One of the best annual reads on Wall St. — Warren Buffett’s letter to shareholders — has been posted [PDF]. Barry discussed his take on Sunday; Here are my views:

Of course, the entire letter is worth reading. Here are two of what are, to me, the more notable points — one excoriating the financial press, the other excoriating some of the horrible mismanagement we’ve seen over the past few years. Amen to both (all emphasis in original).

On risk management:

It’s my job to keep Berkshire far away from such [derivatives-related] problems. Charlie and I believe that a CEO must not delegate risk control. It’s simply too important. At Berkshire, I both initiate and monitor every derivatives contract on our books, with the exception of operations-related contracts at a few of our subsidiaries, such as MidAmerican, and the minor runoff contracts at General Re. If Berkshire ever gets in trouble, it will be my fault. It will not be because of misjudgments made by a Risk Committee or Chief Risk Officer.

In my view a board of directors of a huge financial institution is derelict if it does not insist that its CEO bear full responsibility for risk control. If he’s incapable of handling that job, he should look for other employment. And if he fails at it – with the government thereupon required to step in with funds or guarantees – the financial consequences for him and his board should be severe.

It has not been shareholders who have botched the operations of some of our country’s largest financial institutions. Yet they have borne the burden, with 90% or more of the value of their holdings wiped out in most cases of failure. Collectively, they have lost more than $500 billion in just the four largest financial fiascos of the last two years. To say these owners have been “bailed-out” is to make a mockery of the term.

The CEOs and directors of the failed companies, however, have largely gone unscathed. Their fortunes may have been diminished by the disasters they oversaw, but they still live in grand style. It is the behavior of these CEOs and directors that needs to be changed: If their institutions and the country are harmed by their recklessness, they should pay a heavy price – one not reimbursable by the companies they’ve damaged nor by insurance. CEOs and, in many cases, directors have long benefitted from oversized financial carrots; some meaningful sticks now need to be part of their employment picture as well.

And on the financial press:

Last year we saw, in one instance, how sound-bite reporting can go wrong. Among the 12,830 words in the annual letter was this sentence: “We are certain, for example, that the economy will be in shambles throughout 2009 – and probably well beyond – but that conclusion does not tell us whether the market will rise or fall.” Many news organizations reported – indeed, blared – the first part of the sentence while making no mention whatsoever of its ending. I regard this as terrible journalism: Misinformed readers or viewers may well have thought that Charlie and I were forecasting bad things for the stock market, though we had not only in that sentence, but also elsewhere, made it clear we weren’t predicting the market at all. Any investors who were misled by the sensationalists paid a big price: The Dow closed the day of the letter at 7,063 and finished the year at 10,428.

Given a few experiences we’ve had like that, you can understand why I prefer that our communications with you remain as direct and unabridged as possible.

Buffett’s been around for so long now, one has to wonder why no management at any other company of which I’m aware has adopted his no-nonsense, plain english approach to communicating with both his investors and the public. Seems we’d all be better served if others would follow Buffett’s lead.

Category: Corporate Management

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

14 Responses to “The Oracle Speaks”

  1. Moss says:

    Re: Seems we’d all be better served if others would follow Buffett’s lead.

    The first thing would be his philosophy on compensation, by following his own example. He hits on the root of the issue by deriding the BOD’s but falls short of fingering the totally misaligned compensation schemes of the C suite. We all know the BOD’s in many cases are in place to provide cover for the schemes.

  2. along Moss’ point, Buffett has seen his mission as one of building enterprise value–with the recognition that his Shareholders are, actually, the Owners.

    as opposed to playing the corralled(dis-intermediated) Shareholders(bagholders) as stiffs–merely there to pay lipservice to, while paying the bill..

    we need to remember, paraphrasin William Black’s point: “At this time, after the ‘S&L Crisis’, we had ~1,000 prosecutions/convictions..Today, after an, even, larger Crime, we have had 0 (Zero)”
    ~~
    “…I’ve posted about William Black previously. Lieber describes him as follows: “a Ph.D. criminologist and lead lawyer at the Office of Thrift Supervision, who helped steer the brilliant federal effort that cleaned up the S&L industry and won more than 1,000 felony convictions of senior insiders while recovering millions of their ill-gotten dollars.” Black is someone to whom Obama should be listening. He states that there are two reasons why there aren’t vigorous ongoing prosecutions resulting from this collapse

    1) “It’s difficult to prosecute others for securities fraud if you condoned the deals to begin with,” and

    2) Obama administration lacks the will. Obama was the candidate most preferred by Wall Street and he has surrounded himself with lackeys for big finance, including not only Lawrence Summers and Tim Geithner, but also Attorney General Eric Holder, who has made it clear that white collar crime is something which he’d rather not prosecute.

