Buffett's Wisdom (Of Permanent Value) 2011

Here's my previous collection of words of wisdom from the legendary investor Warren Buffett.

• Buffett's Wisdom (Of Permanent Value) Part I
• Buffett's Wisdom (Of Permanent Value) Part II
• Buffett's Wisdom (Of Permanent Value) Part III
• Buffett's Wisdom (Of Permanent Value) Part IV

On The Telegraph there's an article called Warren Buffett: his best quotes

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Warren Buffett: his best quotes

Billionaire investor Warren Buffett has agreed to pay $9bn for US chemicals maker Lubrizol, making the deal one of his biggest. Here, we look at some of the Sage of Omaha's wisdom.

5:58PM GMT 14 Mar 2011

On investing

“Rule No.1: Never lose money. Rule No.2: Never forget rule No.1”

“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price”

“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years”

“We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful”

“Why not invest your assets in the companies you really like? As Mae West said, “Too much of a good thing can be wonderful”

On success

“Of the billionaires I have known, money just brings out the basic traits in them. If they were jerks before they had money, they are simply jerks with a billion dollars”

“The business schools reward difficult complex behavior more than simple behavior, but simple behavior is more effective”

“You do things when the opportunities come along. I’ve had periods in my life when I’ve had a bundle of ideas come along, and I’ve had long dry spells. If I get an idea next week, I’ll do something. If not, I won’t do a damn thing"

“Can you really explain to a fish what it’s like to walk on land? One day on land is worth a thousand years of talking about it, and one day running a business has exactly the same kind of value”

“You only have to do a very few things right in your life so long as you don’t do too many things wrong"

On helping others

“If you’re in the luckiest 1pc of humanity, you owe it to the rest of humanity to think about the other 99pc”

“It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently”

“I don’t have a problem with guilt about money. The way I see it is that my money represents an enormous number of claim checks on society. It’s like I have these little pieces of paper that I can turn into consumption. If I wanted to, I could hire 10,000 people to do nothing but paint my picture every day for the rest of my life. And the GNP would go up. But the utility of the product would be zilch, and I would be keeping those 10,000 people from doing AIDS research, or teaching, or nursing. I don’t do that though. I don’t use very many of those claim checks. There’s nothing material I want very much. And I’m going to give virtually all of those claim checks to charity when my wife and I die.”

“It’s class warfare, my class is winning, but they shouldn’t be”

“My family won’t receive huge amounts of my net worth. That doesn’t mean they’ll get nothing. My children have already received some money from me and Susie and will receive more. I still believe in the philosophy – FORTUNE quoted me saying this 20 years ago – that a very rich person should leave his kids enough to do anything but not enough to do nothing”

Warren Buffett: Is US In Recession Or Not?

On 14 Sep 2010: Buffett Rules Out Double-Dip Recession Amid Growth

• Warren Buffett ruled out a second recession in the U.S. and said businesses owned by his Berkshire Hathaway Inc. are growing.
  
  “I am a huge bull on this country,” Buffett, Berkshire’s chief executive officer, said today in remarks to the Montana Economic Development Summit. “We will not have a double-dip recession at all. I see our businesses coming back almost across the board.” ....

On CNBC: Warren Buffett to CNBC: "We're Still In a Recession"

• Warren Buffett tells CNBC that by his own "common sense" definition, the U.S. is "still in a recession.
  
  In a taped interview with Becky Quick airing this morning on CNBC's Squawk Box, Buffett says, "I think we're in a recession until real per capita GDP gets back to where it was before."
  
  While Buffett continues to believe the U.S. will eventually emerge from its economic downturn, "We're not gonna be out of it for awhile."

Eh?

The CNBC article continues...

• BECKY: So-- how are small businesses faring right now, if you had to-- look overall? Obviously, everyone's in a different position. But overall, how do you think they're doing?
  
  BUFFETT: I think they're doing about like the economy is. That they-- they've been through-- a terrible period... And-- and basically, the government did the right thing in-- in terms of-- of getting the economy going again. It can't do it overnight or anything of the sort. I think most small businesses have come back somewhat. But they've-- they-- they're nowhere near their peaks.
  
  BECKY: The NBER said this week that the-- recession officially ended back in June of last year.
  
  BUFFETT: Well, they define it differently. (Laughs.) But I-- I mean, I-- I define it-- I think we're in a recession until real per capita GDP gets back to where it was-- before. That is not the way the National Bureau of Economic Research measures it. But I will tell you that to any-- on any common sense definition, the average American is below where he was before, or his family, in terms of real income, GDP. We're still in a recession. And-- and we're not gonna be out of it for awhile, but we will get out of it.
  
  BECKY: We're not gonna be out of it for awhile meaning, you can see what? A quarter, two quarters, a year down the road? Just from your business is-- is telling you?
  
  BUFFETT: Our businesses are coming back-- on average, we've got 70-some businesses. But most of them-- the great majority are coming back slowly. If you take our railroad business, and our railroad business is typical of the other railroads in the company. If you take the peak period for shipments and then you go all the way down to the bottom, we're 61 percent of the way back up. That's better, I think, than most businesses are in the country. I don't think most businesses are 61 percent-- our-- our carpet business, our brick business, our insulation business, they're not back 61 percent, but they are moving back.
  
  

FIFA World Cup: Berkshire Won Big Bet On French Toast!

It was not a shocker as the French team got toasted last night!

It was utter shambolical to say the least.

However did you know the following... Warren Buffet actually won a bet on the French!!!!

Yes... omigawd!

Here's the story...

• Buffett Wins World Cup Bet as France Falls to Host (Update2)
  By Andrew Frye and Hugh Son
  
  June 22 (Bloomberg) -- Warren Buffett won his bet against France in the World Cup when the 1998 champion was eliminated by South Africa.
  
  France fell 2-1 to the host nation today, after drawing Uruguay and dropping 2-0 to Mexico. Berkshire Hathaway Inc. had sold insurance requiring the Omaha-based company to pay a client if France won the tournament, Buffett told CNBC in March.
  
  “I think we’re going to lose 30 million bucks or something like that” if France wins, Buffett, Berkshire’s 79-year-old chief executive officer, said at the time. He didn’t say who purchased the coverage. An assistant to Buffett had no comment.
  
  Ajit Jain, who runs one of Berkshire’s insurance units, sold the contract, Buffett told the business news channel in March. Berkshire has previously guaranteed against the potential cancellation of a college basketball tournament and a possible payout of $1 billion in a contest sponsored by PepsiCo Inc. The firm also sells coverage on natural disasters.
  
  Jain “is known as the man to call when something both very large and unusual needs to be insured,” Buffett said in his annual letter to shareholders released Feb. 27.
  
  “The odds of any one team out of 32 winning is very small, so you could determine the odds and see what the payoff would be,” said Gerald Martin, a finance professor at American University’s Kogod School of Business in Washington. “From a numerical standpoint, it was probably in his favor to take this bet. I’m sure he’ll smile when he sees the results.”
  
  Consumer Refunds
  
  Martin said Berkshire’s client could be any company that wanted to hedge against costs that would have been tied to a French victory.
  
  Carrefour SA, Europe’s biggest retailer, had a promotion in which customers buying flat-screen televisions would have been reimbursed if France won the tournament, according to its website. Customers would have gotten half of the purchase refunded if the team made the final without winning the tournament. A spokeswoman for the Paris-based retailer declined to comment.
  
  Jordan’s Furniture, a Massachusetts-based chain owned by Berkshire, repaid about 30,000 customers for purchases after the Boston Red Sox won baseball’s World Series in 2007. The firm had an insurance policy to cover costs of the promotion, CEO Eliot Tatelman said at the time.
  
  Lloyd’s of London is also among insurers with coverage tied to soccer, CEO Richard Ward said today in an interview at Bloomberg headquarters in New York. Lloyd’s, the three century- old insurance market, has insured “a lot of the players” including former England soccer captain David Beckham, he said.
  
  The World Cup is an international soccer competition that takes place every four years and is the most-watched sporting event.
  

Source : here

Damn! Damn! Triple damn!

Uncle Buffy is now the oracle of soccer too!

Charlie Whacks Warren Buffett For Defending Moodys

On Fox:

• He believes that rating credit is a sleazy business and it makes a lot of money so he’s going to own it. Well, that takes Warren Buffett down three notches in my book. - Charlie Gasparino

Here's the clip

Did Berkshire Get Insider Info On Its Disposal Of Shares In Moody's?

Saw the following news clip on the Edge Financial Daily: Berkshire confirms Buffett subpoenaed to testify

• NEW YORK: Berkshire Hathaway Inc confirmed on Friday, May 28 that Warren Buffett will testify under subpoena before a US panel examining the causes of the 2008 financial crisis.
  
