Log In | Register
— Investor Warren Buffett released his annual letter to Berkshire Hathaway Inc. shareholders Saturday morning. The Berkshire chairman and chief executive spent a large part of the letter explaining the guiding principles he and Vice Chairman Charlie Munger follow in running the Omaha-based company. The full letter is available online at http://www.berkshirehathaway.com.
Here's a sample of what Buffett had to say:
___
BERKSHIRE'S FINANCIAL STABILITY:
"We will never become dependent on the kindness of strangers," Buffett wrote. "Too-big-to-fail is not a fallback position at Berkshire. Instead, we will always arrange our affairs so that any requirements for cash we may conceivably have will be dwarfed by our own liquidity. Moreover, that liquidity will be constantly refreshed by a gusher of earnings from our many and diverse businesses.
"When the financial system went into cardiac arrest in September 2008, Berkshire was a supplier of liquidity and capital to the system, not a supplicant. At the very peak of the crisis, we poured $15.5 billion into a business world that could otherwise look only to the federal government for help."
___
HOUSING MARKET
Buffett said there were three ways to cure the nation's oversupply: "(1) blow up a lot of houses, a tactic similar to the destruction of autos that occurred with the "cash-for-clunkers" program; (2) speed up household formations by, say, encouraging teenagers to cohabitate, a program not likely to suffer from a lack of volunteers or; (3) reduce new housing starts to a number far below the rate of household formations.
"Our country has wisely selected the third option, which means that within a year or so residential housing problems should largely be behind us, the exceptions being only high-value houses and those in certain localities where overbuilding was particularly egregious. Prices will remain far below "bubble" levels, of course, but for every seller (or lender) hurt by this there will be a buyer who benefits. Indeed, many families that couldn't afford to buy an appropriate home a few years ago now find it well within their means because the bubble burst."
___
GOLDEN OPPORTUNITIES
"We told you last year that very unusual conditions then existed in the corporate and municipal bond markets and that these securities were ridiculously cheap relative to U.S. Treasuries," Buffett wrote. "We backed this view with some purchases, but I should have done far more.
"Big opportunities come infrequently. When it's raining gold, reach for a bucket, not a thimble."
___
USING STOCK FOR ACQUISITIONS
Buffett warned companies to be careful about using their own stock to make acquisitions unless they evaluate the value of the stock they would be giving away. Buffett said that in 50 years of serving on corporate boards he has heard plenty of presentations by investment bankers pitching deals, but the bankers never discuss the true value of the stock being given away in the deal.
"When stock is the currency being contemplated in an acquisition and when directors are hearing from an advisor, it appears to me that there is only one way to get a rational and balanced discussion. Directors should hire a second advisor to make the case against the proposed acquisition, with its fee contingent on the deal not going through. Absent this drastic remedy, our recommendation in respect to the use of advisors remains: 'Don't ask the barber whether you need a haircut.'"
