Warren Buffett's 2008 Letter to Shareholders

Here's a well written overview of Buffett's 2008 Berkshire Hathaway letter to shareholders. Written by fatpitchfinancials.com.
Warren Buffett's 2008 Letter to Shareholders



One of the most interesting parts in the letter is the debunking of the black-scholes formula for valuing long-term contracts. I agree with Buffett. In the short-term volatility is an accurate representation of risk, because the mark is unpredictable. And therefore, the Black-Scholes formula is about as good an indication of option value as possible.
However, in the long-term the economy will grow and the stock market will follow it. Therefore, volatility is no longer an accurate representation of investment risk. Investment risk in the long-term should be redefined as the probability of investment loss, and in the long term this risk, on average, will be next to 0%.

Of course, the definition of "long-term" depends on market valuation at the time of purchase. Purchases made 2-years ago, at the market peak, will not see break even levels for possibly 5-10 years. But Buffett's recently booked contracts were booked at depressed market levels and the contracts are set to expire in 10-25 years. Therefore, the probability of the market being at a level less then where it was recently, in 10-25 years is far less then 1%. These contracts can the be estimated at having a 99% probability of being profitable.


Disclosure: I do not own BRK shares.

SG