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Warren Buffett's Annual Letter to Berkshire Hathaway Shareholders [pdf] (berkshirehathaway.com)
396 points by grellas on Feb 25, 2017 | hide | past | web | favorite | 310 comments

"In Berkshire’s 2005 annual report, I argued that active investment management by professionals – in aggregate – would over a period of years underperform the returns achieved by rank amateurs who simply sat still. I explained that the massive fees levied by a variety of “helpers” would leave their clients – again in aggregate – worse off than if the amateurs simply invested in an unmanaged low-cost index fund. ”

He then goes on to show how that's been true, and that a standard index fund outperforms almost every hedge funds even before extra fees to the hedge funds are taken into account.

It's not the first time this has been pointed out, and it suggests that for non-multimillionaires, an index fund is always the most rational choice.

You get close to the return you'd get by investing in real estate, with the added benefit of index funds being much more easily liquifiable.

"My calculation, admittedly very rough, is that the search by the elite for superior investment advice has caused it, in aggregate, to waste more than $100 billion over the past decade."

So big money is dumb money? In a big way.

Not dumb money. Just doesn't justify the fees that they demand.

I would argue that index funds make the most sense for most millionaires these days, too. For the most part, if a hedge fund is actually worth investing in (and there are quite a few), only institutions will have the capital to play.

Actually having a giant amount of money to throw at a hedge fund is counterproductive. In order to invest all that money, a greater number of investments will need to be made. And the more investments one makes, the more likely it is for them to revert to the mean, performance-wise.

It's a simplification, but if a hedge fund manager finds a fantastic investment for $100mn, but they have $100bn to invest, they have to be able to repeat that feat over and over and over and over.

Yes I'm aware of that, but it doesn't change the reality that hedge funds have an incentive to have more money from fewer investors, even if they have to be careful not to take on too much money overall.

Which is how you end up with Access Funds who charge fees to put money into other hedge funds which they got capital into early and performed well. So now to get into a very successful fund you're paying two sets of fees and praying that they continue to outperform.

Hedge funds are at best going to net break even as an industry after fees, quite probably negative. So to look at "Funds of funds" and say they're a good idea is pretty mind boggling.

Absolutely. Reduce the number of friction points.

"Managing money is easy. Managing investors is hard."

> if a hedge fund is actually worth investing in (and there are quite a few)

Apparently it is hard to come up with a collection of 5 of them that would beat the S&P 500 over 10 years. At least Buffett had a hard time finding counterparties for a bet.

RenTec, D.E. Shaw, Baupost, Bridgewater, Farallon, off the top of my head. There are others. I agree that it's hard to find firms that beat the market over long terms but it's not quite that difficult.

Much like other very difficult but not impossible things in life, it is very difficult but not impossible to beat the market for long periods of time. It's fair to say that most people, millionaires included, should go with index funds. But that doesn't mean it's hard to come up with funds that beat the market. They just aren't really available to people without a very high net worth.

Unfortunately the conversation about hedge funds has been dominated by binary thinking, especially since Buffett's wager was publicized. The pendulum has swung so far to the other side that there's not a whole lot of fair discussion about the utility of hedge funds.

Are you willing to bet $1,000 that those funds will, in aggregate, beat VTSMX over the next 10 years?

It's easy to pick the winners in hindsight. Buffett put $1mm on a bet that it's hard to do it beforehand. If Protege partners couldn't do it with $1mm on the line, what makes you so convinced that you can?

Sure, I'll take that bet absolutely.

It's a little reductive to use "past performance is not an indication of future gains" as an argument. If you extrapolate that with the premises that I am using (namely, that it is possible to intentionally and consistently beat the market), there is no reason to have faith in the continued investment in anything, private or public, because you cannot use any past measure of success as guidance. But I don't care about the success in of itself, I care about the cause of that success, and intrinsically I believe there is a cause.

Facebook has done well since its IPO. But since we're throwing out its past performance entirely, we shouldn't consider it a sound investment. Venture capitalists shouldn't have faith in Uber or Snapchat, because its past performance as a private company means nothing going forward. Real estate is not a sound investment because eventually there will be another market correction. And so on and so forth.

Except there are sound arguments for investing in each of those examples (please don't nitpick them specifically...) because people naturally view their respective success as a function of purposeful action. I view certain hedge funds as possessing the same capability for success.

Ultimately, entropy consumes every existing phenomenon we can observe. What we define as "consistent success" is only coherent over slices of time for anything, not just the ability to forecast the market. The only reason why we continue to invest in anything is because we believe that someone at the helm of past success can continue to pull it off in the future. Every streak must necessarily come to an end, whether it's competing as an elite athlete or being the dominant technology company or forecasting market movements.

So yes, I'd absolutely take that bet. I don't believe in EMH; I believe that past success for firms like those has been caused by skill and strategy, which is repeatable until fundamental things change (industries evolve, markets evolve, successful managers retire, etc). I definitely believe that firms like Renaissance Technologies will continue to print money in the future because they have a profitable methodology for doing so, unless something changes. Because I do not believe the success is due to chance, this wager becomes more a question of whether or not I believe the skilled management of these firms will change in the near future or whether the market itself will fundamentally make their strategies untenable. For most of them, I'm confident in another ten years of superlative performance.

All successful investing begins with observing, modeling and capitalizing on market inefficiencies. You can do this with real estate, business ownership, securities, etc. It is clear to me that there are hedge fund managers who are playing an entirely different game than the unprofitable ones the media fixates on. They are similar only in name, but it's like the difference between counting cards and gambling. These are managers who can identify, through their own insight or the aggregate insight of their firms, inefficiencies esoteric enough that they are extremely difficult to find, but useful enough that they can be profitably traded on.

EDIT: I forgot you asked me a specific question...the reason why I feel confident taking on this bet when Protege Partners, LLC is losing is because I'm choosing a small, specific subset of the hedge fund industry that I believe in for the reasons explained above. In contrast, Buffett and Protege's bet is over a basket of funds, a "portfolio of funds of hedge funds." I am not arguing with you that most of the hedge fund industry is crap, just as I wouldn't argue that most people who start tech companies fail. I'm betting on the outliers.

If anyone can just log onto Long Bets and do this I'm happy to take the bet with you immediately.

> It's a little reductive to use "past performance is not an indication of future gains" as an argument. If you extrapolate that with the premises that I am using (namely, that it is possible to intentionally and consistently beat the market), there is no reason to have faith in the continued investment in anything, private or public, because you cannot use any past measure of success as guidance.

No, the point is that any of these outliers that beat the market will, given time, revert back to the mean. Given this, you are simply wasting money on fees for actively-traded funds.

> Facebook has done well since its IPO. But since we're throwing out its past performance entirely, we shouldn't consider it a sound investment.

The market has already factored this information into the price of Facebook. Facebook, the company, may continue to perform well. But if everyone believes this, the stock will be trading at a premium compared to what its current situation looks like.

Facebook, or any other company, could have ten years of record-breaking quarters and the stock not move a dime if the market already assumed there was a significant likelihood that this would happen. It could even decrease if these record-breaking quarters fell short of what the market was expecting.

> I don't believe in EMH; I believe that past success for firms like those has been caused by skill and strategy…

Then invest in these funds and make a killing.

Funnily enough, few of the people who claim to disbelieve in the efficient-market hypothesis are billionaires.

> …I feel confident taking on this bet when Protege Partners Protege Partners, LLC is losing is because I'm choosing a small, specific subset of the hedge fund industry that I believe in for the reasons explained above. In contrast, Buffett and Protege's bet is over a basket of funds, a "portfolio of funds of hedge funds."

That "portfolio of funds of hedge funds" was chosen by Protege Partners exactly the way that you are doing. They picked a portfolio of hedge funds they believed were most likely to succeed over the long haul, and they are losing. Badly.

At least as far as the bet goes. I suspect they've made more than the million dollars lost in the bet by marketing themselves as being confident enough in their picks to make such a bet against Buffett.

In a roundabout way I do invest in hedge funds as part of professional work. At the very least, I have a financial interest in certain funds' success because it will directly translate to my own financial success. (Anticipating a question - I do work in finance, not just the security consulting which is in my profile, and I cannot be more specific than that).

Per your parallel comment - can you define "measurable"? For example, can I just choose RenTec's Medallion and call it a day? How quickly does data about the fund's annual performance have to be available, and from which source preferably?

At this juncture it might just be easier for you to email me :)

Choose a measurable fund or a weighted set of them such that one can do an easy comparison of returns, net of fees and expenses, against VTSMX and I'll create the bet on longbets.

If he gets to include RenTec in his bet then it's as close to a dead certainty as you can get that he'll win. I'd like to get in on that bet too.

If you're trying to locate them after the fact it's quite easy, nothing hard about it at all. It's using skill to identify them before any given period that's hard. Plenty of people do in fact end up identifying them before any given period, but no more than would be predicted by chance, so it is quite hard to prove that anyone at all identifies outperformers using skill; it's laws of chance at work, even though many like to think they used skill (or like for you to believe they used skill, if they're trying to get you to pay them to manage your money).

You and I can't invest in those funds, and you can't confidently predict which open funds will outperform.

Renaissance Technologies claims 71% annualised from 1994 to 2014.

It's easy to find funds that had great performance in the past. If anybody knows how to pick those that will perform in the future, they are keeping it a secret.

And you might not be able to invest directly in rentec, but their holdings are public [1]. So if they really had a good secret, it could be replicated.

[1] https://www.holdingschannel.com/all/stocks-held-by-renaissan...

Those are only their LONG holdings, and rentec isn't a long only fund. In addition, SEC disclosures lag behind and doesn't disclose at what price shares were acquired.

So by looking at their SEC disclosure forms you can see which investments would have made you money in the past, the only thing you now need is a time machine.

RenTec doesn't make money off "buy and hold." They're a quant firm that profits from small inefficiencies in the market, trading that with leverage. Their really good secret is that they have superior data sources, and superior modeling (lowering their risk to almost nothing).

Their secret sauce is less subtle.

They harvest tax loopholes [0].

[0] http://www.zerohedge.com/news/2014-07-21/how-rentec-made-mor...

That might be true, but you'd make your argument more credible if you cited Bloomberg (or anyone else, but BB is who ZeroHedge cites) rather than ZeroHedge, the InfoWars of finance.

> That might be true, but you'd make your argument more credible if you cited Bloomberg (or anyone else, but BB is who ZeroHedge cites)...

Your statement's not "credible." ZH didn't just cite Bloomberg. The ZH post also includes excerpts from the 93 page report (not included in the Bloomberg article) released by the US senate subcommittee, which was highly relevant.

