Berkshire Hathaway
A Contrarian View of the Chairman's Letter

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By UsuallyReasonabl
March 7, 2005

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Folks have commented that they are surprised at negative reactions to the report. Mine was generally negative -- here's why:

1) 2004 marks the first time in history that Berkshire's book value gain failed to match the S&P 500 for two years in a row. Strangely, this went unmentioned in the Chairman's Letter.

2) I find it rather bizarre that trading income of over $2 billion is lumped in with other items in the aggregate totaling only $300 million, without any further explanation. This is the entirety of the description of trading income in the Chairman's Letter, or at least it's all I noticed in one reading:

"the trading operation that I run continues to shrink."

Well, it appears to have "shrunk" to a profit level which exceeds that of most of the companies and divisions actually named and given numbers in the report, including Clayton, GEICO, B-H Reinsurance, MidAmerican, "Flight Services", McLane, Shaw, etc. Isn't a bit more information called for? (n.b. I have only read the letter, not the whole report, so perhaps it is elsewhere, but still . . .).

3) No mention of finite reinsurance at all. I'm not buying this "they shouldn't comment due to the investigations" argument. Buffett has discussed the mechanics of these deals repeatedly in the past, and doing so again at this time would obviously be apropos. That he did not even mention it frankly smells funny to me.

4) Instead, we got rehashes of the GEICO and NICO stories. Enough already; same old same old.

5) How do you lose $579 million (or the pro rata portion thereof) of shareholders' money on some sort of zinc processing scheme? A more apologetic tone, especially considering Buffett's past mea culpas, would have seemed to have been called for, but was not forthcoming. This tiny error consumed about 70% of MidAmerican's earnings for the year. To be blunt, is Walter Scott really that smart if he can **** away $500 million like this?

6) I find it extremely peculiar that Buffett says this regarding Value Capital: In this report, we'll skip over several that are now of lesser importance . . . Value Capital has added other investors, negating our expectation that we would need to consolidate its financials into ours . . . Is this the same man who considers full disclosure so important, now telling me that an investment of size $X is now of lesser importance due to the presence of other investors in the same investment? Am I missing something here? This makes no sense. I would think a $500 million investment would be worthy of a little discussion.

7) It's a personal and unsupportable, as yet, opinion of mine that Clayton/Oakwood will be a P.R. disaster for Berkshire when some evictions of good people with children are publicized by reporters looking for a little guy / big guy angle. Wait and see.

8) Will NetJets ever make money? How impressed should I be by a business that has never made money (to my knowledge, and never significant money in any case) during 7-8 years of ownership by Berkshire, and probably not before that. Buffett anticipates profits next year. Finally. He also says that Europe has been expensive for NetJets � far more expensive than I anticipated . . . . Is this acceptable from the person running the company? Would you accept that statement from any other CEO?

9) Buffett says he can "properly be criticized" for not selling stock during the Bubble, although he also (and rightly) points out that the large position sizes would have made it difficult to leap out of them. Nice to see he agrees with me on this, if belatedly: . (Let me credit stvfox with starting the thread.) KO closed at $53.80 on the trading day prior to my post -- well after the bubble popped -- and $43.64 yesterday, a nice 20% decline over 4 years. Hope that board seat, and of course the "inevitability", made it worthwhile.

10) I love it that he actually uses the term "Junk Bonds" to describe one subset of Berkshire's holdings.

11) I still don't understand the trade deficit issue, and perhaps I never will, but that's a subject for another thread. (Although I think I got it a little better today than I have before.)

I'm willing to be beaten up by those who study the AR with a magnifying glass, and told that some of the omissions and under-explanations I complain about are both 'mitted' and explained. My point, though, is that more prose, easy to read, unconsolidated explanation in the Chairman's Letter would seem to me to be called for.


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