Saturday, February 26, 2011

Latest Warren Buffett Letter is Out

Warren Buffett remains one of the shrewdest investors of all time. His annual letter is always worth reading for its investment discussions and discussions on  management style---despite the fact that Buffett, himself, has to be considered at this time a full-fledged member of the ruling oligarchy. Unquestionably, the Berkshire portfolio performance was aided and abetted by Federal Reserve bailouts of firms such as Goldman Sachs which received government money just days after Buffett invested in the firms.

In this letter, he curiously calls, one of his investment decisions, Berkshire's "social obligation" and a couple of paragraphs later refers to another investment as a "social compact."

Of course, profitable investments do help society by increasing the standard of living, but the use of terns such as "social obligation" and "social compact" severely distorts what investing is all about. It is about investing for personal gain. The gain to society is simply a byproduct of the investment, what Hayek would call, an unintended consequence. (BTW: A much more sophisticated and insightful use of the term "unitended consequence", then is used today by MSM, who laughably think they are demonstrating knowledge of Hayek's thinking, when they use the term in a much less insightful, pedestrian manner.).

Buffett's use of "social obligation" and "social compact" distorts the fact that these two concepts should never be considered when making an investment decision. Ane investment should be considered on its own profit and loss merits, that is all that is needed to keep a society's standard of living growing. To encourage investors to consider "social obligations" and "social compacts" will only cause them to move beyond their area of knowledge and make the the economy less efficient.

I should add that Buffett, although using these "social" terms, appears to have made his investment judgements based solely on the profit and loss merits and appears to have thrown out the "social" stuff for some kind of window dressing. Bizarre.

The man speaks more and more social babble the older he gets.  He even quotes, although in a harmless way, John Kenneth Galbraith, who was probaly one of the most confused economists/socialists to ever appear on American television.

Back to the investment world, Buffett is back on track in his letter with his discussion of the failures of the Black-Scholes model for valuing long-term options or similar long-term investment vehicles. Interestingly, in the EPJ Daily Alert, awhile back, I discussed in detail the view of hedge fund manager Derek Pilecki of Gator Capital Management, who holds a similar view about the failures of  the Black-Scholes valuation model,and  about the investment opportunities available, in Pilecki's view because of this incorrect valuation. Given Buffett's similar discussion, I am going to re-run my coverage of Pilecki's views in Monday's EPJ Daily Alert, so if you have been thinking about subscribing to the Alert now may be the time.

Buffett's full letter is here.


  1. Funny, Buffet's General Re is an ERRP recipient. Note the irony of a reinsurer getting subsidized health claims.

    How many millions will flow to General Re's bottom line from Uncle Sam's PPACA largess?

  2. "An investment should be considered on its own profit and loss merits, that is all that is needed to keep a society's standard of living growing."

    So I should invest in China even though it is a totalitarian state that censors the internet?

  3. @Anonymous 11:52

    Uh, yeah. Why not?

    As long as you are not investing with the government or providing services to the government, you are only increasing the standard of living of the people in China.