Rich people have been getting creamed. From Wall Street bankers sipping their martinis in paper cups to Bernie Madoff in orange prison knickers, the past year and half has been a real bitch to be rich.
On the other hand, there's one rich guy who's my favorite -- Warren Buffett. The Oracle of Omaha. Andy Rooney's younger brother. (Alright, that was a stretch.) Last count, Mr. Buffett was the second richest guy in the world, right behind those guys who invented Twitter.
Warren Buffett might be the most boring investor in the world too. He buys insurance companies. He buys Dairy Queens. Get this -- he buys railroads. Hey, Warren, would you like a side order of sock garters with that?
But through all of the "celebrity" bank collapses, Federal government bailouts, and perp walks, Warren Buffett has stuck to his conservative, boring investing ways, and we have so much to learn from the old man. Here are some snippets from his annual letter to his Berkshire shareholders. (He calls his annual meeting a "Woodstock for Capitalists") The entire letter is a fascinating peek into his brain, with folksy prose ("Sing a country song in reverse, and you will quickly recover your car, house and wife"), and scathing critiques. It should be required reading for all MBA students. Hell, all sixth graders should read it.
On "chasing shiny objects" (my words):
Charlie and I avoid businesses whose futures we can’t evaluate, no matter how exciting their products may be. In the past, it required no brilliance for people to foresee the fabulous growth that awaited such industries as autos (in 1910), aircraft (in 1930) and television sets (in 1950). But the future then also included competitive dynamics that would decimate almost all of the companies entering those industries. Even the survivors tended to come away bleeding.
Just because Charlie and I can clearly see dramatic growth ahead for an industry does not mean we can judge what its profit margins and returns on capital will be as a host of competitors battle for supremacy. At Berkshire we will stick with businesses whose profit picture for decades to come seems reasonably predictable."
On Wall Street:
"We make no attempt to woo Wall Street. Investors who buy and sell based upon media or analyst commentary are not for us. Instead we want partners who join us at Berkshire because they wish to make a long-term investment in a business they themselves understand and because it’s one that follows policies with which they concur. "
On CEOs:
"In my view a board of directors of a huge financial institution is derelict if it does not insist that its CEO bear full responsibility for risk control. If he’s incapable of handling that job, he should look for other employment. And if he fails at it – with the government thereupon required to step in with funds or guarantees – the financial consequences for him and his board should be severe.
It has not been shareholders who have botched the operations of some of our country’s largest financial institutions. Yet they have borne the burden, with 90% or more of the value of their holdings wiped out in most cases of failure. Collectively, they have lost more than $500 billion in just the four largest financial fiascos of the last two years. To say these owners have been “bailed-out” is to make a mockery of the term.
The CEOs and directors of the failed companies, however, have largely gone unscathed. Their fortunes may have been diminished by the disasters they oversaw, but they still live in grand style. It is the behavior of these CEOs and directors that needs to be changed: If their institutions and the country are harmed by their recklessness, they should pay a heavy price – one not reimbursable by the companies they’ve damaged nor by insurance. CEOs and, in many cases, directors have long benefitted from oversized financial carrots; some meaningful sticks now need to be part of their employment picture as well."
On valuating a potential acquisition:
"When stock is the currency being contemplated in an acquisition and when directors are hearing from an advisor, it appears to me that there is only one way to get a rational and balanced discussion. Directors should hire a second advisor to make the case against the proposed acquisition, with its fee contingent on the deal not going through. Absent this drastic remedy, our recommendation in respect to the use of advisors remains: “Don’t ask the barber whether you need a haircut.”
His closing statement:
At 86 and 79, Charlie and I remain lucky beyond our dreams. We were born in America; had terrific parents who saw that we got good educations; have enjoyed wonderful families and great health; and came equipped with a “business” gene that allows us to prosper in a manner hugely disproportionate to that experienced by many people who contribute as much or more to our society’s well-being. Moreover, we have long had jobs that we love, in which we are helped in countless ways by talented and cheerful associates. Indeed, over the years, our work has become ever more fascinating; no wonder we tap-dance to work. If pushed, we would gladly pay substantial sums to have our jobs (but don’t tell the Comp Committee).
Nothing, however, is more fun for us than getting together with our shareholder-partners at Berkshire’s annual meeting. So join us on May 1st at the Qwest for our annual Woodstock for Capitalists. We’ll see you there.
February 26, 2010
Warren E. Buffett
Chairman of the Board
P.S. Come by rail.