Client Letter January 2008
2007 "In the last year our accounts with over $1million showed an average gain of 19.92%. Accounts with less than $1 million gained on average 23.15%. there are a few smaller accounts that engage in (gasp) short term trading (mostly in Berkshire) and they have beaten the long term buy-hold approach for the last few years."
Omaha Cash Flow "This is an attempt to establish the importance of insurance float in any attempt to Value Berkshire Hathaway; we will use Buffett’s two column approach to attempt to understand the company’s current value."
Berkshire - So far in the year to date, Berkshire has continued to power our portfolios to a strong level of out-performance. The composite of our accounts up 2.0% for the year as of February 29th compared the S&P 500 and the Wilshire 5000 which are down 9.38% and 9.20% respectively. For the 12 months ended on February 29 our composite result was up 24.7% while the S&P and the Wilshire were both off about 5.5% This Relative margin of plus 30% for the 12 months feels good for now, but positive trends do not go on forever so enjoy the good news while it lasts. If the Bear Market continues (which I think likely) sooner or later it takes down even the strongest companies.
Western Refining, Inc. Western Refining is an independent crude oil refiner and marketer of refined products. It also operates service stations and convenience stores. The Company owns and operates four refineries with a total crude oil capacity of approximately 234,000 barrels per day.
Hurricane Insurance It should come as no surprise then that Berkshire Hathaway has jumped with both feet into the market for insuring Wall Street and other financial institutions against financial hurricanes.
Moral Hazard I Just finished rereading "When Genius Failed" Roger Lowenstein’s excellent book about the fall of Long Term Capital Management. I thought it would be interesting to compare this earlier blow up with the current pyrotechnics in the bond market; and the fall of Bear Sterns. Indeed the parallels are surprising, surprising that is, if you assume, like I do, that large financial institutions should be able to learn from their mistakes.
Tipping Point "In its annual report, the central bank for central banks said the impact of rising food and energy prices on consumers' incomes, combined with heavy household debts and a pullback in bank lending, may lead to a slowdown in global growth that "could prove to be much greater and longer-lasting than would be required to keep inflation under control. Over time, this could potentially even lead to deflation,"
The Problem is not Inflation The strongest argument in support the view of Edwards and Montier is that the generals always fight the last war. Since the last big battle was inflation that is what most people are worried about, and this concern will make central banks slow to respond to the threat of deflation.
Extra Enclosure I am sending these pages because of the near panic conditions on Wall Street, and because I suspect that your money is probably doing better than you expect. Maybe these orange pages will offer some comfort. It is gratifying to me that we have been able to out-perform the S&P by at least 25% in the last twelve and a half months.
Generational Event Hyman Minsky, an economist popular in the nineteen seventies, held that the capitalistic economy has an inherent tendency to develop instability. This instability eventually erupts into a in severe economic crises. In his words "stability is unstable". He said in the 1970’s that the key mechanism that pushes the economy towards a crisis is the accumulation of debt.
Bear Markets It will take more than a couple of years to de-lever the world. That does not mean the market will continue lower from here, but I do not see a return to a long term (secular) bull market any time soon.
The Paradox of Risk The current market has discounted a great deal of disaster. Mr. Market appears convinced that we have gone off the cliff and that a great deflationary chasm lies beneath us. So today the perception of risk by the people listed above is the opposite of what it was in June of 2007, yet chances are they are just as wrong today as they were then, logic and mathematics would suggest that the actual risk inherent in most equity investments today is lower than it was a year and half ago.