Berkshire meeting: What to expect
Many hope Warren Buffett will blow an 'all-clear' whistle Saturday, saying that the worst of the credit crisis is over and it's safe to invest in financial stocks again. Unfortunately, that doesn't appear to be his view.
OMAHA†(CNNMoney.com) -- The mass migration of investors to Omaha for Warren Buffett's annual shareholder meeting, which kicks off Saturday morning, is the biggest pilgrimage this side of Mecca. More than 25,000 other people from every state in the Union and dozens of foreign countries go to soak up the wisdom of Buffett and his business partner, Charlie Munger, who sit for hours and answer questions from all comers. Their answers are often so educational and entertaining that any investor can take them to heart and learn from them.
People familiar with Buffett's thinking already have a handle on his views about some questions that may be on investors' minds. Many of the professional money managers want to hear Buffett blow an "all-clear" whistle, saying that the worst of the credit crisis is over and it is safe to invest again, especially in financial stocks. Unfortunately, that does not appear to be Buffett's view.
Several people who have heard him speak privately over the past few days say that he believes that, while the odds of a financial panic are much lower, the financial pain has a long time to run; according to my sources, Buffett does not believe recovery is around the corner at all. And he continues to regard most major financial stocks, because of their enormous exposure to subprime loans and derivatives, as impossible to value accurately or confidently.
The good news is that Buffett continues to insist that no one should invest on the basis of a macroeconomic forecast; his point is that the investor's task remains the same no matter what the markets are doing around you. You should continue to look past stock prices to analyze whether the underlying business can continue to grow, paying special attention to whether customers would continue to want a company's goods and services if it had to raise prices. That's one of the main reasons he found the Wrigley/Mars deal attractive, even though (by conventional measures like Wrigley's P/E ratio) it did not come cheap.
As to the losses on derivatives that Berkshire Hathaway (BRKA, Fortune 500) reported in yesterday's earnings statements, my sources tell me that Buffett feels that Berkshire's "book" of derivatives will pay off big-time in the years to come, and he has no intention of exiting the business, even though it may make BRK's earnings much more volatile. Some of these derivatives appear to be a way of "taking the other side of trade" from insurance companies and other issuers of "equity-indexed annuities."
And don't hold your breath waiting for an announcement to come out of Omaha about Buffett's successor, either as CEO of Berkshire or as chief of investments. The board has already decided on who will fill these roles (between one and four people will take over the investment responsibilities), but their names will not be announced this weekend -- or any other time in advance of the moment they take over officially. Which, judging by Buffett's mental and physical energy, won't be anytime soon.