Curious Cat Investing and Economics Blog » Warren Buffett

Buffett Cautions Against Buying Long Term USD Bonds

John Hunter — Sun, 27 Mar 2011 12:51:13 +0000

This is another article supporting my belief that long term bonds are not investments I want to take on now. The risks of inflation and low yields seem like a very bad combination.

Buffett Says Avoid Long-Term Bonds Tied to Eroding Dollar, quoting Warren Buffett:

“I would recommend against buying long-term fixed-dollar investments”
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“I would much rather own businesses,” he said. “It’s very easy to take away the value of fixed-dollar investments.”

By “take away” he mean the government can undertake policies to “inflate” their way out of a budget mess. By undertaking policies that create inflation (drastically increasing the money supply, borrowing huge amounts of money, running huge trade deficits…) the country can devalue the currency, the US dollar in this case, and thus reduce the effective cost of the payments they have to make on long term bonds (because they pay back the loans with devalued, inflated, dollars). I believe he is right and long term USD bonds are a very risky (inflation risk) investing option today. Of course I have felt the same way for the last 5 years. I own very little in the way of bonds – I do own a bit of TIPS (Treasury Inflation-Protected Securities), in my 401(k) – but stopped allocating money to that class in the last year.

Warren Buffett’s 2010 Letter to Shareholders

John Hunter — Sun, 27 Feb 2011 14:28:13 +0000

Warren Buffett has published his always excellent annual shareholder letter. It is a pleasure to read them every year, when they are published, and re-read them at other times of the year.

Yearly figures, it should be noted, are neither to be ignored nor viewed as all-important. The pace of the earth’s movement around the sun is not synchronized with the time required for either investment ideas or operating decisions to bear fruit. At GEICO, for example, we enthusiastically spent $900 million last year on advertising to obtain policyholders who deliver us no immediate profits. If we could spend twice that amount productively, we would happily do so though short-term results would be further penalized. Many large investments at our railroad and utility operations are also made with an eye to payoffs well down the road.
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At Berkshire, managers can focus on running their businesses: They are not subjected to meetings at headquarters nor financing worries nor Wall Street harassment. They simply get a letter from me every two years and call me when they wish.
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From a standing start in 1985, Ajit has created an insurance business with float of $30 billion and significant underwriting profits, a feat that no CEO of any other insurer has come close to matching. By his accomplishments, he has added a great many billions of dollars to the value of Berkshire.
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At bottom, a sound insurance operation requires four disciplines… (4) The willingness to walk away if the appropriate premium can’t be obtained. Many insurers pass the first three tests and flunk the fourth. The urgings of Wall Street, pressures from the agency force and brokers, or simply a refusal by a testosterone-driven CEO to accept shrinking volumes has led too many insurers to write business at inadequate prices. “The other guy is doing it so we must as well” spells trouble in any business, but none more so than insurance.
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a few have very poor returns, a result of some serious mistakes I have made in my job of capital allocation. These errors came about because I misjudged either the competitive strength of the business I was purchasing or the future economics of the industry in which it operated. I try to look out ten or twenty years when making an acquisition, but sometimes my eyesight has been poor.
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It’s easy to identify many investment managers with great recent records. But past results, though important, do not suffice when prospective performance is being judged. How the record has been achieved is crucial, as is the manager’s understanding of – and sensitivity to – risk (which in no way should be measured by beta, the choice of too many academics). In respect to the risk criterion, we were looking for someone with a hard-to-evaluate skill: the ability to anticipate the effects of economic scenarios not previously observed. Finally, we wanted someone who would regard working for Berkshire as far more than a job.

Warren Buffett packs in great lessons all throughout the letter. Read it and take them to heart.

Cultures self-propagate. Winston Churchill once said, “You shape your houses and then they shape you.” That wisdom applies to businesses as well. Bureaucratic procedures beget more bureaucracy, and imperial corporate palaces induce imperious behavior. (As one wag put it, “You know you’re no longer CEO when you get in the back seat of your car and it doesn’t move.”) At Berkshire’s “World Headquarters” our annual rent is $270,212. Moreover, the home-office investment in furniture, art, Coke dispenser, lunch room, high-tech equipment – you name it – totals $301,363. As long as Charlie and I treat your money as if it were our own, Berkshire’s managers are likely to be careful with it as well.

