Quotable quotes from Mr. Buffet’s 2009 letter to the shareholders (my comments are in paranthesis)—-
By yearend, investors of all stripes were bloodied and confused, much as if they were small birds that had strayed into a badminton game.
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As the year progressed, a series of life-threatening problems within many of the world’s great financial institutions was unveiled. This led to a dysfunctional credit market that in important respects soon turned non-functional. The watchword throughout the country became the creed I saw on restaurant walls when I was young: “In God we trust; all others pay cash.”
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The U.S. – and much of the world – became trapped in a vicious negative-feedback cycle. Fear led to business contraction, and that in turn led to even greater fear. (I AGREE!!!!!)
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Whatever the downsides may be, strong and immediate action by government was essential last year if the financial system was to avoid a total breakdown. Had that occurred, the consequences for every area of our economy would have been cataclysmic. Like it or not, the inhabitants of Wall Street, Main Street and the various Side Streets of America were all in the same boat. (To every single Republican and Dem-Hater who was agains the stimulus package and thought “doing nothing is an option” TAKE THAT!!!!! You are wrong. As unsavory as government intervention is we must admit that it was necessary. Period.)
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Though the path has not been smooth, our economic system has worked extraordinarily well over time. It has unleashed human potential as no other system has, and it will continue to do so. America’s best days lie ahead. (I love it)
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As predicted in last year’s report, the exceptional underwriting profits that our insurance businesses realized in 2007 were not repeated in 2008 (Note: Buffet became very concerned about his insurance business in 2005 when Katrina hit. His insurance firm had to pay out a lot of claims. They were prepared to do so and were fine, but he noted that the firm would be in trouble if it global warming had the effect of making a Katrina like disaster more common). Nevertheless, the insurance group delivered an underwriting gain for the sixth consecutive year. This means that our $58.5 billion of insurance “float” – money that doesn’t belong to us but that we hold and invest for our own benefit – cost us less than zero. In fact, we were paid $2.8 billion to hold our float during 2008. Charlie and I find this enjoyable. (hehehe)
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That’s the good news. But there’s another less pleasant reality: During 2008 I did some dumb things in investments. I made at least one major mistake of commission and several lesser ones that also hurt. I will tell you more about these later. Furthermore, I made some errors of omission, sucking my thumb when new facts came in that should have caused me to re-examine my thinking and promptly take action. (The sign of a good manager is one who recognizes mistakes once they happen. The sign of a great manager is one who recognizes flawed behavior….bias and escalation seem to be his two bigest flaws, but recognizing their presence in his thinking is the first step of obliterating there impact in the future.)
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At that time, much of the industry employed sales practices that were atrocious. Writing about the period somewhat later, I described it as involving “borrowers who shouldn’t have borrowed being financed by lenders who shouldn’t have lent.” To begin with, the need for meaningful down payments was frequently ignored. Sometimes fakery was involved. (“That certainly looks like a $2,000 cat to me” says the salesman who will receive a $3,000 commission if the loan goes through.) Moreover, impossible-to-meet monthly payments were being agreed to by borrowers who signed up because they had nothing to lose. The resulting mortgages were usually packaged (“securitized”) and sold by Wall Street firms to unsuspecting investors. This chain of folly had to end badly, and it did. (Sounds like my Credit Crisis for Dummies post!)
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Home ownership is a wonderful thing. My family and I have enjoyed my present home for 50 years, with more to come. But enjoyment and utility should be the primary motives for purchase, not profit or refi possibilities. And the home purchased ought to fit the income of the purchaser. (HERE HERE!) The present housing debacle should teach home buyers, lenders, brokers and government some simple lessons that will ensure stability in the future. Home purchases should involve an honest-to-God down payment of at least 10% and monthly payments that can be comfortably handled by the borrower’s income. That income should be carefully verified. Putting people into homes, though a desirable goal, shouldn’t be our country’s primary objective. Keeping them in their homes should be the ambition. (OKAY, I haven’t really revealed what I used to do before business school but lets just say that a huge portion of my job was trying to convince decision makers that played a significant role in the housing market that our goal shouldn’t just be “generate new home loans” but “to mitigate risk, and keep more people in their homes.” I COMPLETELY agree with Buffet here. Now everyone can or should own a home. Everyone has the right to shelter, but that doesn’t always mean white-picket-fence shelter. A rental apartment or manufactured home must suffice in some cases. What the government and country must do is provide affordable housing options that allows people to have a roof over their head that they can actually pay for on a monthly basis.)
