Whether you are bullish, bearish, or somewhere in between, the odds are that when Warren Buffett talks... you will be listening.
A real life E.F. Hutton, the grandfatherly Buffet is still the best brand in the business.
But then again, there aren't many investors in the world that can turn $1200 from a paper route into one of the greatest fortunes of all time. In that regard, Buffett's reputation came the old fashioned way: he earned it.
The reasons behind this iconic image, however, are two-fold, since Buffett is not exactly your run-of-the-mill billionaire.
Instead, he's an American everyman that not only exudes common sense, but dines primarily on hamburgers, chips, and Cherry Coke.
But buried beneath that cuddly, down-home exterior is something else entirely: the cold and calculating mind of man who is quick to make decisions and has a serious nose for money — a market shark if there ever was one.
And the larger truth is that if you really want to know something about the road ahead, it pays to listen to someone that has been there before.
That's true now more than ever as investors wrestle with the ghosts of the Great Depression and ponder the possibility of a double-dip recession.
Warren Buffett's Annual Letter to Shareholders
Every year, Berkshire Hathaway (NYSE: BRK-A) releases Warren Buffett's Annual Letter to Shareholder's and investors everywhere are eager to hear what the "Oracle of Omaha" has to say.
With that in mind, here are a few of the highlights...
Warren Buffett on Bailouts:
We will never become dependent on the kindness of strangers. Too-big-to-fail is not a fallback position at Berkshire. Instead, we will always arrange our affairs so that any requirements for cash we may conceivably have will be dwarfed by our own liquidity.
When the financial system went into cardiac arrest in September 2008, Berkshire was a supplier of liquidity and capital to the system, not a supplicant. The $20 billion-plus of cash equivalent assets that we customarily hold is earning a pittance at present. But we sleep well.
Warren Buffett on His Biggest Mistake:
And now a painful confession: Last year your chairman closed the book on a very expensive business fiasco entirely of his own making.
For many years I had struggled to think of side products that we could offer our millions of loyal GEICO customers. Unfortunately, I finally succeeded, coming up with a brilliant insight that we should market our own credit card... We got business all right — but of the wrong type.
Our pre-tax losses from credit-card operations came to about $6.3 million before I finally woke up. We then sold our $98 million portfolio of troubled receivables for 55¢ on the dollar, losing an additional $44 million.
Warren Buffett on Utilities and Railroads:
We see a "social compact" existing between the public and our railroad business, just as is the case with our utilities. If either side shirks its obligations, both sides will inevitably suffer. It is inconceivable that our country will realize anything close to its full economic potential without its possessing first-class electricity and railroad systems. We will do our part to see that they exist.
Overall, we expect this regulated sector to deliver significantly increased earnings over time, albeit at the cost of our investing many tens — yes, tens — of billions of dollars of incremental equity capital.
Warren Buffett on Construction:
Every business we own that is connected to residential and commercial construction suffered severely in 2009. Combined pre-tax earnings of Shaw, Johns Manville, Acme Brick, and MiTek were $227 million, an 82.5% decline from $1.295 billion in 2006, when construction activity was booming. These businesses continue to bump along the bottom, though their competitive positions remain undented.
Warren Buffett on Housing:
The industry is in shambles for two reasons, the first of which must be lived with if the U.S. economy is to recover. This reason concerns U.S. housing starts (including apartment units). In 2009, starts were 554,000, by far the lowest number in the 50 years for which we have data. Paradoxically, this is good news.
People thought it was good news a few years back when housing starts — the supply side of the picture — were running about two million annually. But household formations — the demand side — only amounted to about 1.2 million. After a few years of such imbalances, the country unsurprisingly ended up with far too many houses.
There were three ways to cure this overhang: (1) blow up a lot of houses, a tactic similar to the destruction of autos that occurred with the "cash-for-clunkers" program; (2) speed up household formations by, say, encouraging teenagers to cohabitate, a program not likely to suffer from a lack of volunteers or; (3) reduce new housing starts to a number far below the rate of household formations.
Our country has wisely selected the third option, which means that within a year or so residential housing problems should largely be behind us...
Warren Buffett on Corporate and Municipal Bonds:
We told you last year that very unusual conditions then existed in the corporate and municipal bond markets and that these securities were ridiculously cheap relative to U.S. Treasuries. We backed this view with some purchases, but I should have done far more. Big opportunities come infrequently. When it's raining gold, reach for a bucket, not a thimble.
As for Berkshire Hathaway shareholders, they received a whole lot more than just some folksy wisdom. Bouncing back from a tough 2008, Buffett and his partner Charlie Munger guided the company to another great year.
On Saturday, Berkshire Hathaway reported that net earnings ballooned 61% last year to $5,193 per share, while the company's book value jumped by 20% to a record high.
Meanwhile, Berkshire's Class A shares — which fell to almost $70,000 a year ago — have rebounded to over $123,000.today, boasting a net gain of 75%.
In true Buffett fashion, he shrugs off the risks of what has been a pretty busy year for the investment icon.
"Most major companies will be setting new profit records 5, 10, and 20 years from now," Buffett wrote in the New York Times. "If you wait for the robins, spring will be over.''
This time the story probably won't be much different; in a way, it is almost like he has seen this movie before.
After all, they don't call him the Oracle of Omaha for nothing...
When he speaks, people listen.
Your bargain-hunting analyst,
Steve Christ, Managing Editor
Wealth Daily
PS. Buffett is not the only investor to knock 'em dead of late. In fact, Wealth Advisory subscribers have actually managed to top the famed investor by notching net gains of 790% over the last two years...
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