http://www.foxbusiness.com/story/markets/buffetts-berkshire-posts-worst-annual-results/
Summary
On feburary 28th, Buffett sent his shareholders a letter. In the letter, Buffett claimed that the purchase of ConocoPhillips shares while oil and gas prices were near their peak was a terrible timing and mistake of his own. At the end of 2007 Berkshire Hathaway had $1.75 million shares of ConocoPhillips, and in 2008, Berkshire Hathaway had 8.49 million shares of ConocoPhillips. Buffett also said that he didn't predict that the oil prices would fall dramatically, this caused Berkshire Hathaway losing amost $2 billion. Berkshire’s net income in the fourth quarter of 2008 was $117 million, down 96% from $2.9 billion in the same period the prior year. That's why Buffett called 2008 the worst year of Berkshire.
Connection
The connection between this story and chapter 15 is the comparison of financial data. Buffett, as the insider executive of the company didn't do a good job on looking for danger signals and unfavourable trends this year. The owner would possibly decide to change the management if Buffett doesn't increase the profitbality next year. On the other hand, shareholders would not be happy and may be selling their interests in the company that seem to be heading for trouble. In Buffett's letter to shareholders, Buffett used trend analysis to compare Berkshire's performance. It's net income was 96% down and annual income declined to $4.99 billion in 2008 from $13.21 billion the prior year amid declines in the value of its stock holdings, as well as weak results from areas such as its insurance division.
Reflection
In this case, all we need to look at is Buffett's decision of investing ConocoPhillips. Buffett brought in many shares and become the largest shareholder of the company. Besides, Buffett also incresed the shares of NRG Energy Inc.. Because of the economy nowadays, Buffett thought that energy demand would be increasing throughtout the next decade. The International Energy Agency reported that the energy demand would inrease 25% in the next 20 years even under economic depression. However, the oil price was near the peak, the increasing demand must have lower the prices. Buffett qutoed,“I made some errors of omission, sucking my thumb when new facts came in that should have caused me to re-examine my thinking.” to show his attitude towards next year.
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1 comment:
Hi, William
I am Wayne. I agree with your point. A good company need a professional analyzer to compare all the business data. Sometimes a bad comparison could make a huge lose in the company. This article is exactly a good example about it. The company lost 2 billion because of a wrong timing decision. This result cannot be accepted. If I am the owner, I would change management as soon as possible, because I don’t know what wrong decision Buffett will make again. In order to prevent this happen, I must hire another professional analyzer.
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