In addition to permanent stock holdings, we are focused on:
1. Long term common stock investments
2. Medium term fixed income securities
3. Long term fixed income securities
4. Short term cash equivalent
5. Short term arbitrage commitments
Our goal is to maximize eventual net worth.
A. Surveying the field
There are three major investment categories. First: investments that are denominated in a given currency include money market funds, bonds, mortgages, bank deposits and other instruments. Second: involves assets that will never produce anything such as gold. Third: our own preference Investment in productive assets whether businesses, farms or real estate. Our goal is to increase ownership in first class businesses preferably in entirety.
B. Junk Bonds
Investing in stocks and junk bonds both requires you to do price value calculation and also to scan hundreds of securities with attractive reward/risk ratio. Due to management differences between both, you can expect heavy losses in junk bonds. Margin of safety matters when it comes to making the right investment.
C. Zero-Coupon Bonds
Most bonds require regular payments of interest. A Zero-Coupon bond requires no current interest payments. The investor will receive his yield by purchasing the security at a significant discount from maturity value. The effective interest rate is determined by the original issue price, the maturity value and the amount of time between issuance and maturity. Second form of Zero-Coupon bond is U.S. Treasury issue.
D. Preferred Stock
We want to link with people we admire and trust. We recognize that we are working with experienced CEOs who are very much in command of their own business but at moments would appreciate the chance to test their thinking on someone without ties to their industry. Made a number of mistakes in this investment.
E. Derivatives
We view them as time bombs. These instruments call for money to change hands at some future date and the amount will be determined by interest rates, stock prices or currency value. Despite high risk, derivatives are highly mispriced sometimes like bonds and stocks.
F. Foreign Currencies and Equities
Late in 2002, dollar's value begin to slide against major currencies. Charlie and I believe the exchange of goods and services between countries are beneficial. Berkshire's assets remain heavily concentrated in dollar based assets.
G. Home Ownership: Practice and Policy
The belief that value of home prices will increase over time leads to the destructive behavior in lending and borrowing. Homeowners felt richer and rushed to monetize by refinancings. The consumption increased as well and it was all fun while it lasted. In this case the victim was the lender because they lost money to the owners who lost their house through foreclosure but gained profit through high refinancing price. Clayton homes owned by Berkshire Hathaway followed far more sensible practices in lending at that time. Enjoyment and utility should be the primary motives for home ownership. Not profit and refinancing. The home purchased must fit the income of the purchaser. Home purchases should involve 10% down payment and monthly payment that can be handled by the borrower's income. That income must be verified. Keeping borrowers at their home must be our primary objective not taking them out of it.
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