Surprise: Berkshire Hathaway Earnings Highlights

• May 2, 2009, 2:27 PM ET

OMAHA, Neb. — Berkshire Hathaway posted first-quarter operating earnings of $1.7 billion, down from $1.9 billion a year ago. Its book value per share fell 6% in the quarter, in part due to losses in its investing portfolio and losses on credit default swaps.

Earnings fell in Berkshire’s utilities operations in the quarter, while underwriting profit in its insurance businesses gained “a bit” from last year, said Berkshire Chairman Warren Buffett at the company’s annual meeting in Omaha Saturday. (See full article.)

“In all our other businesses, those busineses are basically down” because of the weak economy, said Mr. Buffett.

The company had $22.7 billion in cash at the end of the quarter.

Berkshire made a large investment a day after the end of the quarter, bringing its cash stockpile to just below $20 billion, Mr. Buffett said.

Scenario: Nationalization of the Insurance Industry

• May 2, 2009, 3:47 PM ET

Omaha, Neb. — In response to a question about what is the worst possible development for Berkshire Hathaway’s vast insurance operations, Warren Buffett had a unique answer: nationalization.

If inflation spiked, and insurance policies became extremely expensive, pressure could rise on the government to nationalize the insurance industry, he said during the company’s annual meeting in Omaha, Neb.

“When people get outraged, politicians respond,” Mr. Buffett said. “Wild inflation would be the most likely cause of something like [nationalization] happening.”

Of course, it’s highly unlikely that such an extreme development would happen, he added. But he did note the example of Social Security, which is a form of a nationalized annuity.

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Munger Unusually Optimistic

• May 2, 2009, 4:47 PM ET

Berkshire Hathaway Vice Chairman Charlie Munger is known for his dour views during the company’s annual shareholder meetings. But this year, he was unusually optimistic.

“As I move close to the edge of death, I find myself getting more cheerful about the economic future,” Munger, aged 85, said. (See related story: Here’s the Story on Berkshire’s Munger.)

Munger sees “a final breakthrough that solves the main technical problem of man,” he continued.

By harnessing the power of the sun, electrical power will become more available around the world. That will help humans turn sea water into fresh water and eliminate environmental problems, Munger explained.

“The main technical problem is about to be fixed,” he said. “If you have enough energy you can solve a lot of other problems.”

Berkshire Meeting Ends With Somber Note, Marriage Proposal

• May 2, 2009, 5:04 PM ET

Omaha, Neb. — The main event of Berkshire Hathaway’s annual shareholder meeting—the question and answer session—ended at about 3 p.m. Central Time (4 p.m. Eastern). Its finale was something of an oddity for a shareholder meeting: a marriage proposal on the floor of the Qwest Center.

Of course, the Berkshire annual meeting is anything but ordinary. About 35,000 people showed up for the event, as Berkshire expected, according to CNBC The company had said attendance could be lower than expectations due to worries about swine flu.

Aside from the marriage proposal, it was a relatively somber affair, as befits the shape of the economy, and the shape of Berkshire’s shares, which are down more than 30% since September. The applause was less enthusiastic than in previous years, meeting veterans say. Shareholders asked Warren Buffett and Charlie Munger questions on topics ranging from their views on the behavior of banks (bad) to their views on how to compensate board directors (don’t) to their expectations for Berkshire’s vast operations (good, mostly). See full article.

Mr. Buffett, 78, and Munger, 85, responded at length to all of these questions, often branching off into philosophical ruminations. “There’s always something going wrong with the world,” said Mr. Buffett at one point.

“It was classic Buffett and Munger,” said Paul Howard, an analyst at Langen McAlenny. “Great quotes, opinions and perspectives on Berkshire’s businesses and how they plan on managing for the future.”

Mr. Buffett said he sees fleeting signs of life in the economy. In the last few months, he said, there has been a “real pickup in activity” in housing, though at very low prices.

Investors now await the release of Berkshire’s first quarter earnings next Friday. Mr. Buffett gave a preview of those results Saturday, noting that Berkshire lost 6% in book value per share in the first quarter due to weakness in the economy and losses in the company’s stock portfolio. The loss, while steep, wasn’t as bad as the nearly 10% drop expected by Mr. Howard.

The event has been relatively light on news. Sunday, Berkshire holds a press conference, which will be the final public event of the weekend.

Business Musings From Woodstock for Capitalists

• MAY 4, 2009

Buffett and Munger Play the Main Stage: Views on Newspapers, Triple-A Ratings, Complex Math and More

SCOTT PATTERSON and ALISTAIR BARR

Here are some highlights of Warren Buffett's and Charles Munger's remarks at the Berkshire Hathaway Inc. shareholder meeting this past weekend.

