Mark Lamb | Sunday, 08 March 2009

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In God we trust

Weekly international investment round up to 6th March 2009

‘In God we trust; all others pay cash’ could be the slogan for the dysfunctional credit market which has now become non-functional according to revered investor Warren Buffett in his latest letter to investors.
In the last few days shareholders in Berkshire Hathaway have been receiving their annual letter from the company’s Chairman and legendary investment guru and when one of the richest people in the world corresponds with you it makes good sense to read it!
The much anticipated annual letter not only contains an analysis of his company’s performance but it also provides an insight into the thoughts of one of the most celebrated investors the world has ever known. The full letter is available at www.berkshirehathaway.com
Coming as some relief for us more modest investors, 2008 also proved to be a difficult year for Mr Buffett in fact last year was the worst in his investment company’s 44-year history with profits down 62%, wiping billions off its share value. However, with a compounded annual gain still sitting at of 20.3% and an overall increase in share value of 362,319% since he took the helm, his crown is still in place.
In typically forthright fashion he admitted that he ‘did some dumb things’ in 2008 which included an ill-timed investment in energy company Conoco Phillips when oil prices were at their peak and purchasing into two large Irish Banks which have since continued to perform poorly.
On the mistakes made by the banks, derivatives salespeople, rating agencies, regulators, investors, et al concerning the stupefying losses in mortgage-related securities which have been widely blamed for triggering the credit crisis he makes the point that ‘these parties looked at loss experience over periods when home prices rose only moderately and speculation in houses was negligible. They then made this experience a yardstick for evaluating future loses. They blissfully ignored the fact that house prices had recently skyrocketed, loan practices had deteriorated and many buyers had opted for houses they couldn’t afford’.
While optimistic about the longer term future and even using this period to quietly snap-up some bargains he comments that he believes the American economy ‘will be in shambles throughout 2009’ as the ‘web of mutual dependence’ caused by the tangle of financial derivatives continue to unravel.
He colourfully explains the current predicament faced by institutions as ‘Participants seeking to dodge troubles face the same problem as someone seeking to avoid venereal disease. It’s not just whom you sleep with, but also whom they are sleeping with.’
Last week’s announcement by American Insurance giant AIG of the largest quarterly loss in US corporate history of $61.7 billion dollars for the last three month period of 2008 which now means they will again have to go cap-in-hand to the US government for an additional $30 billion bail-out further confirms that the full extent of the contagion has not been fully extracted from the system.
Comfortingly, Mr Buffett stated in his letter that America had faced bigger challenges and prevailed and will do so again, we trust he is right this time.

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