According to the 2008 Berkshire Hathaway Annual Report and Chairman’s Letter to the Shareholders that was released last weekend, the book value for each share of Berkshire Hathaway was down 9.6%, the worst in 44 years since Warren Buffett took charge. This is the second only time Berkshire book value ever went down. (For the past 44 years, Buffett has managed to increase the book value of Berkshire at average of 20.3% per year.)
The last year’s 9.6% decline is still very good compared to the general stock market as represented by the S&P 500 Index, which went down 38.5% (37% if you include the dividend). And it is probably significantly better than most of our IRA and 401(k) account performances.
If you think that Warren Buffett managed to return -9.6% in stock market last year vs. the market’s -37%, you are like many other people who are exalting him to an immortal status. We at GuruFocus track every move in Warren Buffett’s stock portfolio; as far as we know, he is still human. The truth is, Warren Buffett achieved his return by appropriate asset allocation; not just stock allocation, but asset allocations across the board.
1. Operating Businesses
It is not a secret that Warren Buffett has a business. As a matter of fact, he has a host of businesses. Buffett divides them into two categories: insurance and non-insurance.
Insurance business propelled Berkshire’s growth since it entered the business in 1967. The insurance subsidiaries (GEICO, General Re, BH Reinsurance among others) brought in $2.8 billion income to Berkshire (Page 9 of Chairman’s Letter). Historically, the insurance business has seen lean years and fat years, but over all, it has been very profitable. As of December 31, 2008, the insurance business accumulated $58.5 billion of insurance float for Warren Buffett to invest. And investing is what he does well. Page 27 of the Annual Report lists $201 billion in “Insurance and Other” group; a good portion of that is cash, fixed maturity securities, stocks, and other investments. On this money is where Warren Buffett’s magic has been performed, we’ll get back to this later.
The non-insurance businesses include 67 subsidiaries, from Acme the brick maker to XTRA the truck trailer lessor. Warren Buffett further divides this category into four groups: Utility, Manufacturing, Service and Retailing;Finance and Financial Products; and Bond Insurance Business. 2008 income from the first three groups is $1.7 Billion, $2.3 Billion, and $787 million( pre-tax) respectively. Asset allocated to the Utilities and Finance groups is about $65 Billion.
The point is, the stock market may tumble, but Warren Buffett’s insurance and no-insurance operations keep bringing in positive cash flow for him to allocate.
Applying to individuals, we should all keep a good job or a business that brings in a cash flow regardless how the stock market is doing. Day trading stock doesn’t make the cut for most of us.
2. Plenty of Cash
At the end of 2008, Warren Buffett kept $24 Billion in the “Insurance and Others” groups and a little over $1 Billion in the “Utilities and Finance” groups, making the combine a little over $25 Billion, about 10% of the balance sheet.
In Warren Buffett’s own words from the Chairman’s Letter:
If we Americans all lived according to what he said, we would all have saved a cushion so when we get laid off, the bankers won’t foreclose our houses.
Even better, we would have been careful when we commit to our mortgages, so we wouldn’t be buying into some of the houses in the first place. For the seven years after the dot-com bubble, we blew an even bigger bubble in real estate. When this bubble popped, it dragged all the financial institutes and the rest of us along with it.
Americans, listen to your own oracle!
3. Fixed income Securities
After Warren Buffett released his Chairman’s letter, many people were disappointed at how little common stocks he purchased during Q4 of 2008 when the market was in tailspin. There were stock trading activities, but those were overshadowed by his other “sweetheart deals” - during the last year, he purchased $14.5 billion in fixed-income securities issued by Wrigley, Goldman Sacks, and General Electric, etc., at interest rates ranging from 10% to 15%.
Page 29 of the Annual Report is the Cash Flow Statement of Berkshire Hathaway. Looking at the investment activities: For the year, Warren Buffett purchased $35.6 Billion fixed maturity securities, but received cash from selling of fixed maturity securities ($18.5 Billion) and redemptions and maturities of fixed maturity securities ($14.7 Billion), so he basically rolled over the investment in fixed maturity securities.