  Buffett, 79, rebuffed earlier requests by the Financial Crisis Inquiry Commission to submit to voluntary questioning, resulting in Tuesday's subpoena, Berkshire said.
  
  Carrie Kizer, an assistant to Buffett, confirmed the accuracy of a Fortune magazine article on Thursday that revealed the subpoena and Buffett's resistance to testifying.
  
  Buffett, Moody's Corp Chief Executive Raymond McDaniel, and five other current and former Moody's officials will testify on June 2, as the commission examines credit ratings and how investors use them.
  
  The Congressionally appointed commission is examining the causes of the worst financial crisis since the 1930s and is trying to find flaws that could be remedied through reforms. It is slated to issue a report by December 15.
  
  Moody's is the parent of credit rating agency Moody's Investors Service. Berkshire had a 13% stake in Moody's as of March 31, regulatory filings show.
  
  Buffett is the world's third-richest person, with most of his fortune coming from Berkshire. He has since 1965 run the Omaha, Nebraska-based conglomerate, which now has roughly 80 companies and tens of billions of dollars of investments.

This is the CNBC version: Buffett to Appear Before Financial Crisis Panel

On ZH: Buffett Has "No Comment" On His Sale Of $30MM In MCO Shares Just After Moody's Wells Notice Receipt

• As Zero Hedge first pointed out on Saturday, Moody's is in very big trouble - in its 10Q, in the very last paragraph of the very last page, the company indicated that on March 18, it had received a Wells Notice and a recommendation by the SEC to pursue a Cease and Desist order against the agency's NRSRO status, in effect killing its business model. This was not lost on the market, which punished Moody's stock by 10% yesterday even as every other stock went vertical. When all is said and done the 10% could well become 100%, and as far as the market is concerned nobody would shed a tear: the conflicted rating agency model is long dead, and the independent third party vendors are the only ones that add any actual value at this point. However, far more interesting are the actions by Moody's CEO Raymond McDaniel and key shareholder and kindly grandfather, Warren Buffett, both of whom sold millions worth of Moody's share and stock, the day of, and just after, the Wells notice receipt. The New York Times has reported that Buffett, who recently has not had a problem commenting on pretty much everything, and was vociferously defending not only arch monopolist Goldman Sachs at his annual ukulele outing in Borsheims, but Moody's as well, has had "no comment" on his sales. Perhaps it is time for someone to take Mr. Buffett to task, instead of just to his word: sure, it could be just a coincidence... or three - he sold over $30 million in MCO stock on March 19, March 24 and March 26. Or it might not. However, now that it has become far too clear that nobody in the finance business has a shred of integrity and honesty left, perhaps it is time an independent and impartial jury to decide if any impropriety based on material, non-public insider information, was committed.

Yes, many are not taking it too kindly that Buffett sold millions worth of Moody's share and stock, the day of, and just after, the Wells notice, a Cease and Desist order against the agency's NRSRO status, in effect killing its business model. Yes, Wells notice effectively put the end in Moody's!

Yup. In short, did Berkshire got insider information in its disposal of shares in Moody's?

Here's an older article on NyTimes: Buffett Is Unusually Silent on Rating Agencies

• ...But on the subject of the conflict of interest built into the rating agencies’ business model, Mr. Buffett has been uncharacteristically silent — even though that conflict is especially glaring in his case because one of the companies that Moody’s rates is Berkshire. (Its Aaa rating, for the record, is the same as the one from Standard & Poor’s. Fitch downgraded Berkshire for the first time last week.)
  
  Mr. Buffett also seems to have said nothing about a problem that some contend is just as serious and endemic: because ratings are required in so many transactions, the agencies’ inaccurate ratings have no effect on their own bottom lines. And a company that is paid regardless of its performance is a company that will eventually underperform, says Frank Partnoy, a professor of law at the University of San Diego.
  
  “Imagine if you had a rabbi and said, ‘All the laws of kosher depend on whether this rabbi decides if food is kosher or not,’ ” Mr. Partnoy, a former derivatives trader, told The Times. “If the rules say ‘You have to use this rabbi,’ he could be totally wrong and it won’t affect the value of his franchise.”
  
  The rating agencies have been mislabeling the goods for a long time. “A lot of investors have been eating pork recently,” Mr. Partnoy says, “and they’re not too happy about it.”
  
  Mr. Buffett declined to be interviewed, The Times said. Of course, he has bigger problems on his mind than a company that makes up less than $2 billion of his $127 billion empire....
• “Warren deserves credit for his candor in admitting mistakes,” Alice Schroeder, author of “The Snowball,” a biography of Mr. Buffett, told The Times. “But he chooses which mistakes to discuss. It also pays to listen for the ‘dog that didn’t bark.’ ”
  
  One of those nonbarking dogs, she says, is Moody’s.
  
  “He hasn’t discussed publicly what he might be doing to influence the management at this time of crisis,” she told The Times. “Last spring, he knew the rating agencies were deeply involved with the financial crisis. Since he didn’t sell Moody’s then, he should explain what he’s doing to influence the management.”....

What one should note is that Bershire had started selling Moody's a long time ago.

July 2009: here is a document on SEC showing Berkshire disposal of Moody's shares

That's some 8 million shares disposed back then.

Sept 2009: sec link here

Oct 2009: sec link here

Dec 2009: sec link here

I could go on an on... here's a newsclip on Businessweek: Buffett Sells Moody’s Stock for Sixth Time Since July

• .. By Andrew Frye and Matthew Leising
  
  Dec. 23 (Bloomberg) -- Warren Buffett’s Berkshire Hathaway Inc. cut its stake in Moody’s Corp. for the sixth time since July after the ratings company was hit by profit declines, lawsuits and criticism from regulators.
  
  Berkshire sold 87,992 shares on Dec. 18 for $26.77 apiece and remains Moody’s biggest shareholder, according to a regulatory filing yesterday. Omaha, Nebraska-based Berkshire’s stake is down about 34 percent from the 48 million shares it owned at the end of June.
  
  Buffett buys stocks that he says have lasting competitive advantages and superior management. His stake in the rating firm, whose founder John Moody created credit grades a century ago, dates from 2000 and had a value of more than $3.5 billion at its high in 2007. Moody’s has since dropped by more than half amid criticism that inflated credit ratings during the housing boom exacerbated the recession.
  
  “Moody’s reputation has certainly been tarnished,” said Meyer Shields, an analyst with Stifel Nicolaus & Co. who has a “hold” rating on Berkshire shares. “My sense is he just thinks there’s less value.”...

How? Do you think the criticism is a bit too harsh? Berkshire had started disposing Moody's since 2009 and Berkshire had 48 million shares in Moody's to begin with and probably one should understand the difficulty in disposing 48 million worth of shares.

Warren Buffet talks to Evan Davis On BBC

Warren Buffett's Comments On US Economy

On CNBC: http://www.cnbc.com/id/33404047

• "I am not sure about exact quarters or anything of the sort. Who knows about next week or next month? We made enormous progress since a year ago. We had a real panic. And if you didn’t panic, you didn’t understand what was going on. What happened in September and October of 2008 will particularly be remembered for a long, long time. And while the governmental authorities malign things sometimes, they fortunately did some very right things, very important things. They did them properly, and they kept us from going over the cliff. The fallout from that financial panic hit the regular economy in the fourth quarter like a ton of bricks. We are coming back from that. The patient really went into the emergency room and it won’t come out of the hospital entirely for a while."

Mohnish Pabrai: There's Only One Warren Buffett

Here's a wonderful interview on Mohnish Pabrai. Enjoy!

• Mohnish Pabrai currently manages Pabrai Investment Funds, which he founded in 1999. The fund has around half a billion dollars in assets under management. Pabrai went to the US in 1982 to do his undergrad in computer engineering. After that, he worked with Tellabs in Chicago. In 1990, he started his own company TransTech, an IT services/system integration business and ran that for around ten years, before starting Pabrai Investment Funds. He has written a book on investing, The Dhandho Investor: The Low-Risk Value Method to High Returns. Excerpts from an interview:
  
  How did you get into investing business from information technology?
  Around 1994 I heard about Warren Buffett for the first time accidentally. The first couple of biographies about him had just been published a year or two before that. I read those books and I was quite blown away by some data points that were coming out about him and the industry and so on. I didn’t have any experience or even education in the investment business. But I was very intrigued by it.
  
