March 4, 2009
People all over the investing world very rightly anticipate Berkshire Hathaway's (NYSE: BRK-A) (NYSE: BRK-B) shareholder letter every year. Shareholders get a review of the state of the company, while shareholders and non-shareholders alike are treated to CEO Warren Buffett's wit, wisdom, and outlook for the broader economy.
While my Foolish colleague Rick Munarriz has already highlighted a lot of the wisdom from the most recent shareholder letter, I don't think we should overlook a lot of Buffett's legendary wit that gets baked into the letter. So without further ado ...
It was a brutal year for investors that saw heavily affected banks like Citigroup as well as stalwarts like GE (NYSE: GE) down big. Buffett summed up shareholders' plight simply and effectively:
By yearend, investors of all stripes were bloodied and confused, much as if they were small birds that had strayed into a badminton game.
And, as Buffett also pointed out, this throttling led to a severe decrease in trust:
As the year progressed, a series of life-threatening problems within many of the world’s great financial institutions was unveiled. ... 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.”
Many of Buffett's favorite stocks, including Coca-Cola (NYSE: KO) and American Express (NYSE: AXP), have had terrible years. But Buffett reminds readers that the best time to buy is usually when prices are down:
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.
Berkshire's GEICO insurance group is now behind only Allstate and State Farm when it comes to auto insurance. How has it been so successful? Buffett puts it simply:
GEICO grows because it saves money for motorists. No one likes to buy auto insurance. But virtually everyone likes to drive. So, sensibly, drivers look for the lowest-cost insurance consistent with first-class service.
And speaking of GEICO, Buffett made it very clear that there is a lot of opportunity for the company right now:
As we view GEICO’s current opportunities, Tony and I feel like two hungry mosquitoes in a nudist camp. Juicy targets are everywhere.
One of Berkshire's largest insurance segments is its reinsurance segment run by the very talented Ajit Jain. Does Buffett appreciate this valuable employee? You bet:
Ajit came to Berkshire in 1986. Very quickly, I realized that we had acquired an extraordinary talent. So I did the logical thing: I wrote his parents in New Delhi and asked if they had another one like him at home. Of course, I knew the answer before writing. There isn’t anyone like Ajit.
Buffett also humorously points to a few of the reasons the housing market is in disarray:
To begin with, the need for meaningful down payments was frequently ignored. Sometimes fakery was involved. (“That certainly looks like a $2,000 cat to me” says the salesman who will receive a $3,000 commission if the loan goes through.)
Investors should be skeptical of history-based models. Constructed by a nerdy-sounding priesthood using esoteric terms such as beta, gamma, sigma and the like, these models tend to look impressive. Too often, though, investors forget to examine the assumptions behind the symbols. Our advice: Beware of geeks bearing formulas.
Buffett also talks extensively about derivatives, a line of business that contributed in a big way to the problems of the financial industry. Buffett compared the derivatives market to, well, I’ll let him tell it:
Receivables and payables by the billions become concentrated in the hands of a few large dealers who are apt to be highly leveraged in other ways as well. Participants seeking to dodge troubles face the same problem as someone seeking to avoid venereal disease: It’s not just whom you sleep with, but also whom they are sleeping with.
Sleeping around, to continue our metaphor, can actually be useful for large derivatives dealers because it assures them government aid if trouble hits. In other words, only companies having problems that can infect the entire neighborhood -- I won’t mention names -- are certain to become a concern of the state (an outcome, I’m sad to say, that is proper). From this irritating reality comes The First Law of Corporate Survival for ambitious CEOs who pile on leverage and run large and unfathomable derivatives books: Modest incompetence simply won’t do; it’s mindboggling screw-ups that are required.
And while Buffett did spill a good deal of ink talking about just how serious America's problems are, he also provided some silver lining:
Amid this bad news, however, 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 21 1⁄2% 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.
If this has sufficiently wet your whistle, you can easily access Berkshire's full letter by going here. will warn you though, read one Berkshire letter and you're bound to end up reading them all the way back to 1977.
Berkshire Hathaway Annual Letter to Shareholders 2008 - Read the latest Berkshire Letter
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