August 19, 2009

Op-Ed Contributor

The Greenback Effect

By WARREN E. BUFFETT

Omaha

IN nature, every action has consequences, a phenomenon called the butterfly effect. These consequences, moreover, are not necessarily proportional. For example, doubling the carbon dioxide we belch into the atmosphere may far more than double the subsequent problems for society. Realizing this, the world properly worries about greenhouse emissions.

The butterfly effect reaches into the financial world as well. Here, the United States is spewing a potentially damaging substance into our economy — greenback emissions.

To be sure, we’ve been doing this for a reason I resoundingly applaud. Last fall, our financial system stood on the brink of a collapse that threatened a depression. The crisis required our government to display wisdom, courage and decisiveness. Fortunately, the Federal Reserve and key economic officials in both the Bush and Obama administrations responded more than ably to the need.

They made mistakes, of course. How could it have been otherwise when supposedly indestructible pillars of our economic structure were tumbling all around them? A meltdown, though, was avoided, with a gusher of federal money playing an essential role in the rescue.

The United States economy is now out of the emergency room and appears to be on a slow path to recovery. But enormous dosages of monetary medicine continue to be administered and, before long, we will need to deal with their side effects. For now, most of those effects are invisible and could indeed remain latent for a long time. Still, their threat may be as ominous as that posed by the financial crisis itself.

To understand this threat, we need to look at where we stand historically. If we leave aside the war-impacted years of 1942 to 1946, the largest annual deficit the United States has incurred since 1920 was 6 percent of gross domestic product. This fiscal year, though, the deficit will rise to about 13 percent of G.D.P., more than twice the non-wartime record. In dollars, that equates to a staggering $1.8 trillion. Fiscally, we are in uncharted territory.

Because of this gigantic deficit, our country’s “net debt” (that is, the amount held publicly) is mushrooming. During this fiscal year, it will increase more than one percentage point per month, climbing to about 56 percent of G.D.P. from 41 percent. Admittedly, other countries, like Japan and Italy, have far higher ratios and no one can know the precise level of net debt to G.D.P. at which the United States will lose its reputation for financial integrity. But a few more years like this one and we will find out.

An increase in federal debt can be financed in three ways: borrowing from foreigners, borrowing from our own citizens or, through a roundabout process, printing money. Let’s look at the prospects for each individually — and in combination.

The current account deficit — dollars that we force-feed to the rest of the world and that must then be invested — will be $400 billion or so this year. Assume, in a relatively benign scenario, that all of this is directed by the recipients — China leads the list — to purchases of United States debt. Never mind that this all-Treasuries allocation is no sure thing: some countries may decide that purchasing American stocks, real estate or entire companies makes more sense than soaking up dollar-denominated bonds. Rumblings to that effect have recently increased.

Then take the second element of the scenario — borrowing from our own citizens. Assume that Americans save $500 billion, far above what they’ve saved recently but perhaps consistent with the changing national mood. Finally, assume that these citizens opt to put all their savings into United States Treasuries (partly through intermediaries like banks).

Even with these heroic assumptions, the Treasury will be obliged to find another $900 billion to finance the remainder of the $1.8 trillion of debt it is issuing. Washington’s printing presses will need to work overtime.

Slowing them down will require extraordinary political will. With government expenditures now running 185 percent of receipts, truly major changes in both taxes and outlays will be required. A revived economy can’t come close to bridging that sort of gap.

Legislators will correctly perceive that either raising taxes or cutting expenditures will threaten their re-election. To avoid this fate, they can opt for high rates of inflation, which never require a recorded vote and cannot be attributed to a specific action that any elected official takes. In fact, John Maynard Keynes long ago laid out a road map for political survival amid an economic disaster of just this sort: “By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.... The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”

I want to emphasize that there is nothing evil or destructive in an increase in debt that is proportional to an increase in income or assets. As the resources of individuals, corporations and countries grow, each can handle more debt. The United States remains by far the most prosperous country on earth, and its debt-carrying capacity will grow in the future just as it has in the past.

