5 ms·

Squanderville vs. Thriftville - Warren Buffett (2003)

27 points by philk 17y ago

dreyfiz 17y ago
Good article and the principle is sound, but the postscript is that Buffett wound up losing Berkshire Hathaway's shareholders $1 billion by betting against the dollar. He forgot that the reason the dollar is holding its value is that China is backstopping it because, absent any other source of political legitimacy, it can't afford to allow its economic growth to stall. http://www.nytimes.com/2006/11/01/business/01leonhardt.html?_r=1 http://www.nytimes.com/2006/11/01/business/01leonhardt.html?... Furthermore, he's now a net buyer of US assets: http://www.nytimes.com/2008/10/17/opinion/17buffett.html http://www.nytimes.com/2008/10/17/opinion/17buffett.html (about him buying equities for his personal portfolio) http://www.nytimes.com/2009/11/04/business/04deal.html http://www.nytimes.com/2009/11/04/business/04deal.html (about Berkshire Hathaway buying a railroad for $26 billion)
- yungchin 17y ago
  I think the interesting part of the essay is not so much whether the predictions for the dollar have yet come true. As you say, the principle is sound, and the problem remains today as it was back then. The interesting part, I think, are the proposed Import Certificates. Some searching throws up proposed legislation in the form of the Balanced Trade Restoration Act: http://feingold.senate.gov/opinion/06/20060925oped.htm http://feingold.senate.gov/opinion/06/20060925oped.htm If anyone knows of a good economist's analysis of the proposal, I'd love to see that, too.
  - dreyfiz 17y ago
    The import certificates are indeed a very cool idea.
  - _delirium 17y ago
    This is the only economic analysis of the proposal I can find: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1158096 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1158096 It's not peer-reviewed, but it's from a respectable economics institute.
- fleitz 17y ago
  The general problem with the trade deficit theories that apply very much to other nations is that due to dollar denominated debt and being the defacto reserve currency of the world (oil is traded in dollars) the rules don't apply. If the world switches reserve currencies or stops buying US debt dollar denominated than this exception will no longer apply. Note that Venezuela is going to / has? started selling oil in euros and China is starting to purchase some US debt in non dollar denominated forms.
- xiaoma 17y ago
  >"Good article and the principle is sound, but the postscript is that Buffett wound up losing Berkshire Hathaway's shareholders $1 billion by betting against the dollar." That's incredibly unfair. Buffet has absolutely crushed the market. The S&P500 is down 22% over the past decade, the Nasdaq is down 50% and Buffet is up 150%. Check over the past two decades and the S&P has approximately doubled, the Nasdaq has slightly less than quadrupled what it was and Berkshire Hathaway is worth fifteen times its 1990 value. People who bought Berkshire right after this piece was published beat 99.9% of the market and every single widely followed pundit I know of. http://www.google.com/finance?chdnp=1&chdd=1&chds=1&chdv=1&chvs=Logarithmic&chdeh=1&chdet=1266236606437&chddm=998614&chls=IntervalBasedLine&cmpto=INDEXSP:.INX;INDEXNASDAQ:.IXIC&cmptdms=0;0&q=NYSE:BRK.A&ntsp=0 http://www.google.com/finance?chdnp=1&chdd=1&chds=1&...
  - dreyfiz 17y ago
    It's unfair to point out that Buffett made a bad trade that lost a billion dollars? Regardless of his status as the foremost investor of probably _all time_, he was empirically wrong on this one, and the article was about him talking down the dollar, so it's not unfair to point out that he lost a billion dollars putting his money where his mouth was.
