How to Think Like Warren Buffett, Part 25
Posted by admin in Investing,Warren Buffett
We're getting closer to the end of our 30-part series in which we pick through Warren Buffett's Letters to Berkshire Hathaway shareholders for clues on how we can be as rich as the man.
Part 25 covers the year 2001, a year in which few people got rich and most of us had our worldviews permanently changed by the 9/11 terrorist attacks.
For the first time in this series, Berkshire Hathaway's book value dropped:
Berkshire's loss in net worth during 2001 was $3.77 billion, which decreased the per-share book value of both our Class A and Class B stock by 6.2%.
One of Buffett's themes throughout all of his letters is that Berkshire Hathaway buys businesses and then leaves those in charge alone to run the businesses as they've always done. It's proven to be a wise decision, with at times unbelievable results:
We now have completed 37 Berkshire years without having a CEO of an operating business elect to leave us to work elsewhere.
An interesting story tied to a Berkshire acquisition in 2001:
In early 2000, my friend, Julian Robertson, announced that he would terminate his investment partnership, Tiger Fund, and that he would liquidate it entirely except for four large holdings. One of these was XTRA, a leading lessor of truck trailers. I then called Julian, asking whether he might consider selling his XTRA block or whether, for that matter, the company's management might entertain an offer for the entire company. Julian referred me to Lew Rubin, XTRA's CEO. He and I had a nice conversation, but it was apparent that no deal was to be done.
Then in June 2001, Julian called to say that he had decided to sell his XTRA shares, and I resumed conversations with Lew. The XTRA board accepted a proposal we made, which was to be effectuated through a tender offer expiring on September 11th. The tender conditions included the usual "out," allowing us to withdraw if the stock market were to close before the offer's expiration. Throughout much of the 11th, Lew went through a particularly wrenching experience: First, he had a son-in-law working in the World Trade Center who couldn't be located; and second, he knew we had the option of backing away from our purchase. The story ended happily: Lew's son-in-law escaped serious harm, and Berkshire completed the transaction.
Trailer leasing is a cyclical business but one in which we should earn decent returns over time. Lew brings a new talent to Berkshire, and we hope to expand in leasing.
Buffett beats himself up over Berkshire's losses on September 11, 2001, saying he failed to mitigate the risks he knew were possible from terrorism. He also offered these thoughts about terrorism and the potential future of the insurance industry (Berkshire's bread and butter), as well as the consequences to us all:
Insurers have always found it costly to ignore new exposures. Doing that in the case of terrorism, however, could literally bankrupt the industry. No one knows the probability of a nuclear detonation in a major metropolis this year (or even multiple detonations, given that a terrorist organization able to construct one bomb might not stop there). Nor can anyone, with assurance, assess the probability in this year, or another, of deadly biological or chemical agents being introduced simultaneously (say, through ventilation systems) into multiple office buildings and manufacturing plants. An attack like that would produce astronomical workers' compensation claims.
Here's what we do know:
1. The probability of such mind-boggling disasters, though likely very low at present, is not zero.
2. The probabilities are increasing, in an irregular and immeasurable manner, as knowledge and materials become available to those who wish us ill. Fear may recede with time, but the danger won't-the war against terrorism can never be won. The best the nation can achieve is a long succession of stalemates. There can be no checkmate against hydra-headed foes.
3. Until now, insurers and reinsurers have blithely assumed the financial consequences from the incalculable risks I have described.
4. Under a "close-to-worst-case" scenario, which could conceivably involve $1 trillion of damage, the insurance industry would be destroyed unless it manages in some manner to dramatically limit its assumption of terrorism risks. Only the U.S. Government has the resources to absorb such a blow. If it is unwilling to do so on a prospective basis, the general citizenry must bear its own risks and count on the Government to come to its rescue after a disaster occurs.
There are other bits of interest in this letter, but little of Buffett's usual jovial anecdotes and quotable passages, perhaps reflecting the somber mood of the year overall.
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