Warren Buffett, in an open letter to shareholders of Berkshire Hathaway as part of the companies 2008 report, had plenty to say about the economy.
Famed as one of the great investors of all time, his opinion is sought by governmental leaders, businessman and economists and why not. Shares of his company have averaged an annual growth of over 20% in each of its 44 years of operation, rising from $19 a share to $70,530 on December 31.
Buffett noted that 2008 was the companies worst year.
Here are parts of his statement I felt the most informative on the state of the general economy, if you would like to read his whole statement click here, and my thoughts follow:
“”””As the year progressed, a series of life-threatening problems within many of the world’s great financial
institutions was unveiled. This led to a dysfunctional credit market that in important respects soon turned
non-functional. The watchword throughout the country became the creed I saw on restaurant walls when I was young: “In God we trust; all others pay cash.”
By the fourth quarter, the credit crisis, coupled with tumbling home and stock prices, had produced a
paralyzing fear that engulfed the country. A freefall in business activity ensued, accelerating at a pace that I have never before witnessed. The U.S. – and much of the world – became trapped in a vicious negative-feedback cycle. Fear led to business contraction, and that in turn led to even greater fear.
This debilitating spiral has spurred our government to take massive action. In poker terms, the Treasury
and the Fed have gone “all in.” Economic medicine that was previously meted out by the cupful has recently
been dispensed by the barrel. These once-unthinkable dosages will almost certainly bring on unwelcome
aftereffects. Their precise nature is anyone’s guess, though one likely consequence is an onslaught of inflation.
In 75% of those 44 years years, the S&P stocks recorded a gain.
We’re certain, for example, that the economy will be in shambles throughout 2009 – and, for that matter, probably well beyond – but that conclusion does not tell us whether the stock market will rise or fall.
I would guess that a roughly similar percentage of years will be positive in the next 44. But neither Charlie
Munger, my partner in running Berkshire, nor I can predict the winning and losing years in advance. (In our
usual opinionated view, we don’t think anyone else can either.)
The market value of the bonds and stocks that we continue to hold suffered a significant decline along with the general market. This does not bother Charlie and me. Indeed, we enjoy such price declines if we have funds available to increase our positions. Long ago, Ben Graham taught me that “Price is what you pay; value is what you get.” Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.
Major industries have become dependent on Federal assistance, and they will be followed by cities
and states bearing mind-boggling requests. Weaning these entities from the public teat will be a political
challenge. They won’t leave willingly.
Whatever the downsides may be, strong and immediate action by government was essential last year if
the financial system was to avoid a total breakdown. Had that occurred, the consequences for every area of our economy would have been cataclysmic. Like it or not, the inhabitants of Wall Street, Main Street and the various Side Streets of America were all in the same boat.
The present housing debacle should teach home buyers, lenders, brokers and government some simple
lessons that will ensure stability in the future. Home purchases should involve an honest-to-God down payment of at least 10% and monthly payments that can be comfortably handled by the borrower’s income. That income should be carefully verified.
Putting people into homes, though a desirable goal, shouldn’t be our country’s primary objective.
Keeping them in their homes should be the ambition
The investment world has gone from underpricing risk to overpricing it. This change has not been
minor; the pendulum has covered an extraordinary arc. A few years ago, it would have seemed unthinkable that yields like today’s could have been obtained on good-grade municipal or corporate bonds even while risk-free governments offered near-zero returns on short-term bonds and no better than a pittance on long-terms. When the financial history of this decade is written, it will surely speak of the Internet bubble of the late 1990s and the housing bubble of the early 2000s. But the U.S. Treasury bond bubble of late 2008 may be regarded as almost equally extraordinary.
Clinging to cash equivalents or long-term government bonds at present yields is almost certainly a
terrible policy if continued for long. Holders of these instruments, of course, have felt increasingly comfortable –in fact, almost smug – in following this policy as financial turmoil has mounted. They regard their judgment confirmed when they hear commentators proclaim “cash is king,” even though that wonderful cash is earning close to nothing and will surely find its purchasing power eroded over time. Approval, though, is not the goal of investing. In fact, approval is often counter-productive because it sedates the brain and makes it less receptive to new facts or a re-examination of conclusions formed earlier. Beware the investment activity that produces applause; the great moves are usually greeted by yawns.
Amid this bad news, however, never forget that our country has faced far worse travails in the past. In
the 20th Century alone, we dealt with two great wars (one of which we initially appeared to be losing); a dozen or so panics and recessions; virulent inflation that led to a 211⁄2% prime rate in 1980; and the Great Depression of the 1930s, when unemployment ranged between 15% and 25% for many years. America has had no shortage of challenges.
Without fail, however, we’ve overcome them. In the face of those obstacles – and many others – the
real standard of living for Americans improved nearly seven-fold during the 1900s, while the Dow Jones
Industrials rose from 66 to 11,497.
Compare the record of this period with the dozens of centuries during which humans secured only tiny gains, if any, in how they lived. Though the path has not been smooth, our economic system has worked extraordinarily well over time. It has unleashed human potential as no other system has, and it will continue to do so. America’s best days lie ahead.”””””
I agree, that America and the world will recover from these economic times at some point. The question is how long will the misery last?
Sure, if you look at the 70 year period from 1929, by 1999, the stock market and the overall economy did well over the 70 years.
But I’ve got to tell you, I don’t have 70 years left and if your reading this neither do you.
If you lived through the horrible economic times of the 1930’s, and the wars of the 1940’s, those were 20 bad years.
So the question is, are we looking at 2 bad years or 10?
5 bad years or 20?
I see at least another year of a down economic cycle, before any recovery starts. How will the recovery take?
What will the effects of all the federal government spending be?
Certainly by all accounts including Mr. Buffett’s, you’re looking at a period of high inflation and high interest rates at some point in the next few years.
If you couple that with continued economic slowdown you’re, in an economic period known as stagflation.
Although no one saw the economy melting down the way it has, I did buy the domain stagflation.com at a domain auction, seeing this economic cycle as a realistic possibility at some point in years to come.
Seems like the “years to come” are coming sooner than later.
I also find myself agreeing with Mr. Buffett’s opinion that while, cash is king you have to invest it to buy quality at good prices, because over time cash, especially in a period of high inflation the value of cash, and its buying power erodes.
These are interesting times, while fortunes have already been lost, fortunes will also be made.
You can’t close your eye for opportunity awaits, good buys are to be had and although no one can predict a bottom, value is value.
We continue to buy domains.