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Reflections on Warren Buffett's Worst-Year Ever

Posted Mar 04, 2009 02:23pm EST by Aaron Task in Investing, Newsmakers, Banking
Related: BRK-A, BRK-B, GE, GS, WPO, WFC, JNJ
By his own admission, 2008 was Warren Buffett's worst-year ever.

"The tennis crowd would call my mistakes 'unforced errors,'" Buffett wrote in his annual letter to shareholders.

Jeff Matthews, founder of Ram Partners and author of Pilgrimage to Warren Buffett's Omaha, was wary of criticizing Buffett after one bad year. While the legendary investor did get hit by his exposure to financials such as Wells Fargo, Matthews notes he side-stepped the worst of the carnage by being out of Fannie Mae and Freddie Mac, two stocks he had owned previously. 

Still, the hedge fund manager and Buffett-watcher makes the following observations:

  • As of Feb. 28, Berkshire Hathaway's $37 billion equity portfolio was trading right around its cost basis, meaning Buffett's stock picks were flat after having previously skyrocketed in value.
  • Critics who say Berkshire's derivatives bets will cripple the company are wrong, says Matthews, but those who dismiss them as a non-issue are also misguided. Because of paper losses on what were effectively selling insurance policies against a big market drop, Buffett had roughly $10 billion less in capital to buy stocks during the recent market rout.
  • In part because of those derivatives losses, Buffett was compelled to sell stocks like Johnson & Johnson last year in order to pay for his much-ballyhooed preferred stakes in GE, Goldman Sachs and Wrigley's.

Editor's note: Stay tuned for part 2 of this discussion where Matthews' discusses Berkshire's "Buy American" call from October, what questions he'd like to hear at Berkshire's annual meeting in May, and whether Berkshire, the stock, is really as cheap as many value investors claim.

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