Even Buffett Makes Mistakes (apparently)

March 1, 2009 3:01 PM

Warren Buffett recently released his annual letter to investers (for 2008).

After only the second down year ever for Berkshire Hathaway's share price (since Buffett took over - letter to the shareholders from the only other down year) he admits that

During 2008 I did some dumb things in investments. I made at least one major mistake of commission and several lesser ones that also hurt. I will tell you more about these later. Furthermore, I made some errors of omission, sucking my thumb when new facts came in that should have caused me to re-examine my thinking and promptly take action.

A few positive excerpts include

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 211⁄2% 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 – thereal 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.

posted by jourman2 (41 comments total)

That's the voice of wisdom.
posted by rageagainsttherobots at 3:15 PM on March 1 [1 favorite has favorites]

America’s best days lie ahead.

Like 400 AD Britain.
posted by gman at 3:23 PM on March 1 [4 favorites has favorites]

Is this something you would have to have money to understand?
posted by Joe Beese at 3:24 PM on March 1 [8 favorites has favorites]

Loves Dairy Queen.
posted by pianomover at 3:28 PM on March 1 [2 favorites has favorites]

He makes tons of mistakes. He just A> admits to them, and B> doesn't leverage enough to make them be career-ending disasters.
posted by blenderfish at 3:33 PM on March 1 [5 favorites has favorites]

Buffet's got a $38B bet that things turn around -- get back to 2007 levels, actually -- before 2019 and 2027.

Now, I am no super-pessimist and think we have a chance to fix things.

But we'll need to reform medicare, integrating it within a first-class socialized national health system -- right now my mom can't find a doctor that takes Medi-Cal patients in Fresno. Some system.

We'll need to redirect the $800B+/yr we're spending on defense -- still more than the rest of the world combined, I believe -- on actual wealth-production like energy, transportation, health, communication, and other actual useful technologies and infrastructure.

We'll have improve education such that we don't waste any potential genius, and that graduates with an education don't have to emerge from the system with crippling debt loads.

We'll have to figure out whether or not it's necessary that the top 10% of this country controls 70% of the wealth. A lot of this wealth is invested in the rentierism of land and natural resources, which further enriches the wealthy at the direct cost of actual wage-earners.

This nation is full of stupid, though, so I only think we have a 50% chance of reform before the idiots regain power and again tear the motherfucker down.
posted by troy at 3:38 PM on March 1 [9 favorites has favorites]

From what I've learned from Buffet: do your own research, then have someone else do the research, then have a few more people do the research. Buy for the long term, a decade is not long term. Think realistically about what you want out of your own life and your investments. If you can lay out the cash for a house you're happy to live in the rest of your days, or at least for the long haul, there's no reason to shell out for more than you need.

Before I moved to the Kansas City area I'd never heard of Nebraska Furniture Mart, a (actually quite large) regional brand that competes with Best Buy and every other big box retailer in many cities in the Midwest for electronics, furniture and a variety of other sales. Buffet did his research and invested, and from what I can see in my area NFM is doing better than Sears, Best Buy and the local WalMart that is even being undercut (unrelated product area) by a non chain one store only grocery store.

Do your research and hold on! Or buy guns and ammo, I'm doing both cause when life gets better the guns will still be fun to shoot.
posted by Science! at 3:42 PM on March 1 [2 favorites has favorites]

We'll have to figure out whether or not it's necessary that the top 10% of this country controls 70% of the wealth. A lot of this wealth is invested in the rentierism of land and natural resources, which further enriches the wealthy at the direct cost of actual wage-earners.

What's really not OK is that this %10 gained their control by demanding and then receiving favors, loopholes, tax credits, subsidies, and a plethora of other treatments from the government while at the same time demanding that others not only be cut out, but encouraging a system that hides the facts and makes it hard for the 90% to even find out what's going on.

