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2011 shareholder letter from Warren Buffet

February 29, 2012 Leave a comment

Warren Buffet has publicized his annual letter for the Berkshire Hathaway Inc. shareholders discussing its performance in the S&P500 during the year 2011. It is always worth it reading such a great businessman as Buffet, moreover since goes through some burning topics I’d like to comment below. The complete letter is available on the corporate website: http://www.berkshirehathaway.com/letters/letters.html

Even though Berkshire’s outperformed the S&P500 average results, Buffet do not hesitate to admit a few mistakes for miscalculating win/loss ratio in some investments he has done. It’s not common to see such a big fish stating a “major unforced error” and this behavior is maybe a cause for his long term great success.

 

He is fully convinced that housing business will come back, not as soon as he predicted – which has led Berkshire into some losses this year – but in a near future, involving thousands of new jobs due to the importance this sector’s got in America. Is this expected to happen in Spain too? I hope not. Housing meant (and still does) a huge business in the EEUU, boosted by the financial firms, but they have an industrial background we do not. Coming back to housing here in Spain would culminate in a situation even worse than we are facing nowadays. “As is well-known, the U.S. went off the rails in its home-ownership and mortgage-lending policies, and for these mistakes our economy is now paying a huge price. All of us participated in the destructive behavior – government, lenders, borrowers, the media, rating agencies, you name it” he says. Just watching Inside Job to making an idea of what happened – although any film is fully objective some irrefutable figures arise.

When refers to insurance subsidiaries, Buffet describes which four disciplines any insurer should ensure before signing a premium. The last one is do not make the deal if numbers do not work out just because “the other guy is doing it so we must do it as well”. Not every customer does worth and it is something to bear in mind to ensure long-term profitability. We cannot do everything for everyone, trade-offs are as important as our own product’s features.

“Buy commodities, sell brands”. This KISS statement summarizes what marketing means. Buying commodities reduces your suppliers’ control while strong brands let higher margins. You will have to spend a lot of time in focusing on your customer afterwards.

I find Berkshire’s investing philosophy very interesting. While the standard approach is laying out money expecting to receiving more in the future, they focus on purchasing power. An investment can be influenced by many diverse factors such as inflation, currency exchange rates and taxes. Current world’s gold stock is $9.6 trillion, the same than all US cropland plus 16 Exxon Mobils. Obviously since the first produces nothing, the second would have delivered corn, wheat, cotton and dividends. In Buffet’s opinion, a new bubble is forming due to “well-publicized rising prices”, as happened also with Internet stocks and houses last decade.

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