Saturday, February 25, 2012

Buffett's 2011 Letter to Shareholders

Warren Buffet has just release his 2011 Letter to Shareholders along with the 2011 Annual report. 

2011 Letter to Shareholders:

2011 Annual Report:

2011 Highlights
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. 

Best Regards,


Disclosure: Long BRK.B


  1. Now first off I will start with a disclamimer, lol. I am no financial guru and have probably have an investing record that resembles the Maple Leafs. I have won big and lost big and learned a lot and still learning. Personally I run a tight ship and I'm adverse to debt as we have had a very slow and rough start. We work hard, married almost 21 years, 3 kids (1 Graduated), 1 house and only 1 vehicle for the past 7 years. After 18.5 years we finally got to take that Honeymoon. So this is all just my opinion and I like debating.

    I still have no confidence in the US to pull itself up by it's own bootstraps and I think it is just a matter of time and my reasoning extends well beyond pure economics. The biggest issue is the same as we face here in Canada. We have generations that view a very comfortable lifestyle as an entitlement and they have no concept of living within their means. Just ask any young couple planning their wedding. They want the full meal deal upsized with no understanding of cost or how it will be paid for. These past few generatoins have shot themselves in the foot and the effects have simply magnified. Any data on increased consumer sales to me is most reasonably due to people simply pulling their credit cards out.
    We have come addicted to our life styles and it is well known that in human nature we'll fall to baseless hope before submitting to reality.

    Even Buffet who is a very smart man has recognized that the housing market still has a long road before there is any recovery. (if at all- my opinion)
    US isn't really taking any lessons learned from the EU and I don't see anything good happening there either.
    Not that I'm a gold bug but if it doesn't matter what one uses for money I wonder why the major banks put such pressure on precious metals to keep them down? At least to me there is some truth to tieing value to something that is limited. So let's use shark's teeth. The biggest problem is anytime Gov't needs money it just prints it. In this light Fiat money is potentially even more of a pryamide scheme and bordering on ponzi. Plus if Gold is such a no factor I makes me wonder what will happen down the road as Russia, China and other countries continue to buy and hord tons of it.

    I think some of the biggest issues lies in that for all the US's anti-socialist retoric they are starting to look a little facist. Capitalism has become a muzzled dog.
    As for Canadians? Let our sensibility prevail and take a good look at our debt service levels. Let's teach our kids that you can't have your cake and eat it too. First off you need to work hard and afford the ingredients. If used wisely you can then make a cake not just have it given to you.

    Anyways.. jmo

  2. I came up with a new term for folks who follow Warren Buffet in a sycophantic manner: Buffet bugs. This is a good term for those who refuse to read Zero Hedge. :-)