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....