Tap Dancing to Work: Warren Buffett on Practically Everything, 1966-2013

by Carol J. Loomis

Before we start in on questions, I would like to tell you about one thing going on recently. It may have some meaning to you if you’re still being taught efficient-market theory, which was standard procedure 25 years ago. But we’ve had a recent illustration of why the theory is misguided. In the past seven or eight or nine weeks, Berkshire has built up a position in auction-rate securities [bonds whose interest rates are periodically reset at auction] of about $4 billion. And what we have seen there is really quite phenomenal. Every day we get bid lists. The fascinating thing is that on these bid lists, frequently the same credit will appear more than once. Here’s one from yesterday. We bid on this particular issue—this happens to be Citizens Insurance, which is a creature of the state of Florida. It was set up to take care of hurricane insurance, and it’s backed by premium taxes, and if they have a big hurricane and the fund becomes inadequate, they raise the premium taxes. There’s nothing wrong with the credit. So we bid on three different Citizens securities that day. We got one bid at an 11.33% interest rate. One that we didn’t buy went for 9.87%, and one went for 6.0%. It’s the same bond, the same time, the same dealer. And a big issue. This is not some little anomaly, as they like to say in academic circles every time they find something that disagrees with their theory. So wild things happen in the markets. And the markets have not gotten more rational over the year...