Is anything in the ZH post false? Please add it to the discussion.

Next time, please comment on the substance of ideas and arguments instead of ad hominem attacks. It was one of the first searches that came back for the topic I was looking for. It added more context than a brief Bloomberg article.

Pointing out that a source isn't credible isn't an ad hominem attack --- or, in my case, even an attack at all. I'm broadly sold on the idea that Renaissance profits largely through tax loopholes.

Respectfully, for the link, you're attacking ZH and not the substance of ZH's positions.

ZH isn't the argument. The argument is "does Renaissance succeed principally though tax manipulation".

Although the tax loopholes could increase their income by about 15%, it doesn't explain all of it. Being able to increase their leverage from 1:2 to 1:20 could account for it, but it would require covering loses.

If that's really all they did, it's basically a Ponzi scheme, because they would sometimes lose money.

Don't forget that 15% getting re-invested.

They are a market maker, that accounts for most of their outperformance.

Now name four more

Hedge funds make perfect sense for people who want to hedge their capital in specific ways. A hedge fund doesn't need to outperform the market to deliver tremendous value to their customers.

Secondly, every trade has a counterparty. So somebody necessarily has to be at the loser's end of every trade. For every investment fund that makes oversize profits another fund loses money. It all evens out. That doesn't mean it's entirely zero sum, though, because money still flows from bad businesses towards good businesses as a result. The incentives for professional money managers are also totally misaligned: funds performance is reported quarterly leading to a short term bias; fund managers get a bonus if they invest irresponsibly but get lucky; customers are unsophisticated so it's one big lemon market.

I agree that index funds make a lot of sense for non-millionaires (and single digit millionaires), but that's simply because it takes a lot of effort to beat the market even by a few percent so you need a lot of assets for it to be worthwhile.

> That doesn't mean it's entirely zero sum, though, because money still flows from bad businesses towards good businesses as a result.

Buffet's point is that it's negative-sum. A gambler might win today, but lose tomorrow, and his counterparty will get the opposite, but the house wins on every transaction. While the players churn, the market makers and rent seekers will drain the system of money, in aggregate.

You're reading it incorrectly. Buffett is making the claim that people have "waste[d] more than $100 billion over the past decade" looking for superior investment returns. That's his claim, no more. And I agree.

There wouldn't be a stock market if everybody just invests in a fortune 500 index fund. The benefit to society of a functioning stock market is way more than $10B/yr.

No, he isn't reading it incorrectly. Buffett is claiming that on aggregate, because of the fees, the passive investors will be better off than the active investors.

From page 23:

  A lot of very smart people set out to do better than average in securities markets. Call them active investors.

  Their opposites, passive investors, will by definition do about average. In aggregate their
  positions will more or less approximate those of an index fund. Therefore, the balance of
  the universe—the active investors—must do about average as well. However, these
  investors will incur far greater costs. So, on balance, their aggregate results after these costs
  will be worse than those of the passive investors.

Yes, but Buffett is not claiming that active investing (as opposed to passive index investing) is negative-sum in aggregate! That would be ludicrous, because Buffett is an active investor himself and the Buffett Annual Report is a long form sales letter to persuade people to buy more Berkshire shares.

Buffett, as an active investor, can outperform the market, while active investors as an aggregate might not. I fail to see any ludicrousness.

> Buffett Annual Report is a long form sales letter to persuade people to buy more Berkshire shares.

Nonsense. Buffett doesn't care one whit about people buying more Berkshire Hathaway shares. If anything, he wouldn't mind people selling shares and driving the price down to below 1.2 x book value, so he can buy them back at a discount.

If active investment were negative-sum in aggregate then society would be better off if there were no active investors at all and everybody would invest in passive index funds instead. Unfortunately you need active investors to keep the market honest, without active investors index funds wouldn't work!

Index funds are needed so investment funds don't overcharge their customers, and investment funds are needed to keep the market honest.

It makes sense for individuals (or institutions) to invest in index funds, but only up to a point. When too much money is stuck in passive index funds the active investors will easily outperform the market and the smart money will leave the index funds again.

The person I was responding to was drawing an analogy to a casino where the money just moves around and the institutions just skim every time money changes hands. That's negative sum. In contrast, society benefits when the stock market gives access to capital to well run companies and takes money away from poorly run companies. So the casino analogy doesn't work. Buffett understands that the stock market as a whole isn't zero sum (or negative sum), and that's true even if all investment firms in aggregate underperform the indexes.

Investing in the stock market is secondary to the actual investment into activities performed by the companies that constitute it.

Thus, investments decisions made within such companies are those that promote their growth (or not).

In this manner, without insider knowledge into the internal decisions those companies make, and thus the ability to judge the viability of their investments, investing in something other than a stock index is much riskier. But the stock market itself can still grow.

The distinction is that investing in "the market" is an arms length investment that occurs well after the good or bad investments that affect the profitability of individual companies have occurred.

I think you and your interlocutors are talking past each other. It's true (and fashionable to point out) that active investment is what makes price discovery, and thus the markets themselves, work. But that doesn't make it a good idea to invest in hedge funds or any other active investment vehicles. Just as Buffett describes earlier in the letter w/r/t the insurance business, active investors can compete the returns on effective price discovery down below the returns on passive investing.

Maybe over the long term the returns on active investing will simply go to prop traders.

Perhaps it is fashionable to point that out where you live, but common wisdom I hear is "everybody should just use index funds", without stopping to ask what would happen if everybody actually did.

Worldwide equities are 65 trillion or so. Can you have a functioning stock market if 1T of that is actively managed by prop traders and the remaining 64T is in passive index funds? I'm not so sure.

Now you're talking past me. It does not follow from the fact that active investment is necessary that people should invest with active investors. Again, fierce competition among active investors can --- and probably have --- created conditions where all the returns on active investing will go to (effectively) proprietary traders.

I don't think I'm talking past you -- your previous point was perfectly clear. You literally cannot have active investments if nobody invests with active investors or actively manages their funds themselves. This is tautological. So somebody has to invest with active investors, but Buffett is arguing it should be somebody else and not you.

If 99.99% of all assets are locked up in buy-and-hold passive index funds the prop traders can't do anything when a stock is mispriced because they can only trade with the handful of active investors that remain. With 65 trillion in equities a handful of prop traders can jump high and low all they want but the markets won't budge if nobody is buying or selling. The index managers on the other hand will be able to move markets with a keystroke, because whenever they decide that one stock in the index has to be replaced by another all the index fund money blindly follows.

Nobody has to invest money in prop shops for them to provide market inputs. There are some huge proprietary trading firms.

Prop shops still have owners. They are the investors. There is no such thing as an investment without an investor.

You're now litigating the literal definition of a prop trading firm.

Nobody is arguing that you shouldn't start a prop trading firm. The argument is that you shouldn't invest in hedge funds, because passive investment funds outperform them. If you want to make money in active investment, join or form a prop firm.

The broader point would be, the market can probably function based on passive investment and inputs from prop firms, without retail and institutional investors ever needing to engage in active investment. That would also be compatible with the notion that active trading is in general unprofitable because the profit is so aggressively competed out of it.

I literally made this point earlier. I even used the word literally to indicate I meant it literally.

> Nobody is arguing that you shouldn't start a prop trading firm.

I disagree. People are absolutely arguing that nobody should start a prop firm because you can't beat the market. That the prop funds that succeed are just those that have gotten lucky in the short term. That everybody should put their money in index funds instead. I know you don't believe this, but it's a common belief for sure.

I think that if all retail investors and all institutional investors exclusively invest in passive funds the market will get out of whack. We're talking about all pension funds, university endowments, private trusts, all moving to index funds. All households together own about 80% of the stock market (direct + indirect ownership). Hedge funds another 4%. Prop trading firms probably less than 1%. There are over 3500 publicly listed US equities and another 10,000 OTC. Deep analysis on every equity is needed to determine if it is fairly valued; no way prop firms can take on this gargantuan task by themselves.

Not to mention that index funds are long-only. Very few hedge funds are. If almost everybody moved to index funds the long-only bias by itself could be disastrous.

Like I said, I wasn't say you were wrong, I was saying that you and your interlocutors were talking past each other. It can simultaneously be true that active investors can "beat the market" and that retail and institutional investors shouldn't invest in actively-managed funds.

The place I think we got hung up here is on the notion of "nobody investing in", because obviously a person who starts or joins a prop trading firm is in a sense investing in that firm.

It can be true, but my point is that it probably isn't true. And I've explained why I think this. You can look at passive investing as defecting in a large game of prisoner's dilemma (tragedy of the commons). With passive investing you enjoy the benefits of an efficient market without doing any analysis yourself (or paying for somebody else to do it on your behalf). So you can advise every individual to defect (because it's in their best interest) but if too many people defect the system breaks down.

So when you say "It can be true that [...] retail and institutional investors shouldn't invest in actively-managed funds", that can mean two totally opposite things, as hopefully you can now see. That's why we talk past each other. I also suspect there is a real disagreement about what the impact of index funds will be in the long term.

No, join or start a hedge fund and take the fees from the investors. That's how you make money actively trading.

The whole point of this particular branch of the thread is that hedge funds underperform passive investors.

Not if you are the one collecting the fees.

Nothing says you need investors to do price discovery.

> Buffett Annual Report is a long form sales letter to persuade people to buy more Berkshire shares.

If you have read his past reports you will know that he wants his shareholders (he calls them partners) not to sell their shares. He published some numbers in the past as well where 90% of shareholders don't sell and he is very happy about that.

The vast majority of Hedge funds don't hedge and their investors expect the one thing they can't deliver, outperformance.

With regard to your first sentence, could you give an example of a specific way to hedge capital? I'm not sure I understand.

Suppose you're a business with a lot of positive cash flow, but you also have a lot of exposure to the USD-MXN exchange rate. Maybe you have factories in Mexico but sell to the US, it doesn't matter. In that case you can pay a hedge fund to hedge your money so that if the exchange rate collapses you make enough money on the stock market to compensate, so your business will survive until the exchange rate climbs back.

Most businesses have very high exposure to one section of the market, so wanting to hedge is natural. If your business makes toilet paper you have it easy because no matter what happens demand for your product won't collapse overnight. If you make cars then economic recessions are scary because new car sales will drop like a brick, and you need to hedge.

Most hedge funds have very little to do with the kind of hedging you describe.

If you had that kind of exposure to currency risks, you wouldn't go to a hedge fund. You can easily hedge that risk yourself with futures or options. If you wanted to pay somebody for it, you would go to your banker and he would do it for you for a fraction of the 2/20 fees charged by hedge funds.

