Buffett’s words still resound

By Laurie Bennett

February 28, 2009 at 1:20pm

Warren Buffett’s reputation as a financial prophet has suffered in the past year, as Berkshire Hathaway’s value dropped by almost $12 billion in 2008.

Yet Buffett’s annual letter to stockholders is being received with as much interest in 2009 as in previous years. Buffett, as usual, doesn’t disappoint.

He can still talk to the average investor - with a folksy approach that not only avoids business jargon but actually seems genuine.

When so many executives are dodging blame, his honesty can be startling. How often do you hear a CEO talk like this?

During 2008 I did some dumb things in investments. I made at least one major mistake of commission and several lesser ones that also hurt. … Furthermore, I made some errors of omission, sucking my thumb when new facts came in that should have caused me to re-examine my thinking and promptly take action.

One such misstep, he says, was buying ConocoPhillips shares when oil and gas prices had nearly peaked. Another was the purchase of two Irish banks that have since tanked. And then there’s this on derivatives, the downfall of many American companies:

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 (Munger) and me in this hapless group.

… Improved ‘transparency’ – a favorite remedy of politicians, commentators and financial regulators for averting future train wrecks – won’t cure the problems that derivatives pose. I know of no reporting mechanism that would come close to describing and measuring the risks in a huge and complex portfolio of derivatives.

As always, Buffett sees his letter as an opportunity to comment on the bigger picture. On the mortgage crisis:

Home ownership is a wonderful thing. My family and I have enjoyed my present home for 50 years, with more to come. But enjoyment and utility should be the primary motives for purchase, not profit or refi possibilities. And the home purchased ought to fit the income of the purchaser.

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.
Keeping them in their homes should be the ambition.

Buffett also remarks that the bailout discriminates against companies that don’t receive federal help.

Funders that have access to any sort of government guarantee – banks with FDIC-insured deposits, large entities with commercial paper now backed by the Federal Reserve, and others who are using imaginative methods (or lobbying skills) to come under the government’s umbrella – have money costs that are minimal. Conversely, highly-rated companies, such as Berkshire, are experiencing borrowing costs that, in relation to Treasury rates, are at record levels.

… This unprecedented ’spread’ in the cost of money makes it unprofitable for any lender who doesn’t enjoy government-guaranteed funds to go up against those with a favored status. Government is determining the ‘haves’ and ‘have-nots.’

… Though Berkshire’s credit is pristine – we are one of only seven AAA corporations in the country – our cost of borrowing is now far higher than competitors with shaky balance sheets but government backing. At the moment, it is much better to be a financial cripple with a government guarantee than a Gibraltar without one.

Still, hard times present countless new prospects for those with money to spend. At 78, he still has a kid’s enthusiasm for the game:

As we view GEICO’s current opportunities, Tony (Geico CEO O.M. Nicely) and I feel like two hungry mosquitoes in a nudist camp. Juicy targets are everywhere.

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  • #1.   hsr0601 02.28.2009

    I think the U.S. economy with the multinational companies is in the emergency room, entering into depression from the recent economic indexes, thereby the U.S should devote its entire efforts to the domestic concerns. As a matter of fact, the day one tainted with Gaza misery, the bold stimulus project with the extra armies, the sound budget proposal with the compromised retreat have brought about the cold responses in the stock market, which asks for clear standing.
    At this moment, the most fearful threat may be not the rift surrounding oil, but the worsening world-wide recession and poverty, then the extra forces to Afghanistan and extending period of stay, excessive residual forces in Iraq need to be retracted to forgo the wasteful, unproductive spending.
    ‘Energy Iindependence’ combined with humanitarian aids and technical support for the reeling countries in a positive, productive way will be the most promising pathway to recovery as the global market is intertwined, and the U.S. is possessed with a lot of multinational firms, I believe.

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