  I started to invest in the public equity markets using Buffett’s model in 1994 and basically did extremely well, north of 70% a year, till about 1999. I was getting more and more interested in investment research and securities analysis and made a decision to leave my company. I brought in an outside CEO and decided that I would spend more time on investing and at the same time some friends of mine wanted me to manage their money for them. It started as a hobby in 1999 with about a million dollars from eight people. About a year later the business (TransTech) actually got sold, I wasn’t running it anyway, but I was completely cashed out. And then I thought that let’s make my hobby a real business, try to scale it up and get investors. We now manage about $500 million — ten years later.
  
  How did you narrow down on Warren Bufett and value investing?
  Basically in 1994, when I read about Buffett, there were two things that stood out. One was that he had compounded money at a very high rate. If you are compounding at a high rate, even if you have a small amount of money — let’s say a million dollars — in thirty years you could have a billion dollars. So the idea of compounding at a rate above the market rate is an extremely fine notion because it can lead to enormous wealth creation. That was the first thing.
  
  The second thing was that the way Buffett was compounding money at a rate higher than the market was based on a core wisdom which he stood for. If you are physicist, whether you believe in gravity or not, it will always impact you. Just like there are laws of physics, laws of gravity, there are laws of investing.
  
  I noticed in 1994 that the mutual fund business had two things: one, they did not follow the laws of investing, and two, their results were affected by the fact that they did not follow the laws of investing.
  
  For example, a basic law of investing is that you make very few bets, you don’t buy a hundred companies because you are not going to have an understanding of business. But if you look at mutual funds, that is not the way they operate.
  
  So essentially, what you are saying is that investors should make fewer bets?
  So you make few bets, you make big bets, infrequent bets and you only make bets when the odds are heavily in your favour. What I found very funny was that here is a guy (Buffett) who is telling you very much the approach to investing he follows, and this is like Newton telling you the laws of physics. The second thing is that the investment industry does not care about these laws, and their results reflect it.
  
  The third conclusion I came to is, I said, OK, if what I am saying is right, what it means is that a person like myself, who has no experience in this industry, could come in and apply Buffett’s rules and do better than all these managers running all these funds. So I said, well, that hypothesis means nothing until you test it out. I had an asset sale take place of a part of my business in 1994, and I had about million dollars in cash, sitting with me for which I did not have any need for.
  
  I decided I am going to take this million and put this on a twenty or thirty-year compounding engine. I was about 30 years old, I wanted to see if by the age of sixty I had my billion dollars. I started playing this thirty-year game in 1994, and basically I found that first of all, it was very enjoyable and second, that it’s been fifteen years now and the original hypothesis I had is absolutely correct — which is that the industry doesn’t get it, they still haven’t changed their ways, and there results reflect that.
  
  What are the factors you look at before deciding to invest in a company? Can you give us an example?
  The first thing you got to look at is, “I am not buying a stock, but I am buying a business.” And you only buy the business if you were willing to buy the entire business if you had money for it. So, for example, if Reliance Industries has a market cap of $100 billion and you had a $300 billion, the question you would ask yourself is, would I buy the entire business for a $100 billion?
  
  The first thing is that you are not buying pieces of paper, but you are buying an entire business. The second is that you ask yourself, do I understand the business? Do I truly understand how it will work, how it makes money, how will it do in the future?
  Then the third thing is, if Reliance produces $3 billion a year cash flow and it trades for $100 billion, I have no intention of buying it at 33 times cash flow. It is like I have no interest in putting money in an account that pays 3% interest.
  
  So I love Reliance, maybe, if the fair value of business is 15 times cash flow, which is $45 billion. And since I am cheapskate, I don’t want to buy it for more than half its fair value, so I just say to myself, that if it goes below $20 billion in value — or one-fifth the current price — then I will look at it again. In fact, that is the way to look at the Indian Sensex. You take all the Reliances, the Wipros and Infosyses of the world, chop their price by four, and that’s your entry price.
  
  What has been your most successful stockpick till date?
  You know that’s a very funny question. The most successful company I ever invested in is Satyam. I invested in 1995, and I was completely out by 2000. When I invested the stock was at Rs 40, and Satyam’s earnings at that time were about at Rs 12 a share, so you were buying a business for three-and-a-half times earnings. And the more interesting thing for me was that property the company had in Hyderabad exceeded the market capitalisation as it was carried at a value that was bought a long time ago.
  
  The only reason I knew about Satyam was because I was in the IT services space. These guys had actually visited us to see if they could do business together. And I had been pretty impressed by the way the business operated and the people I had met.
  
  I looked at it from my investment point of view after was amazed that such a business could trade at such a price. So I invested in Satyam. In 2000, it was trading at Rs 7,000, that is about a 150 times the price I bought it at. This was in the days before demat, and actually when I bought the stock with an account through Kotak that I had in Mumbai, I was given physical delivery of these shares that looked like tattered pieces of paper that were falling apart.
  
  Satyam from less than a PE of 3 to more than PE of 100. I just said I am out of it because now I owned a bubble stock even though I did not buy it at bubble price. I sold my entire position within 5% of the peak. Within six months it had dropped from Rs 7,000 to Rs 1,000, and continued on the sidelines for a while. That was the best deal that I ever made.
  
  I also happened to read somewhere that you wear shorts to work and do not as a matter of habit short stocks?
  Well, I am wearing shorts right now … the math for for shorting is really bad. When you are long on a stock, as it goes down in price, the position is going against you and it becomes a smaller portion of your portfolio. In shorting, it is the other way around: if the short goes against you, it is going to become a larger position of your portfolio. When you short a stock, your loss potential is infinite; the maximum you can gain is double your value. So why will you take a bet where the maximum upside is a double and the maximum downside bankruptcy?
  
  Also, any time you short a stock, you are hooked to a (stock price) quote machine for life support because you have to watch what is happening all the time. Many a times, when I am travelling in India, it could be several days when I don’t have a quote for any positions that I hold. So I don’t want to be a in a situation where I have an umbilical cord linked to some quote machine … and blood pressure going up and down.
  
  Do you have investments in emerging markets like India and China or do you stick to the stocks in the US market?
  I would say that most times a very large portion of our portfolio has a lot of exposure to the global market. I have (shares in) several companies in Canada. I own (shares in) one Chinese company and an Egyptian company, I don’t own any Indian companies right now, but I use to own Satyam. Also Pabrai Funds use to own Dr Reddy’s.
  
  You have said in the past that investment ideas come to you by reading a lot…
  An investor should think of himself as a gentleman of leisure. Don’t think that you are in some profession. You just think that you are a person who is focused on enjoying and living life well. If you focus on yourself as a gentleman of leisure what is going to happen is that you do not feel any compelling reason to act. It has been several months since I have bought any new stock. And that is not a problem because we went through a period in December when we bought ten stocks. The first thing is that we are in a profession were you don’t pay for activity, you get paid for being right. So there should be no compelling reason to act. Basically, the thing you do is you take out the reason to act.
  The second thing you do is you focus on acquiring worldly wisdom. I read an enormous amount of stuff and relate to what different investment managers who I respect are saying. So, at times, things become no-brainers.
  
  In the fourth quarter of last year, when everything was going to hell, one part of the market that went to extreme hell was commodity-related stocks. Commodity-related stocks absolutely got crushed. 95% down. 90% down. And if you simply keep in mind that you look at the growth rates of India and China, you can get an insight.
  
  Through our foundation Dakshina I spend a good amount of time in rural India. I can see nuances about India, that most people would not see. You can see that the pressure on the few commodities in the earth’s crust is tremendous.
  
  China has severe problems with fresh water and you really have big problems with agriculture with those type of water issues. When you have growth rates of 7-8%, people will want to eat the best. Generally it is proven that protein consumption climbs very high when economies do well. It is absolutely a given that 10 years from now the amount of agriculture and protein needed will be much higher from today. And getting there will not be easy.
  
  So the thing is there are certain businesses that serve as toll bridges in that space. For example, one toll bridge is if you look at Latin America. It has a lot of land and it is flooded with fresh water rivers. South America can basically take that land and convert it into producing corn and soybean or whatever and export the hell out of it to China. And that is exactly what will end up happening. Latin American agricultural companies with large land holdings today are not excessively priced, they are very cheap. But there is absolutely no way for India and China to satisfy the consumption demand that is coming without going to Latin America. So we will just own the toll bridges and wait.
  
  How much of Warren Buffett’s success can be attributed to his investment prowess and how much to the fact that he is Warren Bufett?
  Well the thing is you could have invested even after Buffett had invested and you could have made six times the money out of it.
  
  In fact there are a couple of professors in Ohio, who studied any stock that Warren Buffett bought, if you bought on the last day of the month, when it was public that he owned that stock, and you sold it after it was public that he had started selling it, you would have generated north of 20% annual rate of return.
  
