Warren Buffett's Berkshire Hathaway hits the wall of reality

It's not easy to say "Warren Buffett is Wrong" and that's what I have been doing a couple of times in the past several months:

• Losing My Integrity - Warren Buffet's Next Book?
• Warren Buffet's unhappy new year
  

I am a bit angry at Buffett (and very disappointed in him, he used to be one of my heroes) because he has been talking his portolio up by making lots non-sense comments such as "It's time to buy shares" back in October-November 2008 or "The government is doing the right thing" since that time. For sure, if the government keeps on doing his reverse-Robin-Hood scheme of taking from the poor to give to the rich, his shareholders will profit. But is this the right thing to do? I believe he's lost his morality/integrity.

It isn't an easy step to bet against Warren Buffett, specially when you're a nobody in the financial world, but still, I am happy to keep the score for myself: Pej 2 - Warren 0 :-)

Here's a Bloomberg report. My comments and emphasis added. The reports also includes interesting points from Buffett about his take on the economy in general which are worse reading (follow the link to Bloomberg for that).

Berkshire Profit Plunges 96% on Stock Market Bets

Feb. 28 (Bloomberg) -- Warren Buffett’s Berkshire Hathaway Inc. posted a fifth-straight profit drop, the longest streak of quarterly declines in at least 17 years, on losses from derivative bets tied to stock markets.

Fourth-quarter net income fell 96% to $117 million, or $76 a share, from $2.95 billion, or $1,904 a share, in the same period a year earlier, the Omaha, Nebraska-based firm said in its annual report. Book value per share, a measure of assets minus liabilities that Buffett highlights in his yearly letter to shareholders, slipped 9.6 percent for all of 2008, the worst performance since Buffett took control in 1965.

I am pretty sure that Berkshire used accounting tricks to not show a real loss. It's as suspicious to see a decline of profits of 96% and a net profit of about $100 million for Berkshire as it was suspicious to see major banks announce the same kinds of figures about a year ago.

[...] Liabilities on derivatives linked to world equity markets widened by 49 percent to $10 billion in the three months ended Dec. 31, though the contracts don’t require Berkshire to pay out until at least 2019, if at all.

Berkshire shares have fallen 44 percent in the past year as the value of the firm’s top equity holdings dropped and losses increased on the derivatives. Nineteen of the top 20 stocks in Berkshire’s U.S. portfolio declined last year.

Hum... Selling 'puts' short. That was very clever when markets where at historical high points, right? Also, remember: "In my view, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.", Warren Buffet in 2002.

My experience is that every time you don't follow your own belief because you become too greedy, the market punishes you. That should be a lesson for all now, I guess...

Coca-Cola Co., Berkshire’s top holding, dropped 26 percent. American Express Co. plunged 64 percent. Oil producer ConocoPhillips fell 41 percent, and Buffett said in his shareholder letter that he made a “major mistake” in buying shares when oil and gas prices were near their peak.

Oh, yeah, buying shares of oil companies when oil is rising exponentially, and both the equity markets and oil are at historical times and not hedge your position at all is a major mistake, indeed. But what about keeping share of financial companies, or investing in banks?

Under the agreements, Berkshire must pay out if, on specific dates starting in 2019, the four benchmarks are below the point where they were when he made the agreements. Buffett, recognized as one of the world’s pre-eminent investors, gets to use the money in the interim. The liabilities on the derivatives are accounting losses that reflect the falling value of the stock indexes, not cash Berkshire has paid out.

Oh, some hope. That's always welcome.

“Derivatives are dangerous,” Buffett said in the annual letter. “Our expectation, though it is far from a sure thing, is that we will do better than break even and that the substantial investment income we earn on the funds will be frosting on the cake.”

Just not sure that Buffett is going to be managing Berkshire until that time, and if his successors will be able to achieve the same kind of returns...