Warren Buffett’s annual Letter to Shareholders is always worth reading even if you didn’t own any shares in Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B). Here are some of the highlights from 2010 letter to shareholders released over the weekend and available on the Berkshire Hathaway website:

  • Conventional wisdom has it that America’s best days are behind it and economic might is going to inevitably shift eastward. Buffett, however, is optimistic about America’s prospects. He says that the country’s best days lie ahead because America’s system for unleashing the human potential is the same it has been in the past. (Pages 3-4).
  • If you invest is stocks, you have to have confidence that management will invest retained earnings sensibly. Buffett points out that a dollar of earnings in the hands of Sears Roebuck’s CEO had a far different story than a dollar entrusted with Sam Walton. (Pages 7-8).
  • Next, Buffett explains the business results in Insurance (Pages 8-11), Berkshire’s vast empire selling everything from candies to underwear (Pages 12-14), Railroads and utilities (Pages 14-15) and stock holdings. (Pages 17-18).
  • Buffett warns investors against putting too much stock in net earnings, which can be gamed by management. Instead, he counsels investors to pay close attention to changes in book value and a company’s operating earnings. (Pages 20-21).
  • Buffett counsels investors to eschew leverage, which can magnify gains but can turn lethal to a portfolio. Instead, he explains why despite very low interest rates investors Berkshire keeps plenty of cash around just in case things go horribly wrong as they did in September 2008. If there is only one thing you can read in this year’s letter, it should be Pages 22 to 25.


On Leverage: “And as we all learned in third grade – and some relearned in 2008 – any series of positive numbers, however impressive the numbers may be, evaporates when multiplied by a single zero. History tells us that leverage all too often produces zeroes, even when it is employed by very smart people.”

On reaching for yield: “We agree with investment writer Ray DeVoe’s observation, “More money has been lost reaching for yield than at the point of a gun.””

On availability of credit: “Borrowers then learn that credit is like oxygen. When either is abundant, its presence goes unnoticed. When either is missing, that’s all that is noticed. Even a short absence of credit can bring a company to its knees.”

On market volatility: “As one investor said in 2009: “This is worse than divorce. I’ve lost half my net worth – and I still have my wife.””

On homeownership: “But a house can be a nightmare if the buyer’s eyes are bigger than his wallet and if a lender – often protected by a government guarantee – facilitates his fantasy. Our country’s social goal should not be to put families into the house of their dreams, but rather to put them into a house they can afford.”

This article has 18 comments

  1. Buffett’s quotes are classic! Regarding the demise of the American economy, I agree and find the comparisons to the fall of the Roman Empire to be just a tad overstated.

    Were there any mentions of the hundreds of millions BRK made off of derivatives last year? I guess they aren’t the ‘time bombs’ he thought they were in the past.

  2. I liked the part where Buffett warns about flexibility in accounting rules. He even applies this warning to Berkshire Hathaway — which had net income rise from $8B in 2009 to $13B in 2010. This doesn’t mean much, Buffett said, because “Charlie and I could – quite legally – cause net income in any given period to be almost any number we would like.”

  3. While I can agree that the short term, America’s capitalist system is better at unleashing human capital. But in the long term, the fiscal imbalance and the demographics are working against America.

    Clearly, US Governments at all levels need to learn to live within their means and guess who is holding all of their debt? The East.

    The statistics are also astounding. I had seen a BNN article saying that universities in China are graduating more engineers every single year than Canada has engineers, total. And they would all gladly accept 1/10th our compensation. I know that I’m not willing to work for 1/10th of my pay, so you have to ask yourself where this is all going? There isn’t a single job, whether vocational or professional, that somebody in India or China can’t do at 1/10th the pay.

    For me, I’m just hoping to squeak into retirement before this new world order finally kicks in and everything is outsourced to the East…

  4. @ECHO – he doesn’t mean EVERY derivative is a timebomb, he just felt (correctly, in fact) that the vast volumes of deriviatives, and the leverage that was associated with these complex instruments posed huge risks to the system. Buffett clearly understands the risks and potential obligations he is taking with the deriviatives he has entered and explains this quite concisely in the letter.

  5. @Phil – I am with you on this although I think what is happening in Wisconsin potentially shows the tipping point of the fiscal imbalance starting to reverse.

    This will either work and America begins to strengthen again, or it doesn’t and they print their way out of it and inflate teh obligations away. I don’t see any other alternatives.

    Sorry. I promise never to use the term “tipping point” again. Never.

  6. Buffett’s letters are always a good read. I did like the explanation of how net income could be easily gamed.

    For those who hope to squeak into retirement before eastern countries take all our jobs, who do you think will pay for your retirement if this doomsday scenario plays out?

  7. @Echo: Yes, as always, Buffett mentioned and explained the derivatives. He treats them as selling insurance and explains how he plans to make money off them. He also explains why the derivatives he is selling are not weapons of mass destruction: they are fully backed up by capital and have no collateral requirements.

    @Larry: Every time, I read Buffett’s letter, I realize how difficult a stock picker’s job is. They have to study the financial reports closely and to gain an edge they have to obtain insights that other investors reading the same statements are missing out.

    @Phil: I don’t disagree that America has significant problems. But it also has significant strengths. I don’t know much about China but I know India more intimately than most people. Though India has many advantages — low-cost, skilled man power, for instance — they also have significant problems. Corruption, inflation especially in food, overheated real estate, very poor infrastructure (this isn’t a problem in China) etc. These emerging markets have potential but also daunting challenges.

    @Rob: America’s current debt isn’t all that bad compared to their economy. It’s just that they can’t keep adding to it indefinitely at their current pace. The political will to act on it though seems to be lacking at least until now.

    @Michael: I agree. If all our jobs are exported, who is going to buy all the junk that powers the export economies?

  8. @CC. No doubt in the short term do I believe that America still has some room to run. The Euro experiment is a great concept but it now seems to be splitting apart at the seams. Also, history suggests that when the Asian tigers want to cool off their economies, it will be mismanaged and it will likely end in another catastrophe.

    So, I’m hoping that the West will be OK for the next 20 yrs until I retire. After that, the long term prospects look like the balance of power will shift to the East. First economic power, then military power will follow.

  9. I understand why there are books written about quotes by Buffet. He’s a bright guy isn’t he 🙂

  10. LeadingEdgeBoomer

    I see that Berkshire Hathaway,s NetJets Inc has placed a huge order for jets with Bombardier, . Bombardier shares up quite a bit at today,s opening. Seeing as i own shares, a big thanks to Mr Buffet.

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  16. Another interesting annual letter would be from Baupost’s Seth Klarman… Tons of info on par to Buffetts

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