Saturday, February 28, 2009

This Just In: Berkshire Equity Portfolio Back to its Cost Basis


The 2008 Chairman’s Letter from Warren Buffett is in, and while it contains much of what you’d expect—a self-confession or two, that old Mae West “Snow White” joke, one humorous new aphorism (“beware of geeks bearing formulas”) and a metaphor that associates derivatives with social diseases, not to mention a sober assessment of the world economy, one no-punches-pulled prediction on inflation, as well as plenty of cheerleading for Berkshire’s managers and businesses—the biggest shocker in the letter is not actually highlighted, or even mentioned, by Buffett.

The shocker is this: Berkshire Hathaway’s portfolio of equities—the stocks such as Coke and P&G and Washington Post that Warren Buffett himself, the “Oracle of Omaha,” famously purchased over the years at bargain prices—appears, as of yesterday’s market close, to be worth not much more than Buffett's cost.

That’s right.

Based on the year-end portfolio presented in the letter (and it has changed only modestly over time, but now excludes two stocks, Burlington Northern and Moody’s, in which Berkshire owns 20% and must report its holdings under the equity method,) Berkshire’s entire equity portfolio, which had a $37 billion cost basis and a $49 billion market value at year-end 2008, was, as of yesterday’s market close, worth only about $37 billion.

Now, we know what you’re thinking: you’re thinking, “Warren doesn’t mind, so why should we?”

Indeed, Buffett doesn’t mind—he says so in this year’s letter, on page 5:

Additionally, the market value of the bonds and stocks that we continue to hold suffered a significant decline along with the general market. This does not bother Charlie and me.

Indeed, we enjoy such price declines if we have funds available to increase our positions. Long ago, Ben Graham taught me that “Price is what you pay; value is what you get.” Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.

Yet Buffett also disclosed what might go down as the second most surprising disclosure in today’s letter: he had to sell some of Berkshire's stocks to make those headline-grabbing investments in GE, Goldman Sachs and Wrigley:

To fund these large purchases [GE, Goldman and Wrigley], I had to sell portions of some holdings that I would have preferred to keep (primarily Johnson & Johnson, Procter & Gamble and ConocoPhillips).

No, to answer the obvious question, we’re not suggesting Buffett’s portfolio is any worse off than anybody else’s.


Yet the fact is, the value of Berkshire’s equity portfolio is not only of enormous economic importance to Berkshire Hathaway and its shareholders, but to investors around the world who watch what Warren does and frequently imitate his moves.

And the fact that it appears to be right back to its cost basis—after decades of not—is startling.

Now, the calculation itself is fairly straightforward. Since year-end Berkshire’s equity portfolio has suffered losses of close to $1 billion or more in American Express, Conoco-Phillips, P&G, and USB, if the computers here at NotMakingThisUp are correct.


And while some of those losses are certainly temporary, the hits to his financial holdings look more permanent—as does the whopping $5 billion decline in Berkshire's 7% stake in Wells Fargo thus far in 2009.

Virtually every other named holding in Berkshire’s portfolio—including Coke, Tesco, Swiss Re, and even poor old Washington Post—is also down year-to-date.

Consequently, if our math is correct, Berkshire’s equity portfolio stands at roughly $37 billion as of yesterday's market close, dead even with its $37.1 billion reported cost basis at year-end 2008.

(For comparison’s sake, at the end of 2007, Berkshire’s equity portfolio had a $35 billion unrealized gain.)

As a modest shareholder in Berkshire Hathaway, we’re rooting for the current, jaw-dropping state of affairs in Berkshire’s equity portfolio to revert to the mean—i.e. back to fat profits.

Nevertheless, if anyone had doubts how bad it is out there (Buffett himself writes in today’s letter, “We’re certain, for example, that the economy will be in shambles throughout 2009 – and, for that matter, probably well beyond”) look no further than the Berkshire portfolio.


As for what may be the least surprising aspect of Warren Buffett’s letter to shareholders—we think it is that Buffett himself acknowledged what we wrote in “Pilgrimage to Warren Buffett’s Omaha,” page 208, in a chapter called “What Would Warren Do?”