  I would say that we will never see another Warren Buffett. Just like we will never see any Albert Einstein or another Mahatma Gandhi. Buffett is a very unique individual. His skillsets outside of investment are phenomenal but they get dwarfed by his investing skills. The main thing that makes Warren Buffett Warren Buffett is that he is a learning machine who has worked really hard for, let’s us say seventy years, and is continuously learning every day.
  
  So the thing is if you want to be like Buffett, there is no short cut. First of all, you have to be deeply interested in investing and you have to be very willing spending tens of hours, hundreds of hours, reading the minutiae. There is a very famous value investor called Seth Klarman. He is into horse racing. And his famous horse is called Read the Footnotes.

Source: here

Warren Buffet On The US Dollar Effect

On NYTimes: The Greenback Effect

• IN nature, every action has consequences, a phenomenon called the butterfly effect. These consequences, moreover, are not necessarily proportional. For example, doubling the carbon dioxide we belch into the atmosphere may far more than double the subsequent problems for society. Realizing this, the world properly worries about greenhouse emissions.
  
  The butterfly effect reaches into the financial world as well. Here, the United States is spewing a potentially damaging substance into our economy — greenback emissions.
  
  To be sure, we’ve been doing this for a reason I resoundingly applaud. Last fall, our financial system stood on the brink of a collapse that threatened a depression. The crisis required our government to display wisdom, courage and decisiveness. Fortunately, the Federal Reserve and key economic officials in both the Bush and Obama administrations responded more than ably to the need.
  
  They made mistakes, of course. How could it have been otherwise when supposedly indestructible pillars of our economic structure were tumbling all around them? A meltdown, though, was avoided, with a gusher of federal money playing an essential role in the rescue.
  
  The United States economy is now out of the emergency room and appears to be on a slow path to recovery. But enormous dosages of monetary medicine continue to be administered and, before long, we will need to deal with their side effects. For now, most of those effects are invisible and could indeed remain latent for a long time. Still, their threat may be as ominous as that posed by the financial crisis itself.
  
  To understand this threat, we need to look at where we stand historically. If we leave aside the war-impacted years of 1942 to 1946, the largest annual deficit the United States has incurred since 1920 was 6 percent of gross domestic product. This fiscal year, though, the deficit will rise to about 13 percent of G.D.P., more than twice the non-wartime record. In dollars, that equates to a staggering $1.8 trillion. Fiscally, we are in uncharted territory.
  
  Because of this gigantic deficit, our country’s “net debt” (that is, the amount held publicly) is mushrooming. During this fiscal year, it will increase more than one percentage point per month, climbing to about 56 percent of G.D.P. from 41 percent. Admittedly, other countries, like Japan and Italy, have far higher ratios and no one can know the precise level of net debt to G.D.P. at which the United States will lose its reputation for financial integrity. But a few more years like this one and we will find out.
  
  An increase in federal debt can be financed in three ways: borrowing from foreigners, borrowing from our own citizens or, through a roundabout process, printing money. Let’s look at the prospects for each individually — and in combination.
  
  The current account deficit — dollars that we force-feed to the rest of the world and that must then be invested — will be $400 billion or so this year. Assume, in a relatively benign scenario, that all of this is directed by the recipients — China leads the list — to purchases of United States debt. Never mind that this all-Treasuries allocation is no sure thing: some countries may decide that purchasing American stocks, real estate or entire companies makes more sense than soaking up dollar-denominated bonds. Rumblings to that effect have recently increased.
  
  Then take the second element of the scenario — borrowing from our own citizens. Assume that Americans save $500 billion, far above what they’ve saved recently but perhaps consistent with the changing national mood. Finally, assume that these citizens opt to put all their savings into United States Treasuries (partly through intermediaries like banks).
  
  Even with these heroic assumptions, the Treasury will be obliged to find another $900 billion to finance the remainder of the $1.8 trillion of debt it is issuing. Washington’s printing presses will need to work overtime.
  
  Slowing them down will require extraordinary political will. With government expenditures now running 185 percent of receipts, truly major changes in both taxes and outlays will be required. A revived economy can’t come close to bridging that sort of gap.
  
  Legislators will correctly perceive that either raising taxes or cutting expenditures will threaten their re-election. To avoid this fate, they can opt for high rates of inflation, which never require a recorded vote and cannot be attributed to a specific action that any elected official takes. In fact, John Maynard Keynes long ago laid out a road map for political survival amid an economic disaster of just this sort: “By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.... The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”
  
  I want to emphasize that there is nothing evil or destructive in an increase in debt that is proportional to an increase in income or assets. As the resources of individuals, corporations and countries grow, each can handle more debt. The United States remains by far the most prosperous country on earth, and its debt-carrying capacity will grow in the future just as it has in the past.
  
  But it was a wise man who said, “All I want to know is where I’m going to die so I’ll never go there.” We don’t want our country to evolve into the banana-republic economy described by Keynes.
  
  Our immediate problem is to get our country back on its feet and flourishing — “whatever it takes” still makes sense. Once recovery is gained, however, Congress must end the rise in the debt-to-G.D.P. ratio and keep our growth in obligations in line with our growth in resources.
  
  Unchecked carbon emissions will likely cause icebergs to melt. Unchecked greenback emissions will certainly cause the purchasing power of currency to melt. The dollar’s destiny lies with Congress.
  
  
  Warren E. Buffett is the chief executive of Berkshire Hathaway, a diversified holding company.
  

Berkshire's Sitting On A Tidy Profit From Its Investment In Goldman Sachs

Here is the chart of Goldman Sachs.

It was just on 24 September 2008, Warren Buffett Gives Goldman Sachs A Vote Of Confidence!

• Goldman (GS, Fortune 500) will sell $5 billion of preferred stock to the insurance and investment giant, which will also receive warrants to purchase $5 billion of common stock with a strike price of $115 per share, the company announced Tuesday. Berkshire (BRKA, Fortune 500) has five years to exercise the warrants.

At around 149.00 plus or minus a buck or two, this would translate to a nice paper gain of 29.5%. Not forgetting the fact that this stake carried a 10% yield dividend.

Of course as can be seen in the above chart when Goldman Sachs sank to 50, Buffett was criticised heavily.

See past posting also: Warren Buffet Talks About Goldman Sachs Investment: Transcript of CNBC Interview

ps: worth a read Spitzer Agonistes Redux

Warren Buffett : US Economy Is Weaker Than Expected

On ABC News Warren Buffett Backs Second Stimulus

• As debate grows about a possible second stimulus package for the flagging American economy, at least one legendary investor is giving the idea his guarded approval.
  
  "I think that a second one may well be called for," Warren Buffett, the CEO of Berkshire Hathaway, told "Good Morning America" today. But, he added, "you hope it doesn't get watered down in many ways."
  
  Buffett cautioned that a second stimulus package, like the first, won't be "a panacea," because stimulus packages take time to work. He criticized lawmakers' work on the first stimulus package, which contained $787 billion in spending.
  
  "Our first stimulus bill ... was sort of like taking half a tablet of Viagra and having also a bunch of candy mixed in ... as if everybody was putting in enough for their own constituents," he said. "It doesn't have really quite the wall that might have been anticipated there."
  
  Buffett also criticized the government's public-private investment plan, through which private investors are supposed to buy so-called toxic assets off the balance sheets of ailing banks that received billions in government aid.
  
  "I do not like the idea of any kind of a plan involving the government where Wall Street makes a lot of money. My plan provided that they would make no money whatsoever, and the American public would make the money. I just think that Wall Street owes the American people one at this point," he said.
  
  Nebraska native Buffett, known as the "Oracle of Omaha" for his long history of prescient stock picks, said that despite the talk of recent economic "green shoots," he couldn't predict when the flagging economy would bounce back.
  
  "We are not in a freefall, but we are not in a recovery either," Buffett said. "We were in a freefall really in the last quarter of last year, starting in the financial markets and spreading to the economy, and we had this huge change in behavior. That change hasn't changed."
  
  The U.S. unemployment rate, which currently stands at 9.5 percent, still "has a ways to go" before it peaks, he said. His own company, he said, had to lay off 500 people.
  
  "We didn't want to do it, and if we saw things coming back we wouldn't do it," he said.
  
  Buffett said he's never seen a recession affect consumers the way the current one has.
  
  "I have never seen it quite happen like this, but what happened was in late September, the American public … saw money market funds break the buck. They saw commercial papers stop, they saw all kinds of things that they hadn't seen before," he said. "It was a shock to the system."
  
  Still, Buffett remains optimistic.
  
  "I want to emphasize, we are going to come out of this better than ever," he said. "I mean the best days of America, by far, lie ahead. But not next week or next month and then, I don't know exactly when we will come out, but we will come out big time."
  
