Warren Buffet and The Finanacial "Pearl Harbor"

As many readers may have noticed, I am not a big fan of capitalism as it is currently constituted. Nevertheless, I am a big fan of one of capitalism's leading lights, Warren Buffet. The genial Mr. Buffet is, perhaps, the most successful investor Wall Street has ever known. The irony is that he never gets anywhere near Wall Street; he lives in the Omaha home he bought in 1958 for $31,000. Granted, he also has a summer home in Laguna Beach, worth some $4 million, but these are modest accommodations for a man who may be the richest in the world.

Buffet's company, Berkshire Hathaway, is likely the most successful firm in the world, judged by the return to investors. The book value of the firm, from its founding in 1965 to last year, grew by an annual compounded rate of 21%/year, which is 10.8% above the S&P 500. The total increase in value over that period is in excess of 400,000%. Not bad for a country boy.

But aside from avoiding Wall Street and living a relatively modest lifestyle, Buffet is unusual in other ways. He believes that the rich pay far too little in taxes. He also believes capital gains should be taxed at the same rate that wages are. This is significant, since Mr. Buffet's salary for running B-H is only $100,000/year; no golden parachutes here! His fortune is entirely the result of his investment expertise. He decries the fact that, as the world's richest man, he pays a proportionately lower share of his income in taxes than does the lady who cleans the office. He also points out, to those who claim that the rich pay too much, that they are ignoring the effects of the Social Security taxes, which raise almost as much as the income taxes, but are only levied on the first $100k or so of income. This means that the less you make, the higher the proportion you pay in taxes.

Like the E. F. Hutton ad of years ago, When Warren Speaks, the Nation (ought) to listen. And Warren spoke with Charlie Rose last week for an hour. For those of you who didn't hear it, here it is:

Mr. Buffet believes that we are in the midst of a “financial Pearl Harbor.” The meltdown will last at least six months, but more likely several years. He supports the bailout, but he thinks the public should buy the toxic paper the banks are trying to foist off on us at their current market value. This is an important point (see “Market Mysticism”) since the banks want us to buy this stuff at its “mark-to-model” value, which means, in effect, any old price the banks put on it. If we buy this stuff at its market price, the public will get a good return on its investment.

As a matter of full disclosure, I am a stockholder in Berkshire Hathaway. But this old distributist will listen to the old capitalist. Pearl Harbor was a rather severe wake-up call. This melt-down is another. How will we respond? Trouble in life is inevitable; the real test, for a person or a nation, is how we deal with it.

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Warren Buffet and Market Myths

I do not claim to be a market guru, but I do claim to know of someone who is: Warren Buffet, easily the smartist man on Wall Street, perhaps because he stays as far away from Wall Street as possible. One of the richest men in the world, and certainly the greatest investor in modern history, he lives a comparatively modest life in Omaha, Nebraska. I found these words of his enlightening:
Many institutions that publicly report precise market values for their holdings or CDOs and CMOs are in truth reporting fiction. They are marking to model rather than marking to market. The recent meltdown in much of the debt market, moreover, has transformed this process into marking to myth.

Because many of these institutions are highly leveraged, the difference between "model" and "market" could deliver a huge whack to shareholders' equity. Indeed, for a few institutions, the difference in valuations is the difference between what purports to be robust health and insolvency. For these institutions, pinning down market values would not be difficult: They should simply sell 5% of all the large positions they hold. That kind of sale would establish a true value, though one still higher, no doubt, than would be realized for 100% of an oversized and illiquid holding.

In one way, I'm sympathetic to the institutional reluctance to face the music. I'd give a lot to mark my weight to "model" rather than to "market."

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