If the playing fields were truly level and still 10% of the population controlled most of the wealth, fair enough, but from the idiocy we've seen from the current 10% that would never happen. Smart, or even competent, people would replace them rapidly.
posted by Science! at 3:48 PM on March 1 [5 favorites has favorites]

During 2008 I did some dumb things

This would be a better world if everyone in a position of power or authority was willing to say this.
posted by EarBucket at 3:59 PM on March 1 [6 favorites has favorites]

Smart, or even competent, people would replace them rapidly

The beauty of the system is that once you've got $1M/yr of asset income you can hire smart and competent people to manage your wealth.

Looked like Madoff did a number on this theory, though.

I don't have a problem with the Buffets of the world making their money from investing in corporations producing stuff and providing financial services like insurance; I'm enough of a capitalist to believe that a bunch of corporations fighting it out tooth & nail for my money is theoretically better than the alternatives.

We've just been hoodwinked though to conflate ownership of land and natural resources as part of the above capitalistic system, when it need not be so.

Buffet owning See's, Wells Fargo, and Goldman Sachs is no skin off my nose; I just have a problem with money investing in land and natural resources since this is not actual capitalism -- the private creation and marketing of goods and services for profit -- but naked rentierism.
posted by troy at 4:08 PM on March 1 [6 favorites has favorites]

Berkshire Hathaway has weathered the storm much better than the DOW which makes me think it has a brand name premium built into its price. Buffett is not immune though, there is no sure thing. It's not a bargain right now, compared with other things.
posted by stbalbach at 4:12 PM on March 1

What's really not OK is that this %10 gained their control by demanding and then receiving favors, loopholes, tax credits, subsidies, and a plethora of other treatments from the government while at the same time demanding that others not only be cut out, but encouraging a system that hides the facts and makes it hard for the 90% to even find out what's going on.

And a new administration will surely "give America back to the American people."

Yawn.

Wake up, people. It's not whether we have a liberals or conservatives in Congress and the White House; it's about how much power and resources we give them which they, in turn, parcel-out to their campaign contributors.
posted by ZenMasterThis at 4:27 PM on March 1 [1 favorite has favorites]

"Wake up, people."

Surely you meant "sheeple".
posted by mr_crash_davis mark II: Jazz Odyssey at 4:35 PM on March 1 [4 favorites has favorites]

Wake up, people. It's not whether we have a liberals or conservatives in Congress and the White House; it's about how much power and resources we give them which they, in turn, parcel-out to their campaign contributors.

With an attitude like this I don't know how one could work up the motivation to put pants on in the morning.
posted by killdevil at 4:40 PM on March 1

As we view GEICO’s current opportunities, Tony and I feel like two hungry mosquitoes in a nudist
camp.

That is an image I could have done without.
posted by empath at 4:40 PM on March 1 [1 favorite has favorites]

I suggest reading his section on Derivatives. I think it's the most interesting part of the report.
posted by empath at 5:03 PM on March 1

related: Bernanke and Geithner continue to say that nationalization—or temporary receivership, the gentler euphemism—is not required and is not in their plans. Yet there are persistent indications of a hidden, whispered narrative of personal rivalry, debate, and unfinished decision-making within the Adminsitration about how to rescue the banks, and in what sequence.
posted by ornate insect at 5:08 PM on March 1 [1 favorite has favorites]

Though the path has not been smooth, our economic system has worked extraordinarily well over time.

We shall win the chess game, and we shall enjoy our omelets! Sucks being a pawn or an egg, though.
posted by StickyCarpet at 5:24 PM on March 1

Thanks for that, ornate. I hadn't seen it.
posted by SeizeTheDay at 5:28 PM on March 1

Sucks being a pawn

Oh, I don't know about that. There seem to be no shortage of pawns around here that have turned into (drama) queens.
posted by SeizeTheDay at 5:30 PM on March 1

I think it's very brave that, rather than taking the easy way out and scapegoating a woman, as so many have suggested, he admits to the situation being his own damn fault.
posted by drjimmy11 at 6:17 PM on March 1 [2 favorites has favorites]

What?
posted by Science! at 6:24 PM on March 1

Huh?
posted by Kraftmatic Adjustable Cheese at 6:32 PM on March 1

Huh?