    - xiaoma 17y ago
      It's unfair to leap on a single mistake and say it was the postscript of his essay. He also bought Petro China as part of his strategy to deal with a weakening dollar around the same time and by when he was selling it 2007, it had earned several billion. It is also worth pointing out that the essay dealt with China specifically, and that the RMB has appreciated against the dollar in the time since (and will more as the government relaxes its peg).
  - dreyfiz 17y ago
    In fact, Buffett is the first to admit his mistakes and apologize to Berkshire Hathaway's shareholders, each and every year he seems to apologize for one monumental fuckup after another.
- jakarta 17y ago
  You have a really strange choice in evidence for your citations. You really jump around in terms of years. Here is what Buffett said in 2004: ''We think, over time, that the dollar is likely to decline in value against some of the major currencies,'' Mr. Buffett said at Berkshire's annual shareholder meeting earlier this month. ''This is not a short term prediction.'' So while you may cite a paper loss after 2 years, that hardly qualifies as a long term loss. Indeed, if you bother to look at the following chart: http://www.google.com/finance?q=USDEUR http://www.google.com/finance?q=USDEUR (set it to max) You will see that shorting the dollar over that period would have been the appropriate strategy. Now, you then go on to cite the fact that Buffett purchased equities and bought Burlington Northern. For the first, Buffett purchased equities at near lows, the gains he was able to lock in from such investments would withstand the frictional forces of inflation. Secondly, most parties look at the Burlington Northern acquisition as a means of gaining a steady stream of free cash flow that will be inflation resistant over the next 50 years. So while it is an American asset, it is an asset that has the ability to raise prices and withstand inflation, that is what is important to note. And if you look more broadly, these are just the types of businesses that Buffett goes after. Businesses with high barriers to entry and the ability to raise prices. That is also why he purchased MidAmerican Energy after utilities underwent regulatory changes.
patrickgzill 17y ago
I can't agree with the IC idea. In practice, importers would set up fake shell companies to invoice the imported goods at a lesser price than the actual cost - the incentives to do so would be enormous. Not unlike the behavior of the "re-insurance" business - which Buffett has been involved in since 1998 or so with his purchase of General Re-insurance and with another re-insurance company called National Indemnity.
- dreyfiz 17y ago
  Similarly, the market in carbon emission credits is rife with fraud.
  - patio11 17y ago
    If you look at the numbers it appears that the market in fraud is rife with carbon emissions credits. Not even joking -- one particular fraud (VAT carousel) was generating over 90% of the exchange volume, according to Europol.
- falsestprophet 17y ago
  There are strong incentives to break many laws. There are also often adequately strong disincentives: fines and prison for example.
  - patrickgzill 17y ago
    If it is cross-border it is almost impossible to prosecute. Not suggesting fraud, but many international companies do use transfer prices to manage recognized profits in different countries; clearly they will shift income to lower-tax areas.