  Second Stimulus Debate Grows
  
  Talk of a second stimulus has grown, as the economy shows limited signs of improvement.
  
  "It looks like the economy is weaker than expected. Why not begin to think about over the next several months whether we need a stimulus package and what it should include," Laura D'Andrea Tyson, Obama's economic adviser said recently.
  
  Some, including Nobel Prize-winning economist Paul Krugman, support the second stimulus idea, but Republicans doubt it will yield any results.
  
  

Warren Buffett: Economy Recovery Will Happen But It Hasn't Happen Yet

On an interview with Becky Quick on CNBC Warren Buffett was rather gloomy about the economy. Buffett's gloomy economic predictions

• "There were a lot of excesses to be wrung out and that process is still under way, and it looks to me that it will be under way for quite awhile. In the annual report, I said that the economy would be in shambles this year and probably well beyond, and I think that is true."
  
  Unemployment, said Buffett, will continue to drag the economy down. He told Bloomberg news that unemployment is "very likely to go above 10%." About 9.4% of the population -- about 14.5 million people -- was unemployed in May, the last month for which statistics are available. High unemployment will continue to depress consumer demand for everything from energy to cars and homes, Buffett said.

Here is the transcript of the full interview on CNBC: Warren Buffett's Live Lunch Interview on CNBC

• BECKY: The last time we sat down to talk to you was on May 4, and at that point you told us that you think we're in an economic war right now. How much progress do you think we've made in that war?
  
  BUFFETT: Well, it's been pretty flat. I get figures on 70-odd businesses, a lot of them daily. Everything that I see about the economy is that we've had no bounce. The financial system was really where the crisis was last September and October, and that's been surmounted and that's enormously important. But in terms of the economy coming back, it takes a while. There were a lot of excesses to be wrung out and that process is still underway and it looks to me like it will be underway for quite a while. In the (Berkshire Hathaway) annual report, I said the economy would be in a shambles this year and probably well beyond. I'm afraid that's true.
  
  BECKY: We hear people on our air all the time who talk about the 'green shoots' that they're seeing. Are you seeing any of those green shoots?
  
  BUFFETT: (Laughs.) I looked. I wasn't seeing anything. I had a cataract operation on my left eye about a month ago and I thought maybe now I'll be able to see green shoots. We're not seeing them. Whether it's retailing, manufacturing, wherever. We have a big utility operation. Industrial demand is down like we've never seen it for a simple thing like electricity. So it hasn't happened yet. It will happen. I want to emphasize that. But it hasn't happened yet.
  
  
  
  
  
  
  

Recommendation From Warren Buffett!

Lazy Saturday once more.

LOL! And a thousand apologies for the cheesy and misleading title.

To understand what had cause the current financial crisis, here is the letter that Warren Buffett recommended during Berkshire Annual meeting.

JP Morgan Chase 2008 Shareholder Letter

• III. FUNDAMENTAL CAUSES AND CONTRIBUTIONS TO THE FINANCIAL CRISIS
  
  After Lehman’s collapse, the global financial system went into cardiac arrest. There is much debate over whether Lehman’s crash caused it – but looking back, I believe the cumulative trauma of all the aforementioned events and some large flaws in the financial system are what caused the meltdown. If it hadn’t been Lehman, something else would have been the straw that broke the camel’s back.
  
  The causes of the financial crisis will be written about, analyzed and subject to historical revisions for decades. Any view that I express at this moment will likely be proved incomplete or possibly incorrect over time. However, I still feel compelled to attempt to do so because regulation will be written soon, in the next year or so, that will have an enormous impact on our country and our company. If we are to deal properly with this crisis moving forward, we must be brutally honest and have a full understanding of what caused it in the first place. The strength of the United States lies not in its ability to avoid problems but in our ability to face problems, to reform and to change. So it is in that spirit that I share my views.
  
  Albert Einstein once said, “Make everything as simple as possible, but not simpler.” Simplistic answers or blanket accusations will lead us astray. Any plan for the future must be based on a clear and comprehensive understanding of the key underlying causes of – and multiple contributors to – the crisis, which include the following:
  
  • The burst of a major housing bubble
  • Excessive leverage pervaded the system
  • The dramatic growth of structural risks and the unanticipated damage they caused
  • Regulatory lapses and mistakes
  • The pro-cyclical nature of virtually all policies, actions and events
  • The impact of huge trade and financing imbalances on interest rates, consumption and speculation
  
  Each main cause had multiple contributing factors. As I wrote about these causes, it became clear to me that each main cause and the related contributors could easily be rearranged and still be fairly accurate.
  
  It was also surprising to realize that many of the main causes, in fact, were known and discussed abundantly before the crisis. However, no one predicted that all of these issues would come together in the way that they did and create the largest financial and economic crisis of our lifetime.
  
  Even the more conservative of us, and I consider myself to be among them, looked at the past major crises (the 1974, 1982 and 1990 recessions; the 1987 and 2001 market crashes) or some mix of them as the worstcase events for which we needed to be prepared. We even knew that the next one would be different – but we missed the ferocity and magnitude that was lurking beneath. It also is possible that had this crisis played out differently, the massive and multiple vicious cycles of asset price reductions, a declining economy and a housing price collapse all might have played out differently – either more benignly or more violently.
  
  It is critical to understand that the capital markets today are fundamentally different than they were after World War II. This is not your grandfather’s economy. The role of banks in the capital markets has changed considerably. And this change is not well-understood – in fact, it is fraught with misconceptions. Traditional banks now provide only 20% of total lending in the economy (approximately $14 trillion of the total credit provided by all financial intermediaries). Right after World War II, that number was almost 60%. The other lending has been provided by what many call the “shadow banking” system. “Shadow” implies nefarious and in the dark, but only part of this shadow banking system was in the dark (i.e., SIVs and conduits) – the rest was right in front of us. Money market funds, which had grown to $4 trillion of assets, directly lend to corporations by buying commercial paper (they owned $700 billion of commercial paper).
  
  Bond funds, which had grown to approximately $2 trillion, also were direct buyers of corporate credit and securitizations. Securitizations, which came in many forms (including CDOs, collateralized loan obligations and commercial mortgage-backed securities), either directly or indirectly bought consumer and commercial loans. Asset securitizations simply were a conduit by which investment and commercial banks passed the loans onto the ultimate buyers.
  
  In the two weeks after the Lehman bankruptcy, money market and bond funds withdrew approximately $700 billion from the credit markets. They did this because investors (i.e., individuals and institutions) withdrew money from these funds. At the same time, bank lending actually went up as corporations needed to increasingly rely on their banks for lending. With this as a backdrop, let’s revisit the main causes of this crisis in more detail.

You need to read the rest of the letter in detail to understand the main causes Jamie is talking about here. It's a real good read.

For example Jamie talks on how and why JP Morgan fared better. See page 10.

• We didn’t write option ARMs (adjustable rate mortgages) because we did not think they were a consumer-friendly product. Although we made plenty of mistakes in the mortgage business, this was not one of them.

And on CDOs.

• We never built up the structured finance business. While we are a large player in the asset-backed securities market, we deliberately avoided the structured collateralized debt obligation (CDO) business because we believed the associated risks were too high. Structured finance in its most complicated forms, such as “CDO-squared,” has largely disappeared after unleashing a myriad of problems on the financial system. They will not be missed.

And lastly, the financial commandment!

• We avoided short-term funding of illiquid assets, and we essentially do not rely on wholesale funding. (Of our $1 trillion of deposits, approximately $300 billion is referred to as “wholesale,” but it essentially is comprised of deposits that corporate clients leave with us in the normal course of business – i.e., they are “sticky” and not like brokered certificates of deposit or “hot money” that move on a whim for one basis point.) Simply put, we still follow the financial commandment: Do not borrow short to invest long.

Michael Lewis On Warren Buffett: The Master Of Money

A fantastic piece. Truly fantastic.

The Master of Money

I was sceptical at first for I remember reading before that Michael was never a fan. ( In the second last passage of this article, Michael does include the link to his past article on Warren).

And again, Micheal does have some rather tough and critical comments on Warren but despite of the comments, he acknowledges his admiration of Warren.

• There is now a long shelf of books about Warren Buffett, but this is the first time he has gone to any trouble to add to it. Reportedly Buffett now regrets his decision--he has apparently put some fresh distance between himself and his official biographer. If so, it's not hard to see why. Alice Schroeder is a former Morgan Stanley research analyst, able to understand and to explain Buffett's money-making, but she declined to confine herself to the business at hand. She has sought to describe Buffett's psychological landscape as clearly as his financial one. For the reader, the results are pretty terrific--there are not a lot of 838-page narratives that leave you wanting more--but for Buffett they are no doubt upsetting.
  