Back to the Balance Sheet (page 27), Berkshire Hathaway carries $27 billion of fixed maturity securities and $21.5 billion of “other” investment (mostly, sweetheart deals) in the Insurance and Other Group alone. There is another $4.5 billion invested in fixed maturity securities in the “Finance and Financial Products” group. The total income producing stocks? $53 billion, or about 20% of the entire assets on the balance sheet.
For the rest of us, fixed income security and other income producing assets should be an important part of our portfolio. Discuss with your financial advisor about a suitable fixed income portfolio for you.
4. Stocks
Warren Buffett is famous for his savvy stock-picking skills. As a matter of fact, GuruFocus follows every move that the investment Guru makes. Before he released the annual report, we have already reported what he bought and what he sold during Q4 of 2008, the same we do for the other 50 or so Investment Gurus. Premium members can even get updated in real time on his trading activities. But here I want to downplay the importance of his stock picking skill in his success, at least on an ongoing basis.
At the end of 2007, Berkshire Hathaway had $75 billion equity investments (stocks). During the year, Warren Buffett purchased $10 billion stocks and sold $7 billion stocks, if every stock price had been frozen, he should have $78 billion in stocks, but instead he had only $49 billion, down $29 billion. Of course BNSF and Moody’s was reclassified as equity investment so they need to add back at the market value which was about $6 billion. So in 2008, Warren Buffett lost about $23 billion in stock over $75 billion initially invested in stocks, or about 30.7%.
In a year when the S&P 500 Index went down 38.5%, -30.7% is remarkable. Does it make the investment manager immortal? Hardly. You could have beaten that.
Because equity is only portion of Buffett’s overall asset, a 30% drop in stocks does not spell disaster for the overall health of the company. After all, all the other assets have produced good income for him in the past year. In the end, the book value of Berkshire Hathaway only dropped 9.6%.
Conclusion
As of December 31, 2008, Warren Buffett held 10% in cash, 20% in stocks, 20% in fixed maturity securities and preferred stocks, and the other 50% was invested in businesses he can control, or operating companies.
An average person could adjust these asset allocation ratio based on the his/her personal situation. But as the Investment Guru has done in the past 44 year, asset allocation is essential for you to navigate the economic hard times.
The last year’s 9.6% decline is still very good compared to the general stock market as represented by the S&P 500 Index, which went down 38.5% (37% if you include the dividend). And it is probably significantly better than most of our IRA and 401(k) account performances.
If you think that Warren Buffett managed to return -9.6% in stock market last year vs. the market’s -37%, you are like many other people who are exalting him to an immortal status. We at GuruFocus track every move in Warren Buffett’s stock portfolio; as far as we know, he is still human. The truth is, Warren Buffett achieved his return by appropriate asset allocation; not just stock allocation, but asset allocations across the board.
1. Operating Businesses
It is not a secret that Warren Buffett has a business. As a matter of fact, he has a host of businesses. Buffett divides them into two categories: insurance and non-insurance.
Insurance business propelled Berkshire’s growth since it entered the business in 1967. The insurance subsidiaries (GEICO, General Re, BH Reinsurance among others) brought in $2.8 billion income to Berkshire (Page 9 of Chairman’s Letter). Historically, the insurance business has seen lean years and fat years, but over all, it has been very profitable. As of December 31, 2008, the insurance business accumulated $58.5 billion of insurance float for Warren Buffett to invest. And investing is what he does well. Page 27 of the Annual Report lists $201 billion in “Insurance and Other” group; a good portion of that is cash, fixed maturity securities, stocks, and other investments. On this money is where Warren Buffett’s magic has been performed, we’ll get back to this later.
The non-insurance businesses include 67 subsidiaries, from Acme the brick maker to XTRA the truck trailer lessor. Warren Buffett further divides this category into four groups: Utility, Manufacturing, Service and Retailing;Finance and Financial Products; and Bond Insurance Business. 2008 income from the first three groups is $1.7 Billion, $2.3 Billion, and $787 million( pre-tax) respectively. Asset allocated to the Utilities and Finance groups is about $65 Billion.
The point is, the stock market may tumble, but Warren Buffett’s insurance and no-insurance operations keep bringing in positive cash flow for him to allocate.