    Keep in mind that “Wall Street’s institutional buccaneers [have] so far have carted off up to $12.7 trillion, and that in 2008, In 2008 American households lost 18 percent of their wealth. Why aren’t there more prosecutions? There’s no good reason. This is an excellent in-depth article. The title: “No Justice: We’ve bailed out the banks. When do we go after the crooks behind our financial collapse?”…”
    http://dangerousintersection.org/2009/11/18/when-do-the-prosecutions-begin/
    ~~
    as an aside, Today is an interesting date.. 2 (months) Down, 10 to go..in 2010.

  3. jpm says:

    Buffett’s been around for so long now, one has to wonder why no management at any other company of which I’m aware has adopted his no-nonsense, plain english approach to communicating with both his investors and the public.

    Because modern leaders do not have the balls to live-or-die by their performance. They’d much rather have some guarenteed middling payoff (or perhaps larger than middling, given the broken state of BoD oversight.)

  4. inthewoods says:

    Ok – then what happened with Moodys? Didn’t they violate all these Oracle rules?

  5. HEHEHE says:

    Did he mention how Berkshire benefited for years by Bank of America, Wells Fargo, etc taking on too much risk? Did he mention how they and Berkshire benefitted from the subsequent government bailouts? Did he mention how he finagled a Bank Holding Company status for American Express? Buffet’s a shark just like the rest of them. End of day absent the government bailouts Warren would be known as the “dipsh*t of Omaha” not the “Oracle of Omaha”.

  6. for further, inthewoods, and HEHEHE, above, ask good Q:s, make good points..

    at the EOD, it is about Actions, not, mere, Words..

    which, goes to show, that if we don’t (care to pay attention to/bother to suss the *Truth from) a given situation, we’ll fall prey to these beautiful people:

    Toxic Sludge is Good For You: Lies, Damn Lies and the Public Relations Industry by John C. Stauber

    Trust Us We’re Experts: How Industry Manipulates Science and Gambles with Your Future by Sheldon Rampton

    Propaganda by Edward L. Bernays
    http://www.amazon.com/exec/obidos/ASIN/1567510604/ref=nosim/cryptogoncom-20
    ~~
    “Educate and inform the whole mass of the people… They are the only sure reliance for the preservation of our liberty.” – Thomas Jefferson
    as opposed, to this:
    http://dprogram.net/2010/02/27/msm-how-mobile-phones-let-spies-see-our-every-move/

  7. flipspiceland says:

    @He

    Taking nothing away from El Jefe, Warren Buffet, his recent self-congratultory tone is a departure from his historic modesty. That is worrisome but more importantly his ‘cachet’ Creates situations that are self-fulfilling prophecies. He’s more than a talisman. Just because he does something, there is a nearly guaranteed positive outcome.

    It remains to be seen whether his 1 billion dollar Put on the S & P 500 will work out over the 10 years of time that he has till expiration, though it looks like a great move for now. The world could easily fall apart between now and then and who in the world but a very few could afford to lose a billion?

    Luck is playing a great part in his recent success and luck has no loyalty. But if he can create the atmosphere and environment that assures a positive outcome, he is as close to a god as heaven will allow.

    @MHoffer

    “Once the people are educated, all is lost”.

    No doubt spoken by a Royalist.

  8. klhoughton says:

    “the minor runoff contracts at General Re.”

    Oh, is that what he’s calling them?

  9. ashpelham2 says:

    I love Buffett’s way of communicating, and his sense of timing with his remarks. He will never be a guy who puts his foot in his mouth. But I do get the sense that things are a little “orchestrated” in Omaha sometimes. Comments made by him are usually not made during the most extreme moments of a crisis, but rather, days later, weeks later, when some dust has settled. Perhaps this is wisdom, perhaps this is an unwillingness to bear any responsibilty or offer solutions. It’s almost like an “outside looking in” approach.

