Including: the 2012 Berkshire Hathaway shareholder letter, some folksy wisdom, America’s healthcare industry, the bad incentives involved, and the article that everyone should read.

Good morning

The headlines:

  1. The Shareholder Letter.

    Link: what to look for.

    On Friday afternoon, Warren Buffett released his 2012 Berkshire shareholder letter in pdf format on his website. Which led to a thoroughly pleasant hour this morning while I read it.

    Obviously – I am a Warren Buffett fan. Mainly because a mix of folksy wisdom and financial commentary make me feel like business is simple, logical and easy. And in many ways – it probably should be: make good decisions based on the economic fundamentals; hire good people to work your business; don’t let greed get in the way of reasonable profit; question conventional wisdom, but not just for the sake of it; be fair and open… Like the rules for good relationships.

    Only – for most of us – unemotional decisions lack the gut instinct feel that are the obvious sign of a good decision; we hire people that we like and/or are cheap; greed and profit are the same thing; if everyone is doing it, then they must know something I don’t; and keep your cards close – the world is out to screw you.

    If only it were so easy. But that shouldn’t stop us from trying.

    Find time to read the letter. The best parts:

    – a mathematical explanation of why dividends should be an abberation (page 19 through 21);

    – why Berkshire is buying community newspapers, and why it makes so much sense (page 16);

    – the rules for good insurers, and where bad insurers fail (page 8);

    – this line (all Apple naysayers – take note):

    “Charlie and I believe in operating with many redundant layers of liquidity, and we avoid any sort of obligation that could drain our cash in a material way. This reduces our returns in 99 years out of 100. But we will survive in the 100th while many others fail. And we will sleep well in all 100.”


  2. Medical care.

    Link: the TIME article that everyone is talking about.

    I’ve been seeing the stories about rising medical costs for some time. Also, recently, in a lecture, I heard a notable economist state say that although the average American’s take-home salary has flat-lined for the last 30 years – his/her gross salary has been rising at a normal pace. And the reason for the discrepancy is rising health-care costs that get deducted automatically off salaries. I have no data to say if this is true – so take all the pinch of salt you need. Nevertheless, I don’t think we need shock statistic to demonstrate that there is a problem with America’s healthcare industry.

    Mainly because there are some unfortunate incentives involved. The pharmaceutical companies and medical equipment manufacturers and medical staff earn more money when they do more procedures and hand out more medication and charge higher rates for both.

    The medical aid companies may be concerned about this when they are privately-owned. But really, who gets incentivised to make it happen for less? The folks approving the payouts are paid to process forms, and don’t really care if the cost just went up – that’s not their job. The folks who watch the bigger picture have an easier time increasing contributions than they do persuading all the little hospitals and clinics to lower their costs. Oh – and then they offer alternative health plans that cover less in the small print.

    And that means that many individuals gets part-cover plans. And then go bankrupt when someone gets cancer. Because, when someone is sick, you don’t go “well let me examine the benefits of their survival versus the quality of our lives post their treatment” – you just hand over your credit card, pray, and then die of heart failure when the bill arrives.

    Ironically, as this article suggests, Medicare may actually be the cheapest way of providing healthcare. Private companies don’t have the ability to regulate the way hospitals charge – the government can. And it does. Because by law, “Medicare’s payments approximate a hospital’s cost of providing a service, including overhead, equipment and salaries“.

    Which means that Medicare pays $20.84 for an x-ray, where the private, uncovered, below-the-age-of-eligibility individual pays $283.00.

    According to McKinsey studies, America spends more on healthcare than the next 10 biggest healthcare spending countries COMBINED. And only about 40% of that is government-funded.

    It does, on some level, make you realise why Obamacare is such a vote-winner. I just don’t think that we non-Americans can understand.

    But for the record, if you’re looking to be shocked by a tale of exploitation and entrenchment, you should take an hour to read the above.

That’s all for now.

Have a good day.