Far too often senior executives treat corporate treasuries as their noble right instead of behaving honorably. I would say over 90% of senior executives at S&P 500 companies are ludicrously over”paid.” Their arguments for that not being the case amount to the same arguments made by those that caused the credit crisis – everyone else is behaving in this unethical and unsustainable way you can’t expect me to behave less badly than them.

But they want to stay in their homes, and generally they borrowed sensible amounts in relation to their income. In addition, we were keeping the originated mortgages for our own account, which means we were not securitizing or otherwise reselling them. If we were stupid in our lending, we were going to pay the price. That concentrates the mind.

If home buyers throughout the country had behaved like our buyers, America would not have had the crisis that it did. Our approach was simply to get a meaningful down-payment and gear fixed monthly payments to a sensible percentage of income. This policy kept Clayton solvent and also kept buyers in their homes.

The cost of poor public policy is not limited to those companies that seek outsized immediate gains for themselves. Those costs are borne by society. Allowing the silly things that went on in the early 2000s (and go on far too often today) is a foolish endeavor shifting short term “profits” to a few greedy individuals and costs to millions of people for years to come.

Other companies we hold are likely to increase their dividends as well. Coca-Cola paid us $88 million in 1995, the year after we finished purchasing the stock. Every year since, Coke has increased its dividend. In 2011, we will almost certainly receive $376 million from Coke, up $24 million from last year. Within ten years, I would expect that $376 million to double. By the end of that period, I wouldn’t be surprised to see our share of Coke’s annual earnings exceed 100% of what we paid for the investment. Time is the friend of the wonderful business.

This is an excellent investing model (looking at the long term and growing dividends). In fact I am looking more into companies that have good dividends and companies that have history (and a likely future) of raising dividends. There is even a fund I found last week that looks good: Vanguard Dividend Appreciation ETF (.23% expense ratio).

The wisdom waiting to be absorbed, in Warren Buffet’s annual letters is substantial. Any investor should take the time to read them, and re-read them and really think about what they can learn.

Buffett Does’t See Double-Dip Recession for USA

John Hunter — Tue, 14 Sep 2010 01:01:05 +0000

Buffett Rules Out Double-Dip Recession Amid Growth

“We will not have a double-dip recession at all. I see our businesses coming back almost across the board.”
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“I’ve seen sentiment turn sour in the last three months or so, generally in the media,” Buffett said. “I don’t see that in our businesses. I see we’re employing more people than a month ago, two months ago.”
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[GE CEO] Immelt said. “We need people to be able to feel like they’re going to get loans, the process is going to work and that they understand the rules,” Immelt said. Signs across the world show growth improving as evidenced by a rise in GE’s orders

40 Billionaires Pledge to Donate Half Their Wealth

John Hunter — Thu, 05 Aug 2010 17:02:27 +0000

40 billionaires pledge to give away half of wealth

In addition to Buffett and Gates – America’s two wealthiest individuals, with a combined net worth of $90 billion, according to Forbes – 38 other billionaires are taking the give-it-away pledge. They include New York Mayor Michael Bloomberg, entertainment executive Barry Diller, Oracle co-founder Larry Ellison, energy tycoon T. Boone Pickens, media mogul Ted Turner, David Rockefeller, film director George Lucas and investor Ronald Perelman.

This is great news. We need more charity. And we don’t need more trust fund babies. The Giving Pledge was established by Bill Gates and Warren Buffet to encourage this spirit.Charity should be a part of your personal finance plan if you are reading this (if you have access to a computer you are wealthier than most people alive today).

To many of the rich today act like they made their money by creating it by themselves. You can’t be a billionaire without getting it given to you by your parents or making your wealth from society. It is wonderful when people provide great solutions to society and become wealthy. It is ridicules to think those people’s wealth is not the result of the society others created. Using that wealth to make society better is right. Spoiling kids and grandkids with it is acceptable, to a certain level. After a couple million that is insulting, however.

Buffett Expects Terrible Problem for Municipal Debt

John Hunter — Thu, 03 Jun 2010 01:42:28 +0000

Buffett Expects “Terrible Problem” for Municipal Debt

“There will be a terrible problem and then the question becomes will the federal government help,” Buffett, 79, said today at a hearing of the U.S. Financial Crisis Inquiry Commission in New York. “I don’t know how I would rate them myself. It’s a bet on how the federal government will act over time.”

