Oracle of Omaha speaks

[AdamSmith]

Latest edition of Buffett's always elucidative annual letter to shareholders:

To the Shareholders of Berkshire Hathaway Inc.:

Our decrease in net worth during 2008 was $11.5 billion, which reduced the per-share book value of both our Class A and Class B stock by 9.6%. Over the last 44 years (that is, since present management took over) book value has grown from $19 to $70,530, a rate of 20.3% compounded annually.

The table on the preceding page, recording both the 44-year performance of Berkshire’s book value and the S&P 500 index, shows that 2008 was the worst year for each. The period was devastating as well for corporate and municipal bonds, real estate and commodities. By yearend, investors of all stripes were bloodied and confused, much as if they were small birds that had strayed into a badminton game.

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.â€

By the fourth quarter, the credit crisis, coupled with tumbling home and stock prices, had produced a paralyzing fear that engulfed the country. A freefall in business activity ensued, accelerating at a pace that I have never before witnessed. 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.

This debilitating spiral has spurred our government to take massive action. In poker terms, the Treasury and the Fed have gone “all in.†Economic medicine that was previously meted out by the cupful has recently been dispensed by the barrel. These once-unthinkable dosages will almost certainly bring on unwelcome aftereffects. Their precise nature is anyone’s guess, though one likely consequence is an onslaught of inflation.

Moreover, major industries have become dependent on Federal assistance, and they will be followed by cities and states bearing mind-boggling requests. Weaning these entities from the public teat will be a political challenge. They won’t leave willingly.

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.

Amid this bad news, however, never forget that our country has faced far worse travails in the past. In the 20th Century alone, we dealt with two great wars (one of which we initially appeared to be losing); a dozen or so panics and recessions; virulent inflation that led to a 21 1â„ 2% prime rate in 1980; and the Great Depression of the 1930s, when unemployment ranged between 15% and 25% for many years. America has had no shortage of challenges.

Without fail, however, we’ve overcome them. In the face of those obstacles – and many others – the real standard of living for Americans improved nearly seven-fold during the 1900s, while the Dow Jones Industrials rose from 66 to 11,497. Compare the record of this period with the dozens of centuries during which humans secured only tiny gains, if any, in how they lived.

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.

Take a look again at the 44-year table on page 2. In 75% of those years, the S&P stocks recorded a gain. I would guess that a roughly similar percentage of years will be positive in the next 44. But neither Charlie Munger, my partner in running Berkshire, nor I can predict the winning and losing years in advance. (In our usual opinionated view, we don’t think anyone else can either.) We’re certain, for example, that the economy will be in shambles throughout 2009 – and, for that matter, probably well beyond – but that conclusion does not tell us whether the stock market will rise or fall...

Whole thing: http://www.berkshirehathaway.com/letters/2...nterstitialskip

[BigK]

Thanks for posting this letter. I've just read the whole letter from the link you provided. Very informative for all interested in our current economic & financial troubles and sound investment principals.

[Guest zachary]

His directness in speaking is easy to read and informative; he says he made mistakes, made some good decisions, but i have never seen anyone's report but his admit to mistakes. well worth the time to read, good insights re credit. essentially says inflation coming, no doubt.

from the report

Derivatives contracts, in contrast, often go unsettled for years, or even decades, with counterparties

building up huge claims against each other. “Paper†assets and liabilities – often hard to quantify – become

important parts of financial statements though these items will not be validated for many years. Additionally, a

frightening web of mutual dependence develops among huge financial institutions. Receivables and payables by

the billions become concentrated in the hands of a few large dealers who are apt to be highly-leveraged in other

ways as 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.

17

Sleeping around, to continue our metaphor, can actually be useful for large derivatives dealers because

it assures them government aid if trouble hits. In other words, only companies having problems that can infect

the entire neighborhood – I won’t mention names – are certain to become a concern of the state (an outcome, I’m

sad to say, that is proper). From this irritating reality comes The First Law of Corporate Survival for ambitious

CEOs who pile on leverage and run large and unfathomable derivatives books: Modest incompetence simply

won’t do; it’s mindboggling screw-ups that are required.

[caeron]

If he weren't so old, I'd buy some berkshire hathaway.

I played some bridge with him online years ago. He's quite a nice guy.

[BigK]

Berkshire is at a real low market price right now. Also Buffett goes into some detail of the 2nd, 3rd, & 4th to pay insurance they've issued on Derivatives contracts. If we the taxpayers keep bailing out the AIG's of this world, Berkshire may end up with a relatively small payout on that insurance.

Also one of Buffett's self admitted big mistake was taking a stake on Connoco Phillips at near the top of the oil prices. I don't think I'll bet on oil staying low forever.