It is incredible that AIG is taken over by the U.S. government as credit dries up. I want to share with you what Warren Buffett said at 2008 annual meeting....
Buffett: In fact, that was one of the interesting things that was said in testimony before the Senate finance committee. I think two of the witnesses (Bear Stearns) said: " We understood we couldn't borrow money unsecured if people started looking at us askance. But we never dreamed that we couldn't borrow money secured." Well we found that out at Solomonn 17 years earlier, when we were having trouble borrowing money secured. When the world doesn't want to lend you money, 10 or 20 or 50 basis points - or a bigger haircut on collateral - doesn't do much. They'll only lend you money if they want to lend you money.
And if you're dependent on borrowed money every day, you have to wake up in the morning hoping the world thinks well of you. And there was a period a couple of months ago when almost every investment bank in the United States was plenty worried about whether people were going to think well of them the next morning. [Extracted from OID Aug 31, 2008 edition]
Also, Charlie Munger made excellent point on risk-aversion....
Munger: You can easily see how risk-averse Berkshire is. In the first place, we try and behave in such a way that no rational person is going to worry about our credit. And after we have done that, we also behave in such a way that if the world suddenly didn't like our credit, we wouldn't even notice it for months, because we have so much liquidity. That double layering of protection against risk is as natural as breathing around Berkshire. It's just part of the culture. [Extracted from OID Aug 31, 2008 edition]
Jeremy Grantham wrote this in Jan 2008....
Grantham: About 2 years ago I was introduced to Hyman Minsky's argument on the development of credit bubbles. Remarkably, 'stability is unstable' really captures his point. Investors, when confronted with an apparent reduction in risk, will seek to return to their normal or desired risk by leveraging up. This attitude becomes contagious and reinforcing – risk is ignored and debt levels soar until at the peak capital gains are needed to merely pay the carrying costs. Then something, it doesn't really matter what, goes wrong; the risk in the environment is seen to return to more normal levels. Many players are caught with risk levels far above their desired level and are forced to cut back on leverage and risk in general, which puts pressures on the prices of what they own and so on. It has a simple and powerful logic. Well, the Minsky Meltdown has clearly arrived, and one shoe after another of the market centipede drops onto the floor, and we are waiting for many more. This is the most important U.S. financial crisis since World War II: it is of course far more global than previous crises, with tentacles reaching everywhere, and it coincides with broad overpricing of assets.
So, the take home messages:
* Excessive leverage kills. Just look at Bear Stearns, Freddie Mac, Fannie Mae, Lehman Brothers and now, AIG. Thus, avoid excessive leverage and have plenty of liquidity like Berkshire Hathaway and Fairfax Financial.
* Margin of Safety. Like Munger said, having "double layering protection against risk."
* "Stability is Unstable"!
Best,
David
Buffett: In fact, that was one of the interesting things that was said in testimony before the Senate finance committee. I think two of the witnesses (Bear Stearns) said: " We understood we couldn't borrow money unsecured if people started looking at us askance. But we never dreamed that we couldn't borrow money secured." Well we found that out at Solomonn 17 years earlier, when we were having trouble borrowing money secured. When the world doesn't want to lend you money, 10 or 20 or 50 basis points - or a bigger haircut on collateral - doesn't do much. They'll only lend you money if they want to lend you money.
And if you're dependent on borrowed money every day, you have to wake up in the morning hoping the world thinks well of you. And there was a period a couple of months ago when almost every investment bank in the United States was plenty worried about whether people were going to think well of them the next morning. [Extracted from OID Aug 31, 2008 edition]
Also, Charlie Munger made excellent point on risk-aversion....
Munger: You can easily see how risk-averse Berkshire is. In the first place, we try and behave in such a way that no rational person is going to worry about our credit. And after we have done that, we also behave in such a way that if the world suddenly didn't like our credit, we wouldn't even notice it for months, because we have so much liquidity. That double layering of protection against risk is as natural as breathing around Berkshire. It's just part of the culture. [Extracted from OID Aug 31, 2008 edition]
Jeremy Grantham wrote this in Jan 2008....
Grantham: About 2 years ago I was introduced to Hyman Minsky's argument on the development of credit bubbles. Remarkably, 'stability is unstable' really captures his point. Investors, when confronted with an apparent reduction in risk, will seek to return to their normal or desired risk by leveraging up. This attitude becomes contagious and reinforcing – risk is ignored and debt levels soar until at the peak capital gains are needed to merely pay the carrying costs. Then something, it doesn't really matter what, goes wrong; the risk in the environment is seen to return to more normal levels. Many players are caught with risk levels far above their desired level and are forced to cut back on leverage and risk in general, which puts pressures on the prices of what they own and so on. It has a simple and powerful logic. Well, the Minsky Meltdown has clearly arrived, and one shoe after another of the market centipede drops onto the floor, and we are waiting for many more. This is the most important U.S. financial crisis since World War II: it is of course far more global than previous crises, with tentacles reaching everywhere, and it coincides with broad overpricing of assets.
So, the take home messages:
* Excessive leverage kills. Just look at Bear Stearns, Freddie Mac, Fannie Mae, Lehman Brothers and now, AIG. Thus, avoid excessive leverage and have plenty of liquidity like Berkshire Hathaway and Fairfax Financial.
* Margin of Safety. Like Munger said, having "double layering protection against risk."
* "Stability is Unstable"!
Best,
David
2 comments:
David,
You really nailed this issue. Charlie Munger's comment really speaks to Keynes's classic line, "The markets can remain irrational far longer than you can remain solvent." Apparently, Berkshire has a plan for that too.
Maybe I should an ING Direct Savings Account.
mpc
Thanks for your comment.
BTW, if you want to open an ING Savings account, do it now as there is special rate of 6.6% for 6 months for money saved from 19 Sept to 10 or 19th Oct.
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