Categories

Archives

Meta:

Blogroll

Recent Posts

Search

The Swamiji of Investing: a Weekend with Warren Buffett at the 2006 Berkshire Hathaway Annual Meeting

May 11th, 2006 by Kaushal Majmudar
Every May, thousands make a pilgrimage to Omaha, Nebraska in America’s heartland to attend a meeting that is unique in global business. This year, Berkshire Hathaway’s Chairman and CEO Warren E. Buffett (the second richest man in the world) and Vice-Chairman Charles T. Munger (his long-time friend and partner) welcomed 24,000 devotees to the Quest Center in downtown Omaha for an event that has been dubbed a “Woodstock for Capitalists.”    

Attending the Berkshire annual meeting is a transformational event - those who attend receive priceless lessons in business, investing, and life. Long time shareholders have also profited handsomely – a share of Berkshire Hathaway could have been purchased for $70 per share in 1971 and now sells for over $89000 – a compound return of 23.4% per year (Buffett cautions the audience each year that Berkshire’s current size makes it unlikely that future price appreciation will approach the past).

The meeting attracts attendees from all 50 states and around the world. More than 500 attendees this year flew to Omaha from India, Australia, Europe, and other parts of Asia to attend. There were captains of industry, including Bill Gates (who sits on Berkshire Hathaway’s board of directors) and Bob Iger (the CEO of the Walt Disney Company) in attendance. A number of professional investors and investment firms, including The Ridgewood Group, were also represented in the audience. However, the most meaningful participation comes from the tens of thousands of “ordinary” people who come to ask questions and learn from Buffett and Munger’s generous insights and wisdom delivered with their trademark candor and humor.

The Berkshire meeting is both a social and an educational gathering. Most participants arrive prior to the meeting. On Friday, participants get acclimated and/or renew their ties with past attendees and friends. On Saturday morning, the official meeting starts with a humorous movie and this year’s movie did not disappoint. In addition to Buffett and Munger (as well as animated renditions of the duo), the movie included cameo appearances by celebrities and friends like Tiger Woods (the golfer), Bono (the musician and activist), Jimmy Buffett (the singer), Jamie Lee Curtis (the actress), Governor Arnold Schwazenneger, Bill Gates (playing himself), and the cast of the Desperate Housewives (Disney’s hit Sunday night show).

After the lighthearted movie, Buffett and Munger (who sit on a dais at the front of the arena) field questions from the audience for almost five straight hours (with a one hour lunch break). There is no restriction on the subject matter of the questions, so Buffett and Munger’s intellects and humility are on full display as they respond to inquiries in fields as wide ranging as terrorism, social security, the financial performance of Berkshire or one or more of its subsidiaries, and advice for students and aspiring investors. Although Buffett just celebrated his 75 birthday, he appeared to be in great health and displayed tremendous energy and mental acuity as he fielded questions.

The longest comment/question of the day came from an Indian-American physician from Texas who christened Buffett, the “Swamiji of Finance” and praised Buffett for the work he does in teaching and sharing his knowledge and the kindness that he had shown a few years earlier to the questioner’s 6 year old son on one of his rare public visits to christen a new furniture mart in Texas.

Although a more detailed transcript of all the questions and answers would be too long for this article (if interested visit: www.valueinvesting.info for a more detailed transcript of the meeting), some thoughts are included below:

Munger: It is a wise policy to trumpet your failures and to stay quiet about your successes (in response to a question about commodities, Warren admitted that he had made the mistake of buying a large stake in silver too early and then selling it too early – if they still had the stake, they would have made many billions more on the investment)

Buffett: My desk has three boxes (ed. note: metaphorically speaking), IN, OUT, and TOO HARD. We put a lot of stuff in the TOO HARD basket. It is important to know and stick to your circles of competence and pass on things that don’t fit squarely in your areas of expertise (later when a questioner asked about what they thought could be done to improve and fix some of the problems in the $2 trillion health care industry, Munger quipped that that one was definitely in the TOO HARD category).

Buffett: More than half the companies in America have executive compensation schemes that are grossly unfair to the owners – in part because of management overreaching and in part because so many companies now rely on outside “compensation consultants” to set the incentives without proper oversight and accountability by the board of directors. A good compensation scheme should be long-term performance oriented and directly tied to the factors that the managers control (he gave the example that in an oil or energy company, a properly designed compensation system should not pay managers a lot more today because they are earning record profits based on oil prices hitting new highs – a factor that has little to do with management’s actions – but should rather be tied to a long-term metric such as the company’s recent average finding costs of oil – a variable that is likely to more reflective of management’s skill and performance and one that if low will also create significant value to shareholders in the long-term).

Buffett went on to observe that the worst of the seven deadly sins must be ENVY, because it makes the person committing the sin suffer more than anyone else (there was much laughter when he quipped that at least GLUTTONY, which he could fault himself with at times, and possibly LUST had some upsides for the sinner).