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Though Berkshire’s credit is pristine – we are one of only seven AAA corporations in the country – our cost of borrowing is nowfar higher than competitors with shaky balance sheets but government backing. At the moment, it is much better to be a financial cripple with a government guarantee than a Gibraltar without one. (This concerns me because it means that strong companies that should survive may not if they do not have enough cash stockpiled to pull them through the credit crunch. If my scenario plays out then our economy will be left with weak, zombie like companies that crutch on the government. This is not good. This is like Japan in the 90s and everyone knows what happened to Japan—-an entire lost decade of growth.)
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Derivatives are dangerous. They have dramatically increased the leverage and risks in our financial system. They have made it almost impossible for investors to understand and analyze our largest commercial banks and investment banks. They allowed Fannie Mae and Freddie Mac to engage in massive misstatements of earnings for years. So indecipherable were Freddie and Fannie that their federal regulator, OFHEO, whose more than 100 employees had no job except the oversight of these two institutions, totally missed their cooking of the books. (LOL! It’s true. I was just in a finance group meeting and we were doing a case on derivatives. The boys in the group were going ga-ga over the terminology. It’s as if engineering a derivative is the equivalence of owning a giant phalice….he who makes the biggest, most obscure, most complicated derivatives trade is the biggest. They are dangerous.)
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Now, for those MBAs looking for a summer internship or fulltime offer—-take a look at these companies for inspirtation, they are all owned by Mr. Warren Buffet himself:
American Express Company . . . . . . . . . . . . . . . . . . . . 13.1% ownership
The Coca-Cola Company . . . . . . . . . . . . . . . . . . . . . . . 8.6%
ConocoPhillips . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.7%
Johnson & Johnson . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1%
Kraft Foods Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.9%
POSCO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2%
The Procter & Gamble Company . . . . . . . . . . . . . . . . . 3.1%
Sanofi-Aventis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.7%
Swiss Re . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2%
Tesco plc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.9%
U.S. Bancorp . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3%
Wal-Mart Stores, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 0.5%
The Washington Post Company . . . . . . . . . . . . . . . . . . 18.4%
Wells Fargo & Company . . . . . . . . . . . . . . . . . . . . . . . 7.2%
The Oracle
Investors should be skeptical of history-based models. Constructed by a nerdy-sounding priesthood using esoteric terms such as beta, gamma, sigma and the like, these models tend to look impressive. Too often, though, investors forget to examine the assumptions behind the symbols. Our advice: Beware of geeks bearing formulas. (LOLOL!!!)
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The investment world has gone from underpricing risk to overpricing it. This change has not been minor; the pendulum has covered an extraordinary arc. A few years ago, it would have seemed unthinkable that yields like today’s could have been obtained on good-grade municipal or corporate bonds even while risk-free governments offered near-zero returns on short-term bonds and no better than a pittance on long-terms. When the financial history of this decade is written, it will surely speak of the Internet bubble of the late 1990s and the housing bubble of the early 2000s. But the U.S. Treasury bond bubble of late 2008 may be regarded as almost equally extraordinary.
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Local governments are going to face far tougher fiscal problems in the future than they have to date. The pension liabilities I talked about in last year’s report will be a huge contributor to these woes. Many cities and states were surely horrified when they inspected the status of their funding at yearend 2008. The gap between assets and a realistic actuarial valuation of present liabilities is simply staggering. (OH NO!)
Does anyone know what happened to him? Did Elizabeth leave him? How is she doing in terms of the cancer?
What is going on with this cnn.com article?