Berkshire’s investment portfolio included municipal bonds valued at less than $3.9 billion as of March 31, down from more than $4.7 billion at the end of 2008. The company had a maximum of $16 billion at risk in derivatives tied to such debt, according to the company’s annual report for 2009.
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Buffett said last month that the U.S. may feel compelled to rescue a state facing default after the government committed $700 billion to bail out financial firms and automakers. “It would be hard in the end for the federal government to turn away a state having extreme financial difficulty when they’ve gone to General Motors and other entities and saved them,”
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About $14.5 billion of municipal bonds defaulted in 2008 and 2009… Many those were securities backed by revenue from nursing homes, property developments and other projects without claim to government tax revenue.
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Defaults by local governments with the power to raise taxes are less common. Jefferson County, Alabama, defaulted on more than $3 billion of bonds backed by sewer fees after the deals grew more costly in the wake of the credit crisis in 2008. Vallejo, California, filed for bankruptcy in 2008 after its tax revenue tumbled.

Taxes – Slightly or Steeply Progressive?

John Hunter — Thu, 15 Apr 2010 15:40:38 +0000

The Wall Street Journal wrote “Their Fair Share” in July of 2008 claiming that the rich are paying their fair share of taxes.

The nearby chart shows that the top 1% of taxpayers, those who earn above $388,806, paid 40% of all income taxes in 2006, the highest share in at least 40 years. The top 10% in income, those earning more than $108,904, paid 71%. Barack Obama says he’s going to cut taxes for those at the bottom, but that’s also going to be a challenge because Americans with an income below the median paid a record low 2.9% of all income taxes, while the top 50% paid 97.1%. Perhaps he thinks half the country should pay all the taxes to support the other half.

Wow. The Wall Street Journal against a tax cut? Well I guess if it is a tax on the poor they don’t support cutting those taxes. I think it may well make sense to reduce the social security and medicare taxes on the working poor (including the company share). Of all the taxes we have this is the one I would reduce, if I reduced any (given the huge amount of government debt any reduction may well be unwise). But reducing income taxes for those under the median income doesn’t seem like something worth doing to me.

The top 1% earned 22% of all reported income. But they also paid a share of taxes not far from double their share of income. In other words, the tax code is already steeply progressive.

They seem to ignore that income inequality has drastically increased. When you have a system that puts a huge percentage of the cash in a few people’s pockets of course those people end up paying a lot of cash per person. One affect of massive wealth concentration is that the limited people all the money is flowing to naturally will pay an increasing portion of taxes.

It is fine to argue that the rich pay too much tax, if you want. I don’t agree. I think Warren Buffett explains the issue much more clearly and truthfully when he says he, and all his fellow, billionaires (and those attempting to join the club) pay a lower percent of taxes on income than their secretaries do. He offers $1 million to any of them that prove that isn’t true.

And I guess you can say that the top 22% of the income paying the top 40% of the taxes is “steeply progressive.” I wouldn’t call that steep, but… It is nice the graphic is at least decently honest. Saying just “top 1% of taxpayers, those who earn above $388,806, paid 40% of all income ” is fairly misleading. It is much more honest (I believe) to say that “the top 1% (that made 22% of the income) paid…” Those with the top 22% of income paid 40% of the taxes, the next 15% payed 20%, the next 31% paid 26% the next 20% 11% and the final 12% paid 3%. That is progressive. From my perspective it could be more progressive but I can see others saying it it progressive enough.

If 22% to 40% is “steeply” progressive what is 1% to 22%? The income distribution seems to be what? very hugely massively almost asymptotently progressive? The to 1% of people, by income, take 22% of the income, the next 4% take the next 15% of the total income, the next 20% take 31%, the next 25% take 30% and the bottom 50% take 12%. This level of income inequality is much more a source of concern than any concern someone should have about a slightly progressive tax result.

In the video Warren Buffet says, and is right:

The taxation system has tilted toward the rich and away from the middle class in the last 10 years. It is dramatic and I don’t think it is appreciated. And I think it should be addressed.
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Hedge fund operators spent a record amount lobbying

What did those ~~bribes~~ “donations” buy the hedge fund managers? The ability to have your grandchildren pay their taxes (with interest) for them.

