Warren Buffett admits to annus horribilis

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The Independent Online

Warren Buffett, the world's most famous investor, announced on Saturday that 1999 was his worst year ever.

Warren Buffett, the world's most famous investor, announced on Saturday that 1999 was his worst year ever.

"We had the worst absolute performance of my tenure and, compared to the S&P, the worst relative performance as well," he said in his famous letter to shareholders, which is full of flashes of wit and wisdom as usual. "Even Inspector Clouseau could find last year's guilty party: your chairman."

Though some of the companies in which Mr Buffett has invested had a rough year, the main reason for the results lay in his insurance subsidiaries. Berkshire Hathaway, his company, is now less an investment vehicle and more a conglomerate, with the reinsurer General Re and the car insurance company Geico at its core.

Net earnings for 1999 dropped to $1.557bn, or $1,025 per share, from $2.830bn, or $2,262 per share in 1998. Class A Berkshire Hathaway shares closed Friday at $41,300 -- the lowest level since May 1997.

Mr Buffett placed the blame on the company's underperforming equity investments. "What most hurt us during the year was the inferior performance of Berkshire's equity portfolio - and responsibility for that portfolio, leaving aside the small piece of it run by Lou Simpson of Geico, is entirely mine," he said. "Several of our largest investees badly lagged the market in 1999 because they've had disappointing operating results.

The main investments - in American Express, Coca-Cola, the mortgage company Freddie Mac, Gillette, the Washington Post and Wells Fargo - remain virtually the same, with slight reductions in his holdings of Wells Fargo and Freddie Mac. His stake in Coca-Cola has plunged in value from $13.4m to $11.7m, while American Express recorded a hefty gain. Overall, the value of his portfolio is roughly unchanged.

"We still like these businesses and are content to have major investments in them," Mr Buffett said. "But their stumbles damaged our performance last year, and it's no sure thing that they will quickly regain their stride." But the report makes no reference to Disney, once a core investment. In 1998, he had 51 million shares in the company worth $1.5bn. It is no longer listed among Berkshire's top holdings with year-end market values of $750m or more. That means that he has sold at least half of his stake.

But it is in Berkshire Hathaway's own subsidiaries that the real problems have occurred. "Our per-share investments changed very little, but our operating earnings, affected by negatives that overwhelmed some strong positives, fell apart," he said. The main factor was a massive $1.4bn loss on its reinsurance business, as well as a big decline on car insurance profits.

"We had a huge - and, I believe, aberrational - underwriting loss at General Re," Mr Buffett said. And he warned: "We do not expect our underwriting earnings to improve in any dramatic way this year."

Berkshire's much-publicised problems have caused a huge drop in its share price, as investors became concerned that Mr Buffett was staying out of technology stocks, and rumours spread that he was ill. Mr Buffett said that he had relatively modest hopes for the next few years, compared with the stellar results of the last few decades when the company outperformed the S&P 500.

"For Berkshire, truly large superiorities over that index are a thing of the past. They existed then because we could buy both businesses and stocks at far more attractive prices than we can now, and also because we then had a much smaller capital base."

Mr Buffett once again underlined that the brave new world of tech stocks was not for him. "Our problem - which we can't solve by studying up - is that we have no insights into which participants in the tech field possess a truly durable competitive advantage," he said.

He reiterated that he believed equity prices were vastly overvalued at the momentand he hinted that a contraction in his equity investments might be ahead. "Right now, the prices of the fine businesses we already own are just not that attractive. In other words, we feel much better about the businesses than their stocks."