bluntlysaid

Excerpts from Berkshire Hathaway’s 2007 Annual Report—Warren Buffet (CEO and Chairman) writes a letter to shareholders saying the following:

Regarding the housing crisis:

You may recall a 2003 Silicon Valley bumper sticker that implored, “Please, God, Just One More Bubble.” Unfortunately, this wish was promptly granted, as just about all Americans came to believe that house prices would forever rise. That conviction made a borrower’s income and cash equity seem unimportant to lenders, who shoveled out money, confident that HPA – house price appreciation – would cure all problems. Today, our country is experiencing widespread pain because of that erroneous belief. As house prices fall, a huge amount of financial folly is being exposed. You only learn who has been swimming naked when the tide goes out – and what we are witnessing at some of our largest financial institutions is an ugly sight.

Regarding his insurance business and ties to natural disasters (i.e. California fires, hurricanes, floods, earthquakes):

That party is over. It’s a certainty that insurance-industry profit margins, including ours, will fall significantly in 2008. Prices are down, and exposures inexorably rise. Even if the U.S. has its third consecutive catastrophe-light year, industry profit margins will probably shrink by four percentage points or so. If the winds roar or the earth trembles, results could be far worse. So be prepared for lower insurance earnings during the next few years.

Buying new companies.

A company that needs large increases in capital to engender its growth may well prove to be a satisfactory investment. There is, to follow through on our example, nothing shabby about earning $82 million pre-tax on $400 million of net tangible assets. But that equation for the owner is vastly different from the See’s situation. It’s far better to have an ever-increasing stream of earnings with virtually no major capital requirements. Ask Microsoft or Google.

To sum up, think of three types of “savings accounts.” The great one pays an extraordinarily high interest rate that will rise as the years pass. The good one pays an attractive rate of interest that will be earned also on deposits that are added. Finally, the gruesome account both pays an inadequate interest rate and requires you to keep adding money at those disappointing returns.

Regarding the Depreciating Dollar.

The U.S. dollar weakened further in 2007 against major currencies, and it’s no mystery why: Americans like buying products made elsewhere more than the rest of the world likes buying products made in the U.S. Inevitably, that causes America to ship about $2 billion of IOUs and assets daily to the rest of the world. And over time, that puts pressure on the dollar.

Our country’s weakening currency is not the fault of OPEC, China, etc. Other developed countries rely on imported oil and compete against Chinese imports just as we do. In developing a sensible trade policy, the U.S. should not single out countries to punish or industries to protect. Nor should we take actions likely to evoke retaliatory behavior that will reduce America’s exports, true trade that benefits both our country and the rest of the world.

Our legislators should recognize, however, that the current imbalances are unsustainable and should therefore adopt policies that will materially reduce them sooner rather than later. Otherwise our $2 billion daily of force-fed dollars to the rest of the world may produce global indigestion of an unpleasant sort. (For other comments about the unsustainability of our trade deficits, see Alan Greenspan’s comments on November 19, 2004, the Federal Open Market Committee’s minutes of June 29, 2004, and Ben Bernanke’s statement on September 11, 2007.)

Regarding death.

(I’ve reluctantly discarded the notion of my continuing to manage the portfolio after my death – abandoning my hope to give new meaning to the term “thinking outside the box.”)

Why I care.

I have a crush on this man because he is just so unbelievably brilliant—he’s a long investor, he’s an anti-flipper, he buys only if he sees values, and most importantly, he’s learned from history. I feel like many Wall Street Investors keep repeating the same old mistakes—they keep flooding towards “too good to be true” payouts and then get burnt time and time again. Not Warren Buffet. He runs his companies with the goal of creating long term value, and that insulates him from short-sighted market hiccups.

Why am I even talking about this—I’m about to get my MBA and I’m thinking a lot about companies that I would like to work for. I WOULD LOVE TO WORK FOR ANY OF BERKSHIRE HATHAWAYS’S SUBSIDIARIES!!!!!! Contact me if you can offer me a position or want to hear more about me:p