The average banker has no idea how to hedge any serious amount of money, nor does the average banker understand what kind of hedging strategy is appropriate for a business. Nothing about hedging with futures or options is easy. Also, hedge funds don't charge 2/20 anymore like in the good old days.

Nonsense. Futures and options and how to use them to hedge exchange rate risks are covered in any good masters in finance (source: I have a masters in finance). You don't even need any advanced math (the ancient Greeks were using options to hedge their olive harvests).

The bank teller might not know about them, but the bank most assuredly has people that can help you.

Also, contrary to what your posts suggests (any serious amount of money), the amount of money has no bearing on how you would hedge its risk.

According to the Shareholder's Letter, the 5 funds of funds in the bet portfolio were comprised of funds that largely did charge 2/20, with the fund-of-fund charging an addition 1% plus performance on top of that.

Hedge fund fees have been in a steady decline.

> The notion that hedge funds all collect a stereotypical management fee of 2 percent and a performance fee of 20 percent has been dying a slow death in recent years, especially for smaller, newer funds.


Buffet's bet went into effect in January of 2008, so before the crash.

If you re-read the letter, you'll see it ran through the entire crash, and hasn't ended yet.

I said 2/20 fees aren't the norm anymore. You quoted from the letter. I provided a source that shows hedge fund fees are going down and remarked that the Buffett bet started before the 2008 crash when fees were higher then they are now. Because it was a boom period and because index funds that push down management fees have only recently become popular.

It seems to be that either Buffett must be mistaken or you are, right? His claim is that the funds involved in the bet are 2/20 funds, and while the bet started in 2008, it is still running today.

Technically, he claims they pay less than 2/20 but no details are provided. Nowadays 2/20 fees are considered high, not the norm. Fees are trending down. This is something you can easily verify. Buffett did say 2/20 is the "prevailing hedge-fund standard" but he's mistaken.

I guess. Mostly, I've just been nerdsniped by the claim you made that the timing of the bet could invalidate it's claim. It's a 10-year bet, so Buffett has in fact maximized his exposure to the phenomenon you describe.

>If your business makes toilet paper you have it easy because no matter what happens demand for your product won't collapse overnight.

Until people figure out the magic of bidets!


You still need some paper right?

An order of magnitude less, I think.

They have a built-in dryer.

> If you make cars then economic recessions are scary because new car sales will drop like a brick, and you need to hedge.

That sounds like a dubious claim to me. Can you name one car maker who hedges their exposure to economic recessions like you describe?

>Secondly, every trade has a counterparty. So somebody necessarily has to be at the loser's end of every trade.

This is not true. There will always be someone who wins less between the two, but it doesnt mean it wasnt a win-win trade. Some things are more valuable to one person than another.

He's talking about the stock market as an investment, not trade in general.

Some people may still value the experience of losing more than the money.

Not only do you get on average better returns, you can do better even when they perform poorly since those funds (in Canada) can charge you anywhere from 1.5% to 3% of your portfolio in fees (MER), while an index fund could charge as low as 0.1%.

https://www.wealthsimple.com/ (I'm a customer) has recently expanded into the US from Canada and are one of a group of what is being called Roboinvestors which take these index funds and let you easily invest in them.

Wealthsimple adds on 0.5% fee which is still lower then active funds, my portfolio has a weighted MER of 0.64%.

0.64% MER is much higher than what you can get with Vanguard. Mutual funds are about 4x less expensive, some ETFs are 10x less expensive.

My personal view of using Wealthsimple is a stepping stone, I've realise that I've throw away money to the banks with higher then needed MERs and Wealthsimple provide a easy way of transferring my money in and saving money now. When my portfolio is larger and I'm seeing a higher cost with them VS doing it myself I'll look into buying ETFs myself.

The lowest bank mutual fund in Canada that I've seen in from Tangerine at ~1% MER, are there ones lower?

> The lowest bank mutual fund in Canada that I've seen in from Tangerine at ~1% MER, are there ones lower?

Without having to handle rebalancing yourself? AFAIK then Wealthsimple and Tangerine are already the lowest you'll find without working with ETFs or index funds directly.

FWIW Vanguard has a 0.3% AUM option here in the US now. I assume their Canadian counterpart offers something similar?

I just wrote about this, but if you read his 2005 letter(when he proposed the bet), he mentioned changing allocations can be much more disastrous than fees. Here's the link, which my first point covers: https://www.linkedin.com/pulse/3-things-you-might-have-misse...

>> You get close to the return you'd get by investing in real estate

Close to the return on unleveraged real estate investing. Most real estate investing is significantly leveraged, to a larger extent than possible (or recommended) for stock market investing.

Cleary, he meant leveraged real-estate investing.

Non-leveraged real estate investing would give you hardly 1-2 % p.a.

>Most real estate investing is significantly leveraged, to a larger extent than possible (or recommended) for stock market investing.

But the market will adjust to cheap leverage. Easy money, house prices go up, you get less value per dollar. So the benefit of leverage is diminished at least a bit.

> a standard index fund outperforms almost every hedge funds even before extra fees

Hedge funds beat the market before fees [1]. (Mutual funds do not [2].) It's just that hedge fund managers are great at gobbling up that alpha with fees.

One way to look at this is hedge fund investors subsidise the efficient price-discovery function hedge funds provide the market.

[1] http://www.marketwatch.com/story/90-of-fund-managers-beat-th...

[2] https://mobile.nytimes.com/2015/03/15/your-money/how-many-mu...

There's one particular passage I'd like to point out, on page 5:

Our efforts to materially increase the normalized earnings of Berkshire will be aided – as they have been throughout our managerial tenure – by America’s economic dynamism. One word sums up our country’s achievements: miraculous. From a standing start 240 years ago – a span of time less than triple my days on earth – Americans have combined human ingenuity, a market system, a tide of talented and ambitious immigrants, and the rule of law to deliver abundance beyond any dreams of our forefathers. You need not be an economist to understand how well our system has worked. Just look around you. See the 75 million owner-occupied homes, the bountiful farmland, the 260 million vehicles, the hyper-productive factories, the great medical centers, the talent-filled universities, you name it – they all represent a net gain for Americans from the barren lands, primitive structures and meager output of 1776. Starting from scratch, America has amassed wealth totaling $90 trillion.

I don't often see this sort of pride in America. Normally the flavors I do observe are hyper-nationalistic and filled with bravado, while the tone here is lauding yet reserved. There's a sense of authenticity delivered in the way Warren Buffett - an extremely humble, yet successful man - talks about the way his country has helped him succeed. It's austere.

This isn't part of the regularly scheduled programming for threads about his letters (mostly we like to champion index funds or debate the utility of active investing), but it's what really struck me this time around. Juxtapose his words here with the same category of conversation about America in many other contexts and contrast the integrity involved. In a time when America appears to be experiencing quite a bit of social and political volatility, it is refreshing to hear optimism from a source that does not appear to use it as an instrument of control.

EDIT: Well this has since ignited a debate about America's cultural identity and history of imperialism...not really the spirit of what I was going for but here we are I guess...

America is worth way more than $90 trillion. He's valuing it like a buyer :)

As a quick back-of-envelope check: American GDP in 2016 was $18.86 tn.

The son of a bitch wants it at a 4.7 trailing multiple, after a relatively slow-growth year. All that praise - and then a 4.8x multiple. Now I know how he butters up his acquisition targets :)

EDIT: I am getting downvoted, but I am keeping this. You guys don't realize that valuing companies is what he does all day, every day. That's literally his job. When he throws a figure like $90 trillion out for America, that is not casual or haphazard - it took him a few seconds to come up with that, and he did it on some basis. We get real insight into his thinking, especially when it comes following such lavish praise. In my opinion I am making a good contribution in pointing this out. We've just learned something.

From: https://www.federalreserve.gov/releases/z1/current/z1.pdf

"The net worth of households and nonprofits rose to $90.2 trillion during the third quarter of 2016."

So? That doesn't evidently include business assets let alone future growth.

I upvoted you, I guess most people downvoted you for the use of "son of a bitch", since most people like Warren Buffet.

Regarding the 90 trillion, I disagree with him. I see a country as a pearl: there's a tiny nugget, a bit of dust or some other small thing that starts the process of creating the pearl inside the shell of they oyster. Then over time more and more mother of pearl is deposited until the pearl is created.

The US mainland hasn't seen a war since 1865. Even the Civil War never touched many parts of the mainland, such as New York or Chicago.

And you've been depositing "nacre" for over 2 centuries at a rate that in the past decade has been around 10 trillion per year. I know that a lot of that wealth doesn't actually come back to the US, a lot of it is immaterial, that there's also a lot of destruction and regeneration even without war, but there's no way I'd evaluate the current wealth of the US at only 90 trillion.

It's got to be at least 10x the current GDP, if not more, in my opinion.

You're talking income statement. He's talking balance sheet. Apples and oranges.

An interesting thought, is GDP really the correct figure to be looking at though? Really what we would want is the 'national earnings' in a net sense.

You are probably getting downvoted because it seems unlikely that a multiple of GDP had to anything to do with Mr. Buffets analysis of American Wealth.


I think my metric is fine. The link you just quoted says "Including human capital such as skills, the United Nations estimated the total wealth of the United States in 2008 to be $118 trillion" - up to you if it's higher or lower 8 years later. His estimation is still low.

Anyway value is not usually priced in terms of wealth, though - but on the future.

"U.S. household and non-profit organization net worth rose from $44.2 trillion in Q1 2000 to a pre-recession peak of $67.7 trillion in Q3 2007. It then fell $13.1 trillion to $54.6 trillion in Q1 2009 due to the subprime mortgage crisis. It then recovered, rising consistently to $86.8 trillion by Q4 2015"

Look, it's great and all but 1) it was not a standing start (NY and VA have colonial histories starting over 400 years ago) 2) even at a low rate of return of 4% wealth should have compounded over 12,200% over 240 years (or: assuming a 4% IRR and current $90T valuation, ignoring inflation were the colonies worth $750M?) 3) this spanned the industrial and computer revolutions and all nations benefited.

If you don't read this much, then go back and read prior ones, WEB writes this way all the time. I like the guy a lot, but he does.

I agree with the main thrust of your statement. My understanding from my synthesis of reading the experts is that the U.S.' current economic success and international power comes down to:

1) Political stability and the rule of law: No point in investing much in a farm, factory, or infrastructure (fiber!) if it will be burnt down the next day by bandits or seized by someone more powerful (government, the rich family in town, etc.). The same applies to human capital (education): No point in studying computer science if there is no electricity and your life will be a fight for survival with guns and knives.

