When the going gets weird, the weird turn pro. - Hunter S. Thompson

03 March 2008

You only learn who has been swimming naked when the tide goes out

[Warren] 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.”

Buffett's State of the World: There's Folly in Wonderland (New York Times, 1 March 2008)

Related: Warren Buffett's 2007 Letter to Shareholders (BerkshireHathaway.com)

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