In somebody's head, Warren meets Jimmy, and they have a conversation regarding culpability. One issues a letter, one sings a song, and here we are.

You people are a little slow on the uptake sometimes...
posted by Chrischris at 6:49 PM on March 1

I think it's very brave that, rather than taking the easy way out and scapegoating a woman, as so many have suggested, he admits to the situation being his own damn fault.
posted by drjimmy11 at 6:17 PM on March 1 [+] [!]
What?
posted by Science! at 6:24 PM on March 1 [+] [!]
Huh?
posted by Kraftmatic Adjustable Cheese at 6:32 PM on March 1 [+] [!]

"Damn fault" is the hint.
posted by 445supermag at 6:51 PM on March 1

Berkshire Hathaway has weathered the storm much better than the DOW which makes me think it has a brand name premium built into its price.

The Dow is supposed to be composed of a selection of major industries that is representative of the overall US economy. Berkshire Hathaway is a holding company which invests specifically in companies that have relatively straightforward business models and have specific competitive advantages over other companies in their respective industries. If you think that Buffett is making the right decisions when it comes to what Berkshire Hathaway is investing in, then you would naturally expect that BRK's downturn would be less severe than the Dow's, in the same way that BRK's gains would tend to outperform the Dow's.
posted by deanc at 7:04 PM on March 1

I firmly believe that Warren Buffett is the greatest financier of the modern era.

However to this: Though Berkshire’s credit is pristine – we are one of only seven AAA corporations in the country – our cost of borrowing is now far higher than competitors with shaky balance sheets but government backing. At the moment, it is much better to be a financial cripple with a government guarantee than a Gibraltar without one.

all I can say is, QQ more, Warren Buffett, QQ more.
posted by aeschenkarnos at 7:27 PM on March 1

It's a decent Mea Culpa EXCEPT for the index puts, which he glosses over.

What the HELL was he thinking?

Repeated rumors over the last week that Buffet has been subject to massive margin calls as a result.

I like WB. What he does is unfeasibly hard. But the index puts were an unforced error, much worse than the Conoco buy IMO.
posted by unSane at 7:34 PM on March 1

Yeah, I'm hearing the major hit on BRK stock lately is due to writing massive puts. If we're looking at a long term Japan-style stag-deflation, he will be out loads of money.
posted by amuseDetachment at 8:00 PM on March 1

We'll have to figure out whether or not it's necessary that the top 10% of this country controls 70% of the wealth. A lot of this wealth is invested in the rentierism of land and natural resources, which further enriches the wealthy at the direct cost of actual wage-earners.

What's really not OK is that this %10 gained their control by demanding and then receiving favors, loopholes, tax credits, subsidies, and a plethora of other treatments from the government while at the same time demanding that others not only be cut out, but encouraging a system that hides the facts and makes it hard for the 90% to even find out what's going on.

Oh, on that topic:
Fishermen Blame Klamath Dam For Salmon Season Shut Down (April 2006)
Two Years of Negotiation Yield Deal To Remove Klamath Dams (Jan 2008)
Klamath Dams' Removal Hinges On Owner [Berkshire-Hathaway-owned PacifiCorp Power] (March 2008)
Buffett Rebuts Dam Removal Activists (May 2008)
...the story goes forward from here, but I'm a bit less clear on the more recent details...
posted by salvia at 8:24 PM on March 1 [1 favorite has favorites]

With an attitude like this I don't know how one could work up the motivation to put pants on in the morning.

killdevil: so you'd rather wear pants than cease nursing a delusion?
posted by ZenMasterThis at 8:29 PM on March 1

This is the internet; no one has to wear pants.
posted by ornate insect at 9:51 PM on March 1 [2 favorites has favorites]

