Warren Buffett's latest on the economy, corporate finance and market returns

[RedEarth]

The Oracle of Omaha ponders the American economy

Last Update: 7:32 PM ET Mar 10, 2008


NEW YORK (MarketWatch) -- Warren Buffett's latest annual shareholder letter just arrived. And in these uncertain times, it's more prescient than ever. Every year, Buffett writes a lengthy letter to shareholders. Devoid of the usual buzzwords and corporate-speak, it's full of original ideas and clever explanations of old ones.

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"You may recall a 2003 Silicon Valley bumper sticker that implored: 'Please God, Just One More Bubble.' Unfortunately, this wish was promptly granted, as just about all Americans came to believe that house prices would forever rise. That conviction made a borrower's income and cash equity seem unimportant to lenders, who shoveled out money, confident that HPA -- home price appreciation -- would cure all problems."

He followed that with an update of one of his most famous quotes over the years, now pertinent more than ever: "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."

........

This year he takes aim at corporate pension accounting. He notes that 363 of the 500 companies in the S&P 500 have pension plans, and that on average they assumed an 8% annual return on pension plan investments in 2006.

So, since 28% of pension plan assets are held in bonds likely to return 5% or less, the remaining 72% of assets held must achieve a rate of return of 9.2% to hit that overall 8%.

As he goes on to state, during the 20th century the Dow rose from 66 to 11,497. Comforting? Yes, but using proper compounding math gives an annualized return of 5.3%, and you can add 2% for dividends. "It was a wonderful century," acknowledges Buffett.

Turning to this century, to merely match the 5.3% gain of last century, starting near 13,000 the Dow would have to close at 2,000,000 on Dec. 31, 2099.

And those expecting 10% annually "....are implicitly forecasting a level of 24,000,000 on the Dow by 2099."

Buffett's lesson: "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 of 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."

http://custom.marketwatch.com/custom/myway-com/news-story.asp?guid={75826F72-A26C-42CF-9AAC-493AA3FC26B1}

[Kolesar]

1. Is that Warren Buffet I am reading or Jennifer Openshaw, who gets the byline?

My company figures pension benefits on a "discount rate" much lower than 8%. I think it is 5.25% or 6.25%. Last time they lowered the discount rate, our managment cut retirement benefits seriously.

BRKA and BRKB links in that webpage don't even work. I want to read Buffet's letter.

[RedEarth]

2. Looks like Openshaw wrote the article...... suppose we could google for the web sites

since the links don't work.,,,,,,,,, http://www.berkshirehathaway.com/

[JDPriestly]

3. The report states that Buffett likes the trade agreements as they are.

I have no doubt that they are good for Coca-Cola. But, sorry, Mr. Buffet, they are not good for the America worker. They are not good for college graduates who work hard and put themselves into for their degrees and then can only get menial jobs upon graduation. They also are not good for the environment. Restrictions on the use of a nation's land or forests to protect the environment may be deemed protectionist, and cause the imposition of penalties on the environmentally conscious nation.

Buffett apparently offers no suggestions as to how the United States is to remain an independent political entity, how it is to maintain its democratic system (what is left of it) if trade courts run, if the truth were known, by major corporations and their minions, dictate local economic, environmental and labor standards.

He does not comment on whether trade agreements should
1) provide protections for unions and their members,
2) protect workers in countries against discrimination,
3) require that employers in countries that are parties to trade agreements provide safe and healthy workplaces, and
4) how workers who are displaced as a result of outsourcing from the United States should be compensates and employed. (The usual placebo, job training, has not worked. It is a vicious circle that leads from initial enthusiasm at a promising solution, paying a lot for the training, losing a lot of time on the training and then getting a low paid job without health insurance which is soon outsourced. Free Trade just means the race to the bottom for the American worker.)

The list of serious issues that are just ignored by apologists for "free trade" is endless. And those of us who ask those questions have no forum for posing them. We are not heard. We are dismissed as fools. We are not fools. And our questions need to be answered.

[Kolesar]

4. Senator Sherrod Brown's position is that we now need to negotiate the "side agreements"

NAFTA was pushed through with a promise that there would be negotiations for labor and environmental standards. Never happened

The more I read about NAFTA, the more I see the stories that are too complicated for the "Lou Dobbs" types in the media.

1. NAFTA forces Canada and Mexico to sell their oil and gas to America.

2. NAFTA allowed American grain producers to blow the Mexican maize farmers out of the marketplace. It displaced Mexican farmers by the millions. Then, in the next decade, ethanol and food demands drive the price for grains up dramatically. Sorry, amigos. Your tortillas cost twice what they used to. Aye yie yie.

[cyberpj]

5. Buffett on trade. My question is...

Buffett on trade:

"Our country's weakening currency is not the fault of OPEC, China, etc. Other developed countries rely on imported oil and compete against Chinese imports just as we do. 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."

My question is:
What does America have left to export? Seems to me we're just consuming everything made everywhere else. What do we actually manufacture any longer?

[The Stranger]

6. Question:

And those expecting 10% annually "....are implicitly forecasting a level of 24,000,000 on the Dow by 2099."

What about stock splits?