This year’s trip to Omaha to listen to Warren Buffett & Charlie Munger answer questions for five hours was the same as previous years… a great cleaning of my investing windshield, an epiphany (or two), and a good time connecting with my 77 year-old father (and brother-in-law and nephew this time too).
This year’s epiphany was about cyclicality. Buffett & Munger talked about how their residential businesses are not doing well right now and how they are perfectly comfortable with “lumpy” profits and cyclicality. They made a comment about how most people understand and are comfortable with seasonality in businesses, but few have a comfort level and understanding of cyclicality. Most overreact both on the ups and downs of cyclical industries like real estate. A great read that talks about how much opportunity there is in understanding cycles is Howard Mark’s book The Most Important Thing
(chapters 8 & 9).
Eight more nuggets:
1. Munger prefers to have permanent partners in acquiring companies vs. pushing paper in out-smarting others in marketable securities (although Buffett disagreed).
2. Biggest mistake – going into smaller business that could never be bigger
3. Raising rich kids – don’t let them think they are special because of being rich and give incentive to work.
4. Fancy projections do more damage than good because people start believing they will be true. Don’t ask the barber if you need a haircut – investment bankers love projections… Reduced expectations are best defense for investing.
5. All $35 billion of BRK’s cash is in treasuries because they want a parking place where we know we’ll get our car back.
6. “Serving on boards is for the birds.” – CM
7. Buffet’s replacement? Get the right person