Mr. Buffett on Newspapers

Mr. Buffett has long held himself out as a newspaper man. As a child, one of his first jobs was delivering newspapers. An Omaha newspaper Berkshire owned, Sun Newspapers, won a Pulitzer Prize in 1973 based in part on a tip Mr. Buffett provided. One of Berkshire's biggest investments in the 1970s was the Buffalo News, which it still owns.

But his view on the future of the newspaper industry is dismal. "For most newspapers in the United States, we would not buy them at any price," he said. "They have the possibility of going to just unending losses."

Reuters

Warren Buffett, left photo, noshes on an ice-cream bar at Berkshire's annual meeting in Omaha, Neb., on Saturday.

As long as newspapers were essential to readers, they were essential to advertisers, he said. But news is now available in many other venues, he said.

Berkshire has a substantial investment in Washington Post Co. He said the company has a solid cable business, a good reason to hold on to it, but its newspaper business is in trouble.

Mr. Munger called newspapers' woes "a national tragedy....These monopoly daily newspapers have been an important sinew to our civilization, they kept government more honest than they would otherwise be."

A Washington Post Co. representative couldn't be reached for comment.

Mr. Buffett on Insurance

In response to a question about the worst possible development for Berkshire Hathaway's vast insurance operations, Mr. Buffett responded: nationalization.

If inflation jumped and insurance policies became extremely expensive, pressure could rise on the government to nationalize the insurance industry, he said. "When people get outraged, politicians respond," Mr. Buffett said. It's highly unlikely that such a development would happen, he added. But he did note the example of Social Security, which is a form of a nationalized annuity.

Mr. Buffett on Housing

"In the last few months you've seen a real pickup in activity although at much lower prices," Mr. Buffett said, citing data from Berkshire's real-estate brokerage business, HomeServices of America Inc., which is one of the largest in the U.S.

Reuters

Attendees wait in a food queue on Friday at the meeting's kickoff celebration.

In California, medium and lower-price homes -- under $750,000 -- have been selling more, though there hasn't been a bounce back in sale prices, Mr. Buffett said. "We see something close to stability at these much-reduced prices in the medium to lower part of the market."

Mr. Buffett on Moody's

Mr. Buffett was asked about Moody's Investors Service, which gave a triple-A rating to billions of dollars of mortgage securities that subsequently lost value. Berkshire has a 20.4% stake in the company.

"Basically, four or five years ago, virtually everybody in the country had this model in their heads, formal or otherwise, that house prices could not fall significantly," Mr. Buffett said. He later added that "it was stupidity and the fact that everyone else was doing it."

He said that if Moody's had started to take a negative view on residential real estate, the ratings provider would have been hauled before Congress to testify about why it was hurting the U.S. economy with its bearish ratings. "They made a huge mistake, and the American people made a huge mistake," he said.

Bloomberg News

One Fruit of the Loom mascot adjusts the hat of another at the Berkshire meeting on Saturday. The apparel maker is one of Berkshire's holdings.

A Moody's representative couldn't be reached for comment.

Mr. Buffett on Treasurys

Berkshire Hathaway had only one slide at this year's annual meeting. It displayed a Dec. 19 trade ticket showing a Berkshire sale of $5 million of Treasury bills. They were coming due on April 29 this year, roughly four months after Berkshire sold them. Berkshire sold the bills for $5,000,090.70. If that buyer had instead put their money in a mattress, by April 29 they would have been $90.70 better off, he said. Negative yields on Treasury bills show how tumultuous last year was, Mr. Buffett added. "We may never see that again in our lifetimes," he noted.

Messrs. Buffett and Munger On Math and Theories

Messrs. Buffett and Munger made clear their complete disdain for the use of higher-order mathematics in finance.

"There is so much that's false and nutty in modern investing practice and modern investment banking, that if you just reduced the nonsense, that's a goal you should reasonably hope for," Mr. Buffett said. Regarding complex calculations used to value purchases, he said: "If you need to use a computer or a calculator to make the calculation, you shouldn't buy it."

Said Mr. Munger: "Some of the worst business decisions I've ever seen are those with future projections and discounts back. It seems like the higher mathematics with more false precision should help you, but it doesn't. They teach that in business schools because, well, they've got to do something."

Mr. Buffett said: "If you stand up in front of a business class and say a bird in the hand is worth two in the bush, you won't get tenure....Higher mathematics my be dangerous and lead you down pathways that are better left untrod."

Mr. Munger on the Future

"As I move close to the edge of death, I find myself getting more cheerful about the economic future," Mr. Munger said.

