matters of the day as he just sent it along for your reading 'pleasure.'
----- Original Message -----
From: olcharlie
To: larry lewis
Sent: Saturday, March 01, 2008 8:54 AM
Subject: Buffett's State of the World: There's Folly in Wonderland
Buffett's State of the World: There's Folly in Wonderland
By FLOYD NORRIS
Published: March 1, 2008
The billionaire investor Warren E. Buffett disclosed Friday that he had
earned profits for shareholders of Berkshire Hathaway by speculating in the
Brazilian currency, the real, and by buying a large stake in a French
pharmaceutical company, Sanofi-Aventis.
He also complained that many other companies were overstating earnings, and
he expressed puzzlement that their auditors let them get away with it.
Mr. Buffett's annual letter to shareholders, which was released Friday, has
become something of a business institution, with the certainty that he will
offer caustic comments and the hope that he will shed light on his
investments.
This year, his scorn was aimed at the "financial folly" of lenders who
financed the housing boom, since vanished, and at companies that use rosy
assumptions of investment success to raise reported profits.
The comments, which were released after the market closed, came as Berkshire
reported that fourth-quarter profit fell 18 percent, in part because of
falling insurance rates. Net income decreased to $2.95 billion, or $1,904 a
share, from $3.58 billion, or $2,323, a year earlier.
Mr. Buffett offered no commentary on Berkshire's foray into the municipal
bond insurance business, and no explanation of why he spent $1.5 billion to
buy a 1.3 percent stake in Sanofi-Aventis.
But he was willing to say, in effect, "I told you so," in recalling his
warning a year ago about "weakened lending practices" in the mortgage
market.
"Just about all Americans came to believe that house prices would forever
rise," he wrote. "That conviction made a borrower's income and cash equity
seem unimportant to lenders, who shoveled out money, confident that H.P.A. —
house price appreciation — would cure all problems. Today, our country is
experiencing widespread pain because of that erroneous belief. As house
prices fall, a huge amount of financial folly is being exposed. You only
learn who has been swimming naked when the tide goes out — and what we are
witnessing at some of our largest financial institutions is an ugly sight."
His criticism of other companies was based on the fact that many assume
their pension funds will earn 8 percent a year from investments, a return he
deems unlikely given the low level of interest rates, but one that lets them
report higher profits now.
He compared money managers who promise double-digit returns to the queen in
"Alice in Wonderland," who proclaimed, "Why, sometimes I've believed as many
as six impossible things before breakfast." Mr. Buffett added, "Beware the
glib helper who fills your head with fantasies while he fills his pockets
with fees."
Mr. Buffett pointed out that some companies with pension plans in both
Europe and the United States assume better returns on the American plans
than the European ones.
"This discrepancy is puzzling," he said. "Why should these companies not put
their U.S. managers in charge of the non-U.S. pension assets and let them
work their magic on these assets as well? I've never seen this puzzle
explained. But the auditors and actuaries who are charged with vetting the
return assumptions seem to have no problem with it."
"What is no puzzle, however, is why C.E.O.s opt for a high investment
assumption: It lets them report higher earnings. And if they are wrong, as I
believe they are, the chickens won't come home to roost until long after
they retire."
Mr. Buffett also had harsh words for state and local governments. "Public
pension promises are huge and, in many cases, funding is woefully
inadequate. Because the fuse on this time bomb is long, politicians flinch
from inflicting tax pain, given that problems will only become apparent long
after these officials have departed. Promises involving very early
retirement — sometimes to those in their low 40s — and generous
cost-of-living adjustments are easy for these officials to make. In a world
where people are living longer and inflation is certain, those promises will
be anything but easy to keep."
He did not discuss why he wanted to insure municipal bonds issued by
governments making such promises.
Mr. Buffett also warned of lower profits ahead for the insurance industry,
which has benefited from two years without major disasters.
"That party is over," he said. "It's a certainty that insurance-industry
profit margins, including ours, will fall significantly in 2008. Prices are
down, and exposures inexorably rise."
Berkshire's investment in Sanofi-Aventis showed a profit of $109 million at
the end of the year, but that profit has since vanished as the share price
fell 23 percent in the first two months of 2008 amid concerns over possible
generic competition for its best-selling drug.
Berkshire's other major new stock investment in 2007, which was previously
disclosed, was Burlington Northern Santa Fe, the railroad. On a $4.7 billion
investment, Berkshire is now ahead by about $600 million.
Mr. Buffett said the company's only direct foreign currency exposure last
year was in the Brazilian real, an investment he conceded might seem odd.
"After all, during the past century, five versions of the Brazilian currency
have, in effect, turned into confetti," he said. But the real position
earned $100 million in 2007, according to the report.
olcharlie@netptc.net
will nap for food
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