But it was a wise man who said, “All I want to know is where I’m going to die so I’ll never go there.” We don’t want our country to evolve into the banana-republic economy described by Keynes.

Our immediate problem is to get our country back on its feet and flourishing — “whatever it takes” still makes sense. Once recovery is gained, however, Congress must end the rise in the debt-to-G.D.P. ratio and keep our growth in obligations in line with our growth in resources.

Unchecked carbon emissions will likely cause icebergs to melt. Unchecked greenback emissions will certainly cause the purchasing power of currency to melt. The dollar’s destiny lies with Congress.

Warren E. Buffett is the chief executive of Berkshire Hathaway, a diversified holding company.

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Battery maker remains `unattractive' after share sale

19/05/2009

Morgan Stanley yesterday raised the target price of BYD Company (1211) by 70 percent to HK$16.5, but still maintains an "unattractive" evaluation on its stock performance. BYD president Wang Chuanfu on Friday sold all his 11.2 million H shares in the company for HK$280 million, or HK$25 each, about 10 percent below the market price. He still holds 27.8 percent of the total issued share capital. "Wang's share disposal was carried out at the behest of Chinese regulators and not due to any concerns over the company's future development." Bank of China International analyst Frank He said. "The company is still awaiting central government approval to sell 225 million shares to Warren Buffett's MidAmerican Energy." Buffett last year said he would buy a 10 percent stake in electric vehicle maker BYD - a deal which is still in process. BYD said it is scheduled to launch its first all-electric car, the E6, in the second half. "We think intensifying competition in handset components and batteries will put great pressure on BYD's margin outlook in what is a fragile market. We retain our Underweight rating." said a Morgan Stanley research report out yesterday. Morgan Stanley said while BYD's move to solar batteries and industrial power storage businesses may offer long-term growth potential, these plans are in their early stages and expected to contribute hardly any immediate revenue in 2009. "The share price has almost doubled since April 2009 and the stock now trades at P/E multiples of 41 times for 2009 earnings against our estimate. We see the current valuation as demanding. "We believe the near-term catalyst for the stock will be battery shipments to European and North American automakers... we reiterate our "sell" rating for BYD," He wrote. The stock dipped 0.60 percent to end at HK$26.80 yesterday.

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Buffett Withholds Hoopla, Hope

• MAY 4, 2009

At Annual Meeting, Investor Sees More Pain After Berkshire's Worst Year

By SCOTT PATTERSON and ALISTAIR BARR

At an event that is typically filled with hoopla, Warren Buffett spent much of his company's shareholder gathering this weekend defending a rough year. And he didn't hold out much hope in the near term for better results in many of Berkshire Hathaway Inc.'s businesses.

"We will continue to do quite well in our insurance and utility operations. We won't do well in other operations," Mr. Buffett said.

But Mr. Buffett was upbeat about opportunities for Berkshire, saying he believes the company is well positioned to capitalize on current market turmoil.

Berkshire last year suffered its worst year ever. Among its hard hit holdings were Wells Fargo & Co., and Moody's Investors Service. Berkshire's shares have fallen more than 30% since the end of September.

Mr. Buffett this weekend fretted that bank stocks could suffer further, thanks to the government's current stress tests of financial firms. His worry: Regulators might paint with too broad a brush and fail to recognize strengths that differentiate companies.

View Full Image

Associated Press

Warren Buffett toured the exhibit floor prior to the annual Berkshire Hathaway shareholders meeting.

"Maybe the whole idea is not such a hot idea," said Berkshire Vice Chairman Charles Munger.

A representative of the Federal Reserve declined comment.

Mr. Buffett said he is especially interested in U.S. deals. "We're always open to things internationally," he said, "probably a little less so now because there are things going on in the United States that are interesting to us."

Still, Berkshire's ability to do many deals may be hampered by a decline in its cash position. The company has roughly $20 billion, down from about $25 billion in cash at the end of 2008. Mr. Buffett has frequently said he would never let his cash go below $10 billion, leaving Berkshire about $10 billion to put to work.

