Fear and contraction feed each other
“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.”
Business
Huge economic medicine brings aftereffects
“Economic medicine that was previously meted out by the cupful has recently been dispensed by the barrel. These once-unthinkable dosages will almost certainly bring on unwelcome aftereffects.”
Strong government action was essential
“Whatever the downsides may be, strong and immediate action by government was essential last year if the financial system was to avoid a total breakdown.”
A system that unleashed human potential
“Though the path has not been smooth, our economic system has worked extraordinarily well over time. It has unleashed human potential as no other system has, and it will continue to do so.”
A grim economy says nothing about stocks
“We’re certain, for example, that the economy will be in shambles throughout 2009 – and, for that matter, probably well beyond – but that conclusion does not tell us whether the stock market will rise or fall.”
Pessimism is the investor's friend
“When investing, pessimism is your friend, euphoria the enemy.”
Buying quality when it is marked down
“Long ago, Ben Graham taught me that ‘Price is what you pay; value is what you get.’ Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.”
Fairly priced businesses over cheap securities
“We like buying underpriced securities, but we like buying fairly-priced operating businesses even more.”
Becoming the buyer of choice by deserving it
“Our long-avowed goal is to be the ‘buyer of choice’ for businesses – particularly those built and owned by families. The way to achieve this goal is to deserve it.”
Rival buyers treat acquisitions as merchandise
“For [most competing buyers], acquisitions are ‘merchandise.’ Before the ink dries on their purchase contracts, these operators are contemplating ‘exit strategies.’”
Regulators see a buyer's whole history
“There is no hiding your history when you stand before [utility regulators].”
A promise is only as good as its maker
“Reinsurance is a business of long-term promises, sometimes extending for fifty years or more. This past year has retaught clients a crucial principle: A promise is no better than the person or institution making it.”
Borrowers and lenders who shouldn't have
“Writing about the period somewhat later, I described it as involving ‘borrowers who shouldn’t have borrowed being financed by lenders who shouldn’t have lent.’”
An ignored warning from manufactured homes
“[The industry's] 1997-2000 fiasco should have served as a canary-in-the-coal-mine warning for the far-larger conventional housing market. But investors, government and rating agencies learned exactly nothing from the manufactured-home debacle.”
Real down payments keep owners from walking
“Homeowners who have made a meaningful down-payment – derived from savings and not from other borrowing – seldom walk away from a primary residence simply because its value today is less than the mortgage.”
Homes are for enjoyment, not profit
“Home ownership is a wonderful thing. My family and I have enjoyed my present home for 50 years, with more to come. But enjoyment and utility should be the primary motives for purchase, not profit or refi possibilities.”
Ten percent down and affordable payments
“Home purchases should involve an honest-to-God down payment of at least 10% and monthly payments that can be comfortably handled by the borrower’s income. That income should be carefully verified.”
Keeping people in homes, not just putting them there
“Putting people into homes, though a desirable goal, shouldn’t be our country’s primary objective. Keeping them in their homes should be the ambition.”
A guaranteed cripple beats an unguaranteed Gibraltar
“At the moment, it is much better to be a financial cripple with a government guarantee than a Gibraltar without one.”
Insured bonds default differently
“A universe of tax-exempts fully covered by insurance would be certain to have a somewhat different loss experience from a group of uninsured, but otherwise similar bonds, the only question being how different.”
Insured towns go easier on bondholders' claims
“When faced with large revenue shortfalls, communities that have all of their bonds insured will be more prone to develop ‘solutions’ less favorable to bondholders than those communities that have uninsured bonds held by local banks and residents.”
Municipal defaults invite imitation
“Losses in the tax-exempt arena, when they come, are also likely to be highly correlated among issuers. If a few communities stiff their creditors and get away with it, the chance that others will follow in their footsteps will grow.”
Loss-free years before a devastating one
“In both cases, a string of loss-free years can be followed by a devastating experience that more than wipes out all earlier profits.”
Similar-looking universes can mislead
“The type of fallacy involved in projecting loss experience from a universe of non-insured bonds onto a deceptively-similar universe in which many bonds are insured pops up in other areas of finance.”
Past data does not reveal the future
“(If merely looking up past financial data would tell you what the future holds, the Forbes 400 would consist of librarians.)”
History-based models drove mortgage losses
“Indeed, the stupefying losses in mortgage-related securities came in large part because of flawed, history-based models used by salesmen, rating agencies and investors.”
Beware of geeks bearing formulas
“Too often, though, investors forget to examine the assumptions behind the symbols. Our advice: Beware of geeks bearing formulas.”
A night's sleep over extra profits
“We never want to count on the kindness of strangers in order to meet tomorrow’s obligations. When forced to choose, I will not trade even a night’s sleep for the chance of extra profits.”
From underpricing risk to overpricing it
“The investment world has gone from underpricing risk to overpricing it. This change has not been minor; the pendulum has covered an extraordinary arc.”
Clinging to cash is a terrible policy
“Clinging to cash equivalents or long-term government bonds at present yields is almost certainly a terrible policy if continued for long.”
Approval sedates the investor's brain
“Approval, though, is not the goal of investing. In fact, approval is often counter-productive because it sedates the brain and makes it less receptive to new facts or a re-examination of conclusions formed earlier.”
Derivatives raise leverage and obscure banks
“[Derivatives] have dramatically increased the leverage and risks in our financial system. They have made it almost impossible for investors to understand and analyze our largest commercial banks and investment banks.”
Big derivatives books defeated famous CEOs
“Indeed, recent events demonstrate that certain big-name CEOs (or former CEOs) at major financial institutions were simply incapable of managing a business with a huge, complex book of derivatives.”
No report can measure derivatives risk
“I know of no reporting mechanism that would come close to describing and measuring the risks in a huge and complex portfolio of derivatives. Auditors can’t audit these contracts, and regulators can’t regulate them.”
Quick settlement keeps credit problems small
“A normal stock or bond trade is completed in a few days with one party getting its cash, the other its securities. Counterparty risk therefore quickly disappears, which means credit problems can’t accumulate.”
Your counterparties' counterparties matter too
“Participants seeking to dodge troubles face the same problem as someone seeking to avoid venereal disease: It’s not just whom you sleep with, but also whom they are sleeping with.”
The CEO as Chief Risk Officer
“I both initiated [Berkshire's derivatives contracts] and monitor them, a set of responsibilities consistent with my belief that the CEO of any large financial organization must be the Chief Risk Officer as well.”
Earnings dips as buying opportunities
“The ups and downs neither cheer nor bother Charlie and me. Indeed, the ‘downs’ can be helpful in that they give us an opportunity to expand a position on favorable terms.”
Black-Scholes fails over long periods
“If the formula is applied to extended time periods, however, [Black-Scholes] can produce absurd results.”
Volatility's usefulness fades with time
“Though historical volatility is a useful – but far from foolproof – concept in valuing short-term options, its utility diminishes rapidly as the duration of the option lengthens.”
Homemade valuations rarely err toward caution
“[Skepticism] would be perfectly understandable: CEOs who have concocted their own valuations for esoteric financial instruments have seldom erred on the side of conservatism.”