This blog post originally appeared on RealMoney Silver on March. 2 at 8:25 a.m. EST.From the hallowed halls in Omaha to the masters of the hedge fund universe in New York City, Mr. Market is humbling the greatest investors in history. Many asset management franchises and investment managers with outstanding long-term track records are currently on their knees and cornered into risk-averse mode for fear of further investment losses or investor redemptions. There are numerous reasons attached to the drubbing, including but not restricted to the major issues below:
- Economy -- a spiraling downturn in the world economy;
- Credit -- a still weak and clogged transmission of credit;
- Populism and political change -- an anti-capital President Obama;
- Structural -- ultra bear ETFs and momentum-based quant funds; and
- Structural (part deux) -- hedge and mutual fund redemptions.
"A lot of people were buying these stocks all the way down. Their models couldn't pick up what was garbage, so they couldn't adjust quickly enough." -- Bill King, Market Strategist, M. Ramsey King SecuritiesAlmost no asset class in the equity universe has been spared in a synchronized downturn that has hit nearly every strategy, even value investing. Over the weekend, the single most successful investor over the past five decades, value investor Warren Buffett, issued his annual letter to Berkshire Hathaway ( BRK.A) shareholders, but what has transpired since year-end is even more interesting than what was contained in his annual missive. But first, let me regress.
"John Maynard Keynes essentially said, Don't try and figure out what the market is doing. Figure out a business you understand, and concentrate." -- Warren BuffettFor nearly a year, I have outlined issues that I have had with the Buffett way. Many of my concerns have been realized and have, arguably, contributed importantly to the recent drop in Berkshire Hathaway's book value and the halving of the company's share price since early 2008. If current trends continue over the balance of the year, 2009 will mark the third annual drop in book value at Berkshire Hathaway since 2001.
"I used to be Snow White, but I drifted." -- Mae West
"Not everything that can be counted counts, and not everything that counts can be counted." -- Albert EinsteinIt was also my intention to question Buffett's analysis of the value of the assets that comprised the asset side of many of his investments in the financial sector and question, in turn, the foundation to his value investing style that seemed to rely so importantly on his perception of a discrepancy between inherent value and real book value relative to market value. From my perch, the moats (so dear to Buffett) perceived to have been protecting the businesses of some of his largest investments (especially of a financial sector kind) were, at the very least, threatened and, worst-case scenario, those moats have been flooded. Stated simply, Buffett's investment strategy over multiple decades could either:
- have been abandoned by the Oracle of Omaha, owing to his reluctance to alter/sell off his strategic and principal holdings and maintain a tax-efficient portfolio approach; or
- have been influenced by his mistaken analysis of the changing competitive landscape facing some of his portfolio companies (in other words, the moat has been flooded!).
"The first rule of investing is don't lose money; the second rule is don't forget rule No. 1." -- Warren BuffettAccording to Berkshire Hathaway's fourth-quarter release, book value dropped by $11.5 billion, or 9.6%, in 2008. According to my pal, Ram Partners' Jeff Matthews, this was the largest annual drop in book since Buffett began investing other people's money in 1956 and only the second year in which Berkshire Hathaway experienced a decline in book value.
"Price is what you pay; value is what you get." -- Benjamin GrahamAt year-end 2008, Berkshire's investment portfolio had an unrealized gain of about $12 billion, with a market value of $49 billion compared to a cost basis of $37 billion. As recently as year-end 2007, Berkshire Hathaway had an unrealized gain of $35 billion in its investment portfolio. No more.
- Wells Fargo (WFC) -- $5 billion loss;
- American Express (AXP) -- approximately $1 billion loss;
- ConocoPhillips (COP) -- approximately $1 billion loss;
- Procter & Gamble (PG) -- approximately $1 billion loss;
- U.S. Bancorp (USB) -- approximately $1 billion loss;
- Coca-Cola (KO) -- approximately $1 billion loss; and
- Kraft (KFT) -- approximately $1 billion loss.
"The rumors of my death have been greatly exaggerated." -- Mark TwainAway from the dual impact of investment and derivative losses, it should only be fair to mention that Berkshire's operating results featured record fourth-quarter 2008 insurance and investment income. As well, 2008's non-insurance income was the best yearly toll ever; it represented one of the best relative years of performance in Berkshire Hathaway's operating divisions.
Today's low prices, painful though they may be, are the market's own shovel-ready stimulus. Before you know it, the stock market, and the residential real estate market, too, will be on their way back up again -- just don't ask when. -- Jim Grant, Grant's Interest Rate ObserverBear markets end when investors give up hope. Despite the market carnage in general and at Berkshire Hathaway in particular, I am growing increasingly more bullish over the past two weeks as: 1. elements of my checklist are starting to show more positive signs; and 2. market sentiment and, arguably, valuation are at negative extremes.
"Economists hesitate to predict the future for good reason." -- Eric Schmidt, Chairman, Google ( GOOG)Two years ago, few saw the cracking foundation of credit, of the economy and our stock markets.
Here's the hard truth: Nobody knows when this recession will end. Economic forecasting is a dark art, and predicting when recessions begin and end is its weakest link. That said, my best guess is that growth will return in the fourth quarter of this year. -- Alan S. Blinder, Professor, Princeton UniversityEven fewer will see the seeds of recovery and anticipate a resumption of growth. Similar to everyone else, I am terrified by the spiraling down in stock prices, but I have to make a judgment as to what degree of economic activity and what level of corporate profits the markets are now discounting. My conclusion is that there are developing investment bargains, or, to borrow a phrase contained in Buffett's letter on Saturday, I am beginning to "feel like a mosquito in a nudist colony." Nevertheless, regardless of my view, in an environment where the big boys are being annihilated and almost every investment strategy is being questioned, redefined and readjusted, we remain in a setting where most should err on the conservative side by keeping investment and trading positions at well-below-average sizes and maintaining that precious commodity called cash. Doug Kass writes daily for RealMoney Silver , a premium bundle service from TheStreet.com. For a free trial to RealMoney Silver and exclusive access to Mr. Kass's daily trading diary, please click here.