Warren Buffet has just release his 2011 Letter to Shareholders along with the 2011 Annual report.
2011 Letter to Shareholders:
2011 Annual Report:
Year End Book Value = $66.57 per B Share. They will buy back stock at 110% of book value or $73.23/B Share. Considering the shares have traded at between $76-80/B share in 2012, you are not paying a huge premium (4-9%) to where Mr. Buffett believes the shares to be significantly undervalued.
On the Banking Industry
The banking industry is back on its feet, and Wells Fargo is prospering. Its earnings are strong, its assets solid and its capital at record levels. At Bank of America, some huge mistakes were made by prior management. Brian Moynihan has made excellent progress in cleaning these up, though the completion of that process will take a number of years. Concurrently, he is nurturing a huge and attractive underlying business that will endure long after today’s problems are forgotten. Our warrants to buy 700 million Bank of America shares will likely be of great value before they expire.
On Buying Bonds
Under today’s conditions, therefore, I do not like currency-based investments.
Today, a wry comment that Wall Streeter Shelby Cullom Davis made long ago seems apt: “Bonds promoted as offering risk-free returns are now priced to deliver return-free risk.”
I have a few ideas on how to short medium to long term treasury bonds that I may post in the near future. The only problem with going short on treasury bonds is you are effectively fighting the FED, who are currently implementing "operation twist". This drives up long dated bond prices which moves drives down yields. Buffett isn't the only bear on longer duration bonds.
Secondly, I highly recommend reading Buffett's essay on inflation, bonds, gold and income producing assets.
On Gold as an Asset Class
The major asset in this category is gold, currently a huge favorite of investors who fear almost all other assets, especially paper money (of whose value, as noted, they are right to be fearful). Gold, however, has two significant shortcomings, being neither of much use nor procreative. True, gold has some industrial and decorative utility, but the demand for these purposes is both limited and incapable of soaking up new production. Meanwhile, if you own one ounce of gold for an eternity, you will still own one ounce at its end.
What motivates most gold purchasers is their belief that the ranks of the fearful will grow. During the past decade that belief has proved correct. Beyond that, the rising price has on its own generated additional buying enthusiasm, attracting purchasers who see the rise as validating an investment thesis. As “bandwagon” investors join any party, they create their own truth – for a while.
Over the past 15 years, both Internet stocks and houses have demonstrated the extraordinary excesses that can be created by combining an initially sensible thesis with well-publicized rising prices. In these bubbles, an army of originally skeptical investors succumbed to the “proof” delivered by the market, and the pool of buyers – for a time – expanded sufficiently to keep the bandwagon rolling. But bubbles blown large enough inevitably pop. And then the old proverb is confirmed once again: “What the wise man does in the beginning, the fool does in the end.”
Buffett's comments once again will incite anger among the gold bugs. I have commented on gold before and will only add this comment. Why does gold as a currency require any less "faith" than fiat currency? As Buffett noted in his essay, does it matter if we use gold, shark teeth, seashells, or fiat money (as today) for exchanging a unit of our labor?
It is interesting to note that Buffett believes gold is in a bubble. He also noted that the world must continually absorb $160 billion of gold per year at current production rates. Buyers – whether jewelry and industrial users, frightened individuals, or speculators – must continually absorb this additional supply to merely maintain an equilibrium at present prices.
If you own gold, you better start convincing your friends to keep your pyramid scheme going.
Disclosure: Long BRK.B