Best investment adviser Richard Losch's blog

Berkshire Hathaway's 3rd Quarter 2009

If the quarterly figure for reported earnings does come in around $4.0 billion (compared to $1.0 billion for the third quarter of 2008) it should provide Mr. Market with an incentive to mark up his price. In March of 2000, when Buffett offered to purchase Berkshire Hathaway for $45,000 per A share, the PE would have been 20.6 if calculated on the same basis, with look-through earnings included. If we ignore investment gains in both years, Berkshire Hathaway’s PE would be 15 now and was 23.4 then.

Career Risk of Investment Manager

Most investors focus on short term results. They do not have patience that is required to outperform the market in the long term. In the media managers are compared using quarterly, monthly, or even daily returns, this creates pressure on managers to focus on short term performance. As Seth Klarman said in a recent interview; "Managers who do well in the short term are rewarded with more assets," he said. "Those who do not do well in the short term often don't survive to see the long term."

Berkshire Hathaway financial tables

For your light summer reading I have included the annual update of some of investment manager's Berkshire Hathaway financial tables. Please ignore the sex and violence.

Berkshire Hathaway’s Preferreds

Berkshire Hathaway’s Goldman Sachs warrants that were part of the $5 billion in preferred stock deal are in the money (profitable) by $754 per “A” share at the moment, total $1152 per share pretax. That's quite a lot in around 9 months, and as Goldman Sachs is nice the Swiss Re Purchase is sweeter. On March 23, 2009 Berkshire Hathaway acquired a 12% convertible perpetual capital instrument that allows Berkshire Hathaway 120 million shares of Swiss Re (25% of company) at 25 CHF (Swiss Francs). On June 30 Swiss Re closed at 35.90 CHF. This equals a gain of 1.30 billion CHF ($1.2 billion) plus $78 million in interest for the second quarter (A near pornographic return on $2.6 billion investment for 3 months).

Learning Things the Hard Way IV - Moral Hazard

It is popular to blame deregulation for our economic collapse. Clearly what deregulation there was came at the worst possible time, and probably helped to make things worse, but deregulation did not cause our bubbles to form. For the bubbles we will have to give a lot of credit to our Federal Reserve, and particularly to Alan Greenspan. It may turn out that our problem was not too little Governmental intrusion it the market place, but too much.

Learning Things The Hard Way III - Credit Default Swaps

I, as investment manager, think it likely that the reason capitalism works and that socialism does not, is that capitalism with its free markets, is able to correct its mistakes. The problem is that this has not been, and never will be a painless process. Until there is pain there is no will to correct. Or as I have said before, when it comes to economic systems, pain is the mother of wisdom.

Learning Things the Hard Way II - The Shadow Banking System

The "Shadow Banking System" includes hedge funds, private equity, and structured investment vehicles and depending on whose definition you accept investment banks. The amount of money handled by these entities is huge. I, as investment manager, have seen estimates that run from $10 trillion up to above $50 trillion, in any event their assets are almost certainly larger than the regulated commercial banks. Participants are lightly regulated or not regulated at all; therefore very little reliable information about activity in this sector is available to the individual investor.

Learning Things the Hard Way

The miracle of Capitalism is that it works at all. Its main virtue, we have been told, is that it is better than the alternatives. To the extent that it does work it is because of its ability to adapt and change, whereas competing ideologies are so dependent on dogma that they become fossilized shortly after conception. Important as this ability to chance is, it does not come easy. Capitalism is no pushover; it is more like a very stubborn mule, so for progress to continue the occasional application of a very large 2x4 is necessary.

Our C-System

Our problems stem from the fact that within the human brain emotion tends to override the rational function. Our brains consist of two different (although interconnected) systems. One is a fast and dirty decision maker (the X-system), the other is more logical but slower (the C-system). While this emotional override response served a useful purpose for our ancestors confronted with a wooly mammoth, it is not nearly as constructive for today’s investor confronted with a market that is rapidly eating his net worth "Effectively from an evolutionary standpoint a rapid response to fear carried a very low cost to a false positive, relative to the potentially fatal cost of a false negative".

2008 Investment year results

It will not come as a shock that 2008 was not a good year in investment. Unfortunately the fact that we have been predicting this sort of market for a few years does not seem to eliminate the pain from watching asset values decline. While it was easy to see the accident about to happen we were still surprised by its magnitude. For the year our average long term account was down about 23% – 25% and the average short term account down somewhat less. This compares to a 37% decline in the S&P 500 Average, a 40% decline in the NASDAQ Composite, a 45% decline in international markets and a 55% decline in emerging market equities.


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