Far from being a “forum for business discussion,” as Buffett wrote [when describing the virtue of attending Berkshire’s shareholder meetings], not a single shareholder has even asked about the business.

So Buffett, according to the final page in this year's letter, is changing the rules on asking questions at the upcoming meeting.

More on those changes Monday, when we introduce the Pilgrimage to Omaha Top Ten List of Questions We’d Like to Hear Somebody Ask “The Oracle of Omaha.”


Jeff Matthews
I Am Not Making This Up


© 2008 NotMakingThisUp, LLC
Pilgrimage to Omaha™

The content contained in this blog represents the opinions of Mr. Matthews.
Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way: such inquiries will not be responded to. This content is intended solely for the entertainment of the reader, and the author.

24 comments:

Mark said...

You know what the worst part of Buffet's terrible recent performance is? The justification it provides for all the "efficient market theorists" who claim that the guy's phenomenal historical performance occurred because he was the one monkey in a billion who sat down at a typewriter and created Shakespeare!

Anonymous said...

Could you elaborate on "Back to its Cost Basis"? Are you saying there is zero profit to show for after holding the stocks in other companies for all these years? 20 years of unrealized capital gains in Coke is wiped out? Wow.

Lyon Jewett said...

Our economy has reached the "event horizon."

The Fed could print money at the speed of light and still not escape what is about to happen.

By the Mr. Matthews, what do you think about Mr. Buffet's inflation prediction?

Anonymous said...

Jeff... I am still shorting more BRK/a and b. This is a layup trade. A fat pitch for a short seller. Only thing holding up BRK is WB himself. The risk of him retiring or leaving the company for whatever reason is there and now no safety net of good assets. Mark my words... The BIG story in 2009 is Warren Buffett going down like all the other storied investors. I'll still buy you a Starbucks when it's all said and done. Can't wait for Becky Quick to to THAT interview.

Anonymous said...

Also - BRK stocks are SO massively crowded with complacent longs... another great reason to worry if you're long.

The Log said...

Here's a question that needs asking.

For a guy that buys franchises that he understands, why did he start buying and pressing blind pools of assets run by inexperinced and incorrectly incentivized managers at banks that COULD NOT POSSIBLY be dumber and Warren could not possibly know what was inside?

In running a portfolio, since when do you sell the winners and keep the losers? Back at cost in JNJ and PG is a lot better than total tattoing in WFC etc! Especially since the losses on this 10lb. pile in a 5lb. bag could be offest against SOMETHING in the last zillion years.

What has happened to Warrens brain? These are investing 101 type concepts.

Trader said...

Buffet seems to contradict himself: Early on in the newsletter he criticizes people who rely on history to make investments, then uses historical inflation to justify his infamous put selling. On the put he made two mistakes: he sold them when stocks were high and vol was low - he's lost on both counts as vol (take the VIX as proxy) has more than double since he sold it. He's clearly thinks inflation will help his position. That is probably true, but he also wrote puts on foreign indicies so if the US$ gets toasted by high US inflation then his foreign puts value will also rise, hurting him. He seems to be hoping for worldwide inflation to ride to his rescue.

slickvguy said...

Two things to consider (not to take away from your main point, which was worth making):

1) You're not including all the dividends the company received throughout the years. Those add up to a significant amount of money and a substantial % of the total return.

2) You aren't including the stocks he bought and sold for a profit over the years.

Anonymous said...

Buffet is guilty of only one BIG investing mistake over the past several decades: Actively pursuing and promoting his elevation to guru status.

Unlike many others, I never spent much time listening to his wisdom or tracking his press coverage. Now I know I allocated my time correctly.

Jeff Matthews said...

"Anonymous" asks:

'Could you elaborate on "Back to its Cost Basis"? Are you saying there is zero profit to show for after holding the stocks in other companies for all these years? 20 years of unrealized capital gains in Coke is wiped out? Wow.'

No, 20 years of unrealized gains in Coke is not wipe out.

What we said is what we wrote: Berkshire's equity portfolio, as of Friday's close, was back to its $37 billion cost.

