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.
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.”
I Am Not Making This Up
© 2008 NotMakingThisUp, LLC
Pilgrimage to Omaha™
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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.
Posted by Jeff Matthews at 1:32 PM