Swimming naked gets so embarrassing

While we await the outcome of Washington’s proposed mega-bailout, an observation from Warren Buffett sheds more light on the current financial crisis than most recent commentaries. The quote goes back to six months before Buffett’s announcement Tuesday afternoon that his firm would invest $5 billion in Goldman Sachs. In his annual letter to Berkshire Hathaway shareholders earlier this year, Buffett said:

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. As house prices fall, a huge amount of financial folly is being exposed. You only learn who has been swimming naked when the tide goes out — and what we are witnessing at some of our largest financial institutions is an ugly sight.

Of course, a true value investor isn’t above putting money into something “ugly” if the price is right. With the prospect of Uncle Sam writing bigger-than-ever checks to ease the pain of Wall Street’s rummage sale, Buffett decided to buy into the least ugly of the big names, Goldman Sachs.

Apart from trying to learn from the financial industry’s woes, investor relations folks might look to Berkshire Hathaway annual reports as an interesting model. Thirty-one years of shareholder letters are available online. Though most IR professionals don’t have “the sage of Omaha” as a CEO, the candid tone, factual recitation of results, and admission of mistakes offer plenty of examples for emulation.

I probably wouldn’t recommend humor in an annual report – unless your CEO is some sort of sage – because clarity is the main goal in investor communications. And not everyone is Warren Buffett.

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