Mr. Buffett predicted more doldrums for retail, manufacturing and services businesses, and offered little hope for newspapers.

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Housing, at least in medium- and lower-end markets, is seeing a pickup in activity, albeit at lower prices, the famed investor said.

He surprised his audience Saturday by sharing some results for the company's first-quarter performance. Operating profits declined to $1.7 billion from $1.9 billion a year earlier, he said. Full results are expected Friday.

Regarding succession, Mr. Buffett has said he plans to split the chief executive and chief investment officer roles. He said Saturday the four money managers who may oversee Berkshire's investment portfolios in the future did no better last year than match the S&P 500's 37% decline. "You would not say that they covered themselves with glory," he said. "I didn't either."

"I have not changed the list" of possible people for the job, Mr. Buffett said, but "we're always looking to add more people to it."

Write to Scott Patterson at scott.patterson@wsj.com and Alistair Barr at alistair.barr@marketwatch.com

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Buffett says economy fell off cliff, fears inflation

Economy near worst-case scenario, won't recover fast

* Democrats, Republicans should set aside differences

* Banks should "get back to banking"

(Adds Buffett comments throughout)

By Jonathan Stempel

NEW YORK, March 9 (Reuters) - Warren Buffett said on Monday the U.S. economy had "fallen off a cliff" but would eventually recover, although a rebound could kindle inflation worse than that experienced in the late 1970s.

Speaking on CNBC television, the 78-year-old billionaire said the country is experiencing a "close to the worst-case" scenario of falling business activity and rising unemployment, causing consumer confidence and spending to tumble.

Buffett called on Democrats and Republican policymakers to set aside partisan differences and unite under the leadership of President Barack Obama to wage an "economic war" that will fix the economy and restore confidence in banking.

He urged policymakers and regulators to communicate their efforts better to the public, though he stopped short of major, specific policy recommendations.

"People are confused and scared," he said. "People can't be worried about banks, and a lot of them are."

Buffett spoke nine days after his insurance and investment company Berkshire Hathaway Inc <BRKa.N> <BRKb.N> said quarterly profit fell 96 percent, largely from losses on derivatives contracts. Berkshire's book value per share fell 9.6 percent in 2008, the worst year since Buffett took over in 1965.

RECOVERY COULD TRIGGER MORE INFLATION

Buffett said Americans, including himself, did not predict the severity of home price declines, which led to problems with securitizations and other debt whose value depended on home prices continuing to rise, or at least not plummet.

"It was like some kids saying the emperor has no clothes, and then after he says that, he says now that the emperor doesn't have any underwear either," Buffett said. "We want to err on the side next time of not allowing big institutions to get as unchecked on leverage as we have allowed them to do."

He said, though, that efforts to stimulate the economy could trigger higher inflation once demand rebounds.

"We are certainly doing things that could lead to a lot of inflation," he said. "In economics there is no free lunch."

The stock of Omaha, Nebraska-based Berkshire has fallen by half since September, with growth in some units such as auto insurer Geico Corp offset by weakness elsewhere, including jewelry retailers that Buffett said have "gotten killed."

Buffett said Berkshire will write less catastrophe insurance this year after investing roughly one-third of its cash in high-yielding securities issued by General Electric Co <GE.N>, Goldman Sachs Group Inc <GS.N> and other companies.

He also said the economy had been mere hours away from collapse last September when credit markets seized up, Lehman Brothers Holdings Inc <LEHMQ.PK> went bankrupt and insurer American International Group Inc <AIG.N> got its first bailout. "The world almost did come to a stop," he said.

While acknowledging that the economy "can't turn around on a dime," Buffett said it will be "running fine" in five years. "This country will work fine even if we screw it up," he said.

In morning trading, Berkshire Class A shares were down $1,705, or 2.3 percent, at $71,490. Their 52-week high is $147,000, set last Sept. 19, Reuters data show.

BANKS SHOULD "GET BACK TO BANKING"

Buffett called on banks to "get back to banking" and said an overwhelmingly number would "earn their way out" of the recession, even if stockholders don't go along for the ride.

