The challenging macroeconomic environment of subdued growth and low interest rates meant the reinsurance sector ended 2011 trading near 20-year lows. As Figure 1 illustrates, the average price to book ratio for the sector of 0.893 is just greater than one and a half standard deviations down from the 20-year average of 1.32.

It’s my experience that extremes do not last forever, so if you’re an enterprising investor, looking at reinsurance companies seems like a great use of time.

California’s rising standards of living and outstanding public schools and universities once attracted millions seeking upward economic mobility. But then something went radically wrong as California legislatures and governors built a welfare state on high tax rates, liberal entitlement benefits, and excessive regulation. The results, though predictable, are nonetheless striking. From the mid-1980s to 2005, California’s population grew by 10 million, while Medicaid recipients soared by seven million; tax filers paying income taxes rose by just 150,000; and the prison population swelled by 115,000.

Although Buffett has always sought to educate shareholders in his annual letters, this was the most pedagogical letter yet. In this year’s letter, Buffett pointed out the high points and low points for the year like he always does and then proceeds to educate readers in two main areas: (1) how to find the intrinsic value of Berkshire and (2) the basic choices available to investors and why Buffett prefers productive assets.

So why has Buffett gone to greater lengths this year to educate shareholders? I think there are several reasons. The first I think is attributable to the recent share repurchase program and Buffett’s desire to ensure that all shareholders have a firm understanding of the value of the company so they can get a fair deal if they choose to sell. A second reason might simply be that Buffett is trying to address the frustration some might feel due to Berkshire’s share price not keeping up with the market’s return in the past several years. Thus, perhaps Buffett is trying to assure—or perhaps convince—shareholders that the value of Berkshire is much higher than current prices suggest. Finally, we think this letter is evidence that Buffett is increasingly thinking about his own mortality. The annual letter to shareholders is an easy way for Buffett to make an impact upon people through education and imparting his decades of wisdom and experience.

Another aspect of the letter that interested me was an apparent contradiction. At the bottom of page six Buffett talks about buying stock in a company that is repurchasing its shares and thus hopes the stock price of languishes. Buffett then says that “talking our book” about a stock Berkshire owns—were it to be effective—would actually be harmful. Although I have the greatest respect for Buffett, I see a contradiction here because Buffett is doing exactly what he has cautioned against by spending the majority of the letter “talking his book” on a company in the midst of a repurchase program: Berkshire Hathaway!

One final point is that housing is a problem that continues to affect the U.S. economy. Buffett admits he was wrong on his timing of a recovery and explains that Berkshire’s four housing-related companies have depressed earnings. However, I thought it was very positive to see that a company like Nebraska Furniture Mart—a company that Buffett did not label as housing-related, but in my mind is very much housing-related—had record earnings last year. Furthermore, virtually every other business aside from housing have made full recoveries since 2008. This is very positive news.

So Berkowitz has released two case studies, and the investment theses are very simple. Both begin with some simple and similar points:

• trades at less than half or less than a third of book value
• fortress balance sheet
• leaders in respective markets
• potential for 20% return on investment

So with those simple facts would you take a serious look at investing in one or both of these companies?

See Case Study I and Case Study II.

According to Audit Analytics, a research firm in Sutton, Mass., 30% of the 1,000 leading U.S. companies have used the same firm to audit their books for at least a quarter-century. Fully 11% have used the same audit firm continuously for 50 years or more. Eight companies haven’t changed auditors in at least a century; the last time any of them hired a new accounting firm, William Howard Taft was in the White House.

Pretty shocking, right? Kinda makes you want to say that there needs to be a change. However, after reading through some of the comments to the article, the idea of term limits seems to be misguided and would likely not improve the chances of catching fraud. As one commenter put it, “Rotating the execution of a poorly designed process won’t fix anything. It might be time to go back to square one.” Also, there is already a requirement that the engagement partner of the auditing firm be rotated every five years. Furthermore, there already is a lot staff rotation with turnover, promotions and re-assignments.

So despite those attention-grabbing stats, it seems people should be always be hesitant to implement new laws or regulations, especially when there doesn’t seem to be any evidence that making a change would have net benefits.

There are many reasons for this, but I’ve looked at some interesting anecdotal evidence that suggests it will be very hard for Japan to make the necessary social and corporate changes to become more productive. For example, read this article about Sony Corporation, which details the rise and fall of the company. Stableboy Selections continues on this subject, arguing that its now Japanese companies (instead of American companies) that are making inferior style electronics. And then, given the recent scandal surrounding Olympus, you have to ask yourself whether there are more Japanese companies that have hidden losses through accounting tricks or fraud as opposed to admitting to mistakes and losses?

Further reading: the latest letter from Hayman Capital provides additional insight into the debt problems around the world.

So how would the SEC have known that LeCroy was a suspicious character a decade before it formally began its investigation of the sewer refinancings – in fact, before the infamous refinancings even took place?  In November 1997, Jefferson County Commissioner Bettye Fine Collins wrote the SEC asking for an investigation into the county’s swap transactions.  Collins argued that the county had been abused and that the transactions “raised the county’s expense by more than $1 million a year, and raised concern that the arrangement involved cronyism, patronage, excessive fees, and fraud.” (From examining the bond terms and swap confirmations, her numbers may have been accurate at the time.)

Why were these details left out of the SEC’s complaints?  Why did the SEC not acknowledge that the county had previous dealings with LeCroy?  Why would the SEC wait nine years to begin an investigation into the deals after being tipped off by a public official, of all people?  (I cannot imagine public officials are the SEC’s typical whistleblowers.)  Collins would have had access to any of the documents that the SEC would have required to determine if the pricing on the transaction was fair (marketing materials, swap confirmations, etc.).  If the SEC suspected her request was simply motivated by politics, they could have examined the deal to see if it was fair and moved on.  It is certainly not the SEC’s job to lecture governments about using swaps for speculative purposes rather than hedges, but if the SEC would have examined the deals, there would have been red flags immediately, such as the archaic commission structure on the swaps and the bizarre strategy that was being pitched to the county.  (The structure could have been appropriate in other sectors of the market, but certainly not for a county government.)  The original bond deals involved the same participants and modus operandi as the fraudulent deals that came later.