2) Free people and free markets (as a general principle, not taken to logical extremes): The system that produces the most aggregate wealth from the same labor and capital inputs.

3) Scale: Of developed nations, the U.S. has by far the largest internal market. ~325 million in the US, second is Japan at ~125 million. The UK market is 60 million, for example; that's why the Beatles sang with American accents (AFAIK - and also because the UK and Europe probably were still recovering from two massive wars). Note that Europeans are roughly as productive per capita as Americans. Scale by itself isn't sufficient; China and India have probably always been larger, for example.

4) Geographic security: Protected from enemies by two oceans, and with neighbors too weak to do anything but be friendly. To get a sense of what those oceans mean, look at how hard it was to attack across the English channel in WWII. If the U.S. was in continental Europe, WWI and WWII would have devastated the U.S., twice, just like the rest of Europe - and who would have provided a Marshall Plan to bail out the US along with the Europeans? Instead, thanks to geography, it's only a slight exaggeration to say that not a foreign shot was fired on US soil - and hasn't been since 1812.

5) Geographic economics: According to one geopolitical analyst I read, the U.S. has the largest navigable river system and the largest contiguous area of farmland in the world, and they are in the same place, the Mississippi River basin. Remember that most of the world economy was agricultural for much of U.S. history; imagine the impact of that geography, an almost guaranteed economic engine. Consider how critical controlling New Orleans and the Louisiana Purchase were and are.

I agree with you, but particularly with 4 and 5. As far as 5 goes N. America had/has enormous iron, copper, uranium, gold, natural gas, coal, and petroleum deposits to an extent that I don't think many appreciate.

Bingo. See Energy in History by Vaclav Smil or Sources of Power by Manfred Weissenbacher for much more on this.

The #2 allocation: Russia/USSR. Saudi Arabia has oil but little else. China does fairly well in resources and coal, but not oil.

Those who credit american ingenuity and exceptionalism must acknowledge land is by far the most precious commodity, an entire continent and a beautiful and rich one like North America is essentially priceless, and will enrich generations to come till the end of time. Much much more than $90 or $900 trillion. The economic value of this immense tract of free land and slave trade cannot be brushed aside.

But there is also credit to the courage and ingenuity of the early immigrants who took perilous journeys leaving everything behind, risking diseases and an unknown and uncertain future, and made something out of it.

One would like to think those who are proud are proud of this and not the usurpation of a continent or slave trade.

Land really isn't that valuable. You can build a great country without it. See Israel or Japan or SK or HK or Singapore.

Its the people and way of life that matter. Primary resources can be bought.

In fact land can be a hindrance when it induces Dutch Disease.

You have to consider geographical advantages when considering the growth of a civilization. For instance, the Mississippi River has amazing properties for transportation which was obviously great for trade, manufacturing, and settling. Many rivers in Africa may seem similar on the surface but due to things like frequent waterfalls and variation of depth, they are not nearly as advantageous.

This stratfor article discusses the natural capital afforded to the US: https://www.stratfor.com/analysis/geopolitics-united-states-... both in terms of transportation networks and being removed by an ocean from the costly power struggles of Europe (which I'll add can be seen in the numbers of casualties for Americans in the first and second world war relative to our European counterparts and realized gains from those wars).

There is also an interesting observation by Nick Szabo about the value of a transportation network: ' Combine this with Metcalfe's Law and we reach a dramatic but solid mathematical conclusion: the potential value of a land transportation network is the inverse fourth power of the cost of that transportation. A reduction in transportation costs in a trade network by a factor of two increases the potential value of that network by a factor of sixteen.'


So yes, the actual land we occupy is worth booku bucks.

Super minor (admittedly grammar nazi) thing, but the spelling is "beaucoup", from the French word for "much" :)

This is classic Warren Buffett. He leads almost all of his annual shareholder letters with something similar. While he may be talking his book, he does it in a wry and genuine way that makes it a pleasure to read regardless.

they all represent a net gain for Americans from the barren lands, primitive structures and meager output of 1776. Starting from scratch, America has amassed wealth totaling $90 trillion.

This was a gain that was achieved not by starting from scratch but by stealing lands from indigenous people and forcing Africans to work that land. I'm not sure if you can describe the kidnapping, murder, rape and ultimately genocide of multiple people groups as miraculous, unless one subscribes to the idealogy of manifest destiny.

While I think it's important to not neglect the horrors of slavery and the theft of lands from indigenous peoples, it's disingenuous to imply that the sole (or a major) cause of America's current and continuous booming economy was either of these.

The easiest way to dispel this notion is to show that the vast, vast majority of American wealth (>99%) came about long after slavery had ended. Indeed, if we could return to the economy at the time slavery was in full swing (even disregarding morals), not one rational person would choose to do so. Another way is to compare the US economy to those that didn't discontinue those practices. Or to show that even in current circumstances the US economy continues to grow rapidly, after hundreds of years of doing so.

So, please don't forget the atrocities caused by the United States. But also don't attribute everything that ever happened in the United States to those atrocities. It may be a cheap way to brush aside the success of the United States, but it isn't an honest argument. Clearly there's something else going on that has made the United States the most wealthy country in the world (per capita).

Microsoft might have billions of lines of code today, but they would be precisely nowhere without the few K-lines of code that composed microsoft basic for the altair.

Its misleading to say that 99%+ of american wealth occured long after slavery etc ended, because it still started there.

True, but I don't know if it's accurate that the United States wouldn't exist without slavery. I wish we could accurately run simulations; a lot of variables.

Sure, but that's a pipe dream so why not study history instead?

The question at hand is "Does the American system create massive amounts of wealth?" The comment essentially claimed it only did so because of slavery. I argue that isn't true.

If the American system only works as a result of slavery then it should be discounted. If not, however, it should be understood and replicated where possible.

And we should all study history regardless.

No, the comment didn't claim that. Rather that it didn't start from scratch in a barren land, instead it started by abusing those people for advantage.

But ex-slavery states in the US are not the wealthiest and economically often in the bottom half. If abusing people gave an advantage the effect should be the strongest there?

> they all represent a net gain for Americans from the barren lands, primitive structures and meager output of 1776. Starting from scratch, America has amassed wealth totaling $90 trillion.

This is the original quote. The issue is with "starting from scratch." You're not starting from scratch if you obtained the land through genocide, assisted by free labor. You are starting with quite a lot. America did not start in 1776. European powers had been investing in the new world for hundreds of years at that point. The whole issue is calling the economy of America at 1776 "starting from scratch." It's ahistorical.

Someone can inherit a fortune as a child and still lose it. Doesn't mean he started from scratch.

Try running it without the centuries of british and european progress and see what you end up with.

I'm not sure what point you're making.

The point Buffett and Munger were making is that the current American system works very well and creates enormous amounts of wealth. Doss the fact that there was slavery for centuries all over the world somehow refute that? I can't see how it does.

That's kind of an absurd comparison.

If you mean "what if time went on without Europeans in the US", that's a big what if. The indigenous peoples would have carried on in the Bronze Age, and would have been wiped out later by a different collection of foreigners.

The reality is that the US benefited from the culture and know how of Europe without the baggage of supporting useless aristocracy.

While I think it's important to remember these atrocities, I think that for economic understanding it's important to note that these were not the major drivers of growth.

Remember that atrocities like that happened in many places that did not grow into giant economies. Stealing land and enslaving people may have given a head start, but clearly something else delivered the big gains.

If you look at the history and the economic charts, the big boost was started by the industrial revolution.

> the big boost was started by the industrial revolution

Exactly. Now, lets look at some of the causes of the first Industrial Revolution

First, large tracts of lands in Britain, largely held in the commons, were stolen from the peasantry and given to private individuals and landlords, as part of the Enclosure movement. This forced the peasants to look for work in cities en masse, providing cheap labor for the capitalists.

Second, Britain's African Slave trade constituted a big part of the early accumulation of capital that made the revolution possible.

Cheap cotton from the colonization of India as well that produced by the slave labor in North America fueled the textile industry, which was at the heart of the industrial revolution. India's share of the world economy fell from 20% to less than 5%, chiefly because the capital required for industrialization was siphoned off to England


Your first point is interesting. People gloss over how disruptive the industrial Revolution was, and the downward pressure it put on the wages of farm workers.

I'm not convinced by your second one. Why didn't states like Portugal industrialise equally quickly? Or within America, why didn't states with more slaves grow faster? Germany has no history of slavery, and the same is true for modern industrialisation transitions like South Korea and China.

The topic has been studied in great detail in economic history. The consensus seems to be that however horrible slavery was, it wasn't fundamental to industrialisation.

Admittedly without support, I'd assume that slavery held back southern productivity.

If you are making profit to support a lavish lifestyle relative to your local peers and (crucially) there is no free market value of your laborers' labor, then what incentive do you have to apply innovation?

Some (cotton gin), but certainly less than a free (in all senses of the word) labor market where a shortage of workers leads to increased wages and a push towards mechanization.

> Admittedly without support, I'd assume that slavery held back southern productivity. If you are making profit to support a lavish lifestyle relative to your local peers and (crucially) there is no free market value of your laborers' labor, then what incentive do you have to apply innovation?

I agree. It is my understanding that the Romans were in a good position to develop a usable steam engine, but never had enough motivation to do so, because slave labor was cheaper.

  Germany has no history of slavery
We'll just conveniently ignore the war years, gotcha.

That is stupid sophistry. In looking at an economy, comparing economic models, forced labor during 4-5 war years (especially a war which turned out to be a big loss and destruction of the country) is different than institutionalized serfdom/slavery over generations.

That's because when l the other empires where getting going Germany was a set of small disunited sates.

Also take a look at what happened in the Sud west if you think Colonial Germany didn't have slaves

> First, large tracts of lands in Britain, largely held in the commons, were stolen from the peasantry and given to private individuals and landlords, as part of the Enclosure movement. This forced the peasants to look for work in cities en masse, providing cheap labor for the capitalists.

A very interesting related book that I've read about that period and which I'd recommend to everyone generally interested in economic and social history is E. P. Thompson's "The Making of the English Working Class" (https://en.wikipedia.org/wiki/The_Making_of_the_English_Work...). I'm generally leaning on the right side of politics and economics (I'm a sympathizer of both Bentham and Benjamin Constant, who are not receiving very kind words in this book), but I found it super interesting and I find it intellectual honest to try and and understand opinions (and related facts) coming from multiple sides of the story.

> Cheap cotton […] fueled the textile industry, which was at the heart of the industrial revolution.

It's always been my understanding that _wool_ had been the early carrier of the industrial revolution? That by the time cotton entered that picture, the revolution was well underway?

