Berkshire Hathaway
A New Chapter

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By EliasFardo
September 17, 2008

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It is of course too late to do so, and I am not smart enough by half to do it, but a new chapter needs to be written in "Investing for Dummies." The title would be, "Things that can go wrong, second and third order effects." If the author desires, AIG could be its case study. When I look at AIG, I see (well saw, it is not profitable now ) a very profitable company that has a lot of good businesses all over the world. It has ( tiresome, had ) a very long history of earnings, a huge capital base and a fanatic at the helm ( which may have been its undoing, more will be disclosed ). My Lord, even Berkshire owns it!

AIG has many tens of thousands of employees all over the world but was undone by a small group of people in its financial products division. If the final losses on the credit default swaps written by AIG were recognized only as the underlying economic conditions required, they may not be significant to its financial condition as a whole. We don't know yet, but the estimates I have seen indicate about a $12 billion final cash loss at the most. This may be understated, who knows? But the new chapter would study how a $12 billion unrealized loss can result in a $70 billion shortage in capital, and possibly the destruction of the largest insurance company in the world.

AIG is just an example. But for me to understand this new chapter, it will need to be written in plain English, using small words, and preferably in crayon. How am I supposed to know these things?

When the late Algis Budrys quit reviewing books for Galaxy in 1971, he ended his last column with this: And with that, we close. Point Two is that your faithful reviewer has no further grounds for believing himself even marginally competent. It has been about five years, I thank you for your kind attention, and I am hanging it up.

But not irretrievably.

I know how Algis felt. At present, I no longer believe myself even marginally competent in financial analysis. And like Algis, I am hanging it up. Since I told my wife I was doing so, I have to follow through. ( You married people know what I mean here. ) And again, if like Algis my retirement is not irretrievable, and out of necessity it is not; if I am going to continue to play this game I am going to do it differently. At the beginning of this process of different, I have two immediate areas of interest. (1) How to really, ( I mean really, like in second and third order ) understand how much and what can go wrong. (2) Learn to appreciate the true beauty in the mundane, the simple, the unsexy and the truly boring industries.

My guess is that it will take me almost two years. When it is safe on the surface again, could someone please call me?