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Read the pattern in Buffett's letters
Same pattern, new rates
In the 1970s, when inflation was high by American standards, Buffett explained how insurance float worked. In the era of zero interest rates, he explained float and its cost the same way. Whatever the conditions in the economy or the rates, he used one pattern each time to decide how to think about money.
Noise and focus
The pattern comes from discipline: cancel the noise and focus on the three things that matter most, which only deep study makes possible. Read carefully enough, the letters show that pattern repeating, and the repetition is the lesson.
What meetings showed
For someone who attended Berkshire annual meetings for years, going there never taught anything new. It showed how the same principles met each year's new economic conditions.
How does an insurer's float make money?
Insurers collect premiums up front and pay claims later, so they hold other people's money in the meantime and can invest it. If the insurer's underwriting breaks even, that money costs nothing to hold. Berkshire bought the insurer National Indemnity in 1967 for about 8.6 million dollars, which Buffett's later letters treated as the start of its insurance float.
Why was inflation such a worry in the 1970s?
U.S. consumer prices rose at an annual rate above 14 percent in 1980, according to the Bureau of Labor Statistics. Buffett wrote a 1977 Fortune article, How Inflation Swindles the Equity Investor, arguing that inflation erodes the real returns of stock owners. The oil shocks of 1973 and 1979 were among the forces pushing prices up.
What changed when interest rates hit zero?
After the 2008 financial crisis, the Federal Reserve cut its policy rate to a range of 0 to 0.25 percent in December 2008. Bond yields fell with it, so insurers' investment income per dollar of float shrank. The Fed held the rate there until December 2015.
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