- Wealth PMS (50L+)
Warren Buffett’s annual shareholder letter:
You may recall a 2003 Silicon Valley bumper sticker that implored, “Please, God, Just One More
Bubble.” Unfortunately, this wish was promptly granted, as just about all Americans came to believe that
house prices would forever rise. That conviction made a borrower’s income and cash equity seem
unimportant to lenders, who shoveled out money, confident that HPA – house price appreciation – would
cure all problems. Today, our country is experiencing widespread pain because of that erroneous belief.
People believe that in India as well. But it doesn’t quite seem that way.
That [huge insurance profits] party is over. It’s a certainty that insurance-industry profit margins, including ours, will fall
significantly in 2008. Prices are down, and exposures inexorably rise. Even if the U.S. has its third consecutive catastrophe-light year, industry profit margins will probably shrink by four percentage points or so. If the winds roar or the earth trembles, results could be far worse. So be prepared for lower insurance earnings during the next few years.
If Buffett’s saying that, it means global insurers will get hit. Problems for the IT outsourcers like Infy, TCS, Wipro – each of which have a huge number of large insurers on their big-customer list.
Buffett himself may see a pretty bad year for his investments. AmEx, where he owns 13%, is likely to see huge credit card defaults or slowing growth. Wells Fargo and Moodys are going to be hit badly with the credit clean up acts. Bond insurance doesn’t work well in a slowing economy, and BH is starting in there. FMCG/Retail is related to economy growth (Posco, P&G, Tesco) and that is suspect. Apart from this BH owns homebuilders, interior furnishers etc. and that is pretty much toast as a business today.
I think we in India will have a bad year too, but it will be a great year for some 10 year stories. Watch the next three quarters. Every company that beats its sector or the index, is worth investigating and buying.