Berkshire Hathaway
Quarterly Review
The King's New Suit

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By PhoolishPhilip
October 28, 2002

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I just finished my quarterly review, the results are in and they are mixed. My portfolio was down 13.5% overall in the 3rd quarter, but the actively managed portion was down 13.9%. I guess I'd better stop managing, eh? I did manage to beat the S&P 500 by 3.7% this past quarter, but it was not enough to make up for previous mistakes. So far this year my investment decisions have cost the wife 24% of her life savings (any help as to how best to break this to her would be greatly appreciated). For the first time since the go-go days of 1998 I have under performed the S&P 500, losing 1.4% more that the S&P has lost year to date. I hope that an investment in big pharma and the debt and equity of the unmentionable one will give the port a boost by years end.

The best investment decision I made so far this year was doubling my position in Berkshire Hathaway when the shares dipped below $2000. The only other holding that is above water for the year is Johnson and Johnson, but then again I diluted that bit of good fortune by selling half my shares at $55 late last year. What did I buy with the proceeds? Disney at $17. You can see why the wife is ready to fire me.

Of my five biggest losers this year, four of them could have been avoided if I'd have just sold all the shares when I initially sold some of them. The bottom three are all speculations I'm too embarrassed to mention (note to self -- stop speculating) and one is an asbestos liability that blew up on me (Sealed Air). The fifth is American Eagle. This last case is an interesting one, because American Eagle was the first company I invested in after coming to value investing. Despite being down some 45% so far this year, it is still nearly 50% above my purchase price. Note to self -- always buy with a substantial margin of safety. I sold half my position in American Eagle near its 52 week highs. I probably should have sold them all. Coulda, shouda, woulda.

I have only made two major investments this year, a plug of three major pharmas and a little bite of Level Three equity and debt. All are under water, although the unmentionable one is nearing break even. I clearly jumped the gun on my pharma purchases as prices eventually sank 20-30% below my entry levels. All hopes in salvaging the year lie in these trinkets recovering.

All in all this has been a year of learning. I've learned that I have to kick the speculation habit, although an investment in Level Three shows that I still have a lot to learn in that regard. I've learned to avoid even the slightest hint of asbestos (or any other blood that attracts the barracudas). And I've learned that margin of safety means waiting until a share price falls past attractive and REALLY attractive to downright unjustifiable. In other words, I've learned the value of patience.

Unless things change, this will be the first year since 1998 that my investments will end the year in the red. Not a very pleasant thought. But all things considered, it could be worse. I could still be holding the bag on Cisco, Sun and all the other tech companies I was invested in back in 1999 before Clint Oppermann took me out to the shed. That was the best spanking of my life. Thanks Clint.


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