Warren Buffett has only sustained losses in book value per share once before, in the year 2001. Now his book value per share has declined nearly 10% from last year. This article reviews the Wall Street Journal article Berkshire Hathaway Reports Worst Year Ever by Scott Patterson.
Historical Decline for Buffett’s Holdings
Since Buffett made Berkshire Hathaway (formerly a New England textile factory) a holding company for its investments over 40 years ago, the company has generally performed better than the market average, even during down times for the market such as the late 1970s and the late 1980s.
Berkshire Hathaway still holds a strong investment portfolio including companies such as Wal-Mart, which readily withstands down markets. And even in the face of these losses, Berkshire Hathaway still performed far better than the Standard and Poor’s index (37% drop) and hedge funds (18% drop)
Buffett’s Investments which Have Suffered
Large holdings including American Express and Coca-Cola have both declined substantially, as well as investments in two Irish banks before the collapse of their economy (which led to an 89% loss of his $244 million investment).
Buffett also invested heavily with General Electric (GE) and Goldman Sachs, selling holdings in oil and pharmaceuticals which he later regretted, as the holdings he sold performed better than the securities he purchased.
Treasury Bonds May be Overpriced
Treasury bonds, or a share of the debt of the United States, have increased their price greatly as the perceived risk of default on debt has increased. Buffett warned in his letter to shareholders that these Treasury bonds may in fact be overpriced, as the objective risk of default by the U.S. government is slight. He foresees a “Treasury bubble” as on par with the Housing bubble and the Internet bubble.
Insurance Investments Have also Underperformed
Buffett’s insurance business sustained losses in 2008 due to an 18% decline in the value of Geico, a company which Berkshire has underwritten heavily, as well as a nearly 40% decline in earnings from General Re, a reinsurance company (a company which insures insurance companies) acquired in 1998 by Buffett.
Municipal Insurance Bonds May be at Risk for Substantial Devaluation
Buffett also warned that, as local governments face further financial shortfalls from decreased tax revenues and increased expenses resulting from unemployment and bankruptcies of businesses and individuals, these governments may choose to default on their bond payments to municipal insurance companies, which would lead to an overall decline in the value of these bonds.
 |
