Wednesday, March 5, 2008

What Warren Buffett’s letter didn’t say (BRK.A)

From the Economist:

THERE is no better read in the admittedly unfashionable literary category of corporate annual reports than Berkshire Hathaway’s. Warren Buffett’s annual letter to shareholders reviews the past year’s performance and the next year's outlook with a clarity, economy and humour that even professional business writers struggle to match.

This year’s report, however, is at its joyous best only in its numbers: book value up again in 2007 by 11%, to a new high. Mr Buffett’s letter—unlike the T-bone steak at Omaha’s Gorat restaurant, which he enthusiastically plugs—is ultimately unsatisfying, leaving the reader hungry for more, or better, fare.

The missive still contains plenty of goodies, including, in keeping with Mr Buffett’s folksy personality, a couple of choice country-music lyrics. “I’ve never gone to bed with an ugly woman, but I’ve sure woke up with a few” (explaining a rare bad investment), for example, and “When the phone don’t ring, you’ll know it’s me” (advising people not to offer him the chance to invest in new ventures, turnarounds or auction-like sales)....

...And yet, interesting as all this is, there is no escaping the question that has never been asked at Gorat’s: where’s the beef? The world is in the middle of a massive financial crisis. Who better to guide us through how it came to pass, what its implications are, and how to repair the damage, than the man universally regarded as the greatest brain in finance, the Sage of Omaha?

Yet the Oracle is saying nothing, beyond issuing a generic “told you so”. “Some major financial institutions have, however, experienced staggering problems because they engaged in the weakened lending practices I described in last year’s letter.” But everyone already understands that “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.”

The silence of the sage is even more mystifying because Berkshire Hathaway is directly exposed to the crisis both generally (through what the crisis does to the American and global economies, which Mr Buffett may or may not think will include recession) and specifically. For instance, Mr Buffett has already seen a money-making opportunity for insurance by entering the lucrative municipal-bond insurance business currently served by several bond insurers harmed by backing sub-prime mortgage-related bonds....MORE

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