A Mea Culpa, With Attitude, From Warren Buffett

Annual shareholder letter suggests economic woes will last through 2009, and "probably well beyond"

The letter that accompanies Berkshire Hathaway's annual report to shareholders has become legendary for the light it shines on Warren Buffett's homespun investing philosophy and deadpan explanation of the markets and the economy. In this year's letter, Buffett begins by pointing out that "the 44-year performance of Berkshire's book value and the S&P 500 index shows that 2008 was the worst year for each." While he worries that the Federal government's dispensation of "once-unthinkable dosages" of "economic medicine" will bring on "unwelcome aftereffects," of which "one likely consequence is an onslaught of inflation," he also bemoans the number of industries that now rely on the government's largesse to stay afloat. He suggests that those industries "will be followed by cities and states bearing mind-boggling requests," and predicts that "weaning those entities from the public teat will be a political challenge."

But Buffett also takes the blame for making errors of "commission" and "omission." "During 2008 I did some dumb things in investments," he writes.

In 2008, Bershire Hathaway's annual net income fell by 62%, and shares of BRK.A closed February 27 at $78,600, far down from its peak in late 2007 of $148,000.

Buffett points out that neither he nor his partner Charlie Munger can predict "winning and losing years in advance" ("we don't think anyone else can either"), he writes that "we're certain, for example, that the economy will be in shambles throughout 2009 - and, for that matter, probably well beyond - but that conclusion does not tell us whether the stock market will rise or fall."

Ever the economic patriot, Buffett says he remains optimistic long term--"America's best days lie ahead"--he writes, and for Berkshire itself.

Speaking of his company's businesses, Buffett said "most of the Berkshire businesses whose results are significantly affected by the economy earned below their potential last year, and that will be true in 2009 as well." Particularly hard hit in 2008 were Berkshire Hathaway's retailers, and its "operations tied to residential construction." However, Buffett writes that Berkshire's insurance operation, "is an economic powerhouse," and that he and Munger are "equally enthusiastic about our utility business."

To read the entire letter, click here.

To view an archive of past annual letters from Buffett, click here.

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