One of the most interesting aspects of the 26-page annual missive penned by Berkshire Hathaway Inc. Chairman Warren Buffett was the reproduction of a 1939 letter from his grandfather and the mathematical trajectory one can trace from a homespun lesson on savings to Berkshire’s ability to massively benefit from the recent financial crisis.
In that 1939 letter from Ernest Buffett to one of his sons and the son’s wife, Ernest described the $1000 cash reserve he had built for them. “I hope it never happens to you, but the chances are that some day you will need money, and need it badly, and with this thought in view, I started a fund …” Ernest wrote. Without liquidity, he said, one might have to “sacrifice some of their holdings” when cash was immediately needed.
Even near the end of that most difficult decade of the 1930s, Ernest Buffett had faith in the value of U.S. currency. He advised his son and daughter-in-law to “place this envelope (of $1000) in your safety deposit box…”
At Berkshire Hathaway, Warren Buffett noted, they typically keep about $20 billion on hand, some because you never know what’s going to happen when you are in the insurance business. But that cash on hand, in Buffett’s words, allows the company in crises to “play offense while others scramble for survival.” In 25 days following the Lehman bankruptcy in 2008, Buffett added, Berkshire Hathaway invested $15.6 billion.
Some of those investments are coming due, Buffett lamented, as companies that needed Berkshire’s money desperately in the dark days of the fall of 2008 are gathering the strength to repay. They will repay at an aggregate premium of $1.4 billion, he said.
Proifiting during panics because of solid financial strength and lots of cash on hand might seem to stand in contrast to Buffett’s version of morning in America. Near the start of his letter, Buffett was downright inspirational. He would no doubt lift the spirits of any debt-ridden American reader who is constantly being told other nations are poised to pass America in economic strength, educational strength and other measures.
The 80-year-old Buffett wrote: “Throughout my lifetime, politicians and pundits have constantly moaned about terrifying problems facing America … The prophets of doom have overlooked the all-important factor that is certain: human potential is far from exhausted, and the American system for unleashing that potential … remains alive and effetive.”
Of course, when things aren’t going badly, Berkshire’s got railroads and utilities and insurance companies and a lot more companies that will prosper in good times.