Small Cheese

Warren Buffett, your good times are gone?

A reply to Warren E. Buffett’s 23 pages letter to Berkshire’s shareholders dated 27 February 2009.

First of all, I really enjoy reading your letter. The reading was like an exciting journey through the Jurassic Park, a place with my dream and imagination. I, a dreamer, although not as well known as you, not as rich as you, do have a common thing you have. A VOICE. Your voice is listened by millions and experts. And I hope you can listen to mine (I wish).

1. “2008 was the worst year…… and the economy will be in shambles throughout in 2009.”

Well, no one had actually expected the downsides of the economy to be in such severity and so badly shaped (unrecognizable may be a better word). Is there any solution? Yes, President Barack Obama throws in stimulus packages worth about $787 billion aiming to give another life to US economy. This is unprecedented and unheard of for a living memory.

When times are good, people spent their money so recklessly in such a way that money is endless and easy coming (of no object?). Who cares about domestic private savings? What is the problem of foreign borrowings backed by strong domestic demand? The illusion was so real that it became a TRUE that MONEY will create more MONEY! Well, who is the idiot of not falling to believe this when S& P Stocks has recorded gains for 33 years out of 44 years? Out of it, 25 years are with double digit growth!

This “VALUE’ creation is such an amazing game that when it is building tall and every one is ‘in it”, we think sky is the limit. (Don’t believe me? Have you heard about UK entrepreneur, Richards Branson with his spaceship project?) When it tumbles, it brought us to the painful memory re WTC collapse on 911. It is sudden, unexpected, many pains to follow. Of course the causes of these two “casualties” are totally different but the aftereffects for both events all need super powered “Intensive Care Unit”. Is it why you said, “the economic medicine that was previously meted out by the cupful…..recently dispensed by the barrel.”

2. “In God we trust, all other pay cash.”

This is a very old fashioned statement since credit card is introduced by our smartest banker. Of course they never run out of ideas as they had also created many more other innovative products, for example derivatives.

These derivatives are such an invention that I could not get my head around it all these while. I am so happy and relieved when you confessed you also could not get your mind around it. Hooray! Why? I am not the only dumb! What I know is simple rule, milk form cow and apple from tree. So how to comprehend the idea of “money from paper” i.e. “derive money or save money by entering into a paper contract called derivative plus the game of PASS IT ON”?

So how derivatives which are supposedly a form of protection to hedge against unwanted “unfavorable movements” (interest rate, indexes etc) became a double edged swords when the games are taking part by opportunists. It became a sellable product! It generates gains and avoidance of unexpected losses. It became a quick fit to for a complicated risk profile. It became a right thing to do! It became a trend! So the ‘derivatives’ mushroomed in major S&P 500 Balance Sheets. It is a MUST have item! The Chief Risk Officer of S&P 500 with derivatives can finally sleep peacefully as he can put his worries behind as he had sold the ‘worries’ to someone else. The “someone else” had happily bought it as it seems to be a trendy product to own with handsome returns. “What to worry, the risks are spread and leveraged!” In their mind, this is what they think!

So now you said “Derivatives are dangerous”. I like your bravery. Now we hear you. Better late than never.

I enjoy what you said “When investing, pessimism is your friend, euphoria is the enemy”.
Yep, when we venture into Jurassic Park, we come in with friends and no knowing the enemy. That is where all the excitement begins!

I am going to stop writing here as I need to catch up with some sleeps now. You will be hearing from me soon as I have more to say.

Thank you.

Talk2u Dreamer
9 March 2009

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