If it's any consolation to mere mortals, master investor Warren Buffett had a shocker of a 2008 too. Yet he remains a buyer of shares, and says the economic disarray gives him a tailwind. Take heed, fearful investors.
In his eagerly awaited annual letter to investors, Warren Buffett revealed the book value of the company he chairs, Berkshire Hathaway (NYSE: BRK.A), fell by 9.6%, the worst performance in the 44 years Buffett has been in charge of the company.
Somewhat perversely, when compared to the performance of the S&P 500 index, it was his 7th best year of relative performance, with Berkshire's 9.6% fall comparing favourably with the 37.0% fall in the index.
Still, that is small consolation to Buffett, and to shareholders in Berkshire Hathaway, who saw their shares fall 32% in 2008, and a further 19% since then.
Shambolic Economy
We know 2008 has been a tough year for investors and the economy. When 78-year old Buffett says there was “A freefall in business activity…accelerating at a pace that I have never before witnessed” you know things are bad and unprecedented.
And things aren’t necessarily set to get better anytime soon. Buffett says “…the economy will be a shambles throughout 2009 – and for that matter, probably well beyond…”
I think it’s even safe to describe the period we are going through now by using the four words most investing dangerous words – “It’s different this time.”
Yet amidst all the doom and gloom, Buffett remains an optimist. He says the US has had plenty of challenges in the past, including the Great Depression with unemployment as high as 25%, two great wars and virulent inflation that lead to a 21% interest rate in 1980.
Compared to today, with unemployment around 7% and rising to perhaps 9% or 10%, base interest rates of effectively 0%, and a massive government stimulus package, these times are a doddle. As Buffett says, “America’s best days lie ahead.”
Our Best Days Lie Ahead
More than a large part of Buffett’s investing success has come because he has been willing and able to take a long-term perspective. America’s best days should lie ahead, but we don’t know how far ahead they lie. The same goes for the UK. Our best days lie ahead, but whether they come in 2010, 2015 or 2020, right now, it’s a little hard to predict.
When it comes to the stock market, Buffett says just because the economy will be shambolic in 2009 and probably well beyond, it “…does not tell us whether the stock market will rise or fall.” On that front, apart from being optimistic in the long-term, Buffett offers no insight or guidance. He rarely does.
One Terrible Investment
What he does however say is “Clinging to cash equivalents or long-term government bonds at present yields is almost certainly a terrible policy if continued for long.” People with ‘high’ interest savings accounts already know this, to their cost.
In these sharply falling markets, many investors have correctly proclaimed “cash is king”. Whilst savings interest rates have become somewhat derisory, at least the value of their capital hasn’t been eroded, as it has been in the share market.
The FTSE 100 is already down 13.6% in 2009, coming off a 31% fall in 2008. These are dark days for investors.
Buffett Makes School Boy Errors
But the darkest days are usually the best days to be buying shares. As Buffett says in this year’s letter, “When investing, pessimism is your friend, euphoria the enemy.”
There are of course no guarantees. Buffett himself made a couple of howlers. You could even go one step further and say he made some school-boy errors. His instinct has served him well in the past.
Perhaps, as “it’s different this time”, he couldn’t draw off his past experiences, and fell into some basic errors, the type of which investing mortals like you and I are more likely to make.
Buffett freely admits his failures, listing buying oil giant ConocoPhillips (NYSE: COP) when the oil price was near its peak, saying “I in no way anticipated the dramatic fall in energy prices that occurred in the last half of the year” and going on to say “…the terrible timing of my purchase has cost Berkshire several billion dollars.”
The other notable failure was buying shares in two Irish banks, “that appeared cheap to me.” By the end of 2008, Berkshire’s investment was down 89%, and has since fallen further. Oops.
Investing Is Not Perfect
The man is human after all. He trusts his instincts and his judgements, and sometimes he gets it wrong. Investing is not a perfect science. You don’t need, nor should you expect, 100% accuracy. Something around 60% should be enough to put you in the top 10% of all investors.
History and the accumulation of a great fortune already shows Buffett to be the best investor of all time. At the age of 78, there will be some ready to write his investing epitaph, citing the mistakes above, his record in 2008, and his preferred share investments in Goldman Sachs (NYSE: GS) and General Electric (NYSE: GE) when the common shares in those companies traded at much higher values than they do today.
Write Buffett Off At Your Peril
Buffett has been written off before, most recently during the dot com boom, when he famously refused to buy telecom and technology shares like BT Group (LSE: BT-A), Vodafone (LSE: VOD), Arm Holdings (LSE: ARM) and Logica (LSE: LOG).
The Berkshire Hathaway book value fell 6.2% in 2001. In 2002, its 10% gain outperformed the S&P 500 by a whopping 32%. Redemption and justification for sticking to his time honoured investing strategies must have been sweet.
What will 2009 bring for Buffett, Berkshire Hathaway and the stock market?
We’ll leave the last words to Buffett…
“Berkshire is always a buyer of both businesses and securities, and the disarray in markets gave us a tailwind in our purchases.”
Go forth, buy and invest for the long-term.
Our Chief Analyst Maynard Paton is a disciple of Warren Buffett, and is also seeing great opportunity amongst the economic and stock market chaos. Check out his very latest share recommendations by taking out a free 30-day trial to The Motley Fool's Champion Shares premium stock picking service. Click here for more details, including his very latest column, Four Shares Beating The Crunch.
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> Of the companies mentioned in this article, Bruce Jackson has an interest in Berkshire Hathaway.