  Over his long and admirable career, the famous billionaire has been shockingly honest about who he is and what he does. Now along comes this first-time author who insists on seeing his pleasant honesty and raising it, painfully. Even worse: she's a woman! Buffett has a long and happy history of admitting attractive, intelligent women into his life, which Schroeder describes without mentioning how neatly she fits into the pattern. These women have invariably felt the need to shelter and to protect their man, and to subordinate their own needs to his--until now. Buffett should have known better: you should never completely trust a writer. Especially if she is any good.
  
  Begin, as Schroeder does, at the beginning. Born in 1930, the son of an emotionally abusive mother and a father whom he adored but who was unable to absorb the full shock of his wife, Buffett was emotionally problematic. In Schroeder's telling, the young Warren was sneaky, socially awkward, and generally a wiseass with a cruel streak. As a man he would reserve his harshest criticism for those who lied or cheated or stole, but as a boy he shoplifted pathologically--not because he wanted a particular thing, but simply for the pleasure of stealing. At ease in Omaha, he was unhappy everywhere else, and so he suffered especially when his stockbroker father Howard was elected to the House of Representatives and he became the new kid at middle school in Washington, D.C. He was young for his class. In the most important social departments, he started out well behind his classmates and, as he puts it, "I never caught up, basically." He had terrible social anxieties and, right up until the time he married, at the age of twenty-one, a special lack of talent with girls.
  
  In spite of all this he was deeply, ferociously competitive. Here is one of the odd things about the man whom Schroeder describes: the plain facts of his young character assemble themselves into something like a portrait of a universal loser--and yet right from the start Buffett himself seems to have been able to believe that the universe was wrong and he was right. What other people thought of him, and how other people measured him, did not prevent him from establishing his sense of himself as someone who might win. In his Washington, D.C. school (before he talked his parents into letting him return to Omaha) Buffett did well in only one class, typing. Here, in his own words, is how he went about it: "I made A's every semester in typing. We all had these manual typewriters and, of course, you'd slam the carriage back to hear this 'ding.' I was by far the best in the class at typing out of twenty people in the room. When they'd have a speed test, I would just race through the first line so I could SLAM the carriage back. Everybody else would stop at that point, because they were still on the first word when they would hear my 'ding!' Then they'd panic, and they'd try to go faster, and they'd screw up. So I had a lot of fun in typing class." (This, by the way, is how Schroeder incorporates Buffett's voice throughout her narrative--long italicized quotes woven into the body of the narrative. One measure of how lucky she is in her subject is how much interest there is in just flipping through the book from cover to cover reading only the italicized quotes. Buffett is apparently incapable of being dull.)
  
  The young Buffett's ambition found a number of conventional if implausible outlets--bodybuilding, for instance; he devoured books with such titles as Big Arms and Big Chest--and one strange one, at least for a little kid: money-making. At a shockingly young age Buffett learned the pleasure of having more money than his friends. To accumulate it he worked paper routes, bought and managed pinball machines, and created a horse-racing tip sheet that he sold at the local track. Upon arriving in Washington he asked his father to use his congressional status to request from the Library of Congress every book it had on horse handicapping. By the time he was sixteen, Buffett had accumulated the equivalent in today's dollars of $53,000, and hardly saw the point of taking the spot he had been offered at the Wharton School. He knew what he wanted to do for a living--live in Omaha and invest in stocks--but his parents prevailed and off he went to college. He lasted three years before he returned and finished at the University of Nebraska.
  
  One of the patterns that Schroeder teases out of Buffett's life--not just in his investments but also in his relationships--is his tendency to seek safe harbors. And yet once he has found safety, he isn't content to remain there. Instead he waits for opportunities to stage surprise attacks on the outside world. Omaha is his fort; the outside world is lucrative but dangerous, and Buffett never enters it without some cost-benefit analysis. But in 1950, after he read a book called The Intelligent Investor written by a pair of Columbia University professors named David Dodd and Benjamin Graham, Buffett didn't think twice. As his then-housemate says here, "it was almost like he'd found a god." When Buffett applied to the Columbia Business School, his application landed on the desk of David Dodd. Dodd brought Buffett to Columbia; Graham brought him into his investment firm.
  
  Like Buffett, Graham was instinctively non-conformist--even more so in his exotic personal life than his professional one. ("A Mount Everest for women who liked a challenge: they met him and wanted to climb on top," is how Schroeder oddly describes it.) Buffett--whose idea of a wild night seems to have involved reading Moody's Manuals in as many positions as possible--turned a blind eye to Graham's sex life to remain focused on his financial technique. Benjamin Graham was in many ways very different from what Warren Buffett was destined to become. Graham's experience of the Great Depression had instilled him with pessimism. He eschewed judgments about the future prospects of a company or an industry, and instead looked for bargains in the here and now--companies that were trading below the value at which they might be liquidated. Graham was "looking at businesses based on what they were worth dead, not alive," as Schroeder puts it. Cigar butts, he called these.
  
  Cigar butts obviously appealed to Buffett, but Buffett's investment career was destined to coincide with a very different period in American financial history. There never was a better time and place to make money from optimism than in the American stock market since World War II. Had Buffett confined himself to the gloomy business of plucking wet smelly cigar butts off the ground, he would never have become Warren Buffett. And Buffett was built differently than Graham. He had emerged from his childhood both a pleaser and an optimist. Dale Carnegie's How To Win Friends And Influence People apparently made a deep impression on him. When he looked at a company, he saw not just its asset value but also its possibilities.
  
  Buffett's first big bet was on a then obscure insurance company called GEICO. GEICO was not, by Graham standards, a bargain: it traded at a price above the value of its assets. But Buffett dug down into the business, saw how fast the company was growing, and, as Schroeder writes, "felt confident of being able to predict what it would be worth in a few years. ... A less Graham-like analysis could hardly be imagined. Graham's 1920s bubble and Depression experiences had made him suspicious of earnings projections. But Warren was betting three-quarters of his patiently acquired money on the numbers he had calculated."
  
  In retrospect it is hard to say whether the rising market created Buffett's long-term optimism, or Buffett's optimism simply found a lucky home in a rising market. It is hard, also, to say whether Benjamin Graham changed Buffett's life or merely gave him an excuse to do what he was going to do anyway. At any rate, Graham wound up being more of an intellectual pit stop than a destination. In 1956 Buffett moved back to Omaha, started his first investment partnership, and really never looked back. By 1960 he had made money grow at such incredible rates that "his name was being passed along like a secret." A dollar invested with Buffett in 1957 was 26 dollars by 1969, and he was taking no obviously wild risks. In no year did he ever lose money.
  
  In describing how Buffett's mind works, and why it is so well suited to his chosen career, Schroeder is particularly good. A shrewd evaluator of businesses and the people who ran them, Buffett turned himself, at a young age, into a kind of odds-calculating machine. As Schroeder puts it, "he tended to extrapolate mathematical probabilities over time to the inevitable (and often correct) conclusion that if something can go wrong it eventually will." This habit of mind informed not just his investment decisions but also much else--for instance, his obsession with nuclear proliferation. In Buffett's mind, it is not a question of if but when a nuclear bomb explodes in a big city, and the goal should be not to prevent it but to reduce the odds, and put the terrible day off for as long as possible.
  
  To his natural gifts as a bookie Buffett coupled an incredibly keen sense of self-preservation. He seems always to have been something of a physical and emotional coward. He is actually less wary in his financial life than he is outside of it. He avoids social conflict, unless there is money on the line, and also all sorts of new experiences. His long-time partner Charlie Munger likes to call Buffett a "learning machine," but there are whole swaths of human activity he actively resists learning anything at all about, such as the entire high-tech industry. He confines himself to the diet of an eight-year-old, refusing to eat anything much beyond spaghetti, hamburgers, and grilled cheese sandwiches. Schroeder describes a bizarre scene in which Katharine Graham escorted Buffett to dinner at the Manhattan apartment of Sony Chairman Akio Morita. Japanese chefs served plate after plate that Buffett left completely untouched. "By the end of fifteen courses, he still had not eaten a bite," writes Schroeder. "The Moritas could not have been more polite, which added to his humiliation. He was desperate to escape back to Kay's apartment, where popcorn and peanuts and strawberry ice cream awaited him. 'It was the worst,' he says about the meal he did not eat. 'I've had others like it but it was by far the worst. I will never eat Japanese food again.'" Buffett ate what he needed to eat to remain alive--and learned what he needed to learn to invest shrewdly.
  
