Waiting Casually

I don’t intend for this to be a financial blog or anything like that, but the economy has been on my mind more or less full time recently.

Anyway, I read Warren Buffett’s annual letter to Berkshire Hathaway shareholders and I recommend you do the same. It displays a level of honesty and transparency that are (in my opinion) completely lacking in the rest of the financial world. Really, there’s something special with a man who can come out and say, ‘…the terrible timing of my purchase has cost Berkshire several billion dollars,’ about his high-volume purchase of oil securities when the price per barrel was near its highest in the shareholder letter and no one asks for his head on a pike. On the contrary, I’m sure at the Q&A portion of the annual shareholder meeting, people will speak up if only to declare their opinion that he is the only man who can see the company through this downturn.

He’s like the Bill Adama of the US financial system. And so really the Bill Adama of the world economy.

A bit cuddlier and funnier maybe.

If you don’t read all 22 pages of his letter (though you should), at least read his introduction and his closing regarding the logistics of the annual meeting in Omaha. He’s really quite a funny man.

I’ve included some teaser quotes below as well.

Our borrowers simply looked at how full-bore mortgage payments would compare with their actual – not hoped-for – income and thendecided whether they could live with that commitment. Simply put, they took out a mortgage with the intention of paying it off, whatever the course of home prices.

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.

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.

Clinging to cash equivalents or long-term government bonds at present yields is almost certainly a terrible policy if continued for long. Holders of these instruments, of course, have felt increasingly comfortable – in fact, almost smug – in following this policy as financial turmoil has mounted. They regard their judgment confirmed when they hear commentators proclaim “cash is king,” even though that wonderful cash is earning close to nothing and will surely find its purchasing power eroded over time.

Indeed, recent events demonstrate that certain big-name CEOs (or former CEOs) at major financial institutions were simply incapable of managing a business with a huge, complex book of derivatives. Include Charlie and me in this hapless group: When Berkshire purchased General Re in 1998, we knew we could not get our minds around its book of 23,218 derivatives contracts, made with 884 counterparties (many of which we had never heard of). So we decided to close up shop. Though we were under no pressure and were operating in benign markets as we exited, it took us five years and more than $400 million in losses to largely complete the task. Upon leaving, our feelings about the business mirrored a line in a country song: “I liked you better before I got to know you so well.”

Participants seeking to dodge troubles face the same problem as someone seeking to avoid venereal disease: It’s not just whom you sleep with, but also whom they are sleeping with.

If I had $75,000 I’d buy a share.

UPDATE: Of course, I forgot to point out what I’d originally intended to when I read the letter. This is only the second time in 44 years that BH has posted a loss for the year and it’s the worst of the two by a fair margin. It’s just about madness that he’s this open, hopeful, and nearly peppy when delivering this fact.