In response to a question about commodities and whether it was a good time to invest, Buffett observed that trends in investing and in markets often start out with some fundamental merit such as a legitimate supply and demand imbalance, but that in his experience, there is almost always a point at which speculators take over and begin to dominate the price movements. Speculation usually takes over once the positive price history and upward movement start to become clearer and establish a long enough history which attracts a much wider following. His guess was that certain commodity markets like copper and silver might be in such a speculative phase today. If you play during these times (which most people do), you are playing with fire and risking disaster when the party ends. His general advice was to stay away summarizing his thoughts with the observation that “What the wise man does in the beginning, the fool does in the end.”

At The Ridgewood Group (www.ridgewoodgrp.com), we share many of the philosophies and principles of long-term investing and patience that are shared by Buffett. Indeed, many of the themes we have touched on in previous Biz India articles have been influenced by Buffett and Munger’s ideas. If you are serious about using intelligent investing as a way to secure your financial freedom, it is a great idea to read Buffett’s writings and maybe even attend the annual meeting in person. It is an investment in time that will surely pay many personal, intellectual, and perhaps even monetary dividends in the years to come.
_____________________________
Kaushal Majmudar is the Chief Investment Officer of The Ridgewood Group (www.ridgewoodgrp.com), a Short Hills, NJ based money management firm focusing on value-oriented investing. Mr. Majmudar, a Harvard graduate and Charted Financial Analyst, is also a noted expert on the investment techniques of great investors like Warren Buffett, the second richest man in the world. You can learn more about Warren Buffett and Berkshire Hathaway, the topic of this article, by visiting www.valueinvesting.info.

Posted in Warren Buffett | 2 Comments »

The Anti-Warren Buffett Club

November 2nd, 2005 by Kaushal Majmudar
Warren Buffett is a hero and mentor to many of us in the value investing community, including those of us here at The Ridgewood Group. To those in the know, he is admired for his wit, wisdom, business acumen, and many other qualities as well. Until recently, I had personally encountered almost no one that did not largely feel this way or express admiration for his many good qualities and contributions. 

Of course, the vast majority of people probably know him only superficially as “that very rich guy, second to Bill Gates” or “that Coke-and-Gillette-buy-and-hold-forever guy.” In a culture which deifies success for its own sake and idolizes the super rich (good looking or not) and the famous and beautiful, its not surprising that Buffett has a large and diverse following. Almost anyone who has ever met, read about, or studied him in any depth has come away humbled and impressed at a far deeper level.

Until recently, the only person I have encountered who disliked Buffett was my ex-boss in investment banking, who openly expressed disdain for the Oracle of Omaha. I discounted this hatred, however, since his criticism seemed to be based more on personal bitterness related to Warren’s handling of bonus compensation when this individual was working as a senior banker at Salomon Brothers during Buffett’s brief Chairmanship than on any direct criticism of the man’s principles.

I was therefore surprised and amused when I recently ran across Victor Niederhoffer’s blog called Daily Speculations. I don’t know him. He seems to be a interesting, colorful, even eccentric individual who calls himself “The Chairman”. The name of his blog says much about his mindset. But far more amusing are his postings on Buffett and Berkshire. I have not read more than a small handful of his posts, but it was not hard find gems like:

1.) Shorting Berkshire where he volunteers “Out of shame, hubris and spite, I shorted some extra Berkshire even though it is even more self-destructive and wrong to short a conglomerate like Berkshire than to try for a boast in squash. I doubtless will be licking my wounds on this, as my plan is to wait until it goes below $85,500, take my 10% or so profit, and then hedge it with some S&P futures.” or

2.) Nebraska Chronicles where he surmises that he has “read all the books about the Sage, [and] his bearish annual reports And I find that there are only two sensible and valuable things he has said (as he never talks in public about the importance of using tax losses and float from an insurance operation to buy stocks for the long term during a rising yield curve environment, and the importance of having very good friends and token ownership in the media, which are the actual sources of his success)” or

3.) Another post where he concludes that “Berkshire Hathaway has been hobbling along near its lows in the 81,000 handle as is appropriate for a company whose chief honcho infuses with disguised hubris his mantras: “I am so much more honest than you or her,” and “I cant find any good stocks to buy for the last 10 years” and, ” I find dishonesty rife in the investment field as compared to myself and the companies I buy, which I can buy in a flash by just looking at their financials, and I just look for companies I understand like See’s Candies and Brown Shoes.” However, the Friday 9/17 close of 2720, a 21-month low, seems to me the manifestations of the “Morse effect” (see EdSpec) so common in markets and life where a former revered statesman finds that all his former hagiographers are the most vehement in their execration when he stumbles. I found the same effect directed at me when I “went under” in 1997 (have I mentioned it in the last week?), as is appropriate.”

