Buffett Has Spoken: Financial Enlightenments from Omaha

by: Brian Zen, CFA

Warren Buffett, the Oracle of Omaha and the world’s richest man, according to Forbes magazine, always has enlightening words for our money minds. Here are the major takeaways we recently collected from Omaha.

The worst of the financial crisis is over.

“The worst of the crisis on Wall Street is over,” declared Mr. Buffett. The game changer is the Fed stepping in to save Bear Sterns (NYSE:BSC). He believes that Citigroup, and other major banks, will be around in the future. You have to think that when the Fed steps in to save the number five, Bear Stearns, they will print money if they have to in order to get the big banks through. However, in terms of people with individual mortgages, there’s a lot of pain left to come.

Fed did the right thing to prevent crisis.

Mr. Buffett believes that the Fed did the right thing to save Bear Sterns. The contagion worry is real. If Bear Stearns had gone, the next day, somebody else would have gone. It could’ve been a very, very, very chaotic situation.

Stick to simplicity but don’t be afraid of complexity.

Although decrying the abuse and the complexity of derivatives, Mr. Buffett himself is extremely sophisticated and will look in just about any corner to find any mispricing. He noted that it is interesting if you look at the credit default swap market, which is essentially the cost of insurance against Citigroup defaulting on its bond obligations, it is implying a 3.4% likelihood of default. He thinks that is too much.

Every derivatives contract must be scrutinized carefully.

The CEO of a financial institution should also be the Chief Risk Manager. Mr. Buffett personally handle all of Berkshire’s (NYSE:BRK.A) (NYSE:BRK.B) derivative contracts. And he stays paranoid every single day. Back when they were running Salomon, Charlie Munger found a large number of mistakes in one of the derivatives contracts. They paid Arthur Anderson millions of dollars to review the contracts for them and yet they had missed them. These things are designed to fool. They fooled the accountants. But they didn’t fool Charlie!

The Chinese people are realizing their potential.

Mr. Buffett made a shocking prediction: The 19th century belonged to England, the 20th century belonged to the U.S. and the 21st century belongs to China. This echoed the belief of another great investor, Jim Roger, who has recently moved to the Greater China Region. However, both of them believe investors should wait for corrections to get into China investments.

The U.S. Congress is not playing fair with China.

People like to play the blame game, blaming China or others for their own problems. Mr. Buffett noted that accompanying the U.S. trade deficit with China are some policy decisions that is questionable. China, accepting the U.S. Dollar for their goods, has accumulated foreign exchange reserves of $1.5 trillion. Yet when they tried to take some of those funds and purchase third-tier oil company, Unocal, Congress went ape. Forcing other countries to take our money and then not allowing them to spend it as they wish does not seem be the right policy for generous Americans.

We are already in a recession.

The U.S. economy is already in recession, according to Mr. Buffett’s new definition for recession, namely that it is a time when people find their financial situation worse than it was six months ago.

Stay calm like a Zen Master.

During the uncertain times, Mr. Buffett’s advice is to remain calm when making financial decisions. It is during these trying times that you must learn how to drive the extraneous thoughts out of their mind, think for yourself, and be “detached” from the crowd. These mental self-control techniques were first invented by the ancient Zen Monks in Shaolin Temple. The late Mrs. Susan Buffett, a fan of Zen Buddhism, might have influenced some of Mr. Buffett’s best practices.

Mr. Buffett correctly grasped many good ideas from oriental philosophy.

It is interesting to note that, while a number of Western writers mis-interpreted many Zen sayings, Mr. Buffett and Mr. Munger intuitively grasped the essence and the intricacies of those ancient wisdoms. Mr. Munger once told me the yin-yang of “detachment”, namely, if you detach yourself too much into the deep mountains, you risk getting lost in real life. That was an insight that many thinkers failed to grasp even after a lifetime of devotion to the philosophy. At Zenway.com, we are doing in-depth studies comparing Zen training and the Warren Buffett way to come up a complete set of daily practices and rituals for aspiring financial athletes.