One might consider that if Enclosure did not increase total food production productivity per person, then the peasants would have had to just keep working the land like they did before. I'm not saying the peasants had better lives as industrial workers than as feudal farmer workers (they probably did not), but maybe in the long run more people will have better lives. Same problem today with automation.

I am not very receptive to those kinds of argument, arguing for widescale criminal/immoral acts today to justify a better future. Sounds very "Final Solution"-esque to me. And everytime this argument is used to justify an action in the present, it is much weaker as it presents merely a "possible" better future. However, you are applying an after the fact justification. There are many actions that justified themselves on the basis of a better future, but failed to deliver.

> for economic understanding it's important to note that these were not the major drivers of growth.

Two hundred years of slavery was not a major driver of economic growth?

Edit: Serious question, rephrased: do economic historians really not consider slavery a major driver of growth? If so, that would be highly counterintuitive. We're talking about the free labor of ~10 million people over two centuries, in an economy that was almost entirely agricultural.

Normally the story is that you need certain institutions to make it work.

Rule of law (contracts, low official corruption), absence of arbitrary confiscation risks (ie the King is not going to suddenly come and grab your stuff), unfettered movement of goods/people/ideas. Generic ideas that allow you to compare across societies.

I actually studied economics, and the explanation of how growth arrived does not normally rely on slaves. It tends to focus more on the advent of early parliamentary government (Glorious Revolution), presence of coal in northern England, and advancement of science and technology.

There's no absolutes in economic history though, and you might well find an argument that the triangular trade aided the industrial revolution. That's more of a vignette that explains why England in particular might have prospered, rather than an explanation of how growth gets started in general.

I've got a degree in economics as well. There are a few more big ones, including the advent of the joint stock company (or more generally, the ability to effectively pool capital) and the common law, specifically the ability to enforce business contracts. Those two are fundamental.

This is a good point, under the rubric "institutions girdling trust".

Quite relevant as a set of innovations in the time when people started having to do business with strangers, particularly ones with different ecological positions. You can imagine having lived in agricultural societies there would be a big question of how exactly you're going to have a business relationship with say a factory owner or delivery company.

JSC, exchanges, (perhaps central banking as well) and various encounters with credit issues worked out a certain way in the UK, and innovations were copied across many other societies.

Didn't the UK mainly copy them from the Netherlands?

Another thread is that a lot of ingredients originated in different places in Europe, thanks to political fragmentation.

- Mass production: Venetian arsenal

- Central Bank: Sweden

- The word Bourse: a certain family in Belgium

- Political philosophy: lots of places

- Coal and steel production, factories: Northern France, Belgium

- Religious freedom: rather bloody wars still in living memory

An economy is about the volume of cashflow (value flow), not magnitude of wealth. If you have all the money in the world, you will find there is nothing you can buy.

While a large number of, not free but very low cost, laborers will build individual wealth for the small percentage of the population who use them, those same laborers do not participate in the economy. So you end up with very large supply and very little demand, little or no reason to innovate, and a stalled engine of growth.

Slavery, or even low wage workforce is bad even from the point of view of entirely selfish actors. It erodes the market eventually killing the entire economy.

The lesson is, if you want to get rich don't reduce the cost of your labor force, increase the value of your production.

This basically sums up the debate to me. Great summary.

Not an economist, but...

I don't think that there is any doubt that slavery provided a great deal of the early economic growth in the American south. (Weirdly, I was just reading an article that suggested that slavery itself did not catch on in the Virginia colony until like 60 years after it was founded because slaves cost more than indentured servants, but didn't live any longer.)

However, if you combine the fact that the southern economy was based on labor intensive agriculture (indigo, tobacco, and cotton) with the presence of cheap slave labor prevented the southern economy from industrializing, which limited its growth during and after the industrial revolution.

An amusing note from the chapter: between 1620 and 1660 (?), the Virginia government continually re-passed laws requiring everyone to plant at least two acres of corn. Apparently, most didn't want to take the minimal time away from their tobacco crops, in spite of the fact that they were frequently starving.

It's not that it wasn't significant at that time. It's just that in the long-term, it looks small compared to making the value of the labor of the entire population 100x more valuable.

This is true, but most of the economic historians I am aware of also acknowledge that America wouldn't have been in the position to leverage industrialization that it was without the economic driver of slavery. Disentangling them is very difficult and usually smells of a political motive.

The slave holding states are now the poorest and were under-industrialized even during the Civil war.

The correlation between historical slavery and industrialization/modern wealth is negative.

Not really difficult to disentangle.

And theres Canada.

>Disentangling them is very difficult and usually smells of a political motive.

Whereas claiming they can't be disentangled is obviously disinterested.

Slavery was the rule, not the exception in the world at the time. The African kingdoms mostly practiced it, the Arabs were infamous for it, Mexico ended slavery in the 1830s after American industrialization was well underway, Russia didn't truly end serfdom until around 1900 as I recall, and then you have India's caste system, so only China is left without slavery in some form? But were they? And why didn't all of these countries industrialize?

Possibly because they didn't have the large amount of valuable raw materials to process, the way England did from its slaveholding colonies?

If you think slavery was the main, or even a large driver of industrial growth, you need to explain the extreme lack of industry in places where slavery was common versus places where there was no slavery. E.g., New England versus the Carolinas, etc.

Northern manufacturing bought cotton from slave plantations, yes. As did British mills.

However, you'll note that in the absence of southern cotton during the Civil War, these textile mills did not shut down or become unprofitable, they switched to alternate sources of cotton.

Slaves were expensive, not free (not to say they werent a contributing factor)

Expensive compared to what? Since this idea is a little counter-intuitive, can you suggest a search or link?

From this [0] I can only conclude that owners were paying for value and the price did go up over time, as did the price of cotton, but it looks like it was a good deal.

[0] https://www.measuringworth.com/slavery.php

Im not saying it wasnt a good investment for them (im sure it was), but it costs a lot of money not only to buy slaves, but to feed and take care of them.

> Remember that atrocities like that happened in many places that did not grow into giant economies. Stealing land and enslaving people may have given a head start, but clearly something else delivered the big gains.

To be fair, there are few if any countries with the scale of stolen/free land and enslaved labor as in US history.

You'd have to look at the European 'colonies' for both. The US of course was the first colony to become independent -- meaning an end to it's profits being extracted for the home country, and instead re-invested locally.

So I'd say there are basically no other countries with close to the scale of profits built from stolen land and enslaved labor, and then not extracted for a colonial home country overseas.

And while the industrial revolution wasn't a distinct U.S. advantage, the post-WW2 period gave the U.S. a near monopoly on industrial production. Most factories across Europe and Asia were destroyed in the war.

I'm not an economist, but as a student of history it seems America's dominance stems from being an arms dealer to Europe during both world wars, not getting its infrastructure razed to the ground in the process, and being both the bank and the builder for the resulting recovery.

It also doesn't hurt that the allies gave the US its best technological secrets during the war and the best minds from both sides emigrated to the US during and after the war.

You just described the history of China, South and Central America, the Middle East, Eastern and Western Europe, Australia, our friendly Nordic pillagers. Am I missing any? Oh that's right all those empires that crumbled to dust to form our current nations, them too.

You just described the history of Humanity.

Yeah, it isn't that America doesn't deserve its riches, it's that just about every current national government doesn't deserve its riches. The working class is as globally exploited as its ever been.

edit: Yo guys I'm not saying we need to give it all back. History is stained in blood.

Im not sure America gained from slavery in the long run. The economic cost of the civil war, the destruction of the South, and the countless dead were probably a net negative over what was gain from slavery.

America achieved massive wealth in spite of a violent history, not because of it.

The working class is living better than at any other time in history. Without progress they'd all be working fields, with little to no leisure time, with little in the way of education, entertainment and the arts. They'd be worried about famines and diseases that have long been brought under control.

Life back then was short, nasty and brutish. If the population continued to grow with corresponding progress, we'd be fighting even more over the limited resources available.

> The working class is living better than at any other time in history

On the larger scale of history, yes. I don't think working class people are necessarily doing better than a few decades ago, when they had stronger unions and more power, and before wages stopped rising (which seems likely related to the loss of power).

But an important note, and I don't mean to pick on the parent. In these discussions, the working class is almost always described as "they" and not "we". What do we really know? Input from people with real experience is necessary.

Slavery was less efficient than a market economy and a free labor pool. Consider the Irish who built the Erie Canal. They were paid mostly in rum and they died off so quickly the bosses didn't care because a fresh crop of Irish workers walked off the boat the following week.

Slaves had to be fed and housed and nominally cared for. After all, they cost money and you didn't want to throw away your investment.

The slavery economy, which is what the South fought to preserve in the American Civil War (let's face it: those who like to hide behind "states rights", it all comes back to "states rights to buy and have slaves"), was a last gasp to try to preserve what was left of feudalism. It was doomed before it began.

Please don't misconstrue this as being "pro slavery". Treating humans as property is an abomination. Even the Romans believed this and enshrined it into their legal codes even though they kept slaves.

>let's face it: those who like to hide behind "states rights", it all comes back to "states rights to buy and have slaves"

This is an idiotic strawman. That's the equivalent of saying that people who think countries in the European Union should be mostly free to implement their own laws are pro slavery.

Smaller localized government control vs one rule for everyone has little to do with slavery. There is no reason that slavery couldn't exist in a strong central federal government system either.

I think you are misunderstanding the context of the parent's argument. I'm assuming he's not talking about all states' rights arguments, only those applied to the US Civil War.

If you look at historical documents, protecting the institution of slavery was clearly the main driver for the Southern states to secede. It relatively recent years, Southern apologists have tried to rewrite this as "No, they were just for States' Rights", because this is currently less offensive than saying they just wanted to own slaves.

Yes you're misunderstanding the point. It refers to southern US states who claimed states rights when seceding from the Union in the American Civil War.

I apologize then, the grammar implied the present tense - "those who like to". There are lots of conservatives who like to advocate for stronger state level governance now, but I don't know of any movement to bring back slavery.

Slavery was a boat anchor on America, not a source of strength. Most of the dynamism and power that was built in the US took off not coincidentally after the wane of slavery.

And until very recently the former slave owning states were and in some ways remain sleepy backwaters dependent on the largess of the military and welfare to remain viable.

> This was a gain that was achieved not by starting from scratch but by stealing lands from indigenous people

Seeing as how you are saying that the growth of America was dependent on 'stealing' land you must be implying that the success is dependent on the stealing of resources.

Which is trivially proven false by simply looking at South America.

