Berkshire Hathaway Annual Letter to Shareholders 2008.
I am a big fan of Warren Buffett, so the following will be boring if you are not in the least bit interested in him.
If you are, please read on.
"Derivatives are dangerous. They have dramatically increased the leverage and risks in our financial system. They have made it almost impossible for investors to understand and analyze our largest commercial banks and investment banks ... 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." Warren Buffett 27.2.09
So Warren Buffett's letter to Berkshire Hathaway shareholders came out on Saturday 28 Feb.
It was full of the usual whimsy, jocularity, honesty, fine detail and memorable quotes like the one above.
22 pages of sage advice from the Oracle of Omaha himself.
Certainly comparing derivative investors to slack jawed studs with no morals makes for sometime humorous reading but this particular comparison really sets an overall tone for me.
Nobody, not even the big man himself knows what lies beneath the sub-prime mess and its associated credit, markets, economic and financial upheaval.
Derivatives discussion is best suited to an outlet that allows several million pages to explain how they work, what they do and the consequences of having them-the last one the most important next question in this fast financial train wreck.
Berkshire nonetheless has derivatives contracts but they, like the core Berkshire insurance business is managed by careful risk and covered by actual real cash. A novel idea these days I know.
Interesting enough one contract is betting 15-20 years from now that the US stockmarket will be higher than it is now(cant be hard I am thinking.)
I commented about 16 months ago that business leaders of these perilous financial institutions, most of them now defunct, should come clean about losses to restore faith.
Little did I know at the time nobody really knew how big the losses were and it appears they still don't.
This of course has affected Warren's beloved Berkshire Hathaway, it has had its worst year ever, and this insurance driven beast has been around for 44 years.
Buffett in his characteristic way has fallen on his billionaire sword and owned up to some blame for the carnage on his firm.
As he remarked he has made some "big mistakes" and some "smaller ones" , buying ConocoPhilips at the height of oil and gas prices and getting his hands on two smallish Irish banks that don't really exist anymore-even the great ones have their bad days.
Get this, unlike some of the charlatans, rogues and vagabonds that he skewered in this letter he took the blame fair and square on his wrinkled chin-honesty when it comes to business is usually such a lonely word(thanks for that B.J.)
Berkshire Hathaway has had its worst ever year but Buffett and his life-long investing mate Charlie Munger intend to continue to invest with their typical middle finger approach to investing-their way:
(1) maintaining Berkshire’s Gibraltar-like financial position, which features huge amounts of
excess liquidity, near-term obligations that are modest, and dozens of sources of earnings
(2) widening the “moats” around our operating businesses that give them durable competitive
(3) acquiring and developing new and varied streams of earnings;
(4) expanding and nurturing the cadre of outstanding operating managers who, over the years,
have delivered Berkshire exceptional results.
Those 4 tenants have served Buffett's investment baby Berkshire well over the last 44 years.
Indeed if you were an investor back in 1965 when they took over the then crumbling textile company, along with the transformation of the company towards an investment vehicle they would have transformed a $10000.00 investment into around $ 40 million today.
Buffett has been putting number 1 and 3 into practice like an near- octogenarian on speed over the last 6 months, buying up big brands like Tiffany, Harley Davison, General Electric, Wrigley-Mars, adding to Kraft Foods and a whole host of other billions spent.
For this Buffett has faced a barrage of criticism from the likes of Doug Kass and Jim Cramer who booted him down the field solidly for making "the wrong move too fast" after writing he was "buying American" in a New York Time's piece late last year in February it was disclosed in SEC filings that Warren had been unloading the likes of his Johnson and Johnson, Proctor & Gamble, ConocoPhilips holdings, stocks he likes to "hold forever" and Cramer tore him a new one in his The Oracle sells America piece.
What Cramer et al were missing though is Buffett's rationale for buying cheaper stocks and selling some of his other holdings to 1. keep "huge amounts of liquidity" in the Berkshire machine and 3. get cheap stocks in the process.
Buffett's attitude to the doubting Thomas', Cramer's etc can best be found in this quote from the current letter:
"Additionally, 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".
Of course Buffett's big bets will only be found out long-term and Kass and Cramer may well find out they have bigger mouths than cerebral cortex's.
The reaction of the Obama's, Brown's, and Rudd's of this world to the financial Armageddon that has smothered us with fear has come in for some docile comment by Buffett.
He hasn't been critical of the billions of borrowed dollars poured into every seemingly all the way to China financial holes that have been thus far uncovered and why at all doing the same insane thing that got us here in the first place will work the second, third, forth...
He has of course pointed to one obvious ramification of all this hole filling, inflation.
Lots of sticky, economy crushing inflation.
Without a doubt Warren Buffett's latest letter leaves me with the idea that this man knows more about the current financial situation than almost anyone on the planet and if that anyone is out there I would like to hear from him.
Buffett's analysis isn't perfect but it is the closest we have to getting to understand more fully what we have seen unfolding and why, and what will possibly unfold and why.
The simple fact that he has operated in this single minded fashion through manifold crises of the past and still lived to tell his financial tales is clear evidence that he knows which way to fold a greenback.
If he is wrong on his big long-term bets he could well be history but that very same history would teach us that he has been right far more than he has been wrong.
He remains positive despite slightly negative near-octogenarian output for nearly the full 22 pages.
"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 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".
What a great way to finish.
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