The Latest BerkshireHathaway Letter

Each year Warren Buffett issues his shareholder letter, and I always recommend it as worth reading. This year I again recommend the 2011 Chairman’s letter to Berkshire shareholders. Unlike his other public discourses in recent years, in the shareholder letters Buffet still hews to comments about the company, its operating subsidiaries, and investments. Even if you’re not a Berkshire shareholder and don’t run a business, you can learn a lot of the economy and investing from reading through the shareholder letters. In the recent letter, Buffett discusses all the firm’s businesses. I found especially interesting the discussions of the insurance group’s derivative investments, the capital investments required by the rail and utility businesses, and the analysis of the housing market.

Last year, I told you that “a housing recovery will probably begin within a year or so.” I was dead
wrong. We have five businesses whose results are significantly influenced by housing activity. The
connection is direct at Clayton Homes, which is the largest producer of homes in the country,
accounting for about 7% of those constructed during 2011.

Additionally, Acme Brick, Shaw (carpet), Johns Manville (insulation) and MiTek (building products,
primarily connector plates used in roofing) are all materially affected by construction activity. In
aggregate, our five housing-related companies had pre-tax profits of $513 million in 2011. That’s
similar to 2010 but down from $1.8 billion in 2006.

Housing will come back – you can be sure of that. Over time, the number of housing units necessarily
matches the number of households (after allowing for a normal level of vacancies). For a period of
years prior to 2008, however, America added more housing units than households. Inevitably, we
ended up with far too many units and the bubble popped with a violence that shook the entire economy.
That created still another problem for housing: Early in a recession, household formations slow, and in
2009 the decrease was dramatic.

That devastating supply/demand equation is now reversed: Every day we are creating more households
than housing units. People may postpone hitching up during uncertain times, but eventually hormones
take over. And while “doubling-up” may be the initial reaction of some during a recession, living with
in-laws can quickly lose its allure.

At our current annual pace of 600,000 housing starts – considerably less than the number of new
households being formed – buyers and renters are sopping up what’s left of the old oversupply. (This
process will run its course at different rates around the country; the supply-demand situation varies
widely by locale.) While this healing takes place, however, our housing-related companies sputter,
employing only 43,315 people compared to 58,769 in 2006. This hugely important sector of the
economy, which includes not only construction but everything that feeds off of it, remains in a
depression of its own. I believe this is the major reason a recovery in employment has so severely
lagged the steady and substantial comeback we have seen in almost all other sectors of our economy.