Each year, Warren Buffett writes a letter to the shareholders of Berkshire Hathaway, a letter that has become as famous for his wit and wisdom about the markets and the follies he sees in the financial world as it has for his report on Berkshire's year. Here follows selected excerpts of his comments this year about investing, the stock market and the economy.
On Investment Expectations:
"During the 20th century, the Dow advanced from 66 to 11,497. This gain, though it appears huge, shrinks to 5.3% when compounded annually ... For investors to merely match that 5.3% market-value gain, the Dow--recently below 13,000--would need to close at about 2,000,000 on Dec. 31, 2099."
On Financial Advisers:
"People who expect to earn 10% annually from equities during this century are implicitly forecasting a level of about 24,000,000 on the Dow by 2100. If your adviser talks to you about double-digit returns from equities, explain this math to him ... Many helpers are 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.'"
On Capital Investment:
"A company that needs large increases in capital to engender its growth may well prove to be a satisfactory investment. ... It's far better to have an ever-increasing stream of earnings with virtually no major capital requirements. Ask Microsoft or Google."
On The U.S. Dollar:
"The U.S. dollar weakened further in 2007 against major currencies, and it's no mystery why: Americans like buying products made elsewhere more than the rest of the world likes buying products made in the U.S. Inevitably, that causes America to ship about $2 billion of IOUs and assets daily to the rest of the world. And over time, that puts pressure on the dollar."
On The U.S. Economy:
"Our country's weakening currency is not the fault of OPEC, China, etc. ... In developing a sensible trade policy, the U.S. should not single out countries to punish or industries to protect. Nor should we take actions likely to evoke retaliatory behavior that will reduce America's exports, true trade that benefits both our country and the rest of the world."
On The U.S. Deficits:
"Our legislators should recognize ... that the current imbalances are unsustainable and should therefore adopt policies that will materially reduce them sooner rather than later. Otherwise our $2 billion daily of force-fed dollars to the rest of the world may produce global indigestion of an unpleasant sort."
On Sovereign Wealth Funds:
"There's been much talk recently of sovereign wealth funds and how they are buying large pieces of American businesses. This is our doing, not some nefarious plot by foreign governments. Our trade equation guarantees massive foreign investment in the U.S. When we force-feed $2 billion daily to the rest of the world, they must invest in something here. Why should we complain when they choose stocks over bonds?"
On Lending Standards:
"John Stumpf, CEO of Wells Fargo, aptly dissected the recent behavior of many lenders: 'It is interesting that the industry has invented new ways to lose money when the old ways seemed to work just fine.'"
On Bank Write-Downs:
"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."
On Selling His PetroChina Stake:
"In 2002 and 2003, Berkshire bought 1.3% of PetroChina for $488 million, a price that valued the entire business at about $37 billion ... Last year, the market value of the company rose to $275 billion, about what we thought it was worth compared with other giant oil companies. So we sold our holdings for $4 billion.
"We paid the IRS tax of $1.2 billion on our PetroChina gain. This sum paid all costs of the U.S. government-- defense, social security, you name it--for about four hours."
On His Worst Investment Mistake:
"When I said 'yes' to Dexter, a shoe business I bought in 1993 for $433 million ... What I had assessed as durable competitive advantage vanished within a few years. By using Berkshire stock, I compounded this error hugely. That move made the cost to Berkshire shareholders not $400 million, but rather $3.5 billion. In essence, I gave away 1.6% of a wonderful business--one now valued at $220 billion--to buy a worthless business."
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