

Warren Buffet's Letter to Investors - quizbiz
http://www.berkshirehathaway.com/letters/2008ltr.pdf

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larrykubin
Good read.

Summary:

1) 2008 sucked badly, and so will 2009

2) Even Buffett makes mistakes. Last year he made moves that lost his company
billions of dollars. One bank stock he bought lost 90% of its value.

3) The Government has taken actions that will have many negative consequences,
but swift action was necessary to avoid a giant collapse.

4) Even though the near future looks gloomy, America has been through worse.
We've been involved in World Wars, had great recessions and depressions, and
have emerged stronger.

5) 75% of the last 44 years have had positive gains in the S&P 500. He thinks
the next 40 years will be similar, but we will have some rough years. Don't be
an idiot and try to go all-in catching falling knives or timing the bottom,
average in your investments slowly, buy things you can afford, work hard,
invest in well-run businesses, and you'll be aiight.

~~~
numair
A counter to #4:

The point that I, and so many like me, keep coming back to is... Every man,
woman, child and dog has a credit card now; a large percentage of people are
carrying unbearable amounts of debt. In the past, America was a creditor
nation; today, Hilary Clinton goes quietly begging in China while Obama gets
on TV and tries to act as though we're so much better than China - "Can you
believe that they're beating us at cleantech! Impossible!" (Disclaimer: I
voted for him, and attended one of his fundraisers.)

I'm not saying this because I want to be some doomsayer fuddy-duddy. I'm
saying this because I like the people in this community we have here at HN,
and I want to make sure people understand what we're looking at here -- years
of economic contraction. You can't spend your way out of a de-leveraging
economy, and it is quite dangerous to borrow money and theoretically finance
"stimulus" from tax revenues dependent on future rich people who may or many
not exist (see: California's economic disaster, wherein they thought the
golden era of dotcom millionaires would continue ad infinitum).

Thankfully, the online software industry seems to have made some enormous
gains in efficiency/automation, and you can now operate enterprise-grade
services at extremely low cost. This will allow many of us here to thrive,
even in this contracting environment (i.e., I may have 1/3rd the customers I
would in 1999, but I'm spending 5% of the money it would have cost to service
them). We are in a unique and special place; unfortunately, however, the rest
of the economy is in for continual hurt.

Also, there are some very smart people questioning whether the golden era of
equities is over. What this means is -- yeah, equities had a great run for 60
years, but what if that doesn't actually mean anything? What if the past and
the future are completely disconnected? In a world in which young innovators
such as ourselves can operate at such low cost, and when Sarbanes Oxley and
friends lead most smart people who value their sanity to avoid the public
markets, this could certainly be the case. Most equities these days are held
by institutional investors, who I can tell you from personal experience tend
to be quite moronic (i.e., I begged the top shareholders in Motorola to make
some activist moves against the crony executive/board structure there, but
they did absolutely nothing - even while watching their equity value dip by
50% or more). A democracy - whether involving citizens or shareholders - only
works when people are smart enough to know what to do; if we can learn
anything from the idiocy of the past several years, it is that the shareholder
democracy is utterly broken, because they were the ones who kept voting in
corrupt boards and awarding retarded salaries. Anyone staking their
future/kids' futures/etc on these people is a fool whose money will be soon
taken from him/her.

If I sound slightly pissed at the state of American business/political society
today, well... :)

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tptacek
"Approval, though, is not the goal of investing. In fact, approval is often
counter-productive because it sedates the brain and makes it less receptive to
new facts or a re-examination of conclusions formed earlier. Beware the
investment activity that produces applause; the great moves are usually
greeted by yawns."

Also, surprising to me that this landed in his shareholder's letter:

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 Berkshire purchased General Re in 1998, we knew we could
not get our minds around its book of 23,218 derivatives contracts, made with
884 counterparties (many of which we had never heard of). So we decided to
close up shop. Though we were under no pressure and were operating in benign
markets as we exited, it took us five years and more than $400 million in
losses to largely complete the task. Upon leaving, our feelings about the
business mirrored a line in a country song: “I liked you better before I got
to know you so well.”

Imagine how Citibank would have worded the same sentiment in its shareholder
letter.

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dcurtis
Starting on page 17, Buffet discusses the failures of Freddie and Fannie and
their oversight committee, the OFHEO. It's a fascinating read.

This particular caption is my favorite on derivatives:

"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. Auditors can’t audit these contracts, and regulators
can’t regulate them. When I read the pages of “disclosure” in 10-Ks of
companies that are entangled with these instruments, all I end up knowing is
that I don’t know what is going on in their portfolios (and then I reach for
some aspirin)."

I also find it hilarious that he ends by trying to sell his shareholders auto
insurance at their annual meeting next month:

"GEICO will have a booth staffed by a number of its top counselors from around
the country, all of them ready to supply you with auto insurance quotes. In
most cases, GEICO will be able to give you a shareholder discount (usually
8%). This special offer is permitted by 44 of the 50 jurisdictions in which we
operate. (One supplemental point: The discount is not additive if you qualify
for another, such as that given certain groups.) Bring the details of your
existing insurance and check out whether we can save you money. For at least
50% of you, I believe we can."

~~~
sqs
The annual meeting is one huge sales event for Berkshire companies. For good
reason: 25,000 mostly wealthy people (investors and their guests) are there.
Borsheim's sells millions of dollars of jewelry, people sign up for NetJets,
the Nebraska Furniture Mart has its best day of the year, etc. And up on the
stage during the meeting, Buffett conspicuously eats See's Candies and drinks
Coca-Cola.

BTW, if anyone else is going to the meeting this year, email me (in my
profile). I'm considering it. I've gone for the last three years and enjoyed
it a lot.

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Donald
"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."

Nicely stated. Interesting how the American government's dramatic intrusions
into the credit market have inverted pre-existing systemic signals.

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toffer
I've never seen this discussed before:

Buffett thinks the Black-Scholes formula produces "absurd results" when
applied to long-dated options (see page 19).

"Though historical volatility is a useful – but far from foolproof – concept
in valuing short-term options, its utility diminishes rapidly as the duration
of the option lengthens."

Berkshire Hathaway has sold equity put options that require payment if various
stock market indexes (S&P 500, the FTSE 100, the Euro Stoxx 50, and the Nikkei
225) have gone down after 15 or 20 years from the inception of the contracts.

Buffett think that the likelihood of these indexes going down over such an
extended period is extremely unlikely, due to inflation and an increase in
corporate retained earnings. But, even if the indexes _do_ decline, he has
already received the option premium up front and is able to invest that money
for 15-20 years, before having to pay out anything.

"Clearly, either my assumptions are crazy or the formula is inappropriate."

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patio11
Here, in one sentence fragment, is why Buffet is a better investor than any of
us: "the U.S. Treasury bond bubble of late 2008"

(He is arguing that the flight-to-safety is causing assets which are riskier
than T-bills to be grievously underpriced relative to their true values.
Accordingly, he is buying.)

------
quizbiz
What I found entertaining and a big lesson is how on page 8, he asks his
readers to call Geico and find out how you can save money on car insurance.

------
j1o1h1n
"Our advice: Beware of geeks bearing formulas."

~~~
quizbiz
WB is never one for tech companies.

~~~
ensignavenger
Thats because he never invests in anything that he doesn't understand. He
wants to fully understand how they make money. That is great investment
advice, too.

