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The book value of a Berkshire Hathaway share declined 9.6% in 2008, the firm said in its 2008 annual report and a recent Chairman’s Letter to the Shareholders. That’s Berkshire’s worst performance in Warren Buffett’s 44 years at the helm, and just the second time during that span that it posted a loss. (For the past 44 years, Buffett has managed to increase the book value of Berkshire at average of 20.3% per year.)
But last year’s nearly ten percent decline is still very good compared to the stock market as a whole. The S&P 500 Index, for example, fell by 38.5% (37% if you include dividends). And it is probably better than most workers’ IRA and 401(k) accounts fared.
Some see Berkshire’s success relative to the stock market as reason to exalt Buffett to immortal status. But we at Gurufocus track every move in Buffett’s stock portfolio and, as far as we know, he remains human. The truth is, Buffett achieved his impressive return with appropriate asset allocation — not just stock allocation, but asset allocations across the board.
Operating businesses
It is no secret that Buffett oversees a host of businesses. Buffett divides them into two categories: insurance and non-insurance.
From the day Berkshire first broke into the insurance business in 1967, insurance has propelled its growth. Berkshire’s insurance subsidiaries (GEICO, General Re, BH Reinsurance and others) brought in $2.8 billion to Berkshire in 2008.
Historically, the insurance business has seen lean years and fat years, but over all it has been very profitable. As of December 31, 2008, the insurance business had accumulated $58.5 billion of insurance float for Buffett to invest. And investing is what he does well. The Annual Report lists $201 billion in assets in the “Insurance and Other” group. A good portion of that is in cash, fixed maturity securities, stocks, and other investments. It’s on this money that Buffett’s magic is performed — but we’ll get back to that later.
The non-insurance businesses are made up of 67 subsidiaries, from Acme, a brick maker, to XTRA, a truck trailer leasing firm. Buffett further divides this category into four groups: Utilities (2008 income: $1.7 Billion); Manufacturing, Service and Retailing ($2.3 Billion); Finance and Financial Products ($787 million); and Bond Insurance Businesses. Berkshire allocated about $65 billion of assets in 2008 to the utilities and finance groups last year and these assets bring in a handsome amount of income each year.
The stock market may tumble, but Buffett’s insurance and non-insurance operations keep bringing in positive cash flows for him to allocate.
The take home lesson for us lesser mortals? We should all keep a job or a business that brings in a cash flow, regardless how the stock market is doing. Day trading doesn’t suffice for Buffett, nor will it for most of us.Display article as PDF for printing.
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