March 04, 2009 | about stocks: BRK.A / GE
General Electric (GE) was once considered one of the safest stocks on the market. It was the kind of stock investors flocked to when they got nervous about the rest of the market. But even GE has been decimated by the massive selloff in equities. The stock lost another 6.5% last Friday after management slashed the dividend in an attempt to preserve cash and safeguard the company’s AAA credit rating. GE can now be had for less than $9 per share.
Warren Buffett’s Berkshire Hathaway (BRK.A) is another stock that was long considered a safe haven in troubled markets. But Berkshire is down by almost one-half from its all-time high. So it was particularly instructive to read Buffett’s latest letter to shareholders released over the weekend. There was plenty of bad news in it. The company’s book value fell 9.6% in 2008, its largest drop ever. Gross unrealized gains in the equity portfolio plummeted $16.5 billion. Berkshire even took a $6.8 billion charge on the income statement to write down the value of derivative securities. It is not just the banks that are getting whacked by FAS 157. This mark-to-market rule is destroying value at perhaps the best-managed company in America as well.
Nonetheless, the most surprising thing about Berkshire’s report was just how well the company did in these extremely troubled times. Despite its extensive exposure to the finance industry, Berkshire actually turned a profit in 2008.
It was also instructive to read Buffett’s views on investing in the current climate. His letter was filled with precious nuggets such as these: “The investment world has gone from underpricing risk to overpricing it.” “The U.S.Treasury bond bubble of late 2008 may be regarded as almost equally extraordinary [to the Internet bubble and the housing bubble].”
“Clinging to cash equivalents or long-term government bonds at present yields is almost certainly a terrible policy if continued for long.” Buffett is telling us to get out of cash and to buy stocks and corporate bonds. It may be true that stocks are oversold as Buffett argues, but that is not keeping them from going lower. And the economy is getting worse. One month ago, for example, the advance estimate for GDP contraction in the fourth quarter was 3.8%. That was bad enough. However, just last week, the preliminary estimate, which is based on more complete data, brought the contraction estimate down to 6.2%. The economy is shrinking much faster than we previously thought.
Amidst all this turmoil, President Obama submitted his budget. Based on what we saw, he obviously believes he was given a mandate for radical social change in America. However, by raising taxes on the so-called rich he is virtually making certain that this recession will be deeper and longer lasting than it has to. You would think his economic advisors would know better than this. Higher taxes on the investment class will make matters worse, not better. To create jobs, we need to encourage investment in the private sector. By raising taxes, we are doing exactly the opposite. The president’s budget projects a peak unemployment rate of 8.1%. Since he wants to penalize investing, that projection looks much too optimistic.
Berkshire Hathaway Annual Letter to Shareholders 2008 - Read the latest Berkshire Letter
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