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As the one of the world's greatest investors, Warren Buffett is headline waiting to happen.
This past weekend was no exception--especially since the famed investor remarked the the economy “will be in shambles throughout 2009 -- and, for that matter, probably well beyond.”
Of course, while the “shambles” quote made for some juicy headlines, the grandfatherly Buffett had much more say than that.
Here's are some of the other highlight from his annual report to Berkshire Hathaway shareholders.
On the need for government action:
“Whatever the downsides may be, strong and immediate action by government was essential last year if the financial system was to avoid a total breakdown. Had one occurred, the consequences for every area of our economy would have been cataclysmic. Like it or not, the inhabitants of Wall Street, Main Street and the various Side Streets of America were all in the same boat.”
On the the role of Government and its aftereffects:
“This debilitating spiral has spurred our government to take massive action. In poker terms, the Treasury and the Fed have gone “all in.” Economic medicine that was previously meted out by the cupful has recently been dispensed by the barrel. These once-unthinkable dosages will almost certainly bring on unwelcome aftereffects. Their precise nature is anyone’s guess, though one likely consequence is an onslaught of inflation. Moreover, major industries have become dependent on Federal assistance, and they will be followed by cities and states bearing mind-boggling requests. Weaning these entities from the public teat will be a political challenge. They won’t leave willingly.”
On buying amid the downturn:
“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.”
On housing:
“The present housing debacle should teach home buyers, lenders, brokers and government some simple
lessons that will ensure stability in the future. Home purchases should involve an honest-to-God down payment of at least 10% and monthly payments that can be comfortably handled by the borrower’s income. That income should be carefully verified.
Putting people into homes, though a desirable goal, shouldn’t be our country’s primary objective.”
On flawed and failing housing default models:
“Indeed, the stupefying losses in mortgage-related securities came in large part because of flawed,
history-based models used by salesmen, rating agencies and investors. These parties looked at loss experience periods when home prices rose only moderately and speculation in houses was negligible. They then made his experience a yardstick for evaluating future losses. They blissfully ignored the fact that house prices had recently skyrocketed, loan practices had deteriorated and many buyers had opted for houses they couldn’t afford. In short, universe “past” and universe “current” had very different characteristics. But lenders, government and media largely failed to recognize this all-important fact.
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.”
On the price of oil and his brush with the bubble:
“Without urging from Charlie or anyone else, I bought a large amount of ConocoPhillips stock when oil and gas prices were near their peak. I in no way anticipated the dramatic fall in energy prices that occurred in the last half of the year. 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
On a $217 million loss:
“I made some other already-recognizable errors as well. They were smaller, but unfortunately not that
small. During 2008, I spent $244 million for shares of two Irish banks that appeared cheap to me. At yearend we wrote these holdings down to market: $27 million, for an 89% loss. Since then, the two stocks have declined even further. The tennis crowd would call my mistakes 'unforced errors.'”
On the Treasury bubble:
“The investment world has gone from underpricing risk to overpricing it. This change has not been
minor; the pendulum has covered an extraordinary arc. A few years ago, it would have seemed unthinkable that yields like today’s could have been obtained on good-grade municipal or corporate bonds even while risk-free governments offered near-zero returns on short-term bonds and no better than a pittance on long-terms. When the financial history of this decade is written, it will surely speak of the Internet bubble of the late 1990s and the housing bubble of the early 2000s. But the U.S. Treasury bond bubble of late 2008 may be regarded as almost equally extraordinary.”
On the madness of Derivatives;
“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.
Indeed, recent events demonstrate that certain big-name CEOs (or former CEOs) at major financial
institutions were simply incapable of managing a business with a huge, complex book of derivatives. Include Charlie and me in this hapless group: When
And finally a word about the 2009 outlook:
“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.”
Great Stuff
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