Mr. Munger sees "a final breakthrough that solves the main technical problem of man," he continued.

By harnessing the power of the sun, electrical power will become more available around the world. That will help humans turn sea water into fresh water and eliminate environmental problems, Mr. Munger explained. "If you have enough energy you can solve a lot of other problems."

Write to Scott Patterson at scott.patterson@wsj.com and Alistair Barr at alistair.barr@marketwatch.com

Buffett Withholds Hoopla, Hope

• MAY 4, 2009

At Annual Meeting, Investor Sees More Pain After Berkshire's Worst Year

By SCOTT PATTERSON and ALISTAIR BARR

At an event that is typically filled with hoopla, Warren Buffett spent much of his company's shareholder gathering this weekend defending a rough year. And he didn't hold out much hope in the near term for better results in many of Berkshire Hathaway Inc.'s businesses.

"We will continue to do quite well in our insurance and utility operations. We won't do well in other operations," Mr. Buffett said.

But Mr. Buffett was upbeat about opportunities for Berkshire, saying he believes the company is well positioned to capitalize on current market turmoil.

Berkshire last year suffered its worst year ever. Among its hard hit holdings were Wells Fargo & Co., and Moody's Investors Service. Berkshire's shares have fallen more than 30% since the end of September.

Mr. Buffett this weekend fretted that bank stocks could suffer further, thanks to the government's current stress tests of financial firms. His worry: Regulators might paint with too broad a brush and fail to recognize strengths that differentiate companies.

View Full Image

Associated Press

Warren Buffett toured the exhibit floor prior to the annual Berkshire Hathaway shareholders meeting.

"Maybe the whole idea is not such a hot idea," said Berkshire Vice Chairman Charles Munger.

A representative of the Federal Reserve declined comment.

Mr. Buffett said he is especially interested in U.S. deals. "We're always open to things internationally," he said, "probably a little less so now because there are things going on in the United States that are interesting to us."

Still, Berkshire's ability to do many deals may be hampered by a decline in its cash position. The company has roughly $20 billion, down from about $25 billion in cash at the end of 2008. Mr. Buffett has frequently said he would never let his cash go below $10 billion, leaving Berkshire about $10 billion to put to work.

Mr. Buffett predicted more doldrums for retail, manufacturing and services businesses, and offered little hope for newspapers.

Live From Omaha

• Business Musings From Woodstock for Capitalists
• Berkshire Meeting Ends With Somber Note, Marriage Proposal
• Munger Unusually Optimistic
• Insurance Nationalization as Worst Possible Scenario
• Berkshire Operating Profit, Book Value Fall
• Buffett Has Dismal Outlook for Newspapers
• Disdain for Complex Math, Portfolio Theory
• Berkshire Set for Marathon Session
• Movie: Buffett Demoted to Mattress Salesman
• More reports from Omaha from WSJ's MarketBeat blog.

Housing, at least in medium- and lower-end markets, is seeing a pickup in activity, albeit at lower prices, the famed investor said.

He surprised his audience Saturday by sharing some results for the company's first-quarter performance. Operating profits declined to $1.7 billion from $1.9 billion a year earlier, he said. Full results are expected Friday.

Regarding succession, Mr. Buffett has said he plans to split the chief executive and chief investment officer roles. He said Saturday the four money managers who may oversee Berkshire's investment portfolios in the future did no better last year than match the S&P 500's 37% decline. "You would not say that they covered themselves with glory," he said. "I didn't either."

"I have not changed the list" of possible people for the job, Mr. Buffett said, but "we're always looking to add more people to it."

Write to Scott Patterson at scott.patterson@wsj.com and Alistair Barr at alistair.barr@marketwatch.com

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Here's the Story on Berkshire's Munger

MAY 1, 2009

By SCOTT PATTERSON

Warren Buffett is synonymous with Berkshire Hathaway Inc., getting credit for billions of dollars in big deals that have made him an icon to investors around the world. But on the one day a year when he faces his shareholders, at his side will be his longtime partner, Vice Chairman Charles Munger.

On Saturday, the partners will take their decades-old act back to the stage in Omaha, Neb., telling thousands of loyal shareholders that they see huge opportunities amid the financial crisis that drove Berkshire to its worst performance since Mr. Buffett took it over 44 years ago.

Charlie Powell

BOOK VALUE: Berkshire Hathaway's Charles Munger reads businesses well -- and, as a bibliophile, he goes through several books a week.

