Commentators had wondered if the sluggish US economy, rising petrol and air fares, would cut the number of people trekking to Omaha in Nebraska at the weekend for the Annual Meeting of Warren Buffett’s Berkshire Hathaway company.
Some 27,000 visited the Midwest city a year ago for the so-called "Woodstock Festival of Capitalism" as the Berkshire AGM has become known.
There was the usual video, which sent him up as well as politics and the presidential candidates. He swapped roles with a TV soap opera charge who is in jail in her series for insider trading and he and Berkshire Vice Chairman Charlie Munger took questions for five hours on investing, the economy, politics and life.
Reports said it was the biggest meeting so far for the legendary investor and his band of devoted shareholders.
A record 31,000 shareholders turned up for the AGM and two days of festivities. If all company AGMs were as successful around the world, there would be fewer problems with shareholder-board relations.
He had bad news before the meeting: a big drop in first quarter earnings (See below) from lower insurance returns and paper losses on credit derivatives (not on subprime mortgages though).
And it looks, from the results in insurance and his forecast in the letter to shareholders in February, that returns from this area, will be weak over the rest of 2008. Insurance is the company’s major activity.
According to CNNmoney he had an interesting take for investors: he and partner Charlie Munger told them to think small and not get too greedy for big returns
“In the Q&A session Saturday morning at Berkshire Hathaway’s annual meeting, CEO Warren Buffett and vice chairman Charlie Munger repeatedly warned investors to lower their expectations. When a shareholder asked whether Buffett’s recent purchases of publicly traded stocks were likely to generate returns greater than 7% to 10% over time, Buffett promptly said no."
He said that the Federal Reserve had avoided financial market "chaos" in coordinating the March bailout of Bear Stearns, which was facing certain bankruptcy before agreeing to be acquired by JPMorgan Chase, with the Fed’s backing. That was a comment he made on Bloomberg the day before (see below).
"I think the Fed did the right thing in stepping in on Bear Stearns. Just imagine the thousands of counterparties around the world having to undo contracts."
Buffett said the Bear Stearns near collapse and rescue illustrates how some investment banks and commercial banks may have grown too large to effectively manage risk.
"The big investment banks, a number of them, and big commercial banks, I think they’re almost too big to manage effectively from a risk standpoint in the way they’ve elected to conduct their business.
"We want to run Berkshire where if the world isn’t working tomorrow the way it is working today, or in a way that wasn’t expected, we wouldn’t have a problem. If we can earn a decent return on capital, what’s an extra percentage point?"
Berkshire has benefited from the recent market disruptions, including many triggered by the subprime problems and the housing crisis.
He said the company’s four-month-old bond insurer, Berkshire Hathaway Assurance Corp, wrote $US400 million in business in the first quarter, more perhaps than other rivals combined. It was taking business from the opposition insuring corporate and other bonds, and charging up to double the premium that existing (and struggling) insurers were offering.
Berkshire also bought $US4 billion of so-called "auction-rate" municipal debt when yields soared into double digits when the market shut down earlier in the year during the credit crunch. These bonds are sold by higher rated states, cities and other groups and some couldn’t get set for weeks with offerings and ended up paying well over 10%, double and triple what they were paying previously.
Buffett plans this month to visit four European countries to seek out family-owned businesses he might want to buy when the time comes for a sale. He said Berkshire isn’t on the "radar screen" of many potential sellers in Europe.
On the eve of its annual meeting in Omaha at the weekend, Warren Buffett’s Berkshire Hathaway said on Friday that first-quarter profit dropped 64% as falling rates cut returns from its huge insurance operations.
The company reported $US991 million in investment losses as it marked down the value of derivative contracts.
It said net profit dropped to $US940 million, from $US2.6 billion, in the first three months of 2007.
The company said that the profit from underwriting insurance policies fell 70% to $181 million in the quarter (see, Insurance Australia Group isn’t the only insurer with problems). Pre-tax underwriting profit at Berkshire Hathaway Reinsurance Group, which sells catastrophe coverage, dropped 95% to $US29 million.
Berkshire’s investment loss compared with a profit of $US382 million a year earlier as the company recorded $US1.7 billion of unrealized losses from contracts that protect fixed-income investors and from options sold on the value of the Standard & Poor’s 500 Index and three other stock indexes.
These were losses forced on the company by accounting regulations on ‘fair value’ as companies have to write down (or write up) assets like derivatives, bonds and forex contracts to ‘fair value’ each quarter. Berkshire seems to have been hit by the turmoil in March in the wake of the rescue of Bear Stearns on March 17.
