Buffett Admits Investment Mistakes; Touts Insurance Group

Berkshire Hathaway Inc. Chairman Warren Buffett admitted some investment mistakes in 2008 and painted a grim picture for the economy in 2009.

The company reported net earnings of $4.99 billion in 2008, down from $13.21 billion in 2008. Additionally, Berkshire saw a 9.6 percent drop in per-share book value for 2008, compared to an 11 percent gain in 2007. In a letter to shareholders, Mr. Buffett cited 2008 as the worst year for Berkshire's book value in the 44 years since present management took over.

Mr. Buffett wrote, "As the year progressed, a series of life-threatening problems within many of the world's great financial institutions was unveiled. This led to a dysfunctional credit market that in important respects soon turned nonfunctional."

He also said he and Charlie Munger, Mr. Buffett's partner in running Berkshire, are certain the economy will be in shambles throughout 2009 and probably well beyond.

Regarding investments, Mr. Buffett admitted a major mistake in buying a large amount of ConocoPhillips stock when oil and gas prices were near their peak. He said, "I in no way anticipated the dramatic fall in energy prices that occurred in the last half of the year. I still believe the odds are good that oil sells far higher in the future than the current $40-$50 price. But so far I have been dead wrong."

He added, "Even if prices should rise, moreover, the terrible timing of my purchase has cost Berkshire several billion dollars."

In another, smaller admitted mistake, Mr. Buffett said, "During 2008, I spent $244 million for shares of two Irish banks that appeared cheap to me. At year-end we wrote these holdings down to market: $27 million for an 89 percent loss. Since then, the two stocks have declined even further."

Mr. Buffett noted, "The tennis crowd would call my mistakes 'unforced errors.'"

Turning to Berkshire's insurance group, Mr. Buffett struck a more upbeat tone. "Clearly our insurance CEOs have not had the wind at their back," he wrote, "yet these managers have excelled to a degree [Mr. Munger] and I never dreamed possible in the early days."

Speaking to current opportunities for GEICO, Mr. Buffett said he and CEO Tony Nicely "feel like two hungry mosquitoes in a nudist camp. Juicy targets are everywhere."

He noted that five years ago, the number of policies per employee at GEICO was 299, and in 2008, the number grew to 439. He also said the company is gaining ground in allied lines, seeing a 23.4 percent rise in motorcycle policies and a rise in RV and ATV business.

Mr. Buffett also said large international reinsurer General RE had "an outstanding year in 2008."

Generally, while underwriting profits were down for Berkshire's insurance units, Mr. Buffett said, "The underwriting profits signify that all four [Berkshire insurance components] provided funds to Berkshire last year without cost, just as they did in 2007. And in both years our underwriting profitability was considerably better than that achieved by the industry."