Berkshire Hathaway
Re: Leucadia National

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By EliasFardo
June 18, 2004

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I believe we have an unstable situation right now in the capital markets. As interest rates go up, it will cause a huge flow of money out of the markets and into fixed income choices. After enduring the last 4 years of ups and downs, people will be glad to see a high yielding sure thing; remember that people's minds are currently anchored to fixed incomes of around 2%...

This is exactly the way I see it also. I don't know how it can be otherwise. At some point, these suppressed interest rates will start to rise. I don't know exactly how and why this will happen, other than that things tend to revert to the mean. And the mean for interest rates is much higher than they are today.

In my opinion, the commentators who claim that stocks and the economy will continue to thrive in such a rising rate scenario are whistling past the graveyard. Denial is a very strong emotion, and I see denial everywhere. I see denial in asset prices, I see denial in the rate of growth in government spending and I see denial in the belief that inflation is dead. Impermanence is in the nature of all things, even asset prices, interest rates and inflation.

I believe that people place undue importance in current conditions. They tend to project such conditions, whether favorable or unfavorable, far into the future. Successful investors need to know what is going to happen before everyone else. For sure, you can't know exactly what will happen. But, one knows that the value of a wonderful company, selling for unreasonably low prices, will eventually out. Likewise, the value of a financially insecure company selling for outrageous prices, will eventually out. This is about all an investor can really know: that value will out, one way or the other. Which is again, impermanence. The greatest benefit an investor has is change. The better one can predict such change, the wiser one can determine how to benefit from such change, and the more courageous he is in acting on such knowledge, the better will be his returns.

This also requires one to be, intellectually at least, a loner. One must be emotionally secure holding a position that everyone else dismisses as nonsense. Today, the crowd says that these unsustainably high asset prices will preserve against rising interest rates, and they will give you studies and slides and theories to support that position. Buffett doesn't buy it for a minute, and neither should we.

If you want to be a contrarian and buy the least loved asset available, you need look no further than cash. Everyone hates it. I believe it is time to get bullish on cash. Returns will be dismal. You will be the butt of jokes. Your cocktail party conversations will be greeted with discomfort. And as asset prices continue to rise, you will be wrong, wrong, WRONG.

But, I am a very stubborn fellow. I only see one real reason to invest: to insure my financial future. It is not for glory, but groceries. It is not for fame, but family. It is not for cheers, but clothing. So, I have some money sitting around for a few years, yielding nothing. Since I am accountable only to myself and my family, why should I care? No one is going to fire me. No one forces me to do anything. Poor returns for one or two years; what possible difference does it make when doing the opposite runs a risk of a permanent forfeiture of capital?

Let me go once again to my favorite Buffett quote. Here is what he wrote to his partnership investors in 1969 when he closed down the partnerships and returned their money, along with Berkshire Hathaway stock to those who wanted it - "I am out of step with present conditions. When the game is no longer played your way, it is only human to say the new approach is all wrong, bound to lead to trouble, and so on. On one point, however, I am clear. I will not abandon a previous approach whose logic I understand ( although I find it difficult to apply ) even though it may mean foregoing large, and apparently easy, profits to embrace an approach which I don't fully understand, have not practiced successfully, and which possibly could lead to substantial permanent loss of capital."

He can't close down Berkshire. But, Berkshire can go into cash.

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