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The sayings of Chairman Warren

They call him the greatest investor of all time, but here’s one thing they rarely say about Warren Buffett: He’s a very good and clear writer. If only he’d possessed the foresight to become a journalist, he could have made hundreds of thousands of dollars in his career and positioned himself for one of those super-sweet buyout packages that journos everywhere have been getting for the past couple of years.

A few excerpts from his annual Berkshire-Hathaway shareholder letter:

On government intervention in the economy

In poker terms, the Treasury and the Fed have gone “all in.” Economic medicine that was previously meted out by the cupful has recently been dispensed by the barrel. These once-unthinkable dosages will almost certainly bring on unwelcome aftereffects. Their precise nature is anyone’s guess, though one likely consequence is an onslaught of inflation. Moreover, major industries have become dependent on Federal assistance, and they will be followed by cities and states bearing mind-boggling requests. Weaning these entities from the public teat will be a political challenge. They won’t leave willingly.

On local governments

Local governments are going to face far tougher fiscal problems in the future than they have to date. The pension liabilities I talked about in last year’s report will be a huge contributor to these woes. Many cities and states were surely horrified when they inspected the status of their funding at year-end 2008. The gap between assets and a realistic actuarial valuation of present liabilities is simply staggering.

On the growing bubble in Treasury bonds

The investment world has gone from underpricing risk to overpricing it. This change has not been minor; the pendulum has covered an extraordinary arc…. When the financial history of this decade is written, it will surely speak of the Internet bubble of the late 1990s and the housing bubble of the early 2000s. But the U.S. Treasury bond bubble of late 2008 may be regarded as almost equally extraordinary.

Clinging to cash equivalents or long-term government bonds at present yields is almost certainly a terrible policy if continued for long.

On derivatives

Derivatives are dangerous. They have dramatically increased the leverage and risks in our financial system. They have made it almost impossible for investors to understand and analyze our largest commercial banks and investment banks…

Improved “transparency”–a favorite remedy of politicians, commentators and financial regulators for averting future train wrecks–won’t cure the problems that derivatives pose. I know of no reporting mechanism that would come close to describing and measuring the risks in a huge and complex portfolio of derivatives. Auditors can’t audit these contracts, and regulators can’t regulate them.

Read the Buffett letter (PDF).

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