> forcing Africans to work that land

Forcing Africans to work the land stunted American growth. It's not a coincidence that the richest parts of the countries are the ones that industrialized.

Industrialization of the North started with textiles. Which were due to cotton. Which was due to slave labor.


To be honest, so is every successful country. That is why they are successful, because they once had or still have power over others.

I'm not an American, but if you feel quilty because of the past, I'm more than welcome to get a little financial contribution to my life. I'm from small and poor country, no great history or privilege.

> To be honest, so is every successful country. That is why they are successful, because they once had or still have power over others.

I'm curious, do you include Hong Kong in that classification? How about Estonia? I'm curious what 'power' you consider those countries have, or exert, over others.

Hong Kong is tricky one, but I wouldn't classify Estonia as such. While Estonia is successful considering its past, they are nowhere on the level of other developed Western countries. (yet)

> Hong Kong is tricky one

Please elaborate, I'm genuinely interested in why you consider them an, exception(?), or example, to your blanket rule that successful countries have power over others.

> While Estonia is successful considering its past , they are nowhere on the level of other developed Western countries.

So Estonia hasn't met your criteria for a 'successful' country (what is your criteria btw?). Is their relative success compared to neighbouring baltic states a result of them exerting force or power over their neighbours or others? Or something else?

> (yet)

Is the only thing stopping them from becoming successful, exerting force or demonstrating power over others, or are they currently suffering from an oppressive regime doing likewise to them (which is holding them back)?

Yes, we took land from indigenous peoples, and enslaved Africans. And yes we did awful things.

But isn't it obvious that neither of these things created the wealth we have today? To my thinking, our current wealth derives from technological innovation, process engineering, psychological insight, most of which would not have been possible without welcoming people from other lands, and being willing to work with those who are different than we are.

But aren't you still doing that today? I believe that somewhere in your country, someone wants a big pipe on some land, but the people living there don't want it, yet they force it anyway.

It's not actually going on land they own, but near it. The argument is that it's an environmental risk to their land, not that in infringes their property rights.

That "someone" is really every American who enjoys cheap energy and, by extension, cheap food, transportation, etc. whether they know it or not.

Don't generalize. I'd much rather gas prices stay high and the environment not get spoiled so alternative energy sources can compete fairly.

Besides there cost / benefit of the pipeline only really makes sense to those who profit from it directly.

Well, we do have, as most modern countries do, a system for the taking of private property for public use. But that's not even what's happening here, as no property is being taken.

The gains weren't just from those things - there was a lot of hard work involved. However, your point that it wasn't "from scratch" is a valid one and that jumped out at me too.

I am going to give Buffett the benefit of the doubt in terms of what he meant. Not that it was a completely clean slate and no one was here beforehand, but that the economic productive output that existed here before (beyond bare resource value) was not assimilated and did not contribute much to present day economic output. For all intents and purposes, it was "starting from scratch". Contrast this with, say, the Roman conquest of the Greeks, which was almost a kind of cultural conquest of the losers over the winners.

This is not to minimize the genocide of the Native Americans that occurred, or the horrors of slavery. But in an economic report looking at compounded returns over the history of the US, starting from scratch is a fairly reasonable assessment.

The areas that used slaves the most are now some of the poorest areas of the USA. Maybe slavery didn't have that big of an impact?

Actually the opposite. Social and political institutions of the slave owning South had developed an entrenched extractive hierarchy not unlike the aristocracies of Eastern Europe at the time. The legacy of these oppressive institutions has lead enterprising Americans to seek their fortunes elsewhere throughout history.

Yes I believe in Ken Burn's documentary he mentioned that even at the time the North's economy far dwarfed the South's. Especially in terms of technological advancement.

Without slavery, much of the colonization of the US would have been economically pointless. Without slavery, much of the non-slaveholding US (and England) would have had little incentive to industrialize.

While it's true that there is a bit of incumbent/disruption element involved - the American south was probably the most advanced agricultural civilization ever, while the north invested heavily in the very disruptive industrial revolution - I'd say having broad swaths of their entire society burnt to the ground and then effectively confiscated by Northerners has much more to do with any present-day economic troubles.

Not to say they didn't deserve it, but the entire American south basically had to reboot. Some states figured it out (Virginia, North Carolina, Georgia), and others haven't done as well (Mississippi, Alabama, Tennessee).

> the [antebellum] American south was probably the most advanced agriculture civilization ever

I don't follow. Certainly the current farming system in the American mid-west is orders of magnitude more productive. But even if we're focussed on pre-industrial history, are you sure that the ancient South American agri-economies weren't better? And for productive land use, what about Japan and south-east Asia, where every square inch ran like clockwork.

I'd like to see a citation for that. Everything that I've read up to an undergraduate level implied that their farming methods were less than ideal, even by the standards of the day, and that in many ways prime land had been exhausted.

Tennessee originally wanted to fight for the North and much of Western North Carolina didn't want to join the confederacy because most of the people in these regions owned no slaves and were rather poor Irish, Scottish, etc. immigrants rather than aristocracies and industrial tycoons like a lot of the Deep South and didn't see any benefit to supporting slavery. However, they did always wonder what'd happen if they didn't join the rich Southerners and the union lost. There's a lot more factors obviously but lumping in Appalachia with the south is an oversight that is pretty misplaced.

Tennessee and much of Appalachia has been historically on the side against slavery and corporate interests until somewhere around 60 years ago. I don't know how it happened besides hand-waving "Southern Strategy."

You forgot the most important data point of all, the theft of IP from the British.

Funny how that's not accounted for much these days, but America's historic success as a direct result of African slavery and Native Indian genocide, is.

You're right in that those things happened, and I even agree with the sentiment of labeling the treatment of the natives as genocide. But saying that these things are responsible for America's economic dominance shows a fundemental lack of understanding of history. In fact it could be easily argued that slavery was a significant setback after we progressed beyond the very early days of the colonies, when there was simply not enough labor of any kind.

>I'm not sure if you can describe the kidnapping, murder, rape and ultimately genocide of multiple people groups as miraculous

Right, which is also the same thing many native americans tried to do to the immigrant settlers in the West as well.

There is alot of terrible history that isn't covered in a simple investors letter. I think the larger point he was trying to make in the letter was that the American economy works better because it has created a place where talent from anywhere in the world can succeed.

One of the hard lessons our society has learned is that putting so much energy into holding a group of people back hurts both those people and society as a whole. Of course, lately I'm wondering whether we need to relearn that lesson.

Guns, Germs, and Steel

It's incredible to me that so many Americans below have reconfigured their relationship to slavery with a narrative such that they have even more pride in their country since it succeeded in spite of slavery, not because of it.

It's incredible. As a foreigner, I feel like I'm witnessing the payoff some absolutely top-notch patriotic propaganda.

I'm 7 or 8 generations removed from American slavery. I don't have a relationship to it.

Then you clearly don't look much at the world around you, or you would see the obvious link between this past from generations ago and the way current society is shaped. If this particular shape of society that resulted from the many years of slavery doesn't seem to affect you personally, then it means it affects you positively, because it certainly affects others negatively.

Completely agree.

But cue endless comments of lazy nitpicking whatabout-ism that completely miss your point.

hyper-nationalistic, filled with bravado, lauding yet reserved, sense of authenticity, extremely humble, it's austere, category of conversation in many other contexts, optimism from a source that does not appear to use it as an instrument of control

Sorry English is not my first language and it is not easy for me to understand such advanced writing.

Is it that you like the sort of pride that quantifies the material wealth of the nation and attributes it to a market based economy and furthermore there are other sorts of pride that do you not like?

I'm not the author, but I think they were alluding to the type of pride that results in negative forms of nationalism, especially when it's tied into ideas about ethnic states. Various nationalist parties (e.g. the British National Party in my country) are actually thinly veiled parties for racial supremacy, and the Nazi regime was born out of a myth of German natural supremacy. Not to say that all nationalism is like this, but there is a certain strain of national identity that cares much more about race or religion than culture or values.

You're mind reading the worst possible intentions.

This is the exact opposite of the principle of charity.

Why insist on mind reading evil from people who vehemently state other ideals?

By your mindset, you'd mind read Churchill and FDR - the defeaters of Nazis - as Nazis themselves.

Similarly, we could mind read leftist parties as a having the real goal of dissolving and erasing the white race. And your political mirrors do this.

Or you'd see BLM as a black supremacist movement.

Double standards.

What are you on about? I'm intentionally laying out the worst extreme of "nationalism" as an example. Would you prefer that I responded to someone asking about what excessive nationalistic pride could do, with "well some people in the UK leer at the french a bit"?

Also, what do you mean by my "political mirrors"? I'm a libertarian, I don't particularly identify with the left or the right. I'm also a nationalist in the sense that I love my country and the values it supports. You're being hyperbolic.

I don't often see this sort of pride in America. Normally the flavors I do observe are hyper-nationalistic and filled with bravado...

I'd go even further: our current presidential administration spends a lot of energy telling us that America sucks because the people in it suck, the government they built sucks, and the ideals they aspire to suck, and that the solution is to deal out cruelty to the right kinds of people.

I don't understand how anyone can listen to that bilge and interpret it as any kind of patriotism at all, but they do. The hyper-nationalism and bravado are a natural result of an underlying emotional condition apparently shared by about a quarter of the populace: an inability to feel pride in anything but the capacity to dominate.

This is why a few sentences by Warren Buffet feel like such a breath of fresh air. It wasn't always like this, Buffet's far more constructive and positive sentiment is perfectly normal.

> I'd go even further: our current presidential administration spends a lot of energy telling us that America sucks because the people in it suck

Wtf are you talking about? This has never happened.

While he didn't use the words "suck", he did say it was a "mess". http://blogs.wsj.com/washwire/2016/01/10/donald-trump-the-st...

That is magnitudes different than saying the american people suck. Lets try not to put words in peoples mouth, thats how we divide people.

I don't think you could cause more division than the current administration has.

That's your opinion but mine is that division requires minimum two parts.

In this situation you are probably right. However, it's very problematic as a general statement. There are too many atrocities committed by violent majorities against powerless minorities that come to mind. This blanket statement gets into victim shaming really quick.

Agreed. Atrocities have happened and will most likely happen again with innocent victims.

But even with violent majorities there is usually a justification of the behavior that somehow involves something the minority party is doing (or not doing) that justifies the action. Not that this makes it any more morally palatable (or true) from an objective viewpoint but the division may exist to be seized upon.

I'd also argue that Trump isn't the cause of division so much as the result of existing divisions some of which are quite old and have been festering.

