Friday, May 09, 2008

A PILGRIMAGE

Last Friday I made a pilgrimage to see and hear Warren Buffett, the Oracle of Omaha in person. Despite the derisory comments of my dear wife:

Ooh, maybe you can touch the hem of his robe. Maybe you can wash his feet. I mean, c’mon, what’s the big deal; you can read all his comments afterward and watch it on YouTube too. It’s just like the time you interrupted Pat Riley at that bar on the Upper East Side,[1]

I made the 130 mile trip in about two hours.[2] Although the whole Berkshire Hathaway (BRK-A: $127,200) thing was a little cultish, it was a great experience. For anyone in the finance business or interested in the stock market, it is a must. 31,000 happy (except for a few members of the Klamath tribe[3]) Berkshire Hathaway investors crammed the Qwest Center in Omaha to listen to Buffett and Charlie Munger, Vice Chairman hold forth. Heck, 60,000 people crowded into Yankee Stadium to see the Pope , and he’s only been on the job a few years. The two senior execs (and I mean senior; Buffett is 77 and Munger is 84!) respectfully responded to unscripted, unfiltered audience questions. Questioners included a 9 year old and a 12 year old, a community college teacher who got the biggest laugh of the day, a group of Chinese CEOs, a lot of Germans, a housewife, finance students, and at least one devout Christian. There were no hotel vacancies within 60 miles of the Qwest Center. I came away from the whole event with an optimistic outlook for my future and the future of my children.

I was the guest of my good friend from Birmingham, Alabama, John T. Bird, author of a biography of Twin Killing: The Bill Mazeroski Story and a new book titled Fuchsia Shock[4], a guide to 151 commonly misspelled words and how to remember to spell them correctly. He first became a Berkshire Hathaway shareholder some years back when he accepted a share of BRK stock in lieu of a cash payment for editing the first edition of Of Permanent Value: The Story of Warren Buffett. He later secured financing for the Mazeroski book with that one share, started his own publishing company, Esmerelda Press, and today is the happy owner of a BRK B share. Small world.

Now, I have attended plenty of annual meetings, and read about many more. None celebrated, and most failed to acknowledge, the shareholders as Berkshire does. Remember Robert Nardelli, former CEO of Home Depot and former candidate for GE CEO? He simply refused to take shareholder questions at his last Home Depot (HD: $29.72) Annual Meeting and many members of HD’s Board of Directors chose to stay home and avoid all contact with owners of their company. Granted, Buffett and his sidekick, Munger, fielded mostly softball questions and rarely missed a chance to promote Sees candy, Wrigley gum and Coke as the keys to longevity. The entire Board was in attendance[5], though, as were many of the managers of BRK’s portfolio companies. And Buffett responded to every question; although Charlie often stuck to his trademark line of “I have nothing to add.” When Munger did have something to add, however, he pulled no punches. Buffett was generally optimistic about opportunities for Berkshire and for the country; Munger was less sanguine and clearly frustrated by some of the “stupidest” things he has ever encountered: the ethanol craze and the subprime mortgage debacle which he described as “sweeping bums off Skid Row and giving them mortgages.”

Buffett looked a little frail when he walked by in the Exhibition hall where about a dozen of BRK’s portfolio companies exhibited their wares. He was hale and hearty on stage though, and neither he nor Munger missed a beat during their 6+ hours’ of interaction with investors. One must wonder how long they will be around: in fact, the first question centered on succession plans. Without offering details Buffett repeated prior statements that they have identified a number of able successors and indicated that the company would like break down the functions he serves into a t least two or three distinct positions. But for now, Buffett and Munger are clearly in control.

Following are excerpts from the Q&A session.

Buffett:

Berkshire will not be able to sustain the double digit returns it has generated to date; the universe of potential deals for them is just too small (because of the size needed to move the needle).

The country will be better for our children and grandchildren.

If you could buy 10% of one person, who would you buy? Surround yourself with that kind of person.

Nobody has proposed a windfall profits tax on corn or soy beans.

All 3 presidential candidates are good; the country will prevail.

If someone walked into this arena weighing 300-350 lbs, I’d know he was fat…we’re looking for fat companies; that is, companies fat with potential.[6] We stick to what we understand…I’ve never done a deal where after the fact more due diligence would have helped avoid a loss, but it might have cost us a few winners.

We need a strong head of regulation, not more agencies or a more complex regulatory structure.

Suppose your dad told you could have any car you want, but it would be the only car you ever got. You’d take care of that car. You only get one body and one mind; take care of it (as he snacks on Sees chocolate and Coke).

A brand is a promise. (Hard not to be impressed at the selection of brand names present in the exhibition hall: Fruit of the Loom, Dairy Queen, Justin Boots, Acme Brick, Ginsu Knives, Geico, Sees Chocolate, Mars/Wrigley = a real slice of Americana).

They are going to Europe: Germany, U.K and a couple others to get the word out that BRK is interested in buying family owned businesses with strong management. “We are the best place for those companies to go.”

At the average age of 80, we're (Buffett and Munger) aging at the average rate of only 1 1/4% per year. That's a lot better than younger people.

Munger:

Use up coal first; oil and gas have other and more important uses.

Ethanol is one of the stupidest things he’s seen; not quite as bad as sweeping bums of Skid Row and giving them mortgages, but close.

In the end we will be left with only the sun; we should be developing ways to tap into it.

“Assets beyond reach” Munger used this phrase to describe the derivative securities many financial institutions carry on their balance sheets. They are only good until reached for, then they recede just beyond the grasp of the institution.

I do not think we'd have this mess if women were running all the financial institutions[7].

CEOS have a moral duty to be underpaid; they should refuse to accept disproportionate compensation.


I have nothing more to add.



[1] Okay, giving props to Riley was a little weird, but She happily waited on the Mall in D.C. to watch the Pope drive by; She didn’t complain the only time I cut class in law school to buy Bruce Springsteen tickets. She gets all googly when she sees big name in horse showing (actually the Boss hangs out at those too).

[2] Just in time to hit the middle of Omaha’s short, but intense Friday evening rush hour. Where were all those people going in such a hurry? Nothing is more than 15 minutes away in Omaha.

[3] They were protesting a hydro power facility; Dave Sokol, CEO of MidAmerican Energy handled their questions with dignity and aplomb. He’s on the short list to succeed Buffett.

[4] I bet you did not know how to spell “fuchsia” which is derived from the name of the scientist Fuchs.

[5] Including Bill Gates, 2nd richest man in the world, made me wonder momentarily about the low level of security.

[6] Referring to BRK’s PetroChina trade, Buffett explained that after reading the annual report and based on his knowledge of the oil & gas business, he concluded that PetroChina was worth about $100 BB, but the market cap was only $35 BB. BRK invested $500MM and cashed out for $4 BB four tears later. It didn’t matter if the real value was $95BB or $105BB; just like it doesn’t matter if the guy weighs 300 or 350 pounds; PetroChina was fat with potential and skinny on risk.

[7] He actually said this at the Wesco Annual meeting the Wednesday after the BRK meeting, but it illustrates his frustration with the mismanagement he sees as the root cause of the mortgage mess.

1 comment:

Thom Singer said...

Tom,

Got your question on my blog, but could not find a way to email you... so I answered you on my comments section of the post.

Nice to meet you.

Have a great day.

thom