Billion-Dollar Whoops: Buffett Apologizes

Feb. 28, 2009— -- Even the world's best-known investor couldn't get it right in 2008, apologizing to his shareholders for doing "some dumb things" with their money.

Billionaire Warren Buffett said in his annual letter to shareholders that while last year was a bad year for all investors, he made some mistakes that he now regrets.

"I made some errors of omission, sucking my thumb when new facts came in that should have caused me to reexamine my thinking and promptly take action," Buffett wrote in a letter released this morning.

During 2008, the price of Buffett's Berkshire Hathaway stock fell from $90,343 a share to $77,793.

Berkshire's 2008 net income of $4.99 billion, or $3,224 per Class A share, was down from last year's $13.21 billion, or $8,548 per share, in 2007. The company's profits fell 62 percent.

Buffett said the performance was "unsatisfactory."

Joel L. Naroff, president and founder of Naroff Economic Advisors, said Buffett is doing the right thing by acknowledging what went wrong.

"I think that's the way a good investor should operate: recognize you made some mistakes, see what they are and try to correct them going forward," Naroff said.

In his letter, Buffett recalled how 2008 was a brutal year for everybody in the market.

"By year end, investors of all stripes were bloodied and confused, much as if they were small birds that had strayed into a badminton game," Buffett said.

He added: "The watchword throughout the country became the creed I saw on restaurant walls when I was young: 'In God we trust; all others pay cash.'"

Naroff said that it's a prime example of how bad things are in the economy when someone like Buffett stumbles.

"I think when somebody as astute as Warren Buffett has problems, I think we all have to recognize that this was a real difficult year and hopefully next year won't be nearly as bad," Naroff said. "His performance was not nearly as bad as the indices did, so he outperformed them."

Buffett's predictions for 2009 aren't much rosier. He said he expects many of Berkshire's companies to be impacted by the recession and earn below their potential in 2009.

"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," Buffett wrote.

The Omaha-based company owns major stakes in many household brands including American Express, Coca-Cola, Johnson & Johnson, Kraft, Procter & Gamble and The Washington Post. Buffett said, though, that it was Berkshire's insurance and utility groups that produced strong earnings in 2008 and helped prevent further losses. He said the two groups have "excellent prospects" for the coming year.

Take Berkshire-controlled GEICO, now the nation's third-largest car insurer. Buffett said when he thinks about the opportunities for GEICO he feels like a hungry mosquito at a nudist camp.

"Americans are focused on saving money as never before, and they are flocking to GEICO," he wrote. "In January 2009, we set a monthly record – by a wide margin – for growth in policyholders. That record will last exactly 28 days: As we go to press, it's clear February's gain will be even better."

Then there were Buffett's mistakes.

Buffett bought a large stake in ConocoPhillips stock when oil and gas prices were near their peak. Berkshire increased its stake in the company from 17.5 million shares in 2007 to 84.9 million shares at the end of 2008.

"I in no way anticipated the dramatic fall in energy prices that occurred in the last half of the year," he said. "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. Even if prices should rise, moreover, the terrible timing of my purchase has cost Berkshire several billion dollars."

Buffett also spent $244 million on shares of two Irish banks in 2008 "that appeared cheap to me." By the end of the year, they were worth $27 million, an 89 percent loss. The shares have dropped even more since.

Diane Swonk, chief economist at Mesirow Financial, said that although shareholders knew these numbers were coming, it doesn't really ease the blow.

"I think the reality of what we're facing right now and actually seeing the numbers is much harder than knowing that they're coming," Swonk said. "It's hard but Warren Buffett does carry with him integrity, and so when he writes his commentary, people do listen to him and he does have a sense of credibility with him."

With reports from ABC News' Daniela Bilotta