The super-investor's letter to shareholders is always an interesting read.
From his earliest days of managing other people's money, Buffett has treated his annual letter to shareholders as a chance to educate them about investment, as well as to update them about how Berkshire Hathaway is doing. That means we can all learn from them.
His latest letter was released on Saturday. You can read the whole thing, but here are a few highlights.
Don't write off America
Unlike many of his compatriots, Buffett is bullish about America. Revealing that Berkshire will invest an extra $2 billion in the US in 2011, he explains:
"Money will always flow toward opportunity, and there is an abundance of that in America."
Buffett says that the "prophets of doom" on America's future ignore how it has consistently raised living standards despite frequent recessions, wars, and other worries. Estimating that the standard of living has increased six times over in his lifetime, he adds:
"Human potential is far from exhausted."
US housing will bounce back
The epicentre of America's (indeed the world's) current woes is its housing market. And Buffett has reassuring words for those who despair at its numerous false start recoveries:
"A housing recovery will probably begin within a year or so. In any event, it is certain to occur at some point."
As a consequence, Berkshire's housing-related businesses MiTek and Acme have made a string of acquisitions. Other holdings are investing tens of millions of dollars in new plants and equipment.
"These businesses entered the recession strong and will exit it stronger. At Berkshire, our time horizon is forever."
How to prevent another housing crash
Much of Buffett's insight into housing comes via Berkshire-owned Clayton Homes, which produces and finances more manufactured homes than any other company in America.
Clayton's market isn't exactly gilt-edged -- it would have been called sub-prime in the days before sub-prime extended to people with no jobs, income or savings! Yet Clayton's recent annual losses from its loan portfolio ranged from just 1.53% in 2008 to a peak of 1.86% in 2009.
Buffett says Clayton's borrowers were badly hit by the recession, but they are motivated to remain in their homes. Sensible borrowing makes that a realistic possibility. There would have been no housing crash -- and no credit crisis -- if all American home buyers had behaved that way, and if all financial firms had lent like Clayton:
"We were keeping the originated mortgages for our own account, which means we were not securitizing or otherwise reselling them. If we were stupid in our lending, we were going to pay the price. That concentrates the mind."
Buy a house (and get married!)
Unlike the hysterical commentators who now decry home ownership as a dangerous legacy of a bygone era, Buffett believes it still makes sense for most Americans. Prices have fallen far more in the US than in the UK, and with fixed interest rates equally low there too, it looks a good time to buy:
"All things considered, the third best investment I ever made was the purchase of my home, though I would have made far more money had I instead rented and used the purchase money to buy stocks. [...] For the $31,500 I paid for our house, my family and I gained 52 years of terrific memories with more to come."
In answer to the obvious question:
"The two best investments were wedding rings."
Buffett the treehugger
Warren Buffett's early reputation as a heartless capitalist has been put to rest by his support of The Gates Foundation, his decades of modest living, and his obvious decency. Still, few would have chalked him up as an environmentalist.
Yet there are two nods to green issues in this year's letter. Firstly, Berkshire's utility company:
"MidAmerican will have 2,909 megawatts of wind generation in operation by the end of 2011, more than any other regulated electric utility in the country. The total amount that MidAmerican has invested or committed to wind is a staggering $5.4 billion."
Buffett also cites the environmental angle when discussing Berkshire's railroad firm, Burlington Northern Santa Fe:
"[We] are enthusiastic about BNSF’s future because railroads have major cost and environmental advantages over trucking, their main competitor. Last year BNSF moved each ton of freight it carried a record 500 miles on a single gallon of diesel fuel. That’s three times more fuel-efficient than trucking is, which means our railroad owns an important advantage in operating costs. Concurrently, our country gains because of reduced greenhouse emissions and a much smaller need for imported oil."
Chuck in Buffett's investment into electric car company BYD, and the famously long-sighted investor clearly sees green issues as fact, not fad.
On long-term dividends
This ability to appreciate the long-term underpins Buffett's success as an investor. As he writes:
"Time is the friend of the wonderful business."
Buffett illustrates his point with recourse to his famous holding in Coca-Cola.
Berkshire received $88 million in dividends from Coke in 1995. In 2011, Buffett expects Coke to pay Berkshire $376 million. He anticipates this dividend income will double over the next decade.
"By the end of that period, I wouldn’t be surprised to see our share of Coke’s annual earnings exceed 100% of what we paid for the investment."
On unearned rewards /funds
Last year Buffett hired hedge fund manager Todd Combs as an investment manager. There are many reasons why Combs may have accepted the job, but it's clear that lucrative hedge fund economics wasn't one, given Buffett's views:
"The hedge-fund world has witnessed some terrible behaviour by general partners who have received huge payouts on the upside and who then, when bad results occurred, have walked away rich, with their limited partners losing back their earlier gains. Sometimes these same general partners thereafter quickly started another fund. [...]
"Investors who put money with such managers should be labelled patsies, not partners."
Combs will get a salary plus a bonus based on his performance relative to the S&P. Checks and balances will stop him banking more money than his investment performance warrants.
The future is always uncertain
Some will always say that Buffett had it easier when it came to making his billions. Ignoring trifles like World War 2, the Cold War, Vietnam, Watergate, and so on, they will higlight modern bogeys like China or Madoff or Goldman Sachs or Central Bank money printing as reasons why it's too dangerous to invest today.
So this last quote is just for them:
"Commentators today often talk of 'great uncertainty'. But think back, for example, to December 6, 1941, October 18, 1987 and September 10, 2001.
"No matter how serene today may be, tomorrow is always uncertain."
More from Owain Bennallack:
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