    The guy’s company has created tremendous wealth for its owners, no doubt, so the results speak for themselves. But Ivory Towers seem to be popping up everywhere these days.

  10. budhak0n says:

    Sorry nobody really to prosecute. If you had shareholder losses, you are entitled to a shareholder lawsuit.

    You’d have to allege that the corporate officers either deliberately or recklessly lost your funds.

    Which isn’t going to happen because all ships rise and fall in a storm. The S&L Scandal was different.

    You may have a claim stating if you are a bank shareholder and they failed to follow proper procedures in mortgage lending but those procedures are not codified, and there’s still no guarantee that they are all bad deals.

    Most of the bank’s unsecured credit card portfolio has come in as profit when it was written off as loss and I suspect a whole lot of their secured portfolio will do the same.

    You don’t simply shoot the entire herd because 1 out of 10 cows did something stupid.

  11. ewmayer says:

    “…excoriating some of the horrible mismanagement we’ve seen over the past few years.”

    That’s a laugh, coming from the biggest Bailout-Beneficiary and Wall Street Welfare Queen of them all.

    Must be nice, to know that a company’s stock is almost guaranteed to get a nice pop simply from the news of one’s having bought some, and to know that the government has one’s back. “It’s my problem”, my ass.

    I used to pay attention to what WEB had to say up to a couple years ago, but it”s become clear tome since that he’s talking his book just like all the other pumpTards, and spewing BS about risk management and the (alleged) perils of derivatives like all the other TBTF douchebags (many of whom are now represented in Berkshire’s holdings, after it was made clear to the Big Players that the government would not allow them to go under) who made massive derivative bets and had no problem in running to the government when said bets blew up. If Berkshire ever gets in trouble, it may be his fault, but it’ll be the U.S. taxpayers’ problem.

    What a self-serving douchebag.

  12. Doug Kass says:

    In a thoughtful three hours, Becky, Joe and Q conducted a wide-ranging interview with the Oracle of Omaha on CNBC’s “Squawk Box.” I watched the show high above the Atlantic Ocean on a JetBlue (JBLU) flight this morning in route to New York City.

    During the course of “Squawk Box” (conducted at Piccolo Pete’s Restaurant in Omaha), Buffett expressed a number of important views and observations (not in order of importance):

    While we have gotten beyond an economic Pearl Harbor, one should always be prepared for extraordinary times.

    Berkshire Hathaway (BRK.A / BRK.B) is solidly positioned for outlier financial and economic outcomes.

    The world’s economies will recover at a modest pace, but he offered a generally cautious view of the domestic economy.

    Within a year, housing will have stabilized as household formations catch up to the excess in home supply for sale.

    The depth in home and stock prices has produced an American consumer that has lost some of his aspirational buying habits.

    U.S. unemployment remains a drag to growth and will for a while longer. Only when the slope of demand improves will companies begin to hire.

    If Buffett retires tomorrow, Berkshire will likely “farm out” the investment responsibilities to three outside managers. A representative of the Buffett family will likely be a nonexecutive Chairman of Berkshire. The Board of Directors is prepared to appoint a CEO if Buffett retires, and the pool has grown as the company has made acquisitions.

    If Geico CEO of Capital Operations Lou Simpson retires tomorrow, Buffett would take over the investment responsibility at Geico.

    Berkshire has been unaffected by the Standard & Poor’s and Moody’s downgrades in its debt from AAA to AA.

    This year’s annual letter to Berkshire Hathaway shareholders was intended as a manual to provide the company’s new shareholders with a good understanding and education of Berkshire, its business components and its strategy.

    While the bottling business is capital intensive and has some execution challenges, Buffett endorsed Coca-Cola’s (KO) acquisition of its bottling operations.

    Berkshire Vice Chairman Charlie Munger has the best 30-second mind extant. Microsoft’s (MSFT) Bill Gates’ knowledge is all-consuming and remarkably broad. Berkshire’s manager of the reinsurance business, Ajit Jain, knows probabilities like no other.

    Buffett’s holding period remains “forever.” His enthusiasm for stocks is in direct relationship with the value that has been created on share price declines. So it follows that both stocks and bonds are less attractive than a year ago.

    The cost of health insurance in the U.S. is like a tapeworm eating at our economic body. The cost of the health system is a drag on growth and, unless changed, will reduce our standard of living and reduce our competitiveness. National health care legislation should be singularly focused on costs.

