Saturday, March 07, 2009


Warren's letter to investors was released last month.  My 1 share of Berkshire Class B stock has taken a big hit since September, primarily due to lack of confidence in the markets and adjustments to valuations across the board.  Ticket to the annual meeting is getting cheaper...

Warren has an excuse for this - the bad guys are getting the handouts while the good guys are suffering, with no end in sight.  He admits to making some stupid mistakes, and also inadvertently avoiding even stupider ones by having his "lowball" offers rejected.

Perhaps if Warren bought a new home it would set an example for the rest of America... since he has been living in the same one for the last 50 years.   If not a new home, perhaps a car company?

Warren & Co. still beat the S&P by 27% last year... not a bad deal until you consider they also lost 9%, and much more as of this year.

I don't take yearly gain/losses #'s too seriously.  Unless you bought the stock at the Jan 2 price and sold at the Dec 23 price, your losses and gains are something different.  In addition, currency exchange also has a dramatic effect if you do not live in the US and are dealing in USD.

Some further insight into what I have figured is the primary reason why companies are failing:

Now, imagine that all of the city’s bonds had instead been insured by Berkshire. Would similar belt-
tightening, tax increases, labor concessions, etc. have been forthcoming? Of course not. At a minimum, Berkshire would have been asked to “share” in the required sacrifices. And, considering our deep pockets, the required contribution would most certainly have been substantial.

I believe insurance on debt and recent risk management practices have caused this spiral, as speculators of this insurance and increasing spread values force their "names" to default after being unable to borrow.  Why else would some of the largest companies in the world get dragged into the quagmire of bankruptcy?

The type of fallacy involved in projecting loss experience from a universe of non-insured bonds onto a
deceptively-similar universe in which many bonds are insured pops up in other areas of finance. “Back-tested” models of many kinds are susceptible to this sort of error. Nevertheless, they are frequently touted in financial markets as guides to future action. (If merely looking up past financial data would tell you what the future holds, the Forbes 400 would consist of librarians.)

99 years of historical data can't be wrong Warren!  :)

Another reason for the economic downward spiral is the loss of confidence in the entire system, due to a number of Ponzi schemes.  It is ironic that Charles Ponzi's company was called the Securities and Exchange Company.  It's no surprise that people will look the other way while they are making money, and then as soon as there is some government intervention and scrutiny about shady deals that money will go running for the hills.

Another cause for the downfall?  Megatrends... baby boomers harvesting their retirement pensions before they disappear.  The root cause, however, has been explained very clearly.

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.


1 comment:

brett said...

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