How can he deny that Obama is doing things differently? I’ve been alive for 27 years and I have NEVER seen a President be so transparent. Every week, Obama puts a video up and updates everyone on what he thinks the government should accomplish. He answers the press’ questions. He gets up there, and answers. Bush did not do that, he had Tony Snow get up there and do that for him. Obama went to Capitol Hill to talk to the Republicans. That is a HUGE sign of respect. Usually, the Hill comes to the White House…walking over there was a sign of respect, a signal that Obama was willing to negotiate.
And he DID negotiate. TONS of stuff was cut from the package, funding that even economists say should be in the package—like infusing cash to state governments to stimulate regional economies.
The Republicans are on the wrong side of this argument. Period. They dragged their feet. They were obnoxiously stubborn.
If the economy does improve, and the great minds of economics and finance attribute it to this stimulus plan…THEN I want to see zero hypocrisy. It is clear that the Republicans are against this, which means they can take no credit.
Freaking nay-sayers. DO something. How can they sit there and just drag their feet, in this environment…instead of DOING, instead of ACTING.
It really makes me angry.
I’m sorry to break it to you, but you lost the Presidential Election. I am relieved for that, because it seems like your incapacity to view problems from a perspective that differs from yours REALLY would have hindered your ability to combat this recession.
You have called this bailout Generational Theft. Interesting. Have you stopped to think what would happen if the USA mimiced the moves of Japan in the 90’s and took no aggressive course of action to realize losses, stimulate demand, and move on? The annual loss of our GDP would QUICKLY exceed the $800 billion recovery package. The annual losses that your course of inaction would bring to us would be more than $1 trillion, more than $2 trillion, more than any country has ever seen before.
Now, I am no expert but I would rather spend $800 billion today and minimize my losses then live in an economy worth TRILLIONS less.
Taking no action today is criminial irresponsibility. It robs future generations of employment, stability, and a whole plethora of other benefits derived from a strong economy. I thank God that you are not leading the country right now.
See a problem. Fix a problem….This is a simple line of reasoning that your brain seems to miss.
PS. I love how spending billions upon billions in Iraq is “A-Okay” but spending billions to help re-start our economy is bad. You are not an expert. Lawrence, Bernanke, Paulson and Geithner are experts. Sir, you are on the wrong side of this argument…I’d appreciate it if you would stop dragging your feet.
Hush now. Who are you to say that this stimulus package will not work? I think that tax cuts are great, which is why the stimulus package is doling out a hefty amount of tax cuts. However, tax cuts are not enough.
Consumers are acting IRRATIONAL right now. So are lending institutions. We need concentrated spending to shock the economy into production. We need demand for industrial goods and since consumers are too skittish to buy things right now, we need the government to purchase enough goods to bring some continuity back into our lives.
Shelby, you are going against LAWRENCE, BERNANKE, PAULSON and a bunch of other VERY reputable minds in finance and economics when you say this stimulas package is doomed.
Stop being a god damned nay-sayer and start DOING something about this situation. Or.Get.Out.
This on the WSJ:
The package, which would cost more than the entire Iraq War, would reverse the Bush administration’s approach to boosting the economy. That approach relied heavily on tax cuts that tended to put money in the pockets of middle-class and more affluent Americans. The $275 billion in tax relief offered in the stimulus package focuses more on lower-income families. It also includes business incentives to spur job creation and a $500 payroll tax holiday for workers.
The 244-188 vote was not what Mr. Obama had hoped for. A week of presidential wooing — including a visit to the Capitol, a return visit to the White House by moderate House Republicans and a bipartisan cocktail party Wednesday night — did not yield a single Republican vote. The president also lost 11 Democrats.
I had many reactions to these two paragarphs. I’ll break these reactions down.
- In less than 1 month in government, Obama will have authorized an expenditure that exceeds the cost of the Iraq war.That is insane. However, as someone who studied economics and has worked in finance I know that the capital markets are paralyzed right now, a condition that is trickling down to every person in this country. Something must be done, and injecting enough cash in the system may stimulate liquidity again. $800 billion is a lot of money, but nothing else seems to work. We’ll judge this action by its results. I can say that so far, the money spent in Iraq has been a total waste of money. Lets hope this stimulus package fares better—my sense is that it will. I approve, but only because I don’t see a better alternative.
