Last year we saw, in one instance, how sound-bite reporting can go wrong. Among the 12,830words in the annual letter was this sentence: “We are certain, for example, that the economy willbe in shambles throughout 2009 – and probably well beyond – but that conclusion does not tell uswhether the market will rise or fall.” Many news organizations reported – indeed, blared – the firstpart of the sentence while making no mention whatsoever of its ending. I regard this as terriblejournalism: Misinformed readers or viewers may well have thought that Charlie and I wereforecasting bad things for the stock market, though we had not only in that sentence, but alsoelsewhere, made it clear we weren’t predicting the market at all. Any investors who were misledby the sensationalists paid a big price: The Dow closed the day of the letter at 7,063 and finishedthe year at 10,428.

Warren Buffet, 2009 shareholder letter, on sound-bite reporting

We got past Pearl Harbor. We will win the war…My enthusiasm for stocks is in direct proportion to how far they go down. Stocks are a lot less attractive now than they were a year ago.

Warren Buffet: CNBC via Reuters via NYT, Monday. On Obama, “I give Obama high marks.”

Those who invest only when commentators are upbeat end up paying a heavy price for meaningless reassurance.

Warren Buffet, 2009 Letter, on the price of risk.

People thought it was good news a few years back when housing starts – the supply side of the picture – were running about two million annually. But household formations – the demand side – only amounted to about 1.2 million. After a few years of such imbalances, the country unsurprisingly ended up with far too many houses.

There were three ways to cure this overhang: (1) blow up a lot of houses, a tactic similar to the destruction of autos that occurred with the “cash-for-clunkers” program; (2) speed up household formations by, say, encouraging teenagers to cohabitate, a program not likely to suffer from a lack of volunteers or; (3) reduce new housing starts to a number far below the rate of household formations.

Our country has wisely selected the third option, which means that within a year or so residential housing problems should largely be behind us, the exceptions being only high-value houses and those in certain localities where overbuilding was particularly egregious. Prices will remain far below “bubble” levels, of course, but for every seller (or lender) hurt by this there will be a buyer who benefits. Indeed, many families that couldn’t afford to buy an appropriate home a few years ago now find it well within their means because the bubble burst.

Warren Buffet, 2009 Letter, on housing, emphasis added.

We are likely to see some downward pressure on home prices in 2010

Jan Hatzius, chief U.S. economist at Goldman Sachs Group