Applying to individuals, we should all keep a good job or a business that brings in a cash flow regardless how the stock market is doing. Day trading stock doesn’t make the cut for most of us.
2. Plenty of Cash
At the end of 2008, Warren Buffett kept $24 Billion in the “Insurance and Others” groups and a little over $1 Billion in the “Utilities and Finance” groups, making the combine a little over $25 Billion, about 10% of the balance sheet.
In Warren Buffett’s own words from the Chairman’s Letter:
I have pledged – to you, the rating agencies and myself – to always run Berkshire with more than ample cash. We never want to count on the kindness of strangers in order to meet tomorrow’s obligations. When forced to choose, I will not trade even a night’s sleep for the change of extra profit.
If we Americans all lived according to what he said, we would all have saved a cushion so when we get laid off, the bankers won’t foreclose our houses.
Even better, we would have been careful when we commit to our mortgages, so we wouldn’t be buying into some of the houses in the first place. For the seven years after the dot-com bubble, we blew an even bigger bubble in real estate. When this bubble popped, it dragged all the financial institutes and the rest of us along with it.
Americans, listen to your own oracle!
3. Fixed income Securities
After Warren Buffett released his Chairman’s letter, many people were disappointed at how little common stocks he purchased during Q4 of 2008 when the market was in tailspin. There were stock trading activities, but those were overshadowed by his other “sweetheart deals” - during the last year, he purchased $14.5 billion in fixed-income securities issued by Wrigley, Goldman Sacks, and General Electric, etc., at interest rates ranging from 10% to 15%.
Page 29 of the Annual Report is the Cash Flow Statement of Berkshire Hathaway. Looking at the investment activities: For the year, Warren Buffett purchased $35.6 Billion fixed maturity securities, but received cash from selling of fixed maturity securities ($18.5 Billion) and redemptions and maturities of fixed maturity securities ($14.7 Billion), so he basically rolled over the investment in fixed maturity securities.
Back to the Balance Sheet (page 27), Berkshire Hathaway carries $27 billion of fixed maturity securities and $21.5 billion of “other” investment (mostly, sweetheart deals) in the Insurance and Other Group alone. There is another $4.5 billion invested in fixed maturity securities in the “Finance and Financial Products” group. The total income producing stocks? $53 billion, or about 20% of the entire assets on the balance sheet.
For the rest of us, fixed income security and other income producing assets should be an important part of our portfolio. Discuss with your financial advisor about a suitable fixed income portfolio for you.
4. Stocks
Warren Buffett is famous for his savvy stock-picking skills. As a matter of fact, GuruFocus follows every move that the investment Guru makes. Before he released the annual report, we have already reported what he bought and what he sold during Q4 of 2008, the same we do for the other 50 or so Investment Gurus. Premium members can even get updated in real time on his trading activities. But here I want to downplay the importance of his stock picking skill in his success, at least on an ongoing basis.
At the end of 2007, Berkshire Hathaway had $75 billion equity investments (stocks). During the year, Warren Buffett purchased $10 billion stocks and sold $7 billion stocks, if every stock price had been frozen, he should have $78 billion in stocks, but instead he had only $49 billion, down $29 billion. Of course BNSF and Moody’s was reclassified as equity investment so they need to add back at the market value which was about $6 billion. So in 2008, Warren Buffett lost about $23 billion in stock over $75 billion initially invested in stocks, or about 30.7%.
In a year when the S&P 500 Index went down 38.5%, -30.7% is remarkable. Does it make the investment manager immortal? Hardly. You could have beaten that.
Because equity is only portion of Buffett’s overall asset, a 30% drop in stocks does not spell disaster for the overall health of the company. After all, all the other assets have produced good income for him in the past year. In the end, the book value of Berkshire Hathaway only dropped 9.6%.
Conclusion
As of December 31, 2008, Warren Buffett held 10% in cash, 20% in stocks, 20% in fixed maturity securities and preferred stocks, and the other 50% was invested in businesses he can control, or operating companies.
An average person could adjust these asset allocation ratio based on the his/her personal situation. But as the Investment Guru has done in the past 44 year, asset allocation is essential for you to navigate the economic hard times.
