Investment Manager’s Letter February 2010
For the year of 2009 Berkshire Hathaway “B” shares were up 2% this means that the stock underperformed the S&P which was up 26% by something like 24% for the year that ended 12/31/2009. This seems a rather curious result in view of the fact that it has been widely acknowledged that Buffett has just completed the best two years of his investment career. Not so much in percentage terms, but in terms of the size and number of deals done, and in terms of long term value of these deals to Berkshire shareholders. But then hard lessons are the important ones and a hard lesson that we learned a long time ago is that there is no rational reason to expect the market to behave rationally.
As far as Losch Investment Management Company’s customer accounts are concerned, even though our concentration in Berkshire Hathaway lead to poor relative performance in 2009; as of 12/31/2009 our three, five and ten year figures still look pretty good. For three years we, as investment company, are plus 6% while the S&P is minus 19% for an average annual advantage of 8%. For Five Years Losch Investment Management Company has a positive 24% return compared to a negative 7% for the S&P. For 10 years we, investment company, are up on the S&P by somewhere between 7% and 9%.
Then in January 2010 Berkshire Hathaway “B”s were split 50 for 1 and the stock was up 16.3% while the S&P was down 3.7%. Now almost all of Losch Investment Management Company’s accounts have outperformed the S&P for the last 12 months. In addition we, as investment company, can hope that February will be a good month with Burlington Northern scheduled to vote on the merger on Thursday February 11, and with the Merger expected to be completed on Friday the 12th. Standard and Poor’s has just announced that Berkshire will be added to the S&P 500 on the market close that Friday.
Whitney Tilson estimates that Index funds will purchase $38 billion of Berkshire Hathaway’s stock when it enters the index. This is much larger than Buffett’s estimate of $9 billion, and S&P’s estimate of $12 – $14 billion (see the enclosed article) obviously the stocks entry into average could have a big impact on the stock price. How much of that impact has already been incorporated into the stock’s price is hard to estimate, but in any event February 12th could be an interesting day.
Even after the recent rally a purchase of Berkshire Hathaway at today’s price offers very little risk. In an economy that is still very uncertain, how many stocks in your portfolio today expose you to less risk than BRK?
With the money supply exploding a political system that addicted to inflation, fixed income investments offer only an illusion of safety, and 10 year treasuries and similar securities offer not the safety so many investors seek, but return free risk.
Certainly there are stocks that will grow faster than Berkshire Hathaway if the economy continues to recover, but how long will the recovery last, and how much damage to the market will there be when the recovery is over? A further strong rally in the stock may change the equation somewhat, but as of today Berkshire Hathaway offers a better risk, return combination than anything else I, as investment manager, can think of.