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The Collab
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(address is not clickable)06-Mar-2006
The Latest Pronouncement from Omaha, by Laurel Kenner
What would Sunday be without a column from Abelson or an annual letter from the Sage of Omaha?
Biology Catches Up. Most revealing are the s#xual allusions sprinkled in the report. The old lion continues to snuffle around the pride, snarling at the young lions who have excluded him from female companionship. After boasting of his latest acquisition (closed in just one week after a glance at the financials) he archly invites entrepreneurs to call him and pitch their businesses for sale.
I'll be waiting like a hopeful teenage girl by the phone.
The invitation makes it even more painful to read, later in the letter, that Berkshire took an aggregate loss of $404 million unwinding the derivatives book the Sage acquired with the purchase of General Re. Did the traditional quick glance at the financials fail to enlighten? Not exactly:
Both Charlie and I knew at the time of the Gen Re purchase that it was a problem and told its management that we wanted to exit the business. It was my responsibility to make sure that happened. Rather than address the situation head on, however, I waited several years while we attempted to sell the operation. That was a doomed endeavor because no realistic solution could have extricated us from the maze of liabilities that was going to exist for decades. Our obligations were particularly worrisome because their potential to explode could not be measured.
Is he is pleading feeblemindedness? Confusion? Naivete? Lucky the Sage has total control of his board.
A bit of preaching about the dangers of derivatives for the rest of us, and then he closes with another s#xual allusion:
When we finally wind up Gen Re Securities, my feelings about its departure will be akin to those expressed in a country song, "My wife ran away with my best friend, and I sure miss him a lot.
Warren's own wife died in 2004. (They hadn't lived together since 1977.)
A Sage's-Eye View of the Economy. The Sage is still bearish on stocks, and his letter introduces a fresh reason: an unchanging pie of returns that is increasingly being diminished by the ever-growing friction of the marketplace. He tells a little fable about wealthy families (the Gotrocks) and their advisers (the Helpers) that assumes that if only the same families would hold onto the same stocks and be happy, never trading in for new stocks, then all would be harmonious and happy.
A record portion of the earnings that would go in their entirety to owners -- if they all just stayed in their rocking chairs -- is now going to a swelling army of Helpers. Particularly expensive is the recent pandemic of profit arrangements under which Helpers receive large portions of the winnings when they are smart or lucky, and leave family members with all of the losses -- and large fixed fees to boot -- when the Helpers are dumb or unlucky (or occasionally crooked.)
We don't disagree that overtrading is a good way to the poorhouse, and we are well aware of the pandemic. And yet.
By the Sage's math, stocks grew at a compounded 5.3% from 1899-2000, excluding dividends. His conclusion:
To achieve an equal rate of [5.3%] in the 21st century, the Dow will have to rise by Dec. 31, 2099 to -- brace yourself -- precisely 2,011,011.23. But I'm willing to settle for 2,000,000; six years into this century, the Dow has gained not at all.
You tell me -- gee-whiz-golly-shucks? Or logical argument? The Dow grew from 66 to 11,497 in the 20th century. We are always hearing that things will be different, but nobody has convinced me yet. And it's not just because I'm a cock-eyed optimist, although I do tend to whistle the happy tune.
Drs. Niederhoffer and Castaldo surveyed the literature and wrote a definitive essay for "Active Trader" magazine in April 2004 on the subject of stock market returns. An uncut version of the article appears on this Web site.
The docs had a somewhat higher estimate for long-term stock market returns -- 6.3% vs. the Sage's 5.3%. But their main point is worth repeating high and low:
The best working hypothesis is that stock returns have nothing to do with reported dividend growth and payouts, but have everything to do with the requirements of entrepreneurs for risk capital, the return they can make on investments, and the requirements of investors who invest at risk. The best working hypothesis for the next 100 years is that investors will achieve what they require a priori for their risky investments.