In his recently released fourth-quarter letter to Berkshire Hathaway shareholders, Warren Buffett reiterates his belief that stocks are a much better investment than gold or bonds, and explains why he sometimes hopes his equity holdings decline in price.
The portion of Buffett’s letter in which he explains his belief in stocks over bonds and gold was published in Fortune a few weeks back, and we summarized his thoughts here. Here are a few highlights from other parts of his letter:
The Economy: Buffett says the strong performance of Berkshire’s non-housing businesses “illustrates the comeback of much of America from the devastation wrought by the 2008 financial panic. Though housing-related businesses remain in the emergency room, most other businesses have left the hospital with their health fully restored.”
Housing: Buffett acknowledges he was early last year in his call that the housing market recovery would occur within a year. He says the oversupply of houses created during the housing bubble’s rise is still being sopped up. But, he says, “Every day we are creating more households than housing units. People may postpone hitching up during uncertain times, but eventually hormones take over. And while ‘doubling-up’ may be the initial reaction of some during a recession, living with in-laws can quickly lose its allure.”
Buffett says the housing sector remains in a depression. “I believe this is the major reason a recovery in employment has so severely lagged the steady and substantial comeback we have seen in almost all other sectors of our economy,” he says. “Fortunately, demographics and our market system will restore the needed balance — probably before long. When that day comes, we will again build one million or more residential units annually. I believe pundits will be surprised at how far unemployment drops once that happens. They will then reawake to what has been true since 1776: America’s best days lie ahead.”
Why He Wants Some of Berkshire’s Stocks to Decline: Buffett talks about Berkshire’s own share repurchasing efforts, and the importance that price and valuation play in them — Berkshire will only buy shares if they are at or below 110% of book value. And, in order to get the most bang for its buck, Buffett likes to see companies whose stocks Berkshire owns buy back their own shares when they are trading on the cheap — and that means it’s best that some of the firm’s stock holdings languish if a share repurchasing program is ongoing or imminent (so long as the underlying businesses remain healthy). “The logic is simple: If you are going to be a net buyer of stocks in the future, either directly with your own money or indirectly (through your ownership of a company that is repurchasing shares), you are hurt when stocks rise,” he says. “You benefit when stocks swoon. Emotions, however, too often complicate the matter: Most people, including those who will be net buyers in the future, take comfort in seeing stock prices advance. These shareholders resemble a commuter who rejoices after the price of gas increases, simply because his tank contains a day’s supply.”
For a PDF copy of Buffett’s full letter, click here.