outcome.

Me, I am personally rooting for value investing although I am not putting all my investments on this strategy.

PS:The BRK newsletter did mention a coming treasury bubble which you rightly mentioned in one of your earlier post.

Anonymous said...
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Anonymous said...

Another thing to add. Aren't the derivatives long term european puts that expire in more than 10 years time? And aren't his potential losses still less than his net assets? He is not leveraged like the banks so I think BRK won't collaspe like Lehman.

DanielXX said...

Treasury can be shorted using Proshares. Do it before it's too late. Expect some people to short on Monday just on the basis of Buffett's statement.

Anonymous said...

There once was a rich man who was near death. He was very grieved because he had worked so hard for his money and he wanted to be able to take it with him to heaven. So he began to pray that he might be able to take some of his wealth with him.

An angel hears his plea and appears to him. "Sorry, but you can't take your wealth with you." The man implores the angel to speak to God to see if He might bend the rules.

The man continues to pray that his wealth could follow him. The angel reappears and informs the man that God has decided to allow him to take one suitcase with him. Overjoyed, the man gathers his largest suitcase and fills it with pure gold bars and places it beside his bed.

Soon afterward the man dies and shows up at the Gates of Heaven to
greet St. Peter. St. Peter seeing the suitcase says, "Hold on, you can't bring that in here!"

But, the man explains to St. Peter that he has permission and asks him to verify his story with the Lord. Sure enough, St. Peter checks and comes back saying, "You're right. You are allowed one carry-on bag, but I'm supposed to check its contents before letting it through."

St. Peter opens the suitcase to inspect the worldly items that the man found too precious to leave behind and exclaims, "You brought pavement?!!!"

LuckySingaporean said...


I'm aware that Graham recovered m his losses by 1935. But imagine what the 6 years were like.

Keynes lost a fortune on commodities. He didn't really have consistent returns. Making and losing several fortunes. But I remember reading that he ended ahead.

I'm not saying that value investing will failure, just that failure is plausible given the challenges ahead.

Anonymous said...

My investing experience over the years tells me that just by the general assessment of the socio-economic climate and watching the general economic trends of countries, I made far better investment decisions than by listening to the gurus and investment experts who like to fill you with some much technicality and details. Yet in the end proven wrong time and again.

This is the reason I don't read investment publications anymore.

Just to provide a pointer based on my own experience, the good buys announced by them had usually been in their own portfolios for a few years be it gold, Aussie dollars or other commodities, whatever. By the time they tell you to buy, these stocks have peaked or about to peak.

Same thing when they frighten you with dark scenarios now even when stockmarkets have plummeted by more than 50% in slightly over year. How much more scary can it get? Another 50% off the present level? Ah that's only around 20% of the original value of late 2007.

Besides, at such a current low level there is more uptrend than downtrend tendency.

LuckySingaporean said...

anon 4:44,

I guess that is why there is a big crowd at the private property launch near St. Patricks Secondary school today. There are people who will step out to buy when times are bad...and that has proven to be a successful strategy for stock investing.

The thing is the economy has to eventually recover for such a strategy to work. Japanese investors learned the hard way - their stock market is at 25 year lows....never making back to the lows of the initial crash in the 80s.

Still buying low is better than buying high. Buying during bad times is infinitely better than buying during good times. My article simply explored whether this time would be an exception...

Anonymous said...

FYI. 1930 depression: market drop 150weeks and wipe out 90% of market value. We are currently down for 80 weeks and 50% gone... more up side than down side at this juncture? may or may not be...
I am also having similar view with Lucky...wil this time be different? Like Japan since 1986??

Anonymous said...


Yes but I don't know how one can value invest commodities (I assume you are referring to commodities rather than companies that deal with commodities). I doubt he applied the same principles.

But for the overall equities where the value investing method applies. He seemed far ahead.

Anonymous said...

If there is going to another Great Depression as they are saying, it does'nt matter where you put your money lah. Withdraw from stocks and shares and put in fixed deposits? What's the difference? Everyone including bankers will be carry a begging bowl lining up for food.

So don't be taken by all the doomsayers, big names they may be but they are in one gang to fix the game - if not to depress the stock market further, to just ensure that investing public do not take advantage of the low prices, otherwise with a liftoff, how are their write-off plans for their national debts going to work?

Anonymous said...

Mixing around with businesses tells me that they are not having second thoughts about the economy. It is just go, go, go, whether starting new businesses or upgrading one. It does'nt feel like a recession, never mind the retrenchments and belt-tightening being reported.

Perhaps there is no way but to move forward.

Anonymous said...

The stock market is definitely in uncharted territory.

To those who think along the line that how much lower can it go?Let me repeat the performance of Nikkei during the last 20 years.

Nikkei peaked at 38,000+ around 1987,I recall,today 2009,22 years later,Nikkei is still at 7,000+(latest)a mere 18% left.

What you need to know is whether the economy is moving in the right direction,in the case of Singapore,I frankly do not think so,but judging fr past experience,I would not be surprised that MM Lee finds out the right way soon,only thing,that I am very certain,is that he would not tell you why,and unlike BUFFETT,he would never admit any mistake.

That is the only reason why BUFFECT is in first world and Singapore third,at least second world.

It is not because of lack of IQ or intelligence,I am sure.

Anonymous said...

Hi Lucky

Mr Buffett was selling last year.
Yes. I know what he said.
Mr Buffett is big player in derivs.
Yes. I know what he said about weapons of mass destruction.

No1 has a crystal ball but MM Lee the saviour?

*hehe* nice joke on a terrible day :-)


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