Saying that "a bank that's going to go broke should be allowed to go broke," Buffett nevertheless added that the "paralysis of confidence" in the sector is "silly" because of safeguards such as deposit insurance.

He said Wells Fargo & Co <WFC.N> and U.S. Bancorp <USB.N>, two large Berkshire holdings, should appear "better than ever" three years from now, while the ailing Citigroup Inc <C.N>, which Berkshire does not own, would probably keep shrinking.

Consumers, meanwhile, should reduce their dependence on credit cards, he said. "I can't make money borrowing money at 18 or 20 percent," said Buffett, whom Forbes magazine in October said was the second-richest American. "I'd go broke."

He said he still expects Berkshire's derivatives contracts, whose value depends on where four stock indexes trade a decade and more from now, to be profitable.

He said that over 10 years, "you will do considerably better owning a group of equities" than U.S. Treasuries.

Buffett also defended his imperfectly timed October opinion piece for The New York Times, where he said he was moving non-Berkshire holdings in his personal account to stocks.

"I stand by the article," he said. "I just wish I had written it a few months later." (Reporting by Jonathan Stempel; Additional reporting by Lilla Zuill; Editing by Lisa Von Ahn and John Wallace) Keywords: BUFFETT/

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Highlights of Buffett's Letter

Warren Buffett's Berkshire Hathaway on Saturday released its annual letter, known well for its folksy writing and wit. Here are some of the highlights:

On His Investments

During 2008 I did some dumb things in investments. I made at least one major mistake of commission and several lesser ones that also hurt. … Furthermore, I made some errors of omission, sucking my thumb when new facts came in that should have caused me to re-examine my thinking and promptly take action.

* * *

By yearend, investors of all stripes were bloodied and confused, much as if they were small birds that had strayed into a badminton game.

* * *

We're certain, for example, that the economy will be in shambles throughout 2009 -- and, for that matter, probably well beyond -- but that conclusion does not tell us whether the stock market will rise or fall.

* * *

On the Economy

This led to a dysfunctional credit market that in important respects soon turned non-functional. The watchword throughout the country became the creed I saw on restaurant walls when I was young: "In God we trust; all others pay cash."

* * *

In poker terms, the Treasury and the Fed have gone 'all in.' Economic medicine that was previously meted out by the cupful has recently been dispensed by the barrel. These once-unthinkable dosages will almost certainly bring on unwelcome aftereffects.

* * *

Whatever the downsides may be, strong and immediate action by government was essential last year if the financial system was to avoid a total breakdown. Had that occurred, the consequences for every area of our economy would have been cataclysmic. Like it or not, the inhabitants of Wall Street, Main Street and the various Side Streets of America were all in the same boat.

* * *

Amid this bad news, however, never forget that our country has faced far worse travails in the past. … America has had no shortage of challenges.

* * *

Local governments are going to face far tougher fiscal problems in the future than they have to date. The pension liabilities I talked about in last year's report will be a huge contributor to these woes. Many cities and states were surely horrified when they inspected the status of their funding at yearend 2008. The gap between assets and a realistic actuarial valuation of present liabilities is simply staggering.

• Read more in Real Time Economics

* * *

On Derivatives

Improved "transparency" -- a favorite remedy of politicians, commentators and financial regulators for averting future train wrecks -- won't cure the problems that derivatives pose. I know of no reporting mechanism that would come close to describing and measuring the risks in a huge and complex portfolio of derivatives. Auditors can't audit these contracts, and regulators can't regulate them. When I read the pages of "disclosure" in 10-Ks of companies that are entangled with these instruments, all I end up knowing is that I don't know what is going on in their portfolios (and then I reach for some aspirin).

* * *

On Housing

The present housing debacle should teach home buyers, lenders, brokers and government some simple lessons that will ensure stability in the future. Home purchases should involve an honest-to-God down payment of at least 10% and monthly payments that can be comfortably handled by the borrower's income. That income should be carefully verified.

* * *

Warren Buffett

Putting people into homes, though a desirable goal, shouldn't be our country's primary objective. Keeping them in their homes should be the ambition.

