My reading list has had quite a bit of reflection on Buffett's latest report,(pdf) and it seems that everyone takes interest in a different part of the report to mention.
For me, Buffett mentions yet another margin squeeze, this time in the insurance business, which I already expected. Indeed, I am wondering if even the mighty Buffett may actually end up with losses exceeding expections. From what I've read, I believe he's charging municipalities 50% more to insure them than the existing municipality insurers. He's probably also being selective about who he insures. The "good" part of the monolines isn't nearly as "good" as people and the media make out.
Those on my reading list were ultra prolific in their writings this week, so I'm not sure where I read it, but something like 27 muncipalities went bankrupt in Florida after the Real Estate boom the preceded the Great Depression. I can't see the last 50 or 60 years years of municipal data reflecting what's coming in any way, shape or form.
I suspect the other branches of insurance will face higher claims as well. When times are harder people tend to try and go after insurance, and perhaps with not necessarily with legitimate claims.
And then there is the demand side for insurance. I've paid, and paid, and paid for insurance, years upon years without a claim, and then I have a claim and it gets denied most likely because of the fraudsters. Well, screw the damn insurance companies, I am in the process of reducing what I insurance and being far more selective based on what I think they can jack consumers around in terms of whether they cover it. Insurance companies are morons for cutting the hand that feeds them and not simply having a lenient policy for covering claims for people who have a long history of paying without making a claim. We aren't the fraudsters. Actually, when I think about it, I've been jacked around 3 for 3 on legitimate claims, meaning the claims were 100% denied. No wonder I'm jaded. I simply don't trust insurance companies to be honorable at all. And then when you read reports that those in the insurance business that are earning the biggest bonuses are those successfully denying or cutting off the most claims... Perhaps my experience and feelings about it are unique, but I somehow doubt it.
From reading Buffett's report, he says they were lucky there were not major catastrophes for two years in a row now. So, in a "lucky" environment earnings were down 18%... He says there is "certainty that insurance-industry profit margins ... will fall significantly in 2008." The emphasis was his. His estimate is that without any major catastrophes profit margins will shrink by 4%.
Another emphasis in his report, "Berkshire's past record can't be duplicated or even approached. Our base of assets and earnings is now far too large for us to make outsized gains in the future."
Of this, I have no doubt. My little $2-20k investments ($20k is big for me) hardly affect share price. Buffett probably isn't interested in companies that he can't see putting under a million in, and that moves share price. I suspect my million dollar estimate is waaayyy low. It is going to take Buffett weeks, and perhaps months, to buy into a position without raising the share price to the point that he doesn't have a hope of making any money on the position. I have no doubt that if he wanted out of a position quickly he could drop the share price in half. I have no chance of doing that.
And currently, everything is priced at a premium. Part of why he's done so well is because he was buying when equities were at a discount. I doubt we will see such buying opportunities of the same magnitude again. There are simply too many people that are far more informed and overall, they will jump in before the market even has a chance to reach the lows that Buffett found. And then of course, there are the ill-informed that buy into the non-sense that the stock market always out performs all other investments, just like those who bought into "real estate never goes down."
I am reading page 4 of the report. Absolutely brilliant, or at least from what I know about how railways work in Canada. With high oil prices, rail because an increasingly important form of transportation. What seemed more economical to ship by truck is now more economical to ship by rail. I still think there will be a retraction in oil prices, although after a discussion about the oil industry I had last night I find it isn't a lack of oil reserves but a lack oft oil refinery that is keeping the price up and that's a much harder thing to correct because of enormous environmental requirements to meet. There's an oil refinery on the harbour in Vancouver that had a problem in the past couple years where the oil completely destroyed nearby houses and the possessions in the houses. The houses had to be torn down. There is huge NIMBY around oil refineries.
I like this quote, "a moat that must be continuously rebuilt will eventually be no moat at all." When you apply this metaphor to commodities and mining companies, well, it should raise caution. I was completely shocked yesterday when I checked out Breakwater's financial reports yesterday. Breakwater is a zinc company on the Toronto exchange. They have what I think of as two good mines and three garbage mines. When people look at mining companies they do a terrible job of appreciating that all mines are not created equal and if production is doubling, they simply double expectations. Well, Breakwater lost 9c per share and I never saw that coming despite the fact that I knew three of their mines were garbage.
The "confession" starts on page 8, where he outlines his mistakes or almost mistakes.
Well, the best quote of the report, page 19:
I should mention that people who expect to earn 10% annually from equities during this century – envisioning that 2% of that will come from dividends and 8% from price appreciation – 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 – not that it will faze 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.” Beware the glib helper who fills your head with fantasies while he fills his pockets with fees.