Warren Buffett’s Letters: 2008

Two investors I admire, Bill Ackman (Trades, Portfolio) and Whitney Tilson (Trades, Portfolio), have recommended that to learn about investing, investors should read Berkshire Hathaway Inc’s (

BRK.A, Financial) (BRK.B, Financial) annual letters to shareholders. This series focuses on the main points Warren Buffett (Trades, Portfolio) makes in these letters and my analysis of the lessons learned from them. In this discussion, I cover the 2008 letter.

2008 Financial Crisis and Berkshire’s Strategy

2008 was of course one of the most turbulent years in recent decades with the global financial crisis wreaking havoc across financial markets. Financial institutions failed, the housing market collapsed, the stock market crashed, and governments were called to make big calls on bailouts. Buffett reminds investors in the 2008 letter, written in February 2009, that America has had no shortage of crises in its history, and that the current crisis shall too, pass. Buffett as ever reiterates his focus on the long-term and that Berkshire will stick to its tried and tested strategy:

We’re certain, for example, that the economy will be in shambles throughout 2009 – and, for that matter, probably well beyond – but that conclusion does not tell us whether the stock market will rise or fall.

In good years and bad, Charlie and I simply focus on four goals:

(1) maintaining Berkshire’s Gibraltar-like financial position, which features huge amounts of excess liquidity, near-term obligations that are modest, and dozens of sources of earnings and cash;

(2) widening the “moats” around our operating businesses that give them durable competitive advantages;

(3) acquiring and developing new and varied streams of earnings;

(4) expanding and nurturing the cadre of outstanding operating managers who, over the years, have delivered Berkshire exceptional results.

Berkshire as the Buyer of Choice

Buffett says that for Berkshire to meet its goal of becoming buyer of choice is to deserve it. By keeping its promises, avoiding too much leverage, and granting unusual autonomy to its managers, and to own companies for the long term, Buffett believes Berkshire’s record matches its rhetoric.

On the other hand, most other acquirers treat companies as “merchandise” who must fit into some “exit strategy”. This gives Berkshire an advantage when encountering family sellers who truly care about the future of their business.

Buffett notes that these other buyers used to be known as “leveraged-buyout operators.” Once the LBO industry came through the 1980s with a battered reputation, the LBO operators started to call themselves private equity. However, the strategies were the same, where the essential ingredients were included cherished fee structures and a love of leverage.

Private Equity and Debt

Their new label became “private equity,” a name that turns the facts upside-down: A purchase of a business by these firms almost invariably results in dramatic reductions in the equity portion of the acquiree’s capital structure compared to that previously existing. A number of these acquirees, purchased only two to three years ago, are now in mortal danger because of the debt piled on them by their private-equity buyers. Much of the bank debt is selling below 70¢ on the dollar, and the public debt has taken a far greater beating. The private-equity firms, it should be noted, are not rushing in to inject the equity their wards now desperately need. Instead, they’re keeping their remaining funds very private.