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The word from Warren Buffett

I don’t know how many of you had time to catch up with Warren Buffett’s annual appearance on the TV channel CNBC last week, timed to coincide with the appearance of his widely followed Letter to Shareholders, but I thought it might be useful to note the most important things that struck me from the transcript of his three-hour appearance. (Listening to the video of the show means having to sit through a lot of banter from the presenters, not to mention regular commercial breaks, making it a far too time-consuming way for most people to keep track of what he had to say).

This is my quick and dirty summary of the main things he had to say:

He thinks that the Federal Reserve has done enough monetary stimulus with the QE2 programme of quantitative easing.  US monetary and fiscal stimulus combined will be equal to 10% of GDP this year, a massive amount. Stimulus was important in fending off the banking crisis, but now it is time to trust in the “natural regenerative capacity of capitalism”. Again, in his words: “There is a resiliency to the American system. It does work”.

The evidence from Berkshire Hathaway’s vast array of companies it owns is that business is beginning to pick up for some of them. The slow and uneven progress towards recovery has so far created only about 3,000 more jobs, about 1% of the total payroll. Jobs have been added more slowly than the increase in sales. Buffett guesses that unemployment could be down to 7% by the time of the next Presidential election in 2012. Berkshire’s cap ex will be up from $6bn to $8bn this year.

The markets are right to be worried about short term shortages of oil supplies because of the situation in the Middle East, but they do of course anticipate future supply-driven price spikes that may or may not happen. Commodity prices have a habit of overshooting. But they won’t make much difference to the long term profitability of global companes, such as Coca-Cola, the ones that Buffett invests in.

Bonds should be a no-go area. “When people ran to cash because they were afraid of everything [during the crisis], they were really going to the worst investment, you know, that is possible”. Bonds won’t be much better.”I do not like short term bonds, and I do not like long term bonds. And if you push me, I’m sure I don’t like intermediate  term bonds either. I just think it is a terrible mistake to buy into fixed dollar investments at these kind of rates”.

Buffett remains uninterested in commodities, including gold, because they produce no tangible or sustainable returns, unlike good quality equities. Putting money into commodities is for speculators, not for investors. All the gold in the world would fill a cube with sides of just 67 feet and be worth around $7 trillion. Given the choice, with that sort of money,  Buffett would rather own real assets. He could buy all the farmland in the United States ($2.5 trillion) three times over, or a third of all the shares in the United States market for the same money.

Buffett has been adding to his holdings in Wells Fargo and Wal-Mart. He would have hung on to all his other holdings in railroads in the United States as well, had it not been thought advisable to sell them when he bought the Burlington Northern railroad, his big acquisition a couple of years ago. All the railroad companies are likely to do well from here. Equities in general look the best bet of all the asset classes.

After the retirement of Lou Simpson, who managed a decent chunk of money for Buffett’s insurance companies over the years, Buffett made sure that he sold the entire portfolio, inlcuding Nike and Bank of America. He never likes to inherit a portfolio from anyone, he said, however good the stocks might be, or the manager of the portfolio might be. He also expects both Goldman Sachs and GE to buy back the bonds he took from them at highly favourable prices during the financial crisis.

The only three ways out of the huge fiscal deficit in the United States are: (1) breaking prior promises and commitments (eg on pensions); (2) raising taxes a lot; and (3) inflating away some of the debt.  There is no surprise that politicians are likely to end up with inflation as the default option. “There is no way you can run the kind of deficits we’re running…..and it is true around the world, without it being enormously inflationary”. Inflation is always the easiest course to take and it is why paper money has “a lousy future”. And although inflation may now be only 1%-2%,  that doesn’t mean anything “If you jump off the 50th floor, at the 45th floor you should not judge the success of your effort by where you are at that point”.

The biggest scandal at the banks which led the world into the financial crisis was not that their bosses did not go to jail, but that they were allowed, by the terms of their contracts, which their boards signed off, to “walk away with hundreds of millions of dollars while the country suffered the consequences of some really terrible actions…… I don’t know whether it should put them in jail, but it should not put them in Cadillacs”.

All very wise and to the point, as always.

Written by Jonathan Davis

March 9, 2011 at 3:20 PM