The Oracle Speaks About Overreaction

Last week, Berkshire Hathaway, Inc. released its 2008 results as well as Chairman Warren Buffett's letter to shareholders.  Both provided a sobering view of the 2008 economic crisis and the bleak outlook for 2009.  Of particular note, Mr. Buffett (aka the "Oracle of Omaha") discussed his view of the pricing of risk in today's investments. Here's what he had to say.

The investment world has gone from underpricing risk to overpricing it. This change has not been minor; the pendulum has covered an extraordinary arc. A few years ago, it would have seemed unthinkable that yields like today’s could have been obtained on good-grade municipal or corporate bonds even while risk-free governments offered near-zero returns on short-term bonds and no better than a pittance on long-terms. When the financial history of this decade is written, it will surely speak of the Internet bubble of the late 1990s and the housing bubble of the early 2000s. But the U.S. Treasury bond bubble of late 2008 may be regarded as almost equally extraordinary.

A crisis and panic will drive people to do crazy things, such as overreact in the face of uncertainty.  Having a solid risk management framework and approach provides the discipline to avoid overreaction.  Visit www.WheelhouseAdvisors.com to learn more.