The two men, Mr. Munger, 85 years old, and Mr. Buffett, 78, speak frequently and confer about most deals, but there are differences. Mr. Munger is laconic; Mr. Buffett loquacious. Mr. Munger leans Republican; Mr. Buffett tilts Democratic. Mr. Munger will pay hefty price tags for businesses; Mr. Buffett likes safe, dirt-cheap stocks.

Mr. Munger's views have pushed Berkshire into some surprising directions. Several years ago, Mr. Munger learned of an obscure Chinese maker of batteries and automobiles called BYD Inc., which hopes to create a cheap, functional electric car.

A Chinese tech company is nothing like the shoe and underwear makers Berkshire had been buying. But Mr. Munger was enthusiastic, less about the technology than about Wang Chuanfu, who runs BYD. Mr. Wang, Mr. Munger says, is "likely to be one of the most important business people who ever lived."

Mr. Buffett was skeptical at first. But Mr. Munger persisted. David Sokol, chairman of Berkshire utility MidAmerican Energy Holdings Co., paid a visit to BYD's factory in China and agreed with Mr. Munger's assessment. Last year, MidAmerican paid $230 million for a 10% stake in BYD.

"BYD was Charlie's idea," Mr. Buffett said. "When he encounters genius and sees it operating in a practical way, he gets blown away."

Mr. Munger also was an advocate of Berkshire's $4 billion investment in Iscar Metalworking Cos., an Israeli maker of metal-cutting tools, in 2006. The investment was relatively pricey, especially given Mr. Buffett's preference for cheap companies. But Mr. Munger convinced his longtime partner that Iscar was worth the cost.

The deal helped pave the way for other large investments by Berkshire in companies outside the U.S. Results on the two investments haven't been reported.

The men share a view that the U.S. financial system will change, and criticize past excesses. "People were horribly overpaid for just pouring on leverage," Mr. Munger said. The two investors have repeatedly warned about the systemic risks posed by the abuse of leverage and derivatives.

More

• Check in with the MarketBeat Blog throughout the weekend for updates from the Berkshire Hathaway shareholder meeting.

Mr. Munger thinks regulators may significantly curb the amount of leverage, or borrowed money, that banks can use. That will drive down pay at Wall Street firms, since traders won't be able to make as many big, leveraged bets. This could benefit Berkshire, with its cash hoard of $24.3 billion at the end of 2008. "There's going to be new rules in the game," he said. "For someone like us, that's going to be very interesting."

Saturday's meeting comes after the worst year in Berkshire's history, when it lost 9.6% in book value per share, a common metric it uses to track its performance. It marked the biggest decline since Mr. Buffett took over the company in 1965, when it was an East Coast textile maker, and turned it into an investing powerhouse. Berkshire's shares have fallen 36% since September.

The two investors say they expect Berkshire to return to form in the near future, and they continue to collaborate. They speak on the phone at least once or twice a week from their respective offices -- Mr. Buffett in Omaha, Mr. Munger in Pasadena, Calif.

"Charlie understands the essence of a lot of businesses probably better than people in those industries do," Mr. Buffett said. "He gets right to the point of it quicker than anyone I've seen.

Mr. Munger grew up in Omaha and joined the U.S. Army during World War II, serving as a meteorologist in Alaska. After the war, he earned a degree from Harvard Law School and became an attorney at a California firm.

He also became a serious investor. He met Mr. Buffett in an Omaha restaurant in 1959. After working together on a number of investments for many years, the two joined forces full time at Berkshire in 1978, when Mr. Munger became vice chairman.

One of their early deals is one of Berkshire's best-known brands. In 1972, Mr. Munger helped persuade Mr. Buffett to participate in a joint purchase of See's Candies, a California boxed-chocolate maker, for $25 million. While the price seemed steep by some measures, the deal was wildly successful, producing more than $1 billion in pretax earnings.

Without such investments, it isn't likely that Berkshire could have grown as large as it has, says Whitney Tilson, manager of T2 Partners LLC, a New York money manager that owns Berkshire stock. He says: "Munger helped Buffett appreciate some of the higher-quality investments that lead to multibillion-dollar outcomes several decades later."

Financially, Mr. Buffett has done better. He boasts a net worth of $37 billion in 2008, according to Forbes magazine's list of the world's wealthiest people, putting him at No. 2 in the world behind Microsoft Corp. founder Bill Gates. Mr. Munger placed 522 on the list, with a net worth of $1.4 billion.

Mr. Munger has won the respect of Mr. Gates, who sits on the company's board. When the Justice Department accused Microsoft of abusing monopoly power with its Windows operating system in the late 1990s, Mr. Gates says he sought out Mr. Munger for legal advice. He also consulted Mr. Munger when considering how to set up his charity, the Bill & Melinda Gates Foundation.

