🌏 Foreign Exchange: The Ark of Multi-Currency

📝 Overview

Foreign Exchange (Forex) investments represented Berkshire Hathaway's first major foray into betting against the U.S. Dollar. Initiated in 2002 and significantly expanded in 2003, this strategy marked a departure from Warren Buffett's lifelong avoidance of currency speculation.

🏜️ The Narrative: Squanderville vs. Thriftysville

In the 2003 Letter, Buffett introduced a profound parable to explain his concern with the U.S. Trade Deficit.

• The Parable: Imagine two islands, Squanderville and Thriftysville. Squanderville imports everything and exports nothing, paying for its lifestyle by giving Thriftysville "IOUs."
• The Outcome: Eventually, Thriftysville owns the entire island of Squanderville. The residents of Squanderville must work 24/7 just to pay rent and interest to their neighbors. They have become "Sharecroppers" in their own land.
• The Application: Buffett argued the U.S. was becoming Squanderville. He initiated the currency bet not for profit, but as an "Ark" to protect Berkshire’s capital from the inevitable devaluation of a "Sharecropper's Currency."

⚙️ Execution & "The Ark"

By year-end 2003, Berkshire held approximately $12 billion in foreign currency contracts across 12 different currencies (including the Euro, Pound, and Yen).

• A "Non-Joyful" Decision: Buffett noted he arrived at this decision with "no joy," as he is naturally a "Buy American" bull. However, the Noah Rule dictated that one must build an ark before it starts raining.
• Methodology: These were largely forward contracts, primarily betting against the dollar rather than picking a "winning" foreign currency.

🔗 Links

• Entities: Warren Buffett, Berkshire Hathaway
• Concepts: Noah Rule, Cost of Capital, Economic Tapeworm, Dollar Devaluation Thesis
• Sources: 2002 Letter, 2003 Letter, 2003 Meeting