* * *

Last year was a terrible year for home sales, and 2009 looks no better. We will continue, however, to acquire quality brokerage operations when they are available at sensible prices.

* * *

On Risk

When the financial history of this decade is written, it will surely speak of the Internet bubble of the late 1990s and the housing bubble of the early 2000s. But the U.S. Treasury bond bubble of late 2008 may be regarded as almost equally extraordinary.

* * *

On Berkshire in 2008

This means that our $58.5 billion of insurance "float" -- money that doesn't belong to us but that we hold and invest for our own benefit -- cost us less than zero. In fact, we were paid $2.8 billion to hold our float during 2008. Charlie and I find this enjoyable.

* * *

Berkshire is always a buyer of both businesses and securities, and the disarray in markets gave us a tailwind in our purchases. When investing, pessimism is your friend, euphoria the enemy.

* * *

Additionally, the market value of the bonds and stocks that we continue to hold suffered a significant decline along with the general market. This does not bother Charlie and me. Indeed, we enjoy such price declines if we have funds available to increase our positions.

* * *

Similarly, when we purchased PacifiCorp in 2006, we moved aggressively to expand wind generation. Wind capacity was then 33 megawatts. It's now 794, with more coming. (Arriving at PacifiCorp, we found "wind" of a different sort: The company had 98 committees that met frequently. Now there are 28.)

* * *

Some years back our competitors were known as "leveraged-buyout operators." But LBO became a bad name. So in Orwellian fashion, the buyout firms decided to change their moniker. What they did not change, though, were the essential ingredients of their previous operations, including their cherished fee structures and love of leverage. Their new label became "private equity" …

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Warren Buffett on the Economy

Warren Buffett on the Economy

Warren Buffett’s annual letter to shareholders offers plenty of investing insight, and we encourage you to follow our colleagues at WSJ.com as they dissect it. At Real Time Economics, we take particular interest in Mr. Buffett’s view of the economy and government policy.

Buffet has insight into the economy. (Associated Press)

It’s hardly shocking that Mr. Buffett would believe the economy, gripped by fear, “will be in shambles throughout 2009.” What he tacked onto that assessment — “and, for that matter, probably well beyond” — is troubling for the lack of any near-term optimism. But it’s also not a surprise. (The great investor notes that his assessment of the economy “does not tell us whether the stock market will rise or fall.” Some of his readers might hope for the market to just remain flat for now.)

Mr. Buffett at times praises the Federal Reserve and other wings of the U.S. government for their response to the crisis. In a discussion of the derivatives “time bomb,” for instance, he supports Tim Geithner — “then the able president of the New York Fed” — for preventing Bear Stearns’s failure and avoiding a financial collapse by chain reaction. “In my opinion, the Fed was right to do so,” Mr. Buffett says.

But his assessment of what the central bank response will create over the long term — a likely “onslaught of inflation” — may cause some heartburn in the months ahead for Fed Chairman Ben Bernanke and other officials who are trying to argue they can withdraw their many programs when they need to. While Mr. Buffett clearly backs most of the government response, he doesn’t think the exit will be easy.

Here’s Mr. Buffett’s precise wording in full:

“This debilitating spiral has spurred our government to take massive action. In poker terms, the Treasury and the Fed have gone ‘all in.’ Economic medicine that was previously meted out by the cupful has recently been dispensed by the barrel. These once-unthinkable dosages will almost certainly bring on unwelcome aftereffects. Their precise nature is anyone’s guess, though one likely consequence is an onslaught of inflation.

“Moreover, major industries have become dependent on Federal assistance, and they will be followed by cities and states bearing mind-boggling requests. Weaning these entities from the public teat will be a political challenge. They won’t leave willingly. Whatever the downsides may be, strong and immediate action by government was essential last year if the financial system was to avoid a total breakdown. Had that occurred, the consequences for every area of our economy would have been cataclysmic. Like it or not, the inhabitants of Wall Street, Main Street and the various Side Streets of America were all in the same boat.”