Buffett Calls on Bank CEOs and Boards to be Held Responsible

John Hunter — Sat, 27 Feb 2010 16:53:29 +0000

In his most recent letter to shareholders Warren Buffett suggests that bank CEOs and board members be held accountable when the risks they take (and reward themselves obscenely for when they payoff) backfire:

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.

The lack of accountability or ethics from those risking the economy so they can take huge payments (and paying off politicians to allow those risks) has hugely damaged the USA and the economic future of the country. The longer we allow such unethical leadership to continue to the more we will suffer. The current low interest paid to savers and the wealth thus transferred to the banks (who then pay themselves even more bonuses) are but one legacy of this economically devastating path.

By the way, there is no way the bankers will actually be held accountable. The behavior of politicians we continually elect shows they will not do something that those giving them the huge amounts of cash don’t like. If we don’t like that we have to elect different people – maybe people that care about the country and have moral principles instead of those lacking such qualities, that we do elect.

The politicians believe in holding those that don’t give them huge payments accountable for their actions. They just draw the line at holding people that they play golf with accountable.

Warren Buffett and Bill Gates on Business, Health Care and more

John Hunter — Tue, 01 Dec 2009 17:20:39 +0000

In the webcast interview above Warren Buffett and Bill Gates discuss business, health care, economics, wall street, the Fed and more. Both agree the health care system is far too expensive and needs to be fixed. And both agree the current reforms are far too small and seem to do little to address the core problems with incentives and entrenched interests maintaining system in need of reform.

Both also agree the future is bright for the USA and the world economically. The innovation possible will may well come from more locations in the next century but those innovations will also come from the USA.

Warren Buffett also defends the independent Federal Reserve board system.

Buffett: Economy Stable, But Residential Real Estate Has Improved

John Hunter — Wed, 16 Sep 2009 11:54:37 +0000

Warren Buffet on the economy:

Warren Buffett tells CNBC that while the economy “hasn’t gotten worse” but also hasn’t “gotten much better” over the past three months, he doesn’t expect a ‘double-dip’ recession and sees significant improvement in residential real estate.
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BECKY: All right. Let me go at this another way. Let’s pretend you’re on a desert island for a month. There’s only one set of numbers you can get. What would it be?

BUFFETT: Well, I would probably look at– perhaps freight car loadings and– perhaps– and– and truck tonnage moved and– but I’d want to look at a lot of figures.
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BUFFETT: Well, I think that– unfortunately, I think that the — what– what– we’re really talking about reforming health insurance more than health care. So I– the incentives that produce the 16 or so percent of GDP that’s going to health care, I think unfortunately they’re getting– they’re going to get changed. But– so I think that we really– and I’m talking as much about reforming health care as we’re talking about reforming the insurance. And I think that will be an opportunity missed if we don’t do more about looking at what– what the incentives are in the present system and what they would be in an ideal system.

Buffett on Need to Reduce Government Deficits

John Hunter — Wed, 19 Aug 2009 12:08:17 +0000

The Greenback Effect by Warren Buffett

The United States economy is now out of the emergency room and appears to be on a slow path to recovery.
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Because of this gigantic deficit, our country’s “net debt” (that is, the amount held publicly) is mushrooming. During this fiscal year, it will increase more than one percentage point per month, climbing to about 56 percent of G.D.P. from 41 percent. Admittedly, other countries, like Japan and Italy, have far higher ratios and no one can know the precise level of net debt to G.D.P.
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Legislators will correctly perceive that either raising taxes or cutting expenditures will threaten their re-election. To avoid this fate, they can opt for high rates of inflation, which never require a recorded vote and cannot be attributed to a specific action that any elected official takes.
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Our immediate problem is to get our country back on its feet and flourishing — “whatever it takes” still makes sense. Once recovery is gained, however, Congress must end the rise in the debt-to-G.D.P. ratio and keep our growth in obligations in line with our growth in resources.

Unchecked carbon emissions will likely cause icebergs to melt. Unchecked greenback emissions will certainly cause the purchasing power of currency to melt. The dollar’s destiny lies with Congress.