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sagitarius84 (65.62)

What I learned from Warren Buffett’s Most Recent Letter to Shareholders



February 28, 2009 – Comments (4) | RELATED TICKERS: BRK-A , BRK-B , JNJ

Warren Buffett’s iconic letter to shareholders has been published on Berkshire Hathaway's website. The legendary chairman of Berkshire Hathaway has been writing this annual letter for more than 32 years. In it he summarizes the performance of the various businesses that make up the portfolio of his conglomerate. The Oracle of Omaha often gives insight on his decision making process, when making investments.

Of particular importance to me were his words on his reduction of stakes in Johnson and Johnson (JNJ), Procter and Gamble (PG) and Conoco Phillips (COP):

"On the plus side last year, we made purchases totaling $14.5 billion in fixed-income securities issued by Wrigley, Goldman Sachs and General Electric. We very much like these commitments, which carry high current yields that, in themselves, make the investments more than satisfactory. But in each of these three purchases, we also acquired a substantial equity participation as a bonus. To fund these large purchases, I had to sell portions of some holdings that I would have preferred to keep (primarily Johnson & Johnson, Procter & Gamble and ConocoPhillips). However, I have pledged – to you, the rating agencies and myself – to always run Berkshire with more than ample cash. We never want to count on the kindness of strangers in order to meet tomorrow’s obligations. When forced to choose, I will not trade even a night’s sleep for the chance of extra profits."

I speculated before that one reason why he might be selling solid dividend stocks such as Johnson & Johnson and Procter and Gamble could be that they haven’t fallen as much as the broader market, which makes them ideal for Buffett to deploy the funds in other beaten down sectors. Another reason could be that he needs to raise as much cash as possible, in order to participate in other preferred stock or fixed income deals, where he could earn a 10%-15% annual dividend yield, with very favorable terms for his company. Ordinary investors do not however have the purchasing power to participate in such favorable deals at this time.

Buffett also spend several pages discussing derivatives and shortcomings of the Black Scholes option-pricing model.

Full Disclosure: Long JNJ, PG

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- Procter & Gamble (PG) Dividend Stock Analysis

4 Comments – Post Your Own

#1) On February 28, 2009 at 1:54 PM, sagitarius84 (65.62) wrote:

Do you think Buffett has lost his touch? Or do you think Buffett still has it? Post your comments on the latest Letter to Shareholders below.

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#2) On February 28, 2009 at 5:45 PM, djemonk (< 20) wrote:

Buffet is down 9.6% in 2008.  How far is everyone else down?

There's your answer as to whether he's lost his touch or not.

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#3) On February 28, 2009 at 6:15 PM, jszoke01 (26.13) wrote:

I'm very concerned with his mention of the false deduction of a "safe haven" in US treasury bonds.  While I agree with him, this statment could have tremendous implications for the value of the dollar, and the general well regarded status of these bonds overseas. 

 This guy has the weight to move markets with his annual reports - they are some of the most highly regarded pieces of financial literature that are provided to the market each year. If even just a few of the large bondholders abroad pare their positions in these US instruments, it could cascade into a massive move out of the dollar.  Forget deflation in this scenario.  You'll be able to clean your tush with greenbacks if all of our money comes home.

 I'm actively positioning my investments in anticipation of this type of scenario, looking at foreing debt instruments from "stable" countries with sound "er" monetary policies.  I think if the dollar drops within the next year, it's going to go like a ton of bricks instead of a handful of feathers.

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#4) On February 28, 2009 at 6:33 PM, spankda (< 20) wrote:

As I suspected all along, Loud mouth Cramer got it all wrong once again......  WB didn't sell because he didn't like the stocks (JNJ, P&G), he sold because he was imploying the money into better investments.  For some reason I don't think Carmer will admit his mistake like WB does though.

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