The end of February is an important weekend for anyone interested in the financial markets. It’s when Warren Buffett writes to the shareholders of his company, Berkshire Hathaway. In it, he presents the results for the previous year, his assessment of the current economic climate, and dispenses wisdom that you really can't get anywhere else.
[For those unfamiliar with Mr Buffett, he is the world’s richest man. He has earned all his money – a truly stupendous $62bn - in his lifetime from his investment in, and management of Berkshire Hathaway.]
Perfectly Balanced Pessimism and Optimism.
His 2008 letter to shareholders is a stunning example of what we call reality-based optimism. The first page of his letter (after the numbers), in particular, is one of the best assessments of the current predicament we have seen. It acknowledges the scale of the financial problems we face - deeply pessimisic - and also compares it to other challenges faced by the US in particular and the world in general - overtly optimistic.
http://www.berkshirehathaway.com/letters/letters.html
Mr Buffett's Right - This isn't the Biggest Economic Crisis We Have Faced.
It is sloppy thinking that describes this recession and credit crisis as the worst economic challenge since the Depression of the 1930s. In terms of challenge, the Second World War was far greater. The current crisis is looking like it will become the deepest recession for a very long time - but the greatest economic challenge since the 1930s? Not even close. Indeed, policy makers would do well to study what happened during the war if they want to get a return on their collossal bail out investment. If the money is used to make structural changes to our economies - such as an enormous move to renewables, a move away from cars, building sustainable communities, massive productivity improvements etc - then the payback period will be much shorter and will be done willingly by citizens who will be able to see a tangible return on their investments.
History Lesson One - We have been here before.
The next 6-12 months are likely to be the worst period of the recession. Not necessarily in terms of the data but in the psychological adjustment needed to successfully tackle it. During this time people invariably fall into the trap of thinking that the recession will last forever and effectively become powerless. ALP's first lesson from history is worth remembering -We have had them before and we will have them again. Just like the boom couldn’t last forever, neither will this. There are undoubtedly some tough times ahead for most of us. This too will pass. It is during this time that the emotional resilience of your team (and yours) will be crucial. Call us if you want to discuss how to strengthen it.
Warren Buffett - the World's Greatest Manager?
Buffett's letter shows a true master at work. For us, you couldn’t find a better model of a CEO or manager – doing a job he loves, stunning levels of competence and ever keen to improve, level headed, open to feedback, and a great sense of humour.
Be sure to read his analysis of the mortgage business attached to his firm, Clayton Homes. Fabulous in its clarity and brevity.
Reading More.
If this year’s letter prompts you to read more from Mr Buffett (and it's well worth it) you can simply stay at the Berkshire Hathaway site and read the other letters. Or you can check out the book, The Essays of Warren Buffett. In it, Larry Cunningham has collated all the best bits from 40 years of writings from the Sage of Omaha.