My last point is I really grow weary of hearing Trump slams. We get it. You don't like Trump. But some people do. Is there any way we could keep this repetitive bleating on Facebook or something? No offense to poster lastlogin. His comment history seems pretty solid, I'm just sick of the Trump slams every third forum.

My remark was not about Trump. That's why I started out saying that the parent is probably right in this particular case. My concern was with the statement being applied as a general statement. Had the parent made a statement exclusively about Trump I would have been totally fine with it.

It's somewhat concerning that there political situation has reached a point where many statements are assumed to be about Trump.

I was probably treading over the line into HN no go territory, which isn't right. However I really do think that ignoring the elephant on the room isn't helpful either. How do you balance these two factors? Likely by keeping threads on topic would by my thought...

As much as I despise Trump, I agree. I'd prefer HN remain relatively non-political. The minute it starts to resemble anything like the default front page of reddit, I'm going to be looking for the next HN.

The politically motivated down-votes here make me sad..

> we divide people.

Can someone please explain what this even means? I've seen this used as a thought terminating cliche for far too long for it to make sense anymore.

This has never happened.

You know he's been a public loudmouth for ~30 years, right? Consider the encyclopedic familiarity with his massive corpus of blabbering you claim when you make a flat statement like this.

I could point out a bunch of his statements and attitudes, none of which would be news to you. The issue is: You haven't recognized those statements for what they are. They apply to classes of Other, so you haven't recognized them as being applicable to full-fledged equals, to human citizens.

When the president says something like "you have to treat [women] like shit" or when he claims that women are untrustworthy because they're all gold-digging bimbos, he's dissing half the nation as fundamentally deplorable.

When the president says things like "laziness is a trait in blacks," he's dissing ~40 million Americans - virtually all of whom are natural citizens, and who are consistently over-represented in the armed forces - as fundamentally less valuable as human beings.

The fact that he's also being a sexist/racist asshole at the same time shouldn't let him off the hook for statements like these. The fact that you haven't already recognized these attitudes (and many others like them) as fundamentally anti-patriotic attacks on your fellow citizens - that's on you.


> He has said politicians and the political class suck. Not 'Americans'.

Well, not all Americans. Not white or Christian Americans. But he has demonized a lot of minority groups, many of them American.

"... America sucks because the people in it suck..." ≠ Americans I believe Trump has said a lot about non Americans in the US (Mexicans for ex.). But he has also said a lot about Americans (American muslims for ex.).

He doesn't think America is great, aye? Hence the imperative that it must be made great... again.

I think its fairly common for people to believe both that the US is the greatest, and it isn't what it used to be. There's obviously some tension between those ideas, noted humorously by Stephen Colbert's book entitled 'America Again: Re-becoming the Greatness We Never Weren't'.

You're just a loser listening to a bunch of bunk. Trump is about business. Business is about winning. Trump likes winners. Losers suck. Winners make America great. Trump is a winner, Trump is for America, so America will be great again.

Clinton and her gang accurately tagged the collection of treasonous fascists, racists and conservative losers surrounding Trump as deplorable. Unfortunately for everyone, she was incapable of understanding how and why Trump appealed to otherwise reasonably intelligent people.

If business is about winning, then during one of the chief components of business; sales, the business is making the customer into a loser when they transact.

Is that the kind of business you're engaged in?

>It is refreshing to hear from a source...

I agree and thanks for sharing.

The biggest challenge now for me with free time is read from those types of sources. Or to just stay off my phone!!!!!

The joy of reading is under attack.

When my parent got near death s/he also framed a very patriotic life full of optimism.

I must say that I also feel proud and I'm not even American!

Every country can be proud of their achievements. The success is powered by science, human ingenuity and risk taking, all over the world.

>Normally the flavors I do observe are hyper-nationalistic and filled with bravado, while the tone here is lauding yet reserved.

He used this same logic when endorsing Hillary Clinton for President.


Note the positive ton towards immigration. I too found this part interesting.


Austerity or not, assuming infinite growth is a fallacy.

Who's doing that?

> Charlie Munger, Berkshire’s Vice Chairman and my partner, and I expect Berkshire’s normalized earning power per share to increase every year.

The transparency and humble tone is pretty unique.

"Unfortunately, I followed the GEICO purchase by foolishly using Berkshire stock"

"It was, nevertheless, a terrible mistake on my part"

"Despite that cautious approach, I made one particularly egregious error"

I bet you don't find that sort of thing in many other annual shareholder letters.

Warren Buffett is an expert salesperson, and this tone is the exquisitely crafted product of 70 years of salesmanship. Buffett has worked tirelessly to build his public image, and his "aw-shucks" act is a critical part of that. His image of a down-to-earth person with unquestionable integrity* has enabled him to lock down investment deals under the most favorable possible terms.

*) read one of his biographies to see he's not afraid to play dirty

I've read his biographies. He's super ethical.

What's the worst he's done?

I do not know what the worst is that he has done.

For sure he and his business partners tried to strongarm the german city / community of Egelsbach to sell it's airport (Germany's largest small airplane airport, near Frankfurt/Main) to him. The aim was to expand the airport, at the expense of the inhabitants. The upside would have been 1-10 jobs, the downside a lot of noise and reduced price of property and life quality.

A lot of intransparent things were going on, fortunately it seems that things came to a halt.

It's business. I would not believe the image of a business man of his class.

[Disclaimer: I live in Egelsbach, Germany, and I have followed the case with great concern.]

Additional source (in German): https://de.wikipedia.org/wiki/Flugplatz_Frankfurt-Egelsbach

It sounds like NetJets bought 80% of shares in the airport [1]. Who did they buy it from? (I assume they were willing to sell?)

[1] http://www.juve.de/nachrichten/deals/2009/05/net-jets-uebern...

Translated: https://translate.google.com/translate?hl=en&sl=de&u=http://...

So a subsidiary wanted to expand an airport they use. What's the big deal?

Off-hand, I can't give specifics. Lehman is one situation that comes to mind.

Another, not WS-based, is that he disowned his granddaughter for talking about the family in a documentary about the ultra-rich.

Here is more info regarding the granddaughter. I would encourage anyone to read it as this situation is more complicated than it seems: http://www.reuters.com/article/us-wealth-buffett-idUSN204043...

Not a blood granddaughter. Just for your information. I'm not making a judgement either way.

He sure supported that girl with a great deal of money. Despite her not being a blood relative, and growing up in another family.

here's one off the top of my head.

Musk vs. Buffett: The Billionaire Battle to Own the Sun - https://www.bloomberg.com/features/2016-solar-power-buffett-...

So he's a bad guy because a subsidiary wanted solar owners to pay fair costs for grid access? Does anyone even think he's aware of this decision?

he's just a simple cave man billionaire.

Sure, but it's easy to be humble when you're essentially an institution. In fact, it's better that way, because it appears honest. It's far harder for an unproven fund manager to admit making egregious mistakes without making his shareholders nervous. Buffett has 50 years of beating the market to soothe stakeholder concerns. Most other managers don't.

For what it's worth - he has been this transparent about mistakes since the very beginning of taking on Berkshire management in the late 1960s (when he was in his 30s) - He makes fairly prudent predictions and plans in each yearly shareholder letter, and is quite fairly critical of himself when those predictions do not pan out.

I suppose. But, see, for example, the recent Cloudflare issues. They were pretty transparent, but missed big on the "humble" part. I don't think there would have been anything but upside had they gone with a humble approach.

His shareholder letters from the 1950s have the same humble tone.

>The transparency and humble tone is pretty unique.

Humble is an understatement. The man is a piece of work, that's for sure.

The HBO biographical documentary is insightful:


It's easy to be self-effacing when everyone views you as the investing messiah! I do agree with you - it is refreshing to read those quotes from the CEO. But he's "earned" it so-to-speak. Less successful people would probably not make such quotes because they have more to lose.

> It's easy to be self-effacing when everyone views you as the investing messiah

He was making critical comments about himself before he got famous.

"Some years, the gains in underlying earning power we achieve will be minor; very occasionally, the cash register will ring loud. Charlie and I have no magic plan to add earnings except to dream big and to be prepared mentally and financially to act fast when opportunities present themselves. Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold. When downpours of that sort occur, it’s imperative that we rush outdoors carrying washtubs, not teaspoons. And that we will do."

It took me 30 minutes to read the complete letter. It was time well spent. I learned why the property/casualty insurance business has a really good business model. It also reminds me to walk away from deals where the financial fundamentals are wrong, but our competition is eager to sign. And finally, I feel that his humble tone is honest and that he is trying teach by showing his considerations, successes and failures.

Buffet has structured his business to give him permanent advantage. The core of Berkshire Hathaway is the insurance business, GEICO and Berkshire Reinsurance. These companies are very profitable and generate steady cash inflow. His cash is cheaper compared other investors who get leverage using financial sector and must hedge against loss. This is important when times are tough, money is tight and stock valuations are low. When other investors must sell something they own or take expensive loan to buy what they want, Buffet is drowning in cash and looking ways to spend it.

from page 8:

>One reason we were attracted to the P/C business was its financial characteristics: P/C insurers receive premiums upfront and pay claims later. In extreme cases, such as claims arising from exposure to asbestos, payments can stretch over many decades. This collect-now, pay-later model leaves P/C companies holding large sums – money we call “float” – that will eventually go to others. Meanwhile, insurers get to invest this float for their own benefit. Though individual policies and claims come and go, the amount of float an insurer holds usually remains fairly stable in relation to premium volume. Consequently, as our business grows, so does our float. .... We recently wrote a huge policy that increased float to more than $100 billion

They have $100 billion float. That's incredible.

If you enjoyed that - take the time and get the book compilation of all BH's annual letters to shareholders - starting 1960s to present. Some of the most valuable reading I have done in years - strongly recommend.

Sold, 2.99 for kindle edition.

You can view many of the letters for free here: http://berkshirehathaway.com/letters/letters.html

I was a #1-ranked stock analyst. And I indeed outperformed the market on my and my parents' accounts. I also know a small hedge fund manager who I believe could consistently outperform the market. But in each case the strategy was to know a small portfolio of underfollowed stocks very very well. It's not something that could scale. He eventually just dumped his clients and managed his own money. I stopped investing in anything except index funds after I stopped being a stock analyst.

I.e., I agree with Buffett's general premise, and have since the 1980s.

"This team efficiently deals with a multitude of SEC and other regulatory requirements, files a 30,450-page Federal income tax return"

30,450 pages holy crap

How can that be necessary? Not a rhetorical question.

I guess they itemize

Plus I hadn't realised they had 3,580 state tax returns as well so that's probably like 100k pages.

