Berkshire Hathaway, the company founded and managed by Warren Buffet released their Annual Report and Shareholder letter for 2009. This year’s report details Warren Buffets thoughts on the economic crisis in 2008 and how performance of his stock was affected. Berkshire’s shares are down roughly 50%, or $70,000 per share over the last 52 weeks. Don’t worry though, if you’d invested $1000 back in 1965, you’d still be up over $3 Million.
As the year progressed, a series of life-threatening problems within any of the worldâ€™s great financial institutions was unveiled. This led to a dysfunctional credit market that in important respects soon turned non-functional. The watchword throughout the country became the creed I saw on restaurant walls when I was young: â€œIn God we trust; all others pay cash.â€
By the fourth quarter, the credit crisis, coupled with tumbling home and stock prices, had produced a paralyzing fear that engulfed the country. A freefall in business activity ensued, accelerating at a pace that I have never before witnessed. The U.S. â€“ and much of the world â€“ became trapped in a vicious negative-feedback cycle. Fear led to business contraction, and that in turn led to even greater fear.
This debilitating spiral has spurred our government to take massive action. In poker terms, the Treasury and the Fed have gone â€œall in.â€ 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. Their precise nature is anyoneâ€™s guess, though one likely consequence is an onslaught of inflation. Moreover, major industries have become dependent on Federal assistance, and they will be followed by cities and states bearing mind-boggling requests. Weaning these entities from the public teat will be a political challenge. They wonâ€™t leave willingly.
Mr. Buffet is advising his shareholders of things readers of this blog and followers of Schif, Faber, Celente and Rogers have known for many months. It’s striking that Berkshire didn’t take aggressive action to protect the investments of their shareholders. I suspect that many investors thought Buffet would know what to do during this crisis, only to get hammered like everyone else. Don’t get me wrong, I am a big fan of Warren Buffet, and have been since my teens, but I am still surprised at the losses.
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. Had that occurred, the consequences for every area of our economy would have been cataclysmic. Like it or not, the inhabitants of Wall Street, Main Street and the various Side Streets of America were all in the same boat.
Amid this bad news, however, never forget that our country has faced far worse travails in the past. In the 20th Century alone, we dealt with two great wars (one of which we initially appeared to be losing); a dozen or so panics and recessions; virulent inflation that led to a 211â„2% prime rate in 1980; and the Great Depression of the 1930s, when unemployment ranged between 15% and 25% for many years. America has had no shortage of challenges.
Without fail, however, weâ€™ve overcome them. In the face of those obstacles â€“ and many others â€“ the real standard of living for Americans improved nearly seven-fold during the 1900s, while the Dow Jones Industrials rose from 66 to 11,497. Compare the record of this period with the dozens of centuries during which humans secured only tiny gains, if any, in how they lived. 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. Americaâ€™s best days lie ahead.
I sure hopeÂ Mr. buffet is right. Â It seems to me, that it was government meddling that caused our eventual need to enter World Wars I and II. The great depression may have only been a severe recession had the government not intervened with policies similar to those being used today. Warren Buffet is a campaign supporter of President Barack Obama, so it is no surprise that he subscribes to the bailout and stimulus theories.
Click here to read the full letter to shareholders (22 pages).