Actually, given the unfortunate chronology, the puts don't look too bad to me. Did you read the full report? As a general rule, he has earned his 50 bill or so by buying things that were incorrectly priced and letting time bring them back to their correct pricing. I would say even after the worst beatdown in stockmarket history there is a pretty good chance he can make that deal fly. Consider the following: this is a man who has made 20% on his money for the last 50 years. Now is a time (unlike the last several years) when there are genuine deals available that WILL very likely yield that kind of return. So, lets say he has an exposure of 40 billion. Lets say in 10 years market is 25% below 2007 rate. He owes 10 billion... On the other hand, he has compounding his 8 billion dollar premium @ 15% (lets assume he has a bad 10 years by his historical averages... ) Leaves him with a 14 billion dollar profit on an investment that involved NO UPFRONT cash... I am good with making 14 bill over next 10 years with nothing down, but I guess I am not greedy. This doesnt even take into account inflation (lets call it a wash, maybe we deflate for 10 years, though the way we print money probably not)... MODEST INFLATION and a 10% yield on his 8 bill will more than clear the decks by 2019, not to mention the longer bets. Does that mean he will make money? Even now, after the beatdown, it is quite likely. I will still book that bet if anyone wants to try it for a few grand. Might it look scary in the meanwhile? Hell yeah... If and only if you can hold this stock for 10 years without panicing, you will make a LOT of money. If you have a shorter time window, do something different. Consider that right now he is investing steadily in 15% yield investments with significant conversion potential. Sorry about the ramble/
posted by jcworth at 9:53 PM on March 1

Back to 2007 by 2019? I think he'll do okay. I'm not sure that this panic of the last, what, 6 months now, is really going to matter much in 12 years. It's not like a comet hit the U.S. or something. Anyway, if nothing else, I think inflation will take care of him.
posted by blenderfish at 9:57 PM on March 1

Yeah, along the lines of what jcworth is saying, his puts are basically an arbitrage between sane options pricing and the commonly-accepted "geeks bearing formulas" options pricing.

I think 15% over 10 years is probably too optimistic. But, worst case is pretty much he breaks even. (Unless there is a complete apocolypse in the U.S., in which case, I think it doesn't matter all that much.)
posted by blenderfish at 10:05 PM on March 1

May I present to you Japan's Nikkei Index. There's historical basis for stagdeflation. Unless he's got a serious inside information on forced inflation in the Obama administration, it's less than a sure bet.
posted by amuseDetachment at 10:47 PM on March 1

Buffet's got a $38B bet that things turn around -- get back to 2007 levels, actually -- before 2019 and 2027.
Is his bet that the $38B will grow? Or is his bet that no-one else will have any money left by 2019?
posted by Thorzdad at 5:06 AM on March 2

The stock market is for chumps. Eventually the market will take off again. We will look around and think that everyone else is making money but us. We will stick our toes in the water, feel it warm and gradually dive in. Then those in charge will take it all away again.
posted by digsrus at 5:24 AM on March 2 [1 favorite has favorites]

Unless he's got a serious inside information on forced inflation in the Obama administration

They just spent 1 trillion with no clear plan on where its coming from, and plan to spend more. There are (M3 a couple years ago) only 10 trillion dollars, so they just increased the money supply by 10%. If they do that once a year for, say, eight years, there's your 100% inflation (Grossly oversimplified, I know.) Even if the market stayed at its current real level, it would nominally recover its 2007 value. Anyway, good times.
posted by blenderfish at 11:43 AM on March 2

Yes it is a gross oversimplification because we're seeing massive demand destruction (like Japan did in the 90s). You need to multiply the money supply with the Velocity of Money, we may see stagdeflation simply because of a lack of market activity. Barring a massive increase of money supply year-over-year, it's hard to get out of that situation. It's not unreasonable for the stock market to stay stagnant for many, many years if we do not conduct inflationary activities (we aren't right now).
posted by amuseDetachment at 1:48 PM on March 2

You may be right; we'll see. With everyone and their dog worried about deflation, it seems likely we may compensate too much.

On a lighter note, If the "velocity of money" decreasing means people are starting to save money, or, even better, allocate money to worthwhile projects and not kitchen renovations, at least there's a silver lining. Of course, unemployment sucks.
posted by blenderfish at 2:39 PM on March 2