Mr. Buffett is quick to note that “our country has faced far worse travails in the past” with a dozen panics and recessions in the 20th century, “virulent inflation” in 1980 and, of course, the Great Depression in the 1930s.

“Without fail, however, we’ve overcome them,” he writes. “In the face of those obstacles – and many others – the real standard of living for Americans improved nearly seven-fold during the 1900s, while the Dow Jones Industrials rose from 66 to 11,497. Compare the record of this period with the dozens of centuries during which humans secured only tiny gains, if any, in how they lived. Though the path has not been smooth, our economic system has worked extraordinarily well over time. It has unleashed human potential as no other system has, and it will continue to do so. America’s best days lie ahead.”

Among the many other notable points in the letter:

* On homeownership, Mr. Buffett says the housing mess teaches that home purchases should require “an honest-to-God down payment of at least 10% and monthly payments that can be comfortably handled by the borrower’s income.” That income must be verified, of course. “Putting people into homes, though a desirable goal, shouldn’t be our country’s primary objective. Keeping them in their homes should be the ambition.”

* He says the lending operation of Clayton Homes, the largest player in the manufactured-home industry, is being threatened by having to compete with funders that have worse credit than Berkshire Hathaway. Firms that are backed by government guarantees — banks with FDIC support, issuers of commercial paper backed by the Fed, and others getting themselves under the government umbrella — have “minimal” money costs, Mr. Buffett says. Highly-rated firms such as AAA-rated Berkshire face record borrowing costs in relation to Treasury rates. At the same time, funds are “abundant” for government-backed borrowers but “scarce” for others. “This unprecedented ’spread’ in the cost of money makes it unprofitable for any lender who doesn’t enjoy government-guaranteed funds to go up against those with a favored status,” he writes. “Government is determining the ‘haves’ and ‘have-nots.’”

* We’re now in a world of overpricing risk rather than underpricing it, pushing yields up for municipal or corporate bonds and knocking them down to near zero for short-term government bonds “and no better than a pittance” for long-term government securities. “When the financial history of this decade is written, it will surely speak of the Internet bubble of the late 1990s and the housing bubble of the early 2000s. But the U.S. Treasury bond bubble of late 2008 may be regarded as almost equally extraordinary. Clinging to cash equivalents or long-term government bonds at present yields is almost certainly a terrible policy if continued for long.”

* Mr. Buffett rails against derivatives, which increased risks to the financial system and “made it almost impossible” to understand the largest commercial and investment banks. He devotes considerable attention to knocking Fannie Mae and Freddie Mac and how derivatives allowed the mortgage giants to misstate earnings for years. He takes repeated jabs at their regulator, then the Office of Federal Housing Enterprise Oversight (now the Federal Housing Finance Agency), for taking so long to recognize the problems at the firms.

* And we can’t leave you without sharing Mr. Buffett’s description of the troubles entailed in settling derivatives contracts. Settlements can take years or decades — while stocks take just three days — and the lengthy periods build up counterparty risk.

Mr. Buffett writes: “Participants seeking to dodge troubles face the same problem as someone seeking to avoid venereal disease: It’s not just whom you sleep with, but also whom they are sleeping with. Sleeping around, to continue our metaphor, can actually be useful for large derivatives dealers because it assures them government aid if trouble hits. In other words, only companies having problems that can infect the entire neighborhood – I won’t mention names – are certain to become a concern of the state (an outcome, I’m sad to say, that is proper). From this irritating reality comes The First Law of Corporate Survival for ambitious CEOs who pile on leverage and run large and unfathomable derivatives books: Modest incompetence simply won’t do; it’s mindboggling screw-ups that are required.”

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Untitled

For Buffett, It Was a Very Bad Year

Investor 'Did Some Dumb Things,' but Berkshire Seen as Well-Positioned Now

By SCOTT PATTERSON

The man considered by many to be the greatest investor of all time just had his worst year ever.

But the results released Saturday for Warren Buffett's company, Berkshire Hathaway Inc., also demonstrate how recently, and over time, the investor has positioned his far-flung empire to weather the financial storm.