- The relief concentrates on lower income individuals WHILE keeping the tax cuts for the upper-middle class and wealthy income brackets. This makes sense. Ideally, we’d give tax cuts to everyone and try to stimulate spending that way. However, it seems like that has not worked in the past….a new approach is necessary. The small business incentives and $500 payroll tax holiday is a new approach. I approve.
- Rebpublicans shunned the plan and 11 Democrats voted against the package. WTF is wrong with these people!!!!! Are they really against stimulating the economy? Would they rather sit tight, bite their nails, and hope that this all goes away? Guess what, IT WILL NOT go away on its own. Look at Japan in the 90s…really, look at Japan! They faced a similar crisis and instead of swallowing the bitter medicine, recognize losses, and move on they sat their chewing their nails waiting for it all to disappear. Japanese banks never realized any losses because their accounting system was “book value” and not “mark-to-market.” Then, the Japanese governments incentivized the banking system to keep giving loans to “zombie” companies—-give loans to businesses that didn’t deserve loans in order to keep these companies from defaulting on prior obligations. The US has RECOGNIZED its losses. Banks HAVE failed. And the car industry received a loan with MAJOR stipulations. There is no free ride going on here, failure is an option. However, this alone has not fixed the problem which means that more must be done to stimulate demand. That is where the new package comes in. WHY would these 11 Democrats and Republicans be against stimulating demand? Do they have a better alternative????? I REJECT ALL POLITICIANS THAT DID NOT SUPPORT THE PLAN (list of NAY votes below).
- NOTE: Remember the TARP and how it failed to pass the fist time around. Do you know why? Was it that the plan lacked enough stipulations, did have enough order? NO. It didnt’ pass because there wasn’t enough pork included . It did pass one week later with $120billion more pork in it. Thanks Republicans…thanks for looking out for the greater good. I REJECT that behavior .
Again, history will prove whether Obama’s plan was a good thing or a bad thing. Those that did not vote for it on on record below. We will hold you accountable if you were wrong. Roll call vote info from www.clerk.house.gov:
| Yeas | Nays | PRES | NV | |
| Democratic | 244 | 11 | ||
| Republican | 177 | 1 | ||
| Independent | ||||
| TOTALS | 244 | 188 | 1 |
—- NAYS 188 —
| Aderholt Akin Alexander Austria Bachmann Bachus Barrett (SC) Bartlett Barton (TX) Biggert Bilbray Bilirakis Bishop (UT) Blackburn Blunt Boehner Bonner Bono Mack Boozman Boustany Boyd Brady (TX) Bright Broun (GA) Brown (SC) Buchanan Burgess Burton (IN) Buyer Calvert Camp Campbell Cantor Cao Capito Carter Cassidy Castle Chaffetz Coble Coffman (CO) Cole Conaway Cooper Crenshaw Culberson Davis (KY) Deal (GA) Dent Diaz-Balart, L. Diaz-Balart, M. Dreier Duncan Ehlers Ellsworth Emerson Fallin Flake Fleming Forbes Fortenberry Foxx Franks (AZ) |
Frelinghuysen Gallegly Garrett (NJ) Gerlach Gingrey (GA) Gohmert Goodlatte Granger Graves Griffith Guthrie Hall (TX) Harper Hastings (WA) Heller Hensarling Herger Hoekstra Hunter Inglis Issa Jenkins Johnson (IL) Johnson, Sam Jones Jordan (OH) Kanjorski King (IA) King (NY) Kingston Kirk Kline (MN) Kratovil Lamborn Lance Latham LaTourette Latta Lee (NY) Lewis (CA) Linder LoBiondo Lucas Luetkemeyer Lummis Lungren, Daniel E. Mack Manzullo Marchant McCarthy (CA) McCaul McClintock McCotter McHenry McHugh McKeon McMorris Rodgers Mica Miller (FL) Miller (MI) Miller, Gary Minnick Moran (KS) |
Murphy, Tim Myrick Neugebauer Nunes Olson Paul Paulsen Pence Peterson Petri Pitts Platts Poe (TX) Posey Price (GA) Putnam Radanovich Rehberg Reichert Roe (TN) Rogers (AL) Rogers (KY) Rogers (MI) Rohrabacher Rooney Ros-Lehtinen Roskam Royce Ryan (WI) Scalise Schmidt Schock Sensenbrenner Sessions Shadegg Shimkus Shuler Shuster Simpson Smith (NE) Smith (NJ) Smith (TX) Souder Stearns Sullivan Taylor Terry Thompson (PA) Thornberry Tiahrt Tiberi Turner Upton Walden Wamp Westmoreland Whitfield Wilson (SC) Wittman Wolf Young (AK) Young (FL) |
The sky rocket gas prices we saw last summer made things very difficult for many people. $5/gallon glass implied eating out less, filling up just one car, car pooling, etc. Public transportation saw increased usage and people started to see the bottom line value of turning green.