    Today’s huge deficits, while a necessary Keynesian response to economic weakness and a financial crisis, will have important and negative long-term consequences.
    Buffett would have preferred to have offered all cash for the Burlington Northern Santa Fe (BNI) acquisition, but putting $22 billion into the Burlington deal made sense and offered Berkshire a good but not great opportunity.

    Chapters 8 and 20 of Intelligent Investor provide the best lessons for the individual investor. In Chapter 12 of General Theory, Keynes might have had the “animal spirits” and the acquisition of Kraft (KFT) in mind.

    Under the circumstances that existed a year ago and based on the form of the investment made (which was done on favorable terms to Berkshire), Buffett is pleased with his investment in Goldman Sachs (GS). Lloyd Blankfein is a superior investment manager and is too maligned by many observers (especially of a media kind).

    Stocks are sold out of Berkshire’s portfolio (Moody’s (MCO), Procter & Gamble (PG), ConocoPhillips (COP), ExxonMobil (XOM), etc.) when:

    they are fully priced;
    there are better alternative investment opportunities available; or
    the company wants to maintain a cushion of liquidity (just in case).
    A “heads they win, tails they win” executive compensation at leading financial institutions is wrong and should be changed, especially if large errors in trading expose our society to systemic risks.
    An expansive and comprehensive mortgage policy must be developed after the “rogue” government-sponsored enterprises (Fannie Mae (FNM) and Freddie Mac (FRE)) have blown up. The GSE’s disproportionate role in residential mortgages must be addressed posthaste.
    There is a large incentive for the E.U. to assist in solving Greece’s current debt crisis. It will be temporarily resolved as the consequences of not finding a solution are far greater than exists today.
    State and municipality economic problems continue apace, providing a further drag to domestic economic recovery.
    No Pepsi (PEP), Coke, for Warren Buffett!
    My view on Warren Buffett remains unchanged. He is an investing legend. No, he is the single most accomplished investor in modern financial history. Buffett’s straightforwardness and logic of argument are constant reminders that simple works better than complicated and complex is often the enemy of the rational investor. Importantly, Buffett sticks to his knitting. He knows what he doesn’t know. His willingness to delegate responsibility and executive autonomy is a key feature to Berkshire’s success over the past half century and should serve as a template to every senior manager in industry and in finance who has too much pride in his / her own decision-making authorship.

    My view on Berkshire’s shares also remains unchanged. Given Buffett’s age, the Oracle (by definition) moves closer and closer to relinquishing the reins of Berkshire. When he retires, no one should or will be accorded the respect and wide berth that Buffett has earned throughout his lifetime. Moreover, the Burlington Northern acquisition completes Buffett’s canvas, at least for the foreseeable future. As a result of these factors (and others), my view is that Berkshire’s large investment holdings will slowly lose their “Berkshire premium” as, in the fullness of time, the shares move closer toward being valued at a discount typically accorded the average closed-end equity fund.

    From my perch, this morning’s “Squawk Box” was most rewarding to viewers and represented one of the finest three hours ever for the CNBC show. Becky, Joe and Q peppered the Oracle with intelligent questions and let Warren Buffett recite his gospel.

    Well done!

    Position: Long PG and PEP

    Buffett Has Still Got It
    3/1/2010 8:01 AM EST

  13. HEHEHE says:

    Mr Kass, do you get a cut of Warren B’s book sales?

    “Buffett’s holding period remains “forever.” Yeah when he knows the government has his back:) I am saving the above screed for future review.

    I am really looking forward to all that “household formation” that is going to soak up all the shadow inventory of housing in this country.

    Earth to Warren, we are in a short term government generated “recovery” in the middle of a balance sheet induced depression; we will be back in recession soon enough. Of course it won’t matter to “Uncle Milty” Buffett because Uncle Sam has his back. 20% real unemployment for the foreseeable future and it’s a “drag” on growth. This clown sounds like Greenspan with all the double speak.

    The lesson of Buffett is that when you see the end of your life facing you, and the thought you may lose your “legendary” status as a consequence of your own bad investment decisions and the negative macro economic environment, you’ll do and/or say anything to preserve the “legacy” of the image you developed early in your life.

  14. HEHEHE says:

    Buffettspeak

    “New Household Formation” – three generations of unemployed living under the same roof:)