Associated Press

Warren Buffett

Mr. Buffett, in his annual letter, read closely by shareholders and nonshareholders alike, reported that Berkshire in 2008 lost 9.6% in book value per share, a common metric Berkshire uses to track performance. That marks the biggest decline since Mr. Buffett took over the company in 1965, when it was a family-run East Coast textile maker.

Mr. Buffett confessed that he "did some dumb things." Among them: scooping up shares of oil giant ConocoPhillips when oil prices were near a record and investing $244 million in a pair of Irish banks that ran into trouble, resulting in an 89% loss.

Berkshire's shares fell nearly as much as the rest of the market last year, indicating that investors are worried about the company's ability to keep growing. In 2008, Berkshire's Class A stock fell 32%. This year, the shares are down about 19%, slightly better than the Dow Jones Industrial Average.

Yet many analysts were pleased that the decline in book value per share wasn't steeper. And Mr. Buffett's results also show he has made moves that have paid off and should continue to do so even if economic woes persist, as he predicts.

He limited his exposure to complex and potentially costly derivatives in his reinsurance unit, General Re Corp. He has $24.3 billion in cash that can be used to find bargains in a distressed market. And he's made several investments in preferred stock of companies such as Goldman Sachs Group Inc. that pay out steady income of 10% or more.

"He's done a great job to prepare for this," said Paul Howard, an analyst at Langen McAlenney, a Hartford, Conn., research group, who rates Berkshire a "buy." "He's got good businesses that are generating a lot of cash, and he's going to continue to put that money to work."

Berkshire's substantial insurance holdings haven't needed to take the kind of massive write-downs on toxic subprime securities that have plagued much of the financial industry in the past two years. One reason is Mr. Buffett's longstanding dislike of complex derivatives, which he famously called "financial weapons of mass destruction" in his 2002 shareholder letter and which he railed on again in his latest letter. He pushed General Re, the large reinsurance company Berkshire acquired in 1998, to disentangle itself from a vast web of derivatives, financial instruments tied to the value of other securities, such as stocks or bonds, over the course of five years, winding down its book of 23,218 derivatives contracts at a loss of about $400 million, he said in the letter. The losses may have been far more substantial if General Re had held onto to the contracts, Mr. Howard said.

"Upon leaving, our feelings about the business mirrored a line in a country song: 'I liked you better before I got to know you so well,'" Mr. Buffett said in Saturday's letter, referring to General Re's derivatives book.

Separately, Berkshire took a loss of $5.1 billion in the fourth quarter on several derivatives contracts the company entered into in recent years. The contracts, essentially insurance policies against long-term declines in U.S. and foreign stocks, expire in 15 or 20 years. Berkshire will have to pay out if the indexes are below where they stood when the deals were struck. The derivatives, whose current estimated value has to be reflected on Berkshire's books, are one reason the company reported a grim fourth quarter on Saturday -- its fifth year-over-year quarterly decline.

The $117 million quarterly gain it eked out in the fourth quarter marked a 96% drop from last year's $2.95 billion in fourth-quarter net income.

Beyond commenting on Berkshire, Mr. Buffett shared his views on the broader economy and financial-system travails. He said he didn't expect the economy to improve any time soon but did expect better times, eventually.

"Our country has faced far worse travails in the past," he said. "Without fail, however, we've overcome them." He declined to draw a correlation between stocks and economics, saying that while he was certain the economy would be "in shambles for 2009," that "does not tell us whether the stock market will rise or fall." Mr. Buffett credited the federal government for stepping in with massive assistance last year, saying the intervention was "essential" to avoiding a total breakdown. But he cautioned there could be "unwelcome aftereffects," such as inflation.

He contended that the "investment world has gone from underpricing risk to overpricing it," which he said is reflected by voracious investor appetite for Treasury bonds. Future historians will comment on the Internet bubble of the 1990s and the housing bubble of the early 2000s, he said, but "the U.S. Treasury-bond bubble of late 2008 may be regarded as almost equally extraordinary."

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