Warren Buffett’s yearly letters to the shareholders of Berkshire Hathaway are classics because they combine sharp analysis and folk wisdom. His 2007 letter was released on Friday. Given the turbulence in global markets, this latest missive is especially worth reading.
First, he deflates some of the criticism of sovereign wealth funds, investment vehicles that are used by Asian governments for their oil and trade surpluses. The fault, he says, does not lie in Asia. “There’s been much talk recently of sovereign wealth funds and how they are buying large pieces of American businesses. This is our doing, not some nefarious plot by foreign governments. Our trade equation guarantees massive foreign investment in the US. When we force-feed $2 billion daily to the rest of the world, they must invest in something here. Why should we complain when they choose stocks over bonds?”
Second, Buffett does not pull his punches when he criticizes the financial industry. “As house prices fall, a huge amount of financial folly is being exposed. You only learn who has been swimming naked when the tide goes out—and what we are witnessing at some of our largest financial institutions is an ugly sight,” writes Buffett.
Third, he suggests that there are still too many problems in the US corporate sector. He says that most American companies have assumed that their pension funds will own 8% a year, clearly unviable given low interest rates. But this unrealistic assumption allows these companies to show heftier profits. When the time to lower these return assumptions will come many years later, says Buffett, the managers pulling off this trick will have collected their bonuses and moved on.
The 2007 letter suggests there is still a lot of dirt in the American business and finance sectors. The US trade deficit is still too high: One of Buffett’s most successful bets of the year was a long position in the Brazilian real.
Speaking of one of his own businesses—insurance—Buffett writes: “That party is over. It’s a certainty that insurance-industry profit margins, including ours, will fall significantly in 2008.” The same could still be said of many other businesses.
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