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Warren Buffett's Greatest Hits, Volume 44

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Generations from now, it won't be just market watchers reading the words of Warren Buffett.

I'm fairly sure that literary scholars will eventually pick up on the warm grit, narrative flow, and frank assessments that make Buffett's annual letter to Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) shareholders so riveting.

Saturday's note was another gem.

Sure, the financial media is shortsightedly pounding on the bad news. Berkshire Hathaway's book value fell by 9.6% in 2008. Since the company's only other big drop in its 44 years with Buffett at the helm was a 6.2% stumble in 2001, this is Buffett's worst year ever.

I'll tell you what others are overlooking. The S&P 500 tanked by a whopping 37% during the same period, so Buffett has a 27.4-percentage-point advantage over Mr. Market. The pain is absolute, but on a relative basis, this is Buffett's best year since 2002.

Buffett has done well … and that's coming from someone who has bashed him before.

In his own words
Rather than deliver a blow-by-blow dissection of the financials that you can find everywhere, I'm going to review some of Buffett's more memorable passages in his 23-page letter.  

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.

Buffett went public with his support for the original government bailout in September, and he put his money where his mouth was by investing billions in Goldman Sachs (NYSE: GS  ) preferred stock. He doesn't have to like the taste, of course. After all, Buffett is the poster child for fiscal discipline. He sums up his thoughts perfectly later in the same paragraph: "Weaning these entities from the public teat will be a political challenge," he writes. "They won't leave willingly."

America's best days lie ahead.

This isn't Buffett's most original insight, but I have to emphasize this particular passage because the media has spent all weekend pointing out how bearish Buffett has become. Yes, he's gloomy about the economy's near-term prospects, but he also points out that the country has overcome all of its challenges in the past, "without fail."

He even offers up a nugget for long-term investors. In singling out the point that the market has risen in 75% of the past 44 years, he suggests that it will also rise in 75% of the next 44 years. Just don't ask him which of those years will be the good ones.

I made some errors of omission, sucking my thumb when new facts came in that should have caused me to re-examine my thinking and promptly take action.

Buffett doesn't pass the buck. He makes himself fully accountable. He even concedes that "the terrible timing of my purchase has cost Berkshire several billion dollars" in discussing his decision to buy into ConocoPhillips (NYSE: COP  ) as oil and gas prices were peaking last year.

That's not his only mistake, of course. Half of the company's 14 largest stock investments -- stakes of less than 20% in respective stocks, but where the market value of Buffett's positions are worth at least $500 million -- are underwater.

Yes, Berkshire Hathaway closed out the year with unrealized losses in Johnson & Johnson (NYSE: JNJ  ) , Kraft Foods (NYSE: KFT  ) , and U.S. Bancorp (NYSE: USB  ) lingering on the balance sheet. Buffett probably bled less than you, but he's still bleeding.

At the moment, it is much better to be a financial cripple with a government guarantee than a Gibraltar without one.

Buffett's brilliantly painful shot is about the financing prowess of his company's Clayton Homes manufactured-housing arm, but it may as well be a nod to all of the enterprising companies out there that have refused government handouts, even if those handouts strengthen their weaker competitors.  

When forced to choose, I will not trade even a night's sleep for the chance of extra profits.

Buffett prefers safer wagers -- like riding insurance float or snapping up corporate debt at attractive rates. This comment refers to his insistence on always keeping an ample supply of cash on hand, even with today's bargains.

Resisting temptation is never easy, though. "Whether we're talking about socks or stocks, I like buying quality merchandise when it is marked down," he points out.

Participants seeking to dodge troubles face the same problem as someone seeking to avoid venereal disease: It’s not just whom you sleep with, but also whom they are sleeping with.

Buffett's comments relate to speculating on derivatives.

"I know of no reporting mechanism that would come close to describing and measuring the risks in a huge and complex portfolio of derivatives," he also writes on the subject. "Auditors can't audit these contracts, and regulators can't regulate them."

If I find sales are lagging, I lock the exits.

One of the biggest draws to May's annual shareholder meeting is the 194,300-square-foot hall that showcases wares from Berkshire Hathaway's companies. From seeing NetJets corporate jets to scoring a discount on GEICO insurance, the roughly 30,000 shareowners in attendance come ready to hear Buffett and Charlie Munger, but they're also ready to shop.

Buffett's joke about locking the exits is just his way of drawing attention to his company's investments.

With his mastery over words -- and markets -- intact, he's unlikely to need to lock the exits for shareholders anytime soon.

Some of Buffett's other greatest hits:

U.S. Bancorp, Kraft Foods, and Johnson & Johnson are Motley Fool Income Investor recommendations. Berkshire Hathaway is a Motley Fool Inside Value selection and a Motley Fool Stock Advisor pick. The Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days.

Longtime Fool contributor Rick Munarriz enjoys the wit behind every single one of Buffett's annual shareholder letters, but he does not own shares in any of the stocks in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.

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  • Report this Comment On March 02, 2009, at 2:16 PM, networkgarden wrote:

    If Buffett wants to do penance for his 2008, I'd like to nominate him for Recovery Czar. After all, he is the gold standard in terms of being smart, reasoned, clear/understandable and straight in all things finance.

    Plus, he is appropriately folksy; he could explain concepts/strategy to the American people in plain English and be a public face for the Recovery team, as rhetoric matters in times like these.

    Who better than Buffett to help restore confidence in our financial system (and provide sanity check on key decisions behind re-work of same), something I blogged about in:

    Warren Buffett for Recovery Czar (

    Check it out.


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