Warren Buffett’s 2008 Letter to Shareholders
In his 2008 letter to shareholders, Warren Buffett admits to a few costly mistakes and offers key insight on the economy, government bailouts, derivatives, municipal markets and more. This really is a must-read and quite worth your time.
Berkshire posted their worst year ever, in part due to a bet on the oil and gas industry during the height of that bubble. I would agree with Mr. Buffett’s assertion that future oil prices will certainly be higher than the currently-traded price of $40-50 a barrel, but placing such a significant bet on this industry when nearly everyone agreed the prices were irrational proved to be costly.
Mr. Buffett further highlights the importance of the worn-out adage “Cash is King.” In his understanding that price is what you pay and value what you get, Mr. Buffett takes a long-term, conservative approach to his investing and businesses. For those with the cash to act now, virtually every investment imaginable is on sale. The problem, of course, is that most people become caught in the exuberance of the current flavor of the month - when things are the cheapest, we often find ourselves on the selling side of the equation. It takes iron-willed patience to be able to practice this philosophy.
Perhaps most interesting, though, was Mr. Buffett’s recognition of the role fear plays in our current crisis:
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.
Mr. Buffett is spot on. Confidence - which we might also refer to as the resurgent political term, hope - is the tonic our economy needs to get moving again.
Take twenty minutes and read through the letter. It’s instructive. But more importantly, I think its candid recognition of both the difficulties of our current situation and the transformational potential of our economic system begins to provide that which we so desperately need: confidence.
