Berkshire on Par

 Berkshire Hathaway (BRK.A) (BRK.B) released 2008 results Saturday morning that were in line with our expectations, and we do not anticipate making a material change to our fair value estimate. The results and management's discussion reinforced our confidence in our longer-term assumptions for the firm. We feel better than we did yesterday, and continue to recommend purchase of the stock.

Berkshire reported the largest percentage decline in book value per share in its history, but the relatively modest 9.6% decline should be viewed in light of the experience at other large financial and industrial firms amid the worst external economic and financial environment in Berkshire's history. Put simply, we think 2008 was par for the course for this low-handicap golfer, especially in light of how it plays the game.

Berkshire carries a relatively large share of equity securities in its investment portfolio, and the worst year for equities since at least World War II should have been expected to hit the firm hard. Berkshire's derivative positions in equity put options were likewise exposed, but we remain comfortable with their implications for the firm as a whole, particularly after thinking critically about Warren Buffett's expanded discussion of those positions in the annual letter to shareholders. But the firm's results in derivatives linked to high-yield fixed-income indexes were a bit more disconcerting, and bear monitoring in the year ahead.

Berkshire's operating subsidiaries have taken on increasing importance in the firm's overall results in recent years, and the firm's overall economic sensitivity has risen, particularly with acquisitions like Marmon in 2008. With economic weakness accelerating as 2008 came to a close, that was another head wind, but results in the firm's manufacturing, retail, and service operations were better than we expected. We also had one of the hardest loss years in the catastrophe reinsurance business on record, but Berkshire's independent underwriting posture and reticence to write business in the softening market allowed it to skirt significant losses that put the hurt on many other participants in that business.

Even after the hard year overall, we see Berkshire's financial strength continuing as a source of significant value, particularly amid a hardening reinsurance market. The firm's insurance operations remain the financial heartbeat of the overall enterprise, and the brightening prospects for its reinsurance business bode well for the firm as whole.