BTW, the last sentence is a reference to the following (quoted from an article by Robert Hunter called “Victor Niederhoffer’s Garage Sale” on derivativestrategy.com) which explains that “Niederhoffer’s $130 million funds blew up on October 27, 1997, when the Asian crisis spooked the U.S. equity market, wiping out all his capital. . . . In order to pay down his debts, Niederhoffer took a mortgage on his estate and sold an interest in a small investment banking business for $1 million, but these steps were not enough to maintain even a modicum of the lifestyle to which he and his family had been accustomed. The result: the silver had to go”

No doubt, Mr. Niederhoffer learned from his 1997 experience and should get kudos for being open about his own setbacks (we all have them). However, his comments above reminds me of the quote in the Food for Thought section of our website at http://www.ridgewoodgrp.com/ from Andrew Carnegie about never having meet someone who made a fortune from speculation and kept it.

My point in sharing the above is not to criticise Mr. Neiderhoffer, as he is certainly within his rights to have his opinion and share it with the world (thought he might want to carefully re-read and review Buffett’s many discussions on Margin of Safety given his 1997 experiences).

In a marketplace of ideas, we should all expose ourselves to multiple points of view with the hope that the best ideas will win out in the end. Indeed, as Charlie Munger has pointed out, Berkshire (and its annual meeting) is not far removed in many respects from the annual gathering of a cult (albeit one focused on celebrating and learning a number of fundamentally sound ideas). I know more than a handful of Buffett followers who think nothing of thoughtlessly substituting the Sage’s thinking for their own (even thought Buffett and Munger frequently and forcefully advise everyone to think for themselves).

I have no quibble with Mr. Neiderhoffer, though I think he is largely wrong in the above points (his point about float however is right - not that Buffett hides the fact). No, my point is to remind us that you simply can’t please all of the people all of the time (so you shouldn’t try). Also, since investing is a probabilistic pursuit, there is even a small chance that Neiderhoffer may, in time, be proven right in some of his contentions. My money, however, is on Buffett and I don’t think its going to be even close.

Posted in Warren Buffett | 1 Comment »

Berkshire Hathaway Is Undervalued

August 12th, 2005 by Kaushal Majmudar
Despite how visible it is, Berkshire may be a contemporary illustration of how the market provides long-term investors opportunities to buy quality at a discount. Sometimes, value is not hidden at all, but available in plan view. 

In examining Berkshire, it is helpful to understand some of the concerns that are creating the present opportunity. These reasons may include the following:

  • The recent and well publicized scandals relating to AIG and the ongoing probes that create something that the pundits call “headline risk”
  • Warren Buffett, the Chairman, CEO, and largest shareholder is 75. Though in good health, the market may anticipate that the price will fall sharply after an announcement of his death or disability
  • Berkshire’s largest businesses involve insurance, though having some commodity characteristics, Berkshires insurance subsidiaries are differentiated by their credit worthiness and ability to write large risks so they have long-term promise. In the short-term, however, almost all insurance businesses are facing near-term pricing pressures after several great years of firm and increasing pricing in the aftermath of the 9/11 attacks
  • Berkshire maintains large cash balances and the low returns currently earned on those balances may be a concern to some
  • The lack of a dividend despite strong cash flow
  • The “high” price and the limited liquidity associated with the stock as a result of never splitting its shares
  • Current management’s focus on fundamentals and building the business for the long-term. The flipside of this emphasis is a notable lack of promotional activity. On the contrary, Berkshire has acted decisively to dampen speculation in its shares whenever possible
  • Susan Buffett’s death in 2005 meant that her holdings passed on to the Buffett Foundation which may sell to fund its activities. This overhand of stock might be creating additional pressure on the price.
     

    While all of the above are legitimate concerns, we believe that the long-term future of Berkshire is probably more dependable than that of the majority of other companies. Using our framework, we would point out that Berkshire:

     

    1. Owns a collection of outstanding businesses whose economics we can understand
    2. Enjoys strong competitive advantages
    3. Is led by a deep bench of ethical and forthright management superstars including the team of Warren Buffett and Charles T. Munger and an outstanding board that more recently includes Bill Gates
    4. Is currently selling for a price under its intrinsic value.

    Although the factors cited above have been in place for sometime and are generally well recognized, Berkshire has continued to be “on sale.” Moreover, Berkshire has the wonderful additional characteristic that it is a safe investment with very low risk of losing our money from current levels. Even on a short-term basis it tends to trade opposite to the market and is rightly viewed as a safe haven in times of difficulty. If some of the macro factors we cited at the beginning of our 2005 semi-annual letter to clients start having a real impact, Berkshire’s price should begin to reap the benefits, both from a short-term flight to quality and a longer-term ability to deploy its capital in the compelling market values that would be created by any gloomy consensus that arises sometime in the future.

     

    Over the long run, buying companies as strong as Berkshire (a minority of companies to begin with since there are not many of its caliber) at a significant discount to intrinsic value is likely to produce good results.

     

Posted in Warren Buffett, Berkshire Hathaway | No Comments »