  Finally, and most critically, Schroeder stresses Buffett's obsession with money, which he famously views less as a unit of exchange than a store of value. Kay Graham once asked him for a dime to make a phone call and Buffett, finding only a quarter in his pocket, went off to make change. In telling the tale of Buffett's rise, Schroeder returns over and over to his pathological stinginess. As rich as Buffett became, he never stopped measuring himself by how much money he had. He tells Schroeder that he pretty much measures his whole life by Berkshire Hathaway's book value, and the reader can't help wondering if that is ultimately how he measures other people, too. "He was preoccupied with money," Schroeder remarks. "He wanted to amass a lot of it, and saw it as a competitive game. If asked to give up some of his money, Warren responded like a dog fiercely guarding its bone, or even as though he had been attacked. His struggle to let go of the smallest amounts of money was so apparent that it was as if the money possessed him, rather than the other way around."
  
  Buffett's single-minded pursuit of money seems to have left him with little interest in anything else. His detachment from his children became a running joke in the Buffett family. Schroeder quotes a friend's description of the first Mrs. Warren Buffett as "sort of a single mother. ... He was so used to her attention and remained so undomesticated that once, when she was nauseous and asked him to bring her a basin, he came back with a colander. She pointed out that it had holes; he rattled around the kitchen and returned triumphantly bearing the colander on a cookie sheet. After that she knew he was hopeless." In the late 1970s Susie Buffett moved to San Francisco and pursued other relationships, and even told one lover that she would seek a divorce. In the bargain she persuaded her housekeeper back in Omaha, an attractive younger woman named Astrid Menks, more or less to replace her as Buffett's caretaker. Buffett apparently leapt rather more enthusiastically into this arrangement than his wife expected. "Susie herself was shocked," writes Schroeder. "This wasn't what she had in mind when she stressed to her husband that they both had needs. But it might have been predicted. Warren had searched his whole life for the perfect Daisy Mae, and whatever he wanted Astrid did: buy the Pepsi, do the laundry, take care of the house, give him head rubs, cook the meals, answer the telephone, and provide all the companionship he needed."
  
  Through it all, Buffett maintained his desire to present to the outside world a life simple and ordinary. He only ever made one public statement on his polygamous family arrangements ("[I]f you knew the people involved, you'd see that it suited all of us quite well"), though he added to Schroeder that "they both need to give, and I'm a great receiver, so it works for them." His life was structured to maximize the time and energy he could devote to Berkshire Hathaway, and he seems to have spent very little time questioning that structure. From time to time he seems to have backed away from his life with what sound like tiny spasms of self-doubt. As early as 1970, he wrote to his shareholders that "I don't want to be totally occupied with outpacing a market rabbit all my life." But always he takes a deep breath and waits for the feeling to pass.
  
  In her account of Buffett's equally complicated financial life, Schroeder describes two decisions that led him down the path he eventually took. The first came in 1958, after he bought a small windmill-maker in Beatrice, Nebraska called Dempster Mill Manufacturing. Having milked its assets for all they were worth and then put it up for sale, Buffett found himself cast in the town papers as the rapacious, heartless big-city financier. He hated the role. He was painfully thin-skinned and avoided any situation in which he might come in for personal criticism. From that moment on, he sought to be seen as the good guy. He set out to solve an original and seemingly insoluble problem: how to become the world's richest man and also be universally admired and loved. At times he would still behave like an old-fashioned capitalist pig--exploiting weakness in others, obsessing about money, stiffing workers, driving ruthlessly hard bargains, and so on; but he did it so deftly and sensibly, and with such good humor, that he was seldom again cast in the role of the villain.
  
  Buffett's second great decision was to maximize, at great financial cost to himself, the interest that the public might take in his business affairs. In 1986, Congress passed a tax reform that changed how Berkshire Hathaway's capital gains were taxed. Previously, those gains had been taxed only once, when a shareholder sold his shares. Now, so long as Berkshire remained a public corporation, Buffett would need also to pay tax on any gains from the sale of stocks inside his portfolio. There was an obvious solution, and it was seized upon by public fund managers everywhere in Buffett's position: shutter the corporation and become a private equity fund. At the time Berkshire had $1.2 billion of unrealized capital gains. Buffett might have doled these out, and then restarted as a partnership free of corporate double tax. Instead, at a cost to himself that Schroeder puts at $185 million, he kept Berkshire intact.
  
  A man who cares so deeply about money reveals himself most wholly in his decisions to part with it. Buffett had exchanged cash for an audience. The first twenty years of his investing life had been spent more or less in obscurity. (In 1981 only twenty-two people attended the Berkshire Hathaway conference.) By 1986, however, Buffett's every move was being watched, and usually cheered. His fame became not only a pleasure but an asset. His capital became unlike anyone else's, because it came with his name attached to it. Warren Buffett saw deals that no one else saw, and had access that no one else had. If the stock market was a roulette table, he had his hand on the wheel. Then he pushed his luck.
  
  
  
  From very early on in his investment career, Buffett had qualms about Wall Street. He began his career as a stockbroker, but when he learned that a stockbroker made his money not by enriching his customers, but by churning their portfolios, he lost interest in the job. As his wealth grew and amplified his opinions, he voiced them more frequently, and conveyed his distaste for Wall Street brokerage firms. And so it came as a shock, in 1986, when he turned on a dime and bought a giant stake in Salomon Brothers (where, at the time, I happened to work). The firm had been mismanaged and was the target of a hostile raid which, if successful, would almost certainly have cost the CEO, John Gutfreund, his job. In rode Buffett to take a stake in the firm that foiled the raid, and to keep Gutfreund in his job.
  
  But it was no ordinary stake. Buffett's reputation as the soul of integrity enabled him to charge the embattled CEO extra for his capital: his dollars were not just money, they were also an ethical imprimatur. Salomon Brothers sold Buffett a security that guaranteed a high return, no matter how the other shareholders fared, and a sensational return if the firm's stock price happened to rise. Other investors had to worry that the firm was well run, whereas Buffett was being paid a big sum to bet only that it would not go bankrupt. He had rented not just his capital but also his reputation. The moral algebra of the transaction was curious: it caused a lot of people to feel better about Salomon Brothers but no one to think worse of Buffett.
  
  But the joke was on Buffett. A few years later, a rogue trader at Salomon Brothers rigged the U.S. Treasury bond market. Gutfreund had learned of the fraud and failed to mention it on visits to both the Treasury and the Fed. Treasury Secretary Nicholas Brady was so outraged that he decided to eliminate the firm from the list of dealers allowed to do business with the U.S. Treasury--a decision that would have driven Salomon Brothers, overnight, into bankruptcy. The head of the SEC, Richard Breeden, described Salomon Brothers as "rotten to the core." Schroeder devotes a great deal of space to the scandal, and in the bargain delivers the definitive account of it, at least from Buffett's point of view. This entanglement with a big Wall Street firm, she tells us, quickly turned into the single most miserable experience in Buffett's career. This man who prized his moral high ground above everything was put in the position of publicly defending, and rescuing for profit, a business of which he strongly disapproved. "How had he gotten himself into the--at best awkward--position of sitting on the board of such a company?" Schroeder asks, quite reasonably. "It was as if, during a dry spell, Buffett's urge to make money had once again overwhelmed his high hopes, high aspirations, and high principles. And as had been true throughout his life, whenever his avarice got the upper hand, trouble followed."
  
  The story that followed remains incredible. The whole world wanted to put Salomon Brothers out of business, but Buffett, all by himself, prevented it from happening. Just as some years earlier the SEC had failed to sanction him for fraud, essentially on the grounds that he was too good a person ever to have meant to commit fraud, the Treasury decided not to put his investment bank out of business because he, Warren Buffett, was willing to run it--which he did, until he got his money back. He then returned to Omaha, and vowed never to do it again.
  
  Which brings us, oddly, to our present financial crisis. There has never really been a bad time in the last fifty years to be Warren Buffett, but just now would seem to be less favorable than most. If Buffett still measures his life by the book value per share of Berkshire Hathaway, then for the first time in forty years he must feel like a wasting asset. His share price is still off more than 40 percent from its highs, underperforming even the S&P 500. He railed against derivatives as weapons of mass destruction, and now turns out to have been sitting on a $68 billion pile of credit default swaps and exotic put options on various stock market indexes. And having vowed never again to become entangled in a big Wall Street investment bank, he has gone and sunk $10 billion into Goldman Sachs, a virtual re-enactment of his investment in Salomon Brothers--cash for reputation. The difference this time is that he has gotten himself a sweeter deal than not merely ordinary shareholders, but also the U.S. Treasury.
  
