A Caveman Could do It

Washington D.C. is blanketed in snow. I have a few of my staff in “work at home” mode. And that’s great. A good snowstorm has been a rarity these last few years. I’m going to encourage the parents of my group to get out and do a little sledding with their kids. 
*****Warren Buffett’s annual report for Berkshire Hathaway was released over the weekend. His letter to his shareholders is one of the most widely read investment documents there is. Buffett’s down home charm, inviting sense of humor and investment savvy are always a great read. 
Perhaps the biggest surprise was that the net asset value of Berkshire Hathaway dropped by $11.5 billion. Buffett was not immune to the market’s drop. Despite well-publicized investments in General Electric (NYSE:GE) and Goldman Sachs (NYSE:GS) that are down considerably, the lion’s share of balance sheet loss has come from derivatives, what Buffett has called “financial weapons of mass destruction.” 
Word is that Buffett sold a few billion in S&P 500 puts. Mark to market accounting forces him to show the loss. But that’s not going to give an accurate picture of his company’s true health. For one, those put options can come back to life and even enter the profit zone. And two, we don’t know what he did with the money. If the premiums he received from the options sales are used wisely, he’ll compound his returns.
*****Some of the more interesting tidbits from Buffett’s letter to shareholders:
We’re certain, for example, that the economy will be in shambles throughout 2009 – and, for that matter, probably well beyond…
*****Buffett said one of his goals for 2008 was “…widening the ‘moats’ around our operating businesses that give them durable competitive advantages…”
You may have noticed that “widening the moat” has meant that approximately 1 out of 5 commercials on TV these days is from Geico, a Buffett company. And the results?
“…the insurance group delivered an underwriting gain for the sixth consecutive year. This means that our $58.5 billion of insurance ‘float’ – money that doesn’t belong to us but that we hold and invest for our own benefit – cost us less than zero. In fact, we were paid $2.8 billion to hold our float during 2008. Charlie and I find this enjoyable.”
Paid to make money. He could have thrown that “float” money in a money-market account and been profitable. It’s so easy, even a caveman could do it.
*****Did you know that Buffett is investing in alternative energy? He said “…when we purchased PacifiCorp in 2006, we moved aggressively to expand wind generation. Wind capacity was then 33 megawatts. It’s now 794, with more coming…. today the company is number one in the nation among regulated utilities in ownership of wind capacity.”
****”I bought a large amount of ConocoPhillips stock when oil and gas prices were near their peak. 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.”
Buffett makes mistakes. Unthinkable! But his contention that oil prices will be higher in the future should be noted. At current levels, oil assets should be good investments.
*****”Economic medicine that was previously meted out by the cupful has recently been dispensed by the barrel. These once-unthinkable dosages will almost certainly bring on unwelcome aftereffects. Their precise nature is anyone’s guess, though one likely consequence is an onslaught of inflation.” And “…the U.S. Treasury bond bubble of late 2008 may be regarded as almost equally extraordinary.”
Like I’m fond of saying, I feel better about my short Treasury bond investment in Recovery Portfolio every day. For more, click HERE
*****Of course, Buffett also sounds a pro-America refrain “…never forget that our country has faced far worse travails in the past. In the 20th Century alone, we dealt with two great wars (one of which we initially appeared to be losing); a dozen or so panics and recessions; virulent inflation that led to a 211⁄2% prime rate in 1980; and the Great Depression of the 1930s, when unemployment ranged between 15% and 25% for many years. America has had no shortage of challenges.
Without fail, however, we’ve overcome them. In the face of those obstacles – and many others – the real standard of living for Americans improved nearly seven-fold during the 1900s, while the Dow Jones Industrials rose from 66 to 11,497. Compare the record of this period with the dozens of centuries during which humans secured only tiny gains, if any, in how they lived. Though the path has not been smooth, our economic system has worked extraordinarily well over time. It has unleashed human potential as no other system has, and it will continue to do so. America’s best days lie ahead.”
It’s worth noting that, despite Buffett’s optimism, he hasn’t exactly gone hog wild buying stocks. He continues to prefer the preferred – stocks that pay a dividend. 
And who can blame him? In these cash-lean days, his ability to inject liquidity is getting him favorable rates. 
*****”…the market value of the bonds and stocks that we continue to hold suffered a significant decline along with the general market. This does not bother Charlie and me. Indeed, we enjoy such price declines if we have funds available to increase our positions. Long ago, Ben Graham taught me that “Price is what you pay; value is what you get.” Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.”
Stocks are on sale, according to the Oracle. Buy them. My lead analyst Jason Cimpl has had his eye on the 715 range as a short-term bottom on the S&P 500. 
I’m not going to tell you to load up on stocks. But you should buy something. Past Daily Profit issues have recommended: Graham Cop (AMEX:GHM), CardioNet (Nasdaq:BEAT), SXC Health Solutions (Nasdaq:SXCI) and Em