Berkshire has incurred massive losses in some stocks, and retains massive gains in others, including, still, Coke.

Anonymous said...

Much of the portfolio is of recent vintage, so it doesn't mean that much that their current market values are less than cost. Of the remaining names, three are still way up, so only the remaining three left over (Amex, Wells and USB) are really "jaw dropping" in the sense that he's held them for a long time and has little to show for it.

I elaborate here:

http://investorsconsigliere.typepad.com/the_investors_consigliere/2009/03/jeff-matthews-on-berkshires-equity-portfolio.html

Anonymous said...

Wow. Everyone's a critic.

Buffet's performance is hardly terrible.

I'd say he's doing pretty damn well compared to the vast majority of hedge funds, private equity, mutual fund managers and small investors in these times.

Some of his key competitors have been destroyed (AIG) or on their knees SwissRe.

His financial holdings have been killed but they have done much better than the BAC 's, or Citi's of the world.

Genius above, why are you shorting both BRK-A and BRK-B. Isn't shorting A enough?

joshuasam said...

it appears Buffett thought Jeff's book was good since he decided to change his annual meeting. The problem is there is no followup so he can do his doubletalk. for example Buffett bemoans the funding issue of competing with the government yet he would have lost about 20 billion more if the government didn't bail out amex,wfc,usb,ge,gs.
Plus who is manipulating berkshire stock at month-end?

Anonymous said...

for reasons that should be fairly obvious, the cost basis measure doesn't mean a whole lot. yes, his portfolio is down, but this is not the way to illustrate that.

Anonymous said...

Looking at cost basis alone does not tell the full picture. Buffet is still beating most investors in performance. His current asset size is still larger compared to 1997. The fact that he has not incurred net capital loss is a significant achievement. Most investors in his shoes (i.e. with bigger current asset) would likely have accumulated substantial capital loss by now.

Michael said...

Buy Stock A for $10. Sell it for $20.
Buy stock B for $20. Sell it for $40.
Buy stock C for $40. Sell it for $80.
Buy stock D for $80. Sell it for $160.
Buy stock E for $160. It goes to $150.
Oh, dear! Cost on the books = $160, but current market value = $150. How can that manager be so stupid?

Anonymous said...

I have shorted both classes of stock due to starting with the B's and I then started shorting A's as we starting really digging into this dog. It was a small position which now is decent size. Thanks for the compliment. Never been called a Genius but I'll tell my kids.

As far as Warren "doing pretty damn well" in relative terms - he is but for how long? That's like peeing in your pants and rationalizing that it's warm.

Michael Comeau said...

We know it's back to cost basis, but can anyone account for dividends received over the years and how that would affect BH portfolio? That may swing him into the green.

Also, it should be noted that the last time Warren was this heavily criticized (late 90's), he subsequently did really really well.

Jeff Matthews said...

Michael,
Take a look at his portfolio and eyeball a rough dividend yield...it's probably roughly 4% currently, and was probably sub-2% during the boom years.
JM

Monevator said...

At the risk of being simplistic, this is all more circumstantial evidence to me that the market was recently the buying opportunity of a lifetime.

After 20 years of hearing nothing but bullish stories about equities, news such as Buffett's portfolio being valued at cost or Treasuries having outperformed equities over 40 years is startling.

But it's not a reason to avoid stocks. If anything it's a reason to back up the truck, IMHO.

Omababe said...

Jeff, sorry to post this as a comment, I couldn't find your e-mail.

You might want to double-check your sources on Querulous Street. There's no such street. It appears to be a copyright trap on the Navteq maps. It's an unmarked, unsigned alley. The Omaha city records show no such name.

Jeff Matthews said...

Omababe:

Excellent! Thanks for reading the book, and thanks for this tid-bit. This will be part of my Buffett speech!

Cheers,
JM

Jeff Matthews said...

P.S. email is notmakingthisup@gmail.com.

JM

Omababe said...

There's more and some photos of Querulous St. at:

http://omababe.blogspot.com/2008/12/street-oddities.html

In case you're interested. :)