March 1, 2011 - Warren Buffett, world's best stock investor, writes an annual letter to shareholders of Berkshire Hathaway, the holding company in which he does all of his investing. Fortunately for the world, he publishes it for everyone to read. While it is full of good investment advice, it also shows the Oracle of Omaha has a great sense of humor and a lot of wisdom. Here are some excerpts from his latest 2010 annual letter.

On America's promise: Don't let that reality spook you. Throughout my lifetime, politicians and pundits have constantly moaned about terrifying problems facing America. Yet our citizens now live an astonishing six times better than when I was born. 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 - a system that has worked wonders for over two centuries despite frequent interruptions for recessions and even a Civil War - remains alive and effective. We are not natively smarter than we were when our country was founded nor do we work harder. But look around you and see a world beyond the dreams of any colonial citizen. Now, as in 1776, 1861, 1932 and 1941, America's best days lie ahead.

On one of his investment moves: When I took control of Berkshire in 1965, I didn't exploit this advantage (the ability to allocate capital anywhere). Berkshire was then only in textiles, where it had in the previous decade lost significant money. The dumbest thing I could have done was to
pursue "opportunities" to improve and expand the existing textile operation - so for years that's exactly what I did. And then, in a final burst of brilliance, I went out and bought another textile company. Aaaaaaargh! Eventually I came to my senses, heading first into insurance and then into other industries.

On changes in corporate officers: As one wag put it, "You know you're no longer CEO when you get in the back seat of your car and it doesn't move."

On the housing industry: A housing recovery will probably begin within a year or so. In any event, it is certain to occur at some point. Consequently: (1) At MiTek, we have made, or committed to, five bolt-on acquisitions during the past eleven months; (2) At Acme, we just recently acquired the leading manufacturer of brick in Alabama for $50 million; (3) Johns Manville is building a $55 million roofing membrane plant in Ohio, to be completed next year; and (4) Shaw will spend $200 million in 2011 on plant and equipment, all of it situated in America. These businesses entered the recession strong and will exit it stronger. At Berkshire, our time horizon is forever.

On the effect of the market swoon: As one investor said in 2009: "This is worse than divorce. I've lost half my net worth - and I still have my wife."

On a retiring investment manager: Lou joined GEICO as its investment manager in 1979, and his service to that company has been invaluable. In the 2004 Annual Report, I detailed his record with equities, and I have omitted updates only because his performance made mine look bad. Who needs that?

On the characteristics of stocks: Fund consultants like to require style boxes such as "long-short," "macro," "international equities." At Berkshire our only style box is "smart."

On leverage: Unquestionably, some people have become very rich through the use of borrowed money. However, that's also been a way to get very poor. When leverage works, it magnifies your gains. Your spouse thinks you're clever, and your neighbors get envious. But leverage is addictive. Once having profited from its wonders, very few people retreat to more conservative practices. And as we all learned in third grade - and some relearned in 2008 - any series of positive numbers, however impressive the numbers may be, evaporates when multiplied by a single zero. History tells us that leverage all too often produces zeroes, even when it is employed by very smart people.

On borrowing: Borrowers then learn that credit is like oxygen. When either is abundant, its presence goes unnoticed. When either is missing, that's all that is noticed. Even a short absence of credit can bring a company to its knees. In September 2008, in fact, its overnight disappearance in many sectors of the economy came dangerously close to bringing our entire country to its knees.

On reaching for yield: We agree with investment writer Ray DeVoe's observation, "More money has been lost reaching for yield than at the point of a gun."

On money buying happiness: Remember: Anyone who says money can't buy happiness simply hasn't learned where to shop.

I can't recommend the whole letter too highly. It's full of well explained, easy to understand business ideas and investments. The link is: http://www.berkshirehathaway.com/letters/letters.html

Click on 2010. (It's in a pdf file.) Previous years are also well worth your time.

- Ted Allrich