"Warren wouldn't have done nearly as well without his help," Mr. Gates said in an interview.

Write to Scott Patterson at scott.patterson@wsj.com

Untitled

For Buffett, It Was a Very Bad Year

Investor 'Did Some Dumb Things,' but Berkshire Seen as Well-Positioned Now

By SCOTT PATTERSON

The man considered by many to be the greatest investor of all time just had his worst year ever.

But the results released Saturday for Warren Buffett's company, Berkshire Hathaway Inc., also demonstrate how recently, and over time, the investor has positioned his far-flung empire to weather the financial storm.

Associated Press

Warren Buffett

Mr. Buffett, in his annual letter, read closely by shareholders and nonshareholders alike, reported that Berkshire in 2008 lost 9.6% in book value per share, a common metric Berkshire uses to track performance. That marks the biggest decline since Mr. Buffett took over the company in 1965, when it was a family-run East Coast textile maker.

Mr. Buffett confessed that he "did some dumb things." Among them: scooping up shares of oil giant ConocoPhillips when oil prices were near a record and investing $244 million in a pair of Irish banks that ran into trouble, resulting in an 89% loss.

Berkshire's shares fell nearly as much as the rest of the market last year, indicating that investors are worried about the company's ability to keep growing. In 2008, Berkshire's Class A stock fell 32%. This year, the shares are down about 19%, slightly better than the Dow Jones Industrial Average.

Yet many analysts were pleased that the decline in book value per share wasn't steeper. And Mr. Buffett's results also show he has made moves that have paid off and should continue to do so even if economic woes persist, as he predicts.

He limited his exposure to complex and potentially costly derivatives in his reinsurance unit, General Re Corp. He has $24.3 billion in cash that can be used to find bargains in a distressed market. And he's made several investments in preferred stock of companies such as Goldman Sachs Group Inc. that pay out steady income of 10% or more.

"He's done a great job to prepare for this," said Paul Howard, an analyst at Langen McAlenney, a Hartford, Conn., research group, who rates Berkshire a "buy." "He's got good businesses that are generating a lot of cash, and he's going to continue to put that money to work."

Berkshire's substantial insurance holdings haven't needed to take the kind of massive write-downs on toxic subprime securities that have plagued much of the financial industry in the past two years. One reason is Mr. Buffett's longstanding dislike of complex derivatives, which he famously called "financial weapons of mass destruction" in his 2002 shareholder letter and which he railed on again in his latest letter. He pushed General Re, the large reinsurance company Berkshire acquired in 1998, to disentangle itself from a vast web of derivatives, financial instruments tied to the value of other securities, such as stocks or bonds, over the course of five years, winding down its book of 23,218 derivatives contracts at a loss of about $400 million, he said in the letter. The losses may have been far more substantial if General Re had held onto to the contracts, Mr. Howard said.

"Upon leaving, our feelings about the business mirrored a line in a country song: 'I liked you better before I got to know you so well,'" Mr. Buffett said in Saturday's letter, referring to General Re's derivatives book.

Separately, Berkshire took a loss of $5.1 billion in the fourth quarter on several derivatives contracts the company entered into in recent years. The contracts, essentially insurance policies against long-term declines in U.S. and foreign stocks, expire in 15 or 20 years. Berkshire will have to pay out if the indexes are below where they stood when the deals were struck. The derivatives, whose current estimated value has to be reflected on Berkshire's books, are one reason the company reported a grim fourth quarter on Saturday -- its fifth year-over-year quarterly decline.

The $117 million quarterly gain it eked out in the fourth quarter marked a 96% drop from last year's $2.95 billion in fourth-quarter net income.

Beyond commenting on Berkshire, Mr. Buffett shared his views on the broader economy and financial-system travails. He said he didn't expect the economy to improve any time soon but did expect better times, eventually.

"Our country has faced far worse travails in the past," he said. "Without fail, however, we've overcome them." He declined to draw a correlation between stocks and economics, saying that while he was certain the economy would be "in shambles for 2009," that "does not tell us whether the stock market will rise or fall." Mr. Buffett credited the federal government for stepping in with massive assistance last year, saying the intervention was "essential" to avoiding a total breakdown. But he cautioned there could be "unwelcome aftereffects," such as inflation.

He contended that the "investment world has gone from underpricing risk to overpricing it," which he said is reflected by voracious investor appetite for Treasury bonds. Future historians will comment on the Internet bubble of the 1990s and the housing bubble of the early 2000s, he said, but "the U.S. Treasury-bond bubble of late 2008 may be regarded as almost equally extraordinary."

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