I liked HBO's documentary on him, "Becoming Warren Buffett", https://www.youtube.com/watch?v=70nGRBvqFNw

> We may in time experience a decline in float. If so, the decline will be very gradual – at the outside no more than 3% in any year. The nature of our insurance contracts is such that we can never be subject to immediate or near-term demands for sums that are of significance to our cash resources. This structure is by design and is a key component in the unequaled financial strength of our insurance companies. It will never be compromised.

Is he basically saying that the insurance business is structured in such a way to never payout catastrophic amounts? Is this a harmful thing for the insurance claimants?

I think he's saying that Berkshire's insurance is so large and diversified that even something like a earthquake in California would not have a big impact on its cash position. I'm surprised it would be capped at 3% though.

I believe he's saying that the year-over-year float won't go below 3%, not that a very big impact event won't hurt the float for a period of a few months. Part of this is because policies are re-issued every year which means that they can increase premiums if needed and drop high risk customers as he's pointed out in previous letters.

Blackswan events are probably contained through diversification.

His thinking on the surface is very solid: insurance business is a cash cow in some regard, and if the market is down, it is actually an opportunity to move that money into equities.

Here's an annotated version of the letter by Bloomberg https://www.bloomberg.com/news/features/2017-02-25/lessons-f...

"Americans have combined human ingenuity, a market system, a tide of talented and ambitious immigrants, and the rule of law to deliver abundance beyond any dreams of our forefathers." - W. Buffet

Buffet is so modest and humble. It comes through in this comment: "A few, however – these are serious blunders I made in my job of capital allocation – produce very poor returns. In most cases, I was wrong when I originally sized up the economic characteristics of these companies or the industries in which they operate, and we are now paying the price for my misjudgments. In a couple of instances, I stumbled in assessing either the fidelity or ability of incumbent managers or ones I later put in place. I will commit more errors; you can count on that. Fortunately, Charlie – never bashful – is around to say “no” to my worst ideas."

One hilarious thing I learned, and I can't wait to put into action:

So stop by for a quote. In most cases, GEICO will be able to give you a shareholder discount (usually 8%). This special offer is permitted by 44 of the 51 jurisdictions in which we operate. (One supplemental point: The discount is not additive if you qualify for another discount, such as that available to certain groups.) Bring the details of your existing insurance and check out our price. We can save many of you real money. Spend the savings on other Berkshire products.

I need to get hooked up with my shareholder discount!

What Buffet left out. The massive windfall from OPIC, a U.S. Government insurance program not audited by the GAO, in the buy of Mid American. https://www.opic.gov/sites/default/files/docs/claim_mid_amer...

that is assuming the stock market doesn't crash. if you bought an index fund in 1928 you would still be broke AF in 1935 and wouldn't get your money back until the 50s.

buffett profited off the housing bubble and should not be trusted. he owned huge stakes in the ratings agencies that were giving AAA+ ratings to these awful mortgage products, even as publically he was decrying the financial products involved as 'mass destruction' he was making money on it.

he is doing the same with his stock market push. if a million people listen to him and go buy stocks, what do you think happens to his index funds? They go up of course.

absolutely hilarious and sad to watch people worship this guy. if his secret is really to buy index funds, then why do people listen to his speeches and newsletters? you could just go buy index funds and be done with it.

like every other con artist, his genius is to get people to buy in to his story.

He doesn't own or sell index funds.

Your analysis of the great crash ignores the effects of dividends, which were very high in the thirties and made investors profitable much more quickly than you claim.

The housing bubble burst and BRK is worth far more now.

You don't know what Buffett does, how he got rich, or much about the stock market either.

Has anyone ever attended a shareholder meeting? Sounds kind of fun.

Been a couple of times a while ago. It was fun especially the first time. If you're read the stories it's fun to see some of the stuff in reality - Omaha, Buffett's house, the furniture mart, Borsheims, the steak house he goes to and so on. I also met Mrs B, now departed and had a book signed by Warren. Some of the fellow visiting shareholders can be interesting too. The actual talk you can see on Yahoo.

Yes, it was really fun.

On a related note, I came across a website several years ago that has a lot of info from the annual meeting Q&As, as well as other interviews, etc. It's quite long, but I found it very enjoyable to read.


If like reading about Buffett you should definitely check out buffettfaq.com

Yeah, I made the "capitalist hajj" to Omaha in 2005. It was fun, though I didn't really learn anything I didn't already know by reading his stuff. Like he says, buy Vanguard mutual funds.

What about BRK.A?

If you listen carefully to what he is saying, even he is advising a diversified portfolio of low cost mutual funds. If you want to move a small portion of your domestic equities into BRK.A instead to try to get some alpha, feel free, but also realize how much harder it is for him now with his massive amount to invest than it was 30, 20 and 10 years ago.

Every time I get an email letting me know about an upcoming shareholder meeting, I think about this. Haven't been to one yet.

I have more respect for Warren Buffett than any person outside my family.

He's smart, honest, humble, generous, witty and a great communicator. And he's the best investor in the world.

Anyone else a bit disappointed?

Normally these letters have some new brilliant insight or dive into a business I know nothing about. This one feels shorter and more peremptory. I see the financials for the major sectors and the same boilerplate explanation of insurance and railroads that's in every letter.

What's up? It's not like nothing happened with Berkshire Hathaway this year.

The "Annual meeting" section is the most entertaining. It sounds like woodstock for capitalists.

"Come to Omaha – the cradle of capitalism – on May 6th and meet the Berkshire Bunch."

Does anyone know why it is that their insurance businesses post underwriting profits? Is there anything structural? Why does GEICO have such a cost-driven moat?

An owner (Buffett) that understands the insurance business goes a long way. There is less pressure than in a public company to do business even when the appropriate premiums can't be obtained (see p. 10). Having a very large and sound balance sheet also helps.

Their insurance businesses don't always make money. There have been years in the past that they posted big losses.

They post underwriting profits cause he picks excellent insurance businesses.

GEICOs moat is customer satisfaction. Obviously selling direct means their product is a great value, and service means hard to get their customers to switch.

Did anyone notice page 4 is 8.5x11 inches while every other page is 8.25x10.75 inches?

All that cheerleading for capitalism, and the only micro-nod to inequality is this: "However our wealth may be divided, the mind-boggling amounts you see around you belong almost exclusively to Americans."

"See around me," indeed.

There's going to be a day where there won't be any more annual letters from him.

Is there anyone as good as him? He has become a household name, but maybe there are other Buffets out there that we don't talk about?

Until someone makes an AI Buffett simulator.

Yes. But why do you want that? Why the need to state this at the moment?

Life expectancy of 86 year old male is 5.4 years.

What is it for 86 year old male multi-billionaires?

tl;dr: ~5.3 years.

I collected all Wikipedia articles on American billionaires who died in 2008 - 2017: http://tools.wmflabs.org/dschwenbot/intersection/index.php?l...

That got me 74 results. I wgot the articles and manually removed the women based on related Wikipedia categories (turns out https://en.wikipedia.org/wiki/Aubrey_McClendon was a man, I would have removed him just based on the name).

Then I grepped the files for '"[0-9]\{4\} births"' to get the year of birth (this string marks the corresponding category). Two men didn't have a known birthdate, so I threw out their articles, too. This left me with the years of birth for 65 American billionaires. I got their years of death analogously.

After that I calculated their ages as the difference (yes, this could be off by +-1 year, but my method is not exactly rigorous anyway). The mean of these values is ~82.6. 29 of them are >= 86. The mean of those is ~91.3, or 5.3 years past 86. Considering the huge error bars, this is well in line with the general population average.

Probably not as much as you would think. Money can buy you access to cutting-edge medical treatment... but not safe or effective cutting-edge medical treatment. Almost all new treatments don't work or have more drawbacks than benefit, that's why it's called research - and billionaires get access to the results of the big clinical trials at about the same time as everyone else.

One possible difference is his access to tailored research and treatment.

When Finnish geneticist Leena Peltonen-Palotie was diagnosed with rare sarcoma in 2008, her colleagues started big project to save her life. Her cancer became the "worlds most studied cancer" for a short period. They sequenced her genes and used large screening robot to test tens of thousands combinations of different drugs against tissue samples taken from her.

They actually fond a cure for the sarcoma she was diagnosed with, but the cancer had already mutated into a form that did not respond to the treatment and she died two years later 2002. I believe this might have been the first ever for this kind of large scale tailored cancer research. Weirdly enough I can't find any mention of this research effort in English speaking magazines.


"They actually fond a cure for the sarcoma she was diagnosed with, but the cancer had already mutated into a form that did not respond to the treatment and she died two years later 2002"

One could also cite Steve Jobs. Despite heroic measures, his delay doomed him.

(To expand a little bit on this: the Gompertz curve means that even if a 85yo billionaire contracts some cancer and is able to buy a cure no one else can which isn't useless or iatrogenic, he is going to die very soon anyway as the annual mortality risk increases exponentially. This is what is behind those surprising observations like 'curing all cancer would only add a few years to the average life expectancy' - curing cancer just means that you die of dementia, Alzheimers, a heart attack or something else a year or two later.)

Steve Jobs had good prognosis but he delayed the surgery almost a year and relied on 'alternative medicine'. Even with late start he still lived eight years after the diagnosis when doctors used all tricks money can buy.

> he is going to die very soon anyway

This is true. People close to 90 are one flu and pneumonia away from death.

Of the average 86 year old male, you mean. I think he wouldn't bat an eye on getting the best personal health care on the face of the planet (it's also an important long-term goal for him.) He wouldn't overpay for it, either.

Warren Buffet is not health freak. He enjoys life and according to his own words is "one quarter Coca-Cola"

>"If I eat 2700 calories a day, a quarter of that is Coca-Cola. I drink at least five 12-ounce servings. I do it everyday."

Really funny:

>Asked to explain the high-sugar, high-salt diet that has somehow enabled him to remain seemingly healthy, Buffett replies: "I checked the actuarial tables, and the lowest death rate is among six-year-olds. So I decided to eat like a six-year-old." The octogenarian adds, "It's the safest course I can take."


>"If I eat 2700 calories a day, a quarter of that is Coca-Cola. I drink at least five 12-ounce servings. I do it everyday."

What do you expect? ;) "Warren Buffett, who through Berkshire Hathaway (BRK.A) (BRK.B) owns about 9.3% of Coca-Cola's (KO) outstanding shares"

That is interesting. Goes against what I read, "what do you want to be remembered for? Longevity." which given what you just quoted must have just been a joke.

His daughter said that he does not drink water, he just drinks coke. He also eats lots of burgers and steak, I dont understand how his body remains in good health with all that junk food.

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