The Practical Way

How We Can Restore Confidence

Thursday, 25th February 2010 | Articles

The Washington Post
By Charles T. Munger
February 11, 2009

Our situation is dire. Moderate booms and busts are inevitable in free-market capitalism. But a boom-bust cycle as gross as the one that caused our present misery is dangerous, and recurrences should be prevented. The country is understandably depressed — mired in issues involving fiscal stimulus, which is needed, and improvements in bank strength. A key question: Should we opt for even more pain now to gain a better future? For instance, should we create new controls to stamp out much sin and folly and thus dampen future booms? The answer is yes.[...]

Basically, It’s Over

Thursday, 25th February 2010 | Articles

Slate
By Charles Munger
Sunday, Feb. 21, 2010

In the early 1700s, Europeans discovered in the Pacific Ocean a large, unpopulated island with a temperate climate, rich in all nature’s bounty except coal, oil, and natural gas. Reflecting its lack of civilization, they named this island “Basicland.”

The Europeans rapidly repopulated Basicland, creating a new nation. They installed a system of government like that of the early United States. There was much encouragement of trade, and no internal tariff or other impediment to such trade. Property rights were greatly respected and strongly enforced. The banking system was simple. It adapted to a national ethos that sought to provide a sound currency, efficient trade, and ample loans for credit-worthy businesses while strongly discouraging loans to the incompetent or for ordinary daily purchases.[...]

Mr. Buffett on the Stock Market

Thursday, 25th February 2010 | Articles

Fortune
By Warren Buffett
November 22, 1999

The most celebrated of investors says stocks can’t possibly meet the public’s expectations. As for the Internet? He notes how few people got rich from two other transforming industries, auto and aviation.

Warren Buffett, chairman of Berkshire Hathaway, almost never talks publicly about the general level of stock prices–neither in his famed annual report nor at Berkshire’s thronged annual meetings nor in the rare speeches he gives. But in the past few months, on four occasions, Buffett did step up to that subject, laying out his opinions, in ways both analytical and creative, about the long-term future for stocks. FORTUNE’s Carol Loomis heard the last of those talks, given in September to a group of Buffett’s friends (of whom she is one), and also watched a videotape of the first speech, given in July at Allen & Co.’s Sun Valley, Idaho, bash for business leaders. From those extemporaneous talks (the first made with the Dow Jones industrial average at 11,194), Loomis distilled the following account of what Buffett said. Buffett reviewed it and weighed in with some clarifications.[...]

Who Really Cooks the Books?

Thursday, 25th February 2010 | Articles

The New York Times
By Warren E. Buffett
Published: July 24, 2002

OMAHA— There is a crisis of confidence today about corporate earnings reports and the credibility of chief executives. And it’s justified.

For many years, I’ve had little confidence in the earnings numbers reported by most corporations. I’m not talking about Enron and WorldCom — examples of outright crookedness. Rather, I am referring to the legal, but improper, accounting methods used by chief executives to inflate reported earnings.

The most flagrant deceptions have occurred in stock-option accounting and in assumptions about pension-fund returns. The aggregate misrepresentation in these two areas dwarfs the lies of Enron and WorldCom.[...]

Fuzzy Math And Stock Options

Thursday, 25th February 2010 | Articles

The Washington Post
By Warren Buffett
Tuesday, July 6, 2004

Until now the record for mathematical lunacy by a legislative body has been held by the Indiana House of Representatives, which in 1897 decreed by a vote of 67 to 0 that pi — the ratio of the circumference of a circle to its diameter — would no longer be 3.14159 but instead be 3.2. Indiana schoolchildren momentarily rejoiced over this simplification of their lives. But the Indiana Senate, composed of cooler heads, referred the bill to the Committee for Temperance, and it eventually died.

What brings this episode to mind is that the U.S. House of Representatives is about to consider a bill that, if passed, could cause the mathematical lunacy record to move east from Indiana. First, the bill decrees that a coveted form of corporate pay — stock options — be counted as an expense when these go to the chief executive and the other four highest-paid officers in a company, but be disregarded as an expense when they are issued to other employees in the company. Second, the bill says that when a company is calculating the expense of the options issued to the mighty five, it shall assume that stock prices never fluctuate.[...]