Four Things Barefoot Learned From Warren Buffet in 2008

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It’s 4am, Sunday morning or, for those of you under 30, Saturday evening.

Unable to sleep, I’m sitting in my flannel PJs squinting at my computer screen, waiting for legendary investor Warren Buffett’s annual letter to shareholders of his mega-successful company, Berkshire Hathaway.

Nervous anticipation?

Well, maybe a little. After all, I spent all year listening to what basically amounts to financial porn – bank economists who window-dress economic news to fit their employer’s views, eternally bullish fund managers and poll-watching politicians.

Not today.

Buffet’s legacy

Today is the one chance we get all year to tap into the brain of a man who started with nothing, and through investing skill alone became one of the richest men in the world.

Mr Buffett’s annual letters are required reading for serious investors (and after the year we’ve just had, that’s all of us).

Better yet, unlike the techno-babble that most experts use to confuse us, you’ll actually understand what the hell he’s on about. His writing style has been compared to a letter from your wise old uncle.

Recently, for example, the 78-year-old said the share market drop had created so many bargains that he felt like a mosquito in a nudist colony. (On second thoughts, maybe he is a little like your uncle – if your old man’s brother has achieved an investment return of 362,319 per cent since 1965).

Finally the 2008 letter arrives, and it fills up my social calendar for the rest of the weekend, reading and re-reading the messages it contains – and there are always messages. Here’s where my highlighter hit:

America’s best days lie ahead

Yes, that’s what he said, yet the majority of the media who’ve analysed this same letter have chosen not to spoil the funeral, focusing instead on Mr Buffett’s rather obvious assertion that the economy will be in shambles throughout this year and for that matter, probably well beyond.

That’s not news. Having the best investor in the world reassert his long-term faith in the economy at a time when everyone is bailing, however, is.

Never forget that our economy has faced far worse travails in the past – two great wars, a dozen panics and recessions – oh, and the Great Depression. America has had no shortage of challenges. Without fail, however, we’ve overcome them.

I did some dumb things in 2008

Even the best make mistakes. This year Mr Buffett lost several billion investing in an oil company just before the price retreated, and lost 89 per cent of his investment in two Irish banks. Yet he chose to protect his pocket rather than his ego – admitting his error, booking the loss, and moving on.

Take his lead. If there are any dogs in your portfolio, now’s the time to send them to the kennel. Don’t feel bad. Look at all the financial engineers from Babcock & Brown, Allco Finance and various hedge funds who flushed their financials down the toilet last year. It could be worse. Well, unless of course you invested your hard-earned with the smartest guys in the loo.

Prepare for an onslaught of inflation

The major consequence of governments spending (our) money like drunken sailors will be an onslaught of inflation.

That’s why Mr Buffett warned investors that clinging to cash is almost certainly a terrible policy if continued for long, and those who do will surely find its purchasing power eroded over time.

Fine for you, Warren. You’re an investment genius. What about the rest of us?

Well, conventional wisdom suggests you slay the inflation dragon by investing in growth assets like shares and property.

Yet over the next few years (and possibly a lot longer), we’re likely to see a continued massive de-leveraging occur.

OK, this time in English. What we’re seeing is investors reducing their debts by selling assets, and pushing prices down as they do it. With interest income being negligible, the only real respite for investors is to stack their portfolio with companies that pay fully franked dividends.

Yet be warned, many of our biggest companies will cut their dividends as we enter what looks like a deep and prolonged recession (including, most probably, all of the banks). So, with the bull out to pasture, forget about share price appreciation and instead focus on the income it puts in your pocket.

Beware the glib helper who fills your head with fantasies while he fills his pockets with fees

Actually, Mr Buffett made that statement in the previous year’s letter. He was warning investors that the days of achieving 10 per cent returns were over. To do so for the rest of the century would require the Dow Jones Index to hit 24 million by the year 2100 (it’s currently 6875).

This is perhaps the most important lesson that all investors need to learn from the coming crisis.

Mr Buffett was really having a dig at investment advisers, who know they couldn’t justify their percentage-based fees if clients knew the real deal. Mr Buffett describes these commission-based advisers as being apparently direct descendants of the queen in Alice in Wonderland, who said: “Why, sometimes I’ve believed as many as six impossible things before breakfast.”

Therein lies the real value of reading the Buffett letters. While I’m not as optimistic as Warren (at least in the short term anyway), his advice is straight up, and free from the blatant conflicts of interest that have served to bring world financial markets to their knees.

Tread your own path!
Photo: www.flickr.com/photos/stuckincustoms/2746960560/

* Berkshire Hathaway doesn’t have shareholders – it has part-owners. Scott Pape is proud to be one of them.
Weekend reading: Each investment letter dating back to 1977 is available for nix at www.berkshirehathaway.com

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