27 points by philk 17y ago

Good article and the principle is sound, but the postscript is that Buffett wound up losing Berkshire Hathaway's shareholders $1 billion by betting against the dollar. He forgot that the reason the dollar is holding its value is that China is backstopping it because, absent any other source of political legitimacy, it can't afford to allow its economic growth to stall. http://www.nytimes.com/2006/11/01/business/01leonhardt.html?_r=1 http://www.nytimes.com/2006/11/01/business/01leonhardt.html?... Furthermore, he's now a net buyer of US assets: http://www.nytimes.com/2008/10/17/opinion/17buffett.html http://www.nytimes.com/2008/10/17/opinion/17buffett.html (about him buying equities for his personal portfolio) http://www.nytimes.com/2009/11/04/business/04deal.html http://www.nytimes.com/2009/11/04/business/04deal.html (about Berkshire Hathaway buying a railroad for $26 billion)

yungchin 17y ago
I think the interesting part of the essay is not so much whether the predictions for the dollar have yet come true. As you say, the principle is sound, and the problem remains today as it was back then. The interesting part, I think, are the proposed Import Certificates. Some searching throws up proposed legislation in the form of the Balanced Trade Restoration Act: http://feingold.senate.gov/opinion/06/20060925oped.htm http://feingold.senate.gov/opinion/06/20060925oped.htm If anyone knows of a good economist's analysis of the proposal, I'd love to see that, too.
- dreyfiz 17y ago
  The import certificates are indeed a very cool idea.
- _delirium 17y ago
  This is the only economic analysis of the proposal I can find: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1158096 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1158096 It's not peer-reviewed, but it's from a respectable economics institute.
fleitz 17y ago
The general problem with the trade deficit theories that apply very much to other nations is that due to dollar denominated debt and being the defacto reserve currency of the world (oil is traded in dollars) the rules don't apply. If the world switches reserve currencies or stops buying US debt dollar denominated than this exception will no longer apply. Note that Venezuela is going to / has? started selling oil in euros and China is starting to purchase some US debt in non dollar denominated forms.
xiaoma 17y ago
>"Good article and the principle is sound, but the postscript is that Buffett wound up losing Berkshire Hathaway's shareholders $1 billion by betting against the dollar." That's incredibly unfair. Buffet has absolutely crushed the market. The S&P500 is down 22% over the past decade, the Nasdaq is down 50% and Buffet is up 150%. Check over the past two decades and the S&P has approximately doubled, the Nasdaq has slightly less than quadrupled what it was and Berkshire Hathaway is worth fifteen times its 1990 value. People who bought Berkshire right after this piece was published beat 99.9% of the market and every single widely followed pundit I know of. http://www.google.com/finance?chdnp=1&chdd=1&chds=1&chdv=1&chvs=Logarithmic&chdeh=1&chdet=1266236606437&chddm=998614&chls=IntervalBasedLine&cmpto=INDEXSP:.INX;INDEXNASDAQ:.IXIC&cmptdms=0;0&q=NYSE:BRK.A&ntsp=0 http://www.google.com/finance?chdnp=1&chdd=1&chds=1&...
- dreyfiz 17y ago
  It's unfair to point out that Buffett made a bad trade that lost a billion dollars? Regardless of his status as the foremost investor of probably _all time_, he was empirically wrong on this one, and the article was about him talking down the dollar, so it's not unfair to point out that he lost a billion dollars putting his money where his mouth was.
  - xiaoma 17y ago
    It's unfair to leap on a single mistake and say it was the postscript of his essay. He also bought Petro China as part of his strategy to deal with a weakening dollar around the same time and by when he was selling it 2007, it had earned several billion. It is also worth pointing out that the essay dealt with China specifically, and that the RMB has appreciated against the dollar in the time since (and will more as the government relaxes its peg).
- dreyfiz 17y ago
  In fact, Buffett is the first to admit his mistakes and apologize to Berkshire Hathaway's shareholders, each and every year he seems to apologize for one monumental fuckup after another.
jakarta 17y ago
You have a really strange choice in evidence for your citations. You really jump around in terms of years. Here is what Buffett said in 2004: ''We think, over time, that the dollar is likely to decline in value against some of the major currencies,'' Mr. Buffett said at Berkshire's annual shareholder meeting earlier this month. ''This is not a short term prediction.'' So while you may cite a paper loss after 2 years, that hardly qualifies as a long term loss. Indeed, if you bother to look at the following chart: http://www.google.com/finance?q=USDEUR http://www.google.com/finance?q=USDEUR (set it to max) You will see that shorting the dollar over that period would have been the appropriate strategy. Now, you then go on to cite the fact that Buffett purchased equities and bought Burlington Northern. For the first, Buffett purchased equities at near lows, the gains he was able to lock in from such investments would withstand the frictional forces of inflation. Secondly, most parties look at the Burlington Northern acquisition as a means of gaining a steady stream of free cash flow that will be inflation resistant over the next 50 years. So while it is an American asset, it is an asset that has the ability to raise prices and withstand inflation, that is what is important to note. And if you look more broadly, these are just the types of businesses that Buffett goes after. Businesses with high barriers to entry and the ability to raise prices. That is also why he purchased MidAmerican Energy after utilities underwent regulatory changes.

patrickgzill 17y ago

I can't agree with the IC idea. In practice, importers would set up fake shell companies to invoice the imported goods at a lesser price than the actual cost - the incentives to do so would be enormous. Not unlike the behavior of the "re-insurance" business - which Buffett has been involved in since 1998 or so with his purchase of General Re-insurance and with another re-insurance company called National Indemnity.

dreyfiz 17y ago
Similarly, the market in carbon emission credits is rife with fraud.
- patio11 17y ago
  If you look at the numbers it appears that the market in fraud is rife with carbon emissions credits. Not even joking -- one particular fraud (VAT carousel) was generating over 90% of the exchange volume, according to Europol.
falsestprophet 17y ago
There are strong incentives to break many laws. There are also often adequately strong disincentives: fines and prison for example.
- patrickgzill 17y ago
  If it is cross-border it is almost impossible to prosecute. Not suggesting fraud, but many international companies do use transfer prices to manage recognized profits in different countries; clearly they will shift income to lower-tax areas.