-->S&P 500 um 32% outperformed
<ul> ~ Buffett</ul>

-->Charlie and I not only don’t know today what our businesses will earn next year - we don’t even
know what they will earn next quarter. We are suspicious of those CEOs who regularly claim they do know
the future - and we become downright incredulous if they consistently reach their declared targets. Managers
that always promise to “make the numbers” will at some point be tempted to make up the numbers.

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We continue to do little in equities. Charlie and I are increasingly comfortable with our holdings in Berkshire’s major investees because most of them have increased their earnings while their valuations have decreased. But we are not inclined to add to them. Though these enterprises have good prospects, we don’t
yet believe their shares are undervalued.
In our view, the same conclusion fits stocks generally. Despite three years of falling prices, which have significantly improved the attractiveness of common stocks, we still find very few that even mildly interest us. That dismal fact is testimony to the insanity of valuations reached during The Great Bubble.
Unfortunately, the hangover may prove to be proportional to the binge.

The aversion to equities that Charlie and I exhibit today is far from congenital. We love owning common stocks - if they can be purchased at attractive prices. In my 61 years of investing, 50 or so years have offered that kind of opportunity. There will be years like that again. Unless, however, we see a very high probability of at least 10% pre-tax returns (which translate to 6½-7% after corporate tax), we will sit on the sidelines. With short-term money returning less than 1% after-tax, sitting it out is no fun. But occasionally successful investing requires inactivity.
Last year we were, however, able to make sensible investments in a few “junk” bonds and loans. Overall, our commitments in this sector sextupled, reaching $8.3 billion by yearend. Investing in junk bonds and investing in stocks are alike in certain ways: Both activities require us to make a price-value calculation and also to scan hundreds of securities to find the very few that have attractive
reward/risk ratios. But there are important differences between the two disciplines as well.

In stocks,...
Purchasing junk bonds...

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