Warren Buffett lifts the lid on his secrets

Warren Buffett always had spectacular timing. As Wall Street burns, the billionaire investor is the hero of the hour after predicting the financial meltdown and riding to the rescue — $5 billion (£2.7 billion) in hand — of Goldman Sachs.

Tomorrow marks the release of The Snowball, the first and only, Buffett says, biography to be written with his co-operation. The book’s author is Alice Schroeder, a former analyst who spent “literally thousands” of hours with Buffett and his family.

“Invaluable” hardly describes Schroeder’s access to the world’s richest man when you consider that lunch with Buffett recently fetched $2.1m in a charity auction.

Such is Buffett’s reputation that last week, when he snapped up his stake in Goldman, the bank’s shares rose $8 as investors who had wondered if it would survive the credit crunch reacted positively.

Schroeder said: “Around the time Bear Stearns was being taken over, he talked about the domino effect to me. He said to me first Bear, then Lehman, then Merrill. He saw this coming and he talked about a crisis of a magnitude that we had not seen before.”

Full Article

Going Nowhere (Vitaliy Katsenelson)

Link to the Article

Howard Marks' Memo to Clients

Link to the Memo

CNBC INTERVIEW : Warren Buffett Explains His $5B Goldman Investment

BECKY QUICK: We know you get all kinds of deals, all kinds of people who come knocking asking you to jump in. You've said no to everything to this point. Why is this the right deal at the right time?

WARREN BUFFETT: Well, I can't tell you it's exactly the right time. I don't try to time things, but I do try to price things. And I've got a formula that says bet on brains, and bet of them when it's the right type of deal. And in this case, there's no better firm on Wall Street. We've done business with them for years, with Goldman, and the price was right, the terms were right, the people were right. I decided to write a check.

BECKY: Does the backdrop of the Federal government potentially getting involved with a massive bailout plan for Wall Street, does that have anything to do with this deal?

BUFFETT: Well, I would say this. If I didn't think the government was going to act, I would not be doing anything this week. I might be trying to undo things this week. I am, to some extent, betting on the fact that the government will do the rational thing here and act promptly. It would be a mistake to be buying anything now if the government was going to walk away from the Paulson proposal.

BECKY: Why would that be a mistake? Because the institutions would collapse, or because you could get a better price?

BUFFETT: Well, there's just no telling what would happen. Last week we were at the brink of something that would have made anything that's happened in financial history look pale. We were very, very close to a system that was totally dysfunctional and would have not only gummed up the financial markets, but gummed up the economy in a way that would take us years and years to repair. We've got enough problems to deal with anyway. I'm not saying the Paulson plan eliminates those problems. But it was absolutely, and is absolutely necessary, in my view, to really avoid going over the precipice.

Transcript 1

Transcript 2

Transcript 3

THE FOURTH QUADRANT: A MAP OF THE LIMITS OF STATISTICS

Statistical and applied probabilistic knowledge is the core of knowledge; statistics is what tells you if something is true, false, or merely anecdotal; it is the "logic of science"; it is the instrument of risk-taking; it is the applied tools of epistemology; you can't be a modern intellectual and not think probabilistically—but... let's not be suckers. The problem is much more complicated than it seems to the casual, mechanistic user who picked it up in graduate school. Statistics can fool you. In fact it is fooling your government right now. It can even bankrupt the system (let's face it: use of probabilistic methods for the estimation of risks did just blow up the banking system).

The current subprime crisis has been doing wonders for the reception of any ideas about probability-driven claims in science, particularly in social science, economics, and "econometrics" (quantitative economics). Clearly, with current International Monetary Fund estimates of the costs of the 2007-2008 subprime crisis, the banking system seems to have lost more on risk taking (from the failures of quantitative risk management) than every penny banks ever earned taking risks. But it was easy to see from the past that the pilot did not have the qualifications to fly the plane and was using the wrong navigation tools: The same happened in 1983 with money center banks losing cumulatively every penny ever made, and in 1991-1992 when the Savings and Loans industry became history.

Full Article

Note: Thanks to agatesystems from MSN BRK Shareholders Board for the original reference

Confessions of a risk manager

An insider explains why it is so hard to stop traders behaving recklessly

IN JANUARY 2007 the world looked almost riskless. At the beginning of that year I gathered my team for an off-site meeting to identify our top five risks for the coming 12 months. We were paid to think about the downsides but it was hard to see where the problems would come from. Four years of falling credit spreads, low interest rates, virtually no defaults in our loan portfolio and historically low volatility levels: it was the most benign risk environment we had seen in 20 years.

As risk managers we were responsible for approving credit requests and transactions submitted to us by the bankers and traders in the front-line. We also monitored and reported the level of risk across the bank’s portfolio and set limits for overall credit and market-risk positions.

The possibility that liquidity could suddenly dry up was always a topic high on our list but we could only see more liquidity coming into the market—not going out of it. Institutional investors, hedge funds, private-equity firms and sovereign-wealth funds were all looking to invest in assets. This was why credit spreads were narrowing, especially in emerging markets, and debt-to-earnings ratios on private-equity financings were increasing. “Where is the liquidity crisis supposed to come from?” somebody asked in the meeting. No one could give a good answer.

Full Article

Howard Marks' Memo to Clients

Link to the Memo

Sequoia Fund 2008 Annual Meeting Transcript

Link to the transcript