  On the surface at least, he seems like a guy who has spent the last few years ignoring all of his own best advice. What does Schroeder make of this? By September of last year, when Berkshire's share price began to collapse, The Snowball was already in bookstores. Its final chapter has a rushed, panicky feel to it, as if the author sensed that she was going to watch some meaningful part of her story unfold after she told it. If so, she was right: Buffett's role in the current crisis is likely to be as interesting as any episode of his career.
  
  Still, while Schroeder could not have foreseen the sensational reversal in Berkshire's fortunes, she offers, inadvertently, an explanation for it: the impulse to grasp for things before they all slip away. Susie Buffett, diagnosed with cancer the year before, died in 2004. "Before 2003," writes Schroeder, "Buffett's need for attention had been satisfied by a few interviews a year and the shareholder meeting. He had always been careful and strategic in his cooperation with the media (if not always forthcoming about just how cooperative he had been). But starting around the time of Susie's illness, for whatever reason, he had begun to need the mirror of media attention, television cameras especially, almost like a drug. The intervals he could tolerate without publicity were growing shorter. He cooperated with documentaries, spent hours talking to Charlie Rose, and became such a regular on CNBC that it started to prompt puzzled queries from his friends."
  
  Thus she leaves open the possibility that Buffett might have gone a bit soft in old age. "Basically, when you get to my age," she quotes him telling a group of business school students, "you'll really measure your success in life by how many of the people you want to have love you actually do love you. I know people who have a lot of money, and they get testimonial dinners and they get hospital wings named after them. But the truth is that nobody in the world loves them." Where there was once only the time value of money, there is now also the time value of love. My God, he's even given his fortune away!
  
  In short, there has never been a better time to bet against Warren Buffett. The reader will forgive me, I hope, if I decline to do it. For one, he is sitting on a huge pile of increasingly precious capital, and has the power to extract the most onerous terms for its use. Yes, he railed incessantly against derivatives and yes, he has gotten himself twisted into the awkward position of having traded them himself. But the problem, as he most surely knew, was never derivatives. (This was a man who, in 1998, stood ready to buy the entire trillion-dollar derivatives book of the collapsed hedge fund Long Term Capital Management.) The problem was stupidly priced derivatives.
  
  For some years now Buffett has been making his living selling insurance mainly against natural rather than financial catastrophe. He demanded high prices to accept the risk that Florida would be wiped out in a hurricane instead of low prices to accept the risk that American house prices would fail to appreciate forever. That he drifted, when the price beckoned him to drift, into selling insurance against financial catastrophe is not all that surprising. What is surprising is what he somehow avoided: every other AAA-rated financial institution essentially rented out its credit rating to the great subprime mortgage boom, and bankrupted itself. These firms have either collapsed (AIG, AMBAC, MBIA) or are in the process of collapsing (GE). Berkshire Hathaway may no longer be AAA-rated, but it will easily survive even this debacle. The problem in this sorry episode was not that we suffered from too much of Warren Buffett's instincts, but that we suffered from too little.
  
  There is another reason I wouldn't like to bet against Warren Buffett: I did it once and lived to regret it. Long ago, after Buffett became entangled with Salomon Brothers, I wrote long critical article about him for this magazine, which, perhaps because there has never been much criticism of Warren Buffett, makes a cameo appearance in several books about him, including this one. The piece dwelled on Buffett's small hypocrisies--posing as a friend of the ordinary shareholder while accepting bribes from corrupt corporate regimes, using his track record as a weapon against the efficient-markets people when he cut deals available to no other investor--and downplayed his virtues.
  
  Even then I thought that his virtues far outweighed his vices, and felt a bit like the guy who, having grown weary of hearing others drone on about the physical perfection of some supermodel, went to the beach with a camera and snapped a photo of her cellulite. Now Schroeder's brave book offers a close-up of the same cellulite, but more fairly, in the context of a genuinely delightful character. Buffett might not like it, but this book has done him a very Buffett-like service. Twenty years from now, when the financial markets have forgotten our current trauma, and finance is once again fashionable, some young person will pick it up and discover that history's most legendary investor was not a cartoon but a real live human being. And still, somehow, deeply admirable.
  

Warren Buffett Says Companies Should Borrow Less!!

On Star Business: What is the most important lesson from financial crisis?

• Published: Monday May 4, 2009 MYT 8:50:00 AM
  What is the most important lesson from financial crisis?
  
  OMAHA, Nebraska: Billionaires Warren Buffett and Charlie Munger said Sunday the most important lessons of the recent financial turmoil are that companies should borrow less and build a system of severe disincentives for failure.
  
  Berkshire Hathaway Inc.'s top two executives offered that frank assessment of businesses' role in the current recession at a news conference held a day after 35,000 attended the company's annual meeting in Omaha.
  
  The two men also said most of the nation's biggest banks are not too big to fail, but consumers shouldn't be worried about bank failures because of the protections built into the system.
  
  Buffett said having severe disincentives for failure and proper incentives for success is key to ensuring large financial institutions are run well.
  
  He said people didn't become more greedy in the last decade, but the system allowed people to take advantage of it.
  
  "I think the most important lesson is the world needs a whole lot less leverage," said Buffett, who is Berkshire's 78-year-old chief executive and chairman.
  
  In speaking of disincentives, Buffett suggested that if an executive would be shot if the company fails, then the company would definitely borrow more carefully.
  
  Buffett said Fannie Mae and Freddie Mac show that intense regulation can't prevent problems because those mortgage finance firms were some of the most regulated companies before government seized control of them amid mounting mortgage losses.
  
  But Buffett said assigning blame for the economic mess doesn't make a ton of sense because so many people made mistakes.
  
  "I think that virtually everyone associated with the financial world contributed to it," Buffett said.
  
  Munger, Berkshire's 85-year-old vice chairman, said a combination of factors caused the financial mess.
  
  He said the nation tolerated way too much debt, immorality and stupidity, and now it's paying the price.
  
  "We have failed big-time on multiple fronts," Munger said.
  
  He said gross immorality persisted in the consumer credit and derivatives businesses, and many people were taken advantage of.
  
  Then the accounting profession failed to catch problems and tolerated too much foolishness, Munger said.
  
  He said accounting rules that allow companies to report huge profit just before failing doesn't make sense.
  
  "We do not need insane accounting that rewards people that can't handle the temptation," Munger said.
  
  But it still might be hard to get Congress to pass sensible rules for investment banks and derivatives, Munger said, because of the amount of lobbying investment banks have done.
  
  "We're going to have a hell of a time getting this fixed the way it should be fixed," Munger said.
  
  Buffett said he's not sure how the government will handle the results of the stress tests officials are conducting on the 19 largest U.S. banks, but he doesn't think the government should rule out the failure of most of the banks.
  
  "These 19 banks are not too big to fail," Buffett said.
  
  "You can make a deal for any but the top four on the list."
  
  To prove his point Buffett pointed to the examples of Wachovia and Washington Mutual banks, which both failed in the past year and were sold to competitors.
  
  The stress tests are supposed to determine which banks would need more cash if the economy weakens further.
  
  Federal Reserve officials have said the banks will be required to keep extra capital on hand in case losses escalate, which means some banks would be forced to raise money.
  
  Buffett said consumers should worry about bank failures because the Federal Deposit Insurance Corp. is there to protect them with the resources it collects by charging banks fees, so taxpayers don't pay when the FDIC rescues banks.
  
  "I'm not worried at all about a run on the banks," said Buffett, whose company holds large stakes in Wells Fargo & Co., US Bancorp, M&T Bank, Bank of America and Sun Trusts Banks
  
  Given the age of Buffett and Munger, there is always speculation on who might replace them.
  
  Buffett said Sunday that investors would know if either had health problems.
  
  "If I know of anything serious - or anything that might be interpreted as serious - health problems, Berkshire would disclose it," Buffett said.
  
  "We don't want rumors flying around."
  
  But Munger joked there might be a high threshold for disclosing anything about his health: "In my case, I'm so nearly dead anyway that it's a minor detail."
  
  Both Munger and Buffett said they feel great.
  
  Berkshire's Class A stock lost 32 percent in 2008, and Berkshire's book value - assets minus liabilities - declined 9.6 percent, to $70,530 per share.
  
  That was the biggest drop in book value under Buffett and only the second time its book value has declined.
  
  But Buffett always measure's the company's book value performance in relation to the S&P 500, which fell 37 percent in 2008, so he's not bothered by stock price fluctuations.
  
  "We don't consider it our worst year by miles," Buffett said Sunday.
  
  Berkshire owns more than 60 subsidiaries including insurance, clothing, furniture, and candy companies, restaurants, natural gas and corporate jet firms.
  
  Berkshire also has major investments in such companies as Coca-Cola Co. and Burlington Northern Santa Fe Corp.