Setting more aggressive fuel efficiency standards for cars will help turn this country green, will save money in the long run, and will definitely reduce the risks of global warming. Obama’s executive order allowing states to set their own fuel efficiency standard is a step in that direction.
States like that we are a federation, they like having control over things like this…on the other hand, fi each state mandates a different efficiency standard then this promising order will instead turn into a tangled pile of mush.
This is why California will likely play a key role in defining these standards—California pick a standard, and since its the largest state we have (36 million) then the sheer consumer demand will serve as an anchor. Other states will follow, and hopefully we’ll have only 2 efficiency standard for the whole country—old standard and new standard. I assume the new standsard will weed the old one out, eventually.
Problem: The car companies are in trouble right now and asking them to deal with multiple standards is going to create even more problems. Rebuttals:
- Aren’t these companies supposed to be moving towards greener technology either way?
- Why are they fighting efficiency?
- I would assume that the standards do not have to be met immediately, there is time and the car companies can wait for the markets to improve.
Others say that Obama’s executive order is another example of “government knows best.” BS. The whole point is that Obama has de-regulated the industry by allowing individual states to weigh in. He just made the Federal Government less relevant to this issue and left the power in the hands of more local government. The big government argument falls flat on its face.
Overall, I think the executive order is a positive change but it must be structured appropriately so that the car companies do not fail as a result of the stricter standards (massive unemployment, etc).
The administration must (and will) strike a balance between our green aspirations and economic realities.
I am impressed. The Government of the United States grabbed technology by the horns and is using it to increase transperency and efficiency as the country faces its biggest economic crisis in a generation. That sounds like Obama-speak, but it’s true.
Check out President Obama’s weekend address for Jan 24th 2008 and then go here so see the foundation of how Obama’s administration will ensure that this $800 billion recovery package is executed with transperency and efficiency.
I.Am.Impressed.
I want to outline his plan and figure out how I can get myself into a position that’s going to grow as the recovery plan is executed. For example, should I be looking for a summer internship in GE’s green groups since it is likely they will have to supply the green technology to “rehab” all of our government buildings? Should I start familiarizing mysef with the energy world and try to work somewhere that will have a say on how this new electricity grid is built out? How can I better position myself in finance given the changes Obama’s is likely to apply to the financial markets????
So many questions. So much hope. And so many sources of information!!!
I have never felt so connected to an administration.
cnn.com reports:
But speaking on Fox News Sunday, Pelosi said she wants Congress to consider repealing tax cuts on those who make over $250,000 immediately and is pushing for a congressional investigation into whether the Bush administration illegally fired federal prosecutors two years ago.
Pelosi has to quit playing those partisan games. We get it. Bush sucked, he did stuff that was wrong. However, right now there is entirely too much going on (i.e. economic meltdown, record unemployment, etc) to dwell on the past. I mean, I personally don’t care of the Bush administration fired prosecuters illegally or not. I don’t care AT ALL and I’d rather you spend time thinking about how to FIX things right now instead of playing name games for something minor that happened two years ago.
Furthermore, kudos to Obama for voicing his independence from the party in saying that repealing the “rich” tax breaks is unwise given the current economic climate.
Right now taxes need to be low for everyone—that will help boost the economy. Pelosi is playing partisan politics if she tries to repeal that tax any time soon AND it will cost us GDP.
Pelosi—SIMMER DOWN.
