I just finished reading Berkshire Hathaway’s annual letter to shareholders. On their website, anyone can find Warren Buffet’s annual letters, dating back to 1977 – that’s 42 tax reporting years ago. Books that compile the annual letters even go all the way back to 1965.

Free of charge and without any strings attached, Warren Buffett, through the stroke of his pen, has allowed any westerner to catch a glimpse of his mind for more than half a century and to gain insights as to how he thinks about capitalism and how he invests his shareholders’ funds and his own.

Reading the letters is a task that has far-reaching value, much more than any Ivy League college degree can offer. The richest investor ever lays out, in simple terms, how he thinks about allocation of capital. Following his picks, as soon as they become public every quarter, has generated an 11% ALPHA over index funds. He is a market wizard, even if you invest in delay.

But like all geniuses, he has his blind spots. We note that with all gurus, their obsession with sticking to their own philosophy, above all else, has caused them to miss out on many opportunities.

When visiting the ruins of Pompeii, Italy, the infamous town at the foothills of Mt. Vesuvius, you can find clay figures of the inhabitants of the ancient city. In A.D. 79, the dormant volcano suddenly erupted – without fair warning. When the lava came down the slopes of the mountain, the Italians were busy making love, taking their siestas (power naps) and minding their own business. Archeologists found them in these postures, hugging and sound asleep. They didn’t flee, since they weren’t aware of the ensuing danger.

In his 2018 annual letter, Warren Buffett reminds me of those numb Pompeiians, who were probably thinking that since the volcano hasn’t erupted in their lifetime, that the statistical probability of a future explosion is next to nil.

The citizens of Rome were probably under the same impression, not being able to imagine that their emperor would one day lose a battle or even an entire war, but it eventually happened.

Billionaire Ray Dalio, the greatest hedge fund manager of all time, talks about this oversight of longer cycles quite often. He accurately points out that some economic cycles are longer than the length of the average individual human lifespan. Therefore, people aren’t conscious of many long-term cycles. That is why Buffett surprises me with his optimism on the future prospects of the American economic machine. EVERY empire has seen its demise, each and every one. EVERY reserve currency has met its expiration date. This doesn’t mean the U.S. will become a 3rd world country, just that it will undergo major societal and economic changes.

The math is simple on this matter.

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    I do agree with Buffett that the national debt is not the most pressing problem of the federal government. The problem is SERVICING it. In other words, since the population is growing – with the tax receipts also growing, in turn – governments can borrow funds in ever-increasing amounts. What is key, though, is the debt/GDP ratio, which is a measure of how EFFECTIVE debt creation is.

    If a nation issues bonds of a certain amount, yet its GDP grows faster than its expenses, it can continue to function, even in the face of bigger debts. But when outgoing payments are a bottomless pit – just as Washington’s erratic deficit spending plan is – the end is in sight.

    88-yr old Warren might not be around to see it, but we will be here, most likely.

    Buffett loves to take trips down memory lane, reminding us that 250 years ago there were 4 million pioneers living here, and their offspring grew the United States of America into the wealthiest country ever. The same could be said of any culture who had humble beginnings and rose to world fame, only to crumble due to debt, over-taxation, wealth gap, civil unrest, or military mistakes. The quiet people of the Tiber River, the Latino tribe, could have never imagined that their destiny would one day be world domination, yet Rome dominated the political landscape for centuries. The farmers of the Nile River were not special either, yet ancient Egypt is still regarded by many as the greatest of all civilizations. Consider also the small, bankrupt country of Greece, a place that has contributed more to our present way of life than any other culture. All great civilizations commit errors, which topple them, at some point.

    Cycles, Warren, cycles; some greater than 250 years in the making, but nonetheless, the wheels of economic booms and busts are turning and the U.S. is likely next.

    The Dow is up 9 weeks in a row – 8 weeks to start 2019 – which makes it the longest winning streak since 1995. This last happened in 1964. The S&P 500 is having its best start to a year since 1987.

    These are not normal times. In fact, it is the most confusing investing environment in modern history. In 2018, the dollar was the best-performing asset class in the world. More hedge fund managers lost money than ever before.

    This must be the reason that although the market rallies higher, investors have actually been pulling funds out for 12 straight weeks. Even Buffett admits that he can’t make acquisitions in the terms and prices that the market is currently offering. 

    Don’t end up like the Pompeiians did. Secure your destiny by listening to your heart and to your intuition. All is not right in the land of plenty. This does not mean that the cure is to build a bunker and head for the hills. It does mean that owning stocks isn’t enough anymore. On top of your portfolio, there must be additional allocation, aimed at preservation as well as diversification.

    Don’t put all your eggs in the Corporate America basket. Look into rental real estate, private lending opportunities, precious metals, offshore asset protection, and whole life insurance policies as well.

    It’s been a heck of a ride, but the fun part is likely behind us.

    Best Regards,

    Tom Beck
    Research Partner,

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