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Monday Mornings with Madison

MADISON COMMERCIAL REAL ESTATE SERVICES MADISON COMMERCIAL REAL ESTATE SERVICES
#47

WORDS OF WISDOM
In the last few weeks we have witnessed the biggest global economic downturn in history.  The basic underpinnings of our economy are coming apart faster than anyone ever thought possible. Every day we wake up to more bad news, with predictions for worse to come. Little wonder, then, that anxiety is rampant.

In such times of uncertainty, people look to those they respect and trust for reassurance. We want to hear from them that life will eventually get back to normal — that the bad times will end. These days, many look to the investor Warren Buffet for this reassurance. With an estimated worth of $62 billion, according to Forbes, Buffet is the richest man in the world. But what has earned him almost universal respect is not merely his wealth: it is his wisdom in making financial decisions. So the public took some comfort in hearing that Buffet was investing $3 billion in GE and $5 billion in Goldman Sachs because he believed that the time was right for investing in these companies.

A few interesting points about Warren Buffet:

  • In 1943 at the age of 13, he filed his first tax return for his job delivering newspapers, deducting his bicycle as a business expense for $35.
  • In 1956 he began buying stocks in companies that he felt were considerably underpriced and then held them as long-term investments.
  • In 1962 at the age of 32, Buffet was already a millionaire from the growing value of his investments.
  • In 2006 he announced that he would give away 85% of his Berkshire Hathaway holdings to five foundations, with the largest portion going to the Bill and Melinda Gates Foundation.

On CNBC, Buffet recently shared his three rules for investing in a crisis:
1.  Cash combined with courage in a crisis is priceless.
2.  Don’t invest in things you don't understand.
3.  Don't try to catch a falling knife until you have a handle on the risk.
He also sat down for an interview with Charlie Rose to discuss the recent turmoil in the economy. Here, lightly edited for clarity and space, is an excerpt from that interview, offered in the hope that Buffet’s words of wisdom offer some reassurance.

On the proposed government rescue plan: Well, I don't think it's perfect, but I'd rather be approximately right than precisely wrong. We have a terrific economy but right now it’s like a great athlete that's had a cardiac arrest.  It's flat on the floor, and the paramedics have arrived.  They shouldn't argue about whether to put the resuscitation equipment a quarter of an inch this way or a quarter of an inch that way and they shouldn't start criticizing the patient because he didn't have a blood pressure test. Congress should do what's needed right now and I think they will.  When something is this important, they do the right thing.  This really is an economic Pearl Harbor.  That sounds melodramatic and I've never used the phrase before but this really is a crisis.

On why the government needs to step in: When $40 billion worth of seven-day treasury bills are sold at a yield of 1/20th of one percent, that means that a lot of people are at the point of putting their money under the mattress.  You don't want 300 million Americans putting their money under the mattress.  This economy doesn't work well without the lubrication of credit and trust.  And that's been lost.  The major institutions of the world all want to deleverage.  What was so easy to borrow against a year ago now looks like rat poison to them, so they're trying to deleverage.  There is only one institution in the world that can leverage up enough to be countervailing force to that, and it's the United States Treasury.

On the future: The people in this country are going  be living better in ten years than they are today and they’ll be living even better in 20 years.  We had a seven-for-one improvement in the average American standard of living in the 20th century.  We had the Great Depression, we had two world wars, we had the flu epidemic. We had all these terrible things happen but something about the American system unleashed more and more of the potential of human beings so that we had a seven-for-one improvement. You have entire centuries where if you got a 1 percent improvement, then it's something.  So we've got a great system.  And we've got more productive capacity now than we ever have.  The American worker is more productive than he's ever been.  We've got more people to do the work.  We've got all the ingredients for a sensational future.

QUOTE OF THE WEEK
Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.   Warren Buffett


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