Buffett Makes Unforced Errors… But Still Wins To Love

Warren Buffett’s annual letter to shareholders came out at the end of last week. It always makes for interesting reading and never more so than in the years when crisis hits. What I like most about Buffett’s words is that the message does not change: Buffett keeps his head when all around him are losing theirs.

Some may be surprised to see that the world’s greatest investor has, in his own words, done “some dumb things” during 2008 and made what a “tennis crowd would call … unforced errors”. However, this is characteristic of a man who can stand up, admit his mistakes, and take responsibility. What a refreshing contrast to so many of the politicians, bankers, and over leveraged institutions and individuals who have sought to place blame for their considerably larger errors elsewhere.

When we look at the numbers we realise that Buffett has not done too badly after all, particular when compared to his peers. Yes, it was Berkshire Hathaway’s worst performance in 44 years in terms of decrease in book value; and yet when compared to the S&P performance it ranks as the seventh best year (he outperformed the index by a punchy 27.4%).

With the world financial system in its worst state for some time the rules of value investing, as laid out by Benjamin Graham, remain as pertinent and sound as ever. The first goal of Berkshire Hathaway “in good years and bad” is:

“Maintaining Berkshire’s Gibraltar-like financial position, which features huge amounts of excess liquidity, near-term obligations that are modest, and dozens of sources of earnings and cash”

Both individuals and insitutions would do well to make this their own goal if they want to avoid a repeat of the present problems. History however suggests that even a shock like the current one will not ensure that such parametres will be taken on by most. As Buffett points out: America”has faced far worse travails in the past”.

To end on a positive note:

“America has had no shortage of challenges. Without fail, however, we’ve overcome them … 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. America’s best days lie ahead.”

The Sage of Omaha hasn’t got too much wrong over the last four decades, and if we play the percentages – as tennis crowds like to do – then we can be reassured that the above statement will not rank amongst his “unforced errors”.

Why Gordon Can’t Shred Fred’s Pension

It is now well documented that the government “approved” Sir Fred Goodwin’s pension package when it took over RBS. The problem was no  one in the Treasury actually bothered to check what they were approving. It now emerges that Gordon Brown only became aware that the package was “discretionary” in “the last few days” and at the time of the takeover the RBS board “gave the impression” that this was not the case.

If this is true, I find it depressing (if not unsurprising) that the government, before splashing out £20 billion of taxpayers’ money, relied on the “impression” given by the bankers who helped to create this mess. Imagine you had to buy a car and had no option but to go to the most disreputable second hand salesman in town. His reputation had been ruined after years of selling over-priced cars that worked for the short-term before breaking down. You probably wouldn’t accept the salesman’s words at face value when he asserted “nothing wrong with that guv”. The sensible course would be, at the very least, to kick the tyres and beyond that to get a qualified mechanic to see what gremlins lay within before getting the cheque book out. It has now become apparent that ministers didn’t even kick the tyres, let alone get their mechanics (lawyers and accountants in this case) to look into the detail. Instead they relied on those who had most to gain from them doing the opposite. This leaves ministers in the position where all they can do now is whinge from the sidelines, express how “angry” they are and describe the episode as “unfortunate”. The government made itself and taxpayers hostages to fortune when they spent such an enormous sum without doing their homework.

And what of Sir Fred’s position? Of course he doesn’t deserve the pension after his performance, especially one paid for by taxpayers. However, I can understand why he is in no mood to do the Prime Minister and the Chancellor a costly favour. The government have done everything they can to pin the entire crisis on him and his colleagues; humiliate him in front of – for the most part – an ignorant, uninformed and unqualified Treasury Select Committee; and done this to divert any blame away from their own substantial failings. I doubt that the current crop of spineless politicians will stand up and take even a modicum of responsibility; they certainly wouldn’t entertain giving up their own state funded pensions after their poor performance. Given the government’s track record so far, I’m beginning to think that Sir Fred spending his pension on cleaners, chauffeurs and staff would be a better way of stimulating the economy than letting Gordon Brown get his clunking fists on it.