Buffett

The Oracle of Omaha has posted his annual tome to shareholders, reflecting on Berkshire Hathaway’s performance in 2008.  While the performance of the company as a whole should come as no surprise given the economic health of the markets in 2008, the outlook for the future is a bit more interesting.

However you regard Warren Buffett, his annual letter to shareholders is always a good read, and this years letter in particular is enlightening, if anything because it offers up some humility many less affluent and savvy investors have realized in the last 6 to 8 months.

I’ll offer up some of the highlights from The Corner Office perspective:

Owning up to mistakes.

With any business or investment decision, it’s important to own up to your mistakes while taking credit for your success.  Buffett is savvy enough to understand this, and comes clean in several paragraphs in his letter.

During 2008 I did some dumb things in investments…

I told you in an earlier part of this report that last year I made a major mistake of commission (and maybe more; this one sticks out). Without urging from Charlie or anyone else, I bought a large amount of ConocoPhillips stock when oil and gas prices were near their peak. I in no way anticipated the dramatic fall in energy prices that occurred in the last half of the year. I still believe the odds are good that oil sells far higher in the future than the current $40-$50 price. But so far I have been dead wrong. Even if prices should rise, moreover, the terrible timing of my purchase has cost Berkshire several billion dollars. -Source

Current events guidance to the future.

This debilitating spiral has spurred our government to take massive action. In poker terms, the Treasury and the Fed have gone “all in.” Economic medicine that was previously meted out by the cupful has recently been dispensed by the barrel. These once-unthinkable dosages will almost certainly bring on unwelcome aftereffects. Their precise nature is anyone’s guess, though one likely consequence is an onslaught of inflation.  Moreover, major industries have become dependent on Federal assistance, and they will be followed by cities and states bearing mind-boggling requests. Weaning these entities from the public teat will be a political challenge. They won’t leave willingly. -Source

Sound advice for anyone.

In good years and bad, Charlie and I simply focus on four goals:

1. maintaining Berkshire’s Gibraltar-like financial position, which features huge amounts of excess liquidity, near-term obligations that are modest, and dozens of sources of earnings and cash;
2. widening the “moats” around our operating businesses that give them durable competitive advantages;
3. acquiring and developing new and varied streams of earnings;
4. expanding and nurturing the cadre of outstanding operating managers who, over the years, have delivered Berkshire exceptional results.  -Source

Maintain some sense of humor.

Our meeting this year will be held on Saturday, May 2nd. As always, the doors will open at the Qwest Center at 7 a.m., and a new Berkshire movie will be shown at 8:30. At 9:30 we will go directly to the question-and-answer period, which (with a break for lunch at the Qwest’s stands) will last until 3:00. Then, after a short recess, Charlie and I will convene the annual meeting at 3:15. If you decide to leave during the day’s question periods, please do so while Charlie is talking.

The best reason to exit, of course, is to shop. We will help you do that by filling the 194,300-squarefoot hall that adjoins the meeting area with the products of Berkshire subsidiaries. Last year, the 31,000 people who came to the meeting did their part, and almost every location racked up record sales. But you can do better. (A friendly warning: If I find sales are lagging, I lock the exits.) -Source

The Corner Office Comments

There are many other sound highlights in Berkshire’s annual report, and I encourage you to read the entire document.  I think Buffett’s view of the recent government action regarding the economy is telling, as is his prediction that inflationary guidance will be a strong part of his outlook going forward.

If the last several years in the market has told us anything, it’s that we should be more forward looking.  What will be the long-term effects of today’s policy and actions, and how can I capitalize on them?

We’ve come out of an era of credit, and I think Buffett’s guidance to widen the financial moat and increase or maintain an excess of liquidity and cash should rule the day, regardless of the scale of your portfolio.

As I’ve mentioned before, inflation going forward is as nearly a sure thing as you can get.  You can’t dump trillions of dollars into an economy and expect to keep inflation at bay.  This, above anything, should guide investing decisions going forward.

Economics, Investing, Market Trends annual report, Berkshire Hathaway, Warren Buffett

Next week will reveal a lot about the state of our economy:

Institute for Supply Management data – April 1st.
The institutes’s data for March suggests a drop to 48.0 which would signal that the economy is close to falling into a recession.

Joint Economic Committee Meeting – April 2nd.
Ben Bernanke is set to testify before the congressional Joint Economic Committee on the out look of our economy. The committee will discuss whether our economy is already in a recession or heading into one.

Earnings: Best Buy and RIM – April 2nd.
Earnings reports for Best Buy (BBY: chart, web, Y!) and Research in Motion (RIMM: chart, web, Y!) are due out on Wednesday. Analysts expect an increase in Best Buy’s Q4 profits on the heals of 52% increase in Q3 profits. On top of that, earnings are expected to more than double.

Things aren’t as rosy for RIM. BlackBerry sales continue to struggle against the iPhone and Q3 results didn’t live up to expectations. EPS is expected to increase only slightly.

Why you should care? Well, Best Buy is a good indicator of consumer spending. After all, the store specializes in selling products related to discretionary spending (big screen TV’s, music, electronics… stuff we can all probably live without if times are tough). As for RIM, it’s a sign of continued pressure on Tech as a result of competition.

Non-farm payrolls report – April 4th
March non-farm payrolls are forecast to drop 30,000 and the unemployment rate is predicted to increase to 5% (still not bad). This information along with what ever rolls out of the congressional meeting on economics will help determine whether or not we’re really in a recession.

At this point in time, I’m not sure it really matters if we call this a “recession” or not, but perhaps if we can get the government to buy into the fact that we can finally call it a recession, we can move on with our lives.

Economics, Finance, Market Trends BBY, payrolls, recession, RIMM, tech

Walgreens reports earnings – March 24th
What a difference a day makes. Leap year is going to be particularly good to Walgreens (WAG: chart, web, Y!).

On Monday the drugstore chain reports second-quarter earnings, and those numbers garner help from one extra day’s worth of business in February. Same-store sales rose 8.3% in February, and analysts expect that February 29th sales will push the EPS up to 67 cents.

Oracle Insight – March 26th
Oracle (ORCL: chart, web, Y!) is scheduled to report fiscal third quarter earnings after the market closes on the 26th. Normally I don’t follow Oracle, but since their quarter ends a full month before the rest of the major tech companies, their numbers will give a sneak peak on how hard the economy is pounding the tech sector.

GDP Growth Numbers for Q407 – March 27th
The final fourth quarter, 2007 growth report is expected to show 0.7% economic growth, up from the 0.6% as expected in the preliminary GDP report. Economists are expecting export numbers to be revised to the upside due to the dwindling dollar.

Economics, Finance, Market Trends GDP, ORCL, WAG