On the institutional imperative: "'The other guy is doing it so we must as well' spells trouble in any business, but none more so than insurance."
On housing policy: "Our country's social goal should not be to put families into the house of their dreams, but rather to put them into a house they can afford."
On market declines: "As one investor said in 2009: 'This is worse than divorce. I've lost half my net worth - and I still have my wife.'"
On value estimates: "It is appropriate, nevertheless, to including improved [interest] rates in an estimate of 'normal' earning power."
On investment managers: "It’s easy to identify many investment managers with great recent records. But past results, though important, do not suffice when prospective performance is being judged. How the record has been achieved is crucial, as is the manager’s understanding of – and sensitivity to – risk (which in no way should be measured by beta, the choice of too many academics). In respect to the risk criterion, we were looking for someone with a hard-to-evaluate skill: the ability to anticipate the effects of economic scenarios not previously observed."
On manager compensation:
"We have arrangements in place for deferrals and carryforwards that will prevent see-saw performance being met by undeserved payments."
"Should we [add one or two investment managers] we will probably have 80% of each manager's performance compensation be dependent on his or her own portfolio and 20% on that of the other manager(s). We want a compensation system that pays off big for individual success but that also fosters cooperation, not competition."
On false precision:
"Part of the appeal of Black-Scholes to auditors and regulators is that it produces a precise number. Charlie and I can’t supply one of those. We believe the true liability of our contracts to be far lower than that calculated by Black-Scholes, but we can’t come up with an exact figure – anymore than we can come up with a precise value for GEICO, BNSF, or for Berkshire Hathaway itself. Our inability to pinpoint a number doesn’t bother us: We would rather be approximately right than precisely wrong."
"You can be highly successful as an investor without having the slightest ability to value an option.'
On debt: "...to finish first, you must first finish."
There are more concepts we'll likely discuss at a later date, these were some initial highlights that resonated for one reason or another.
Great letter again this year. We never cease to be amazed at how after all this time, he nonetheless manages to discuss something he's not openly addressed in the past. That doesn't mean they haven't been speculated about and, often, nailed by others. But to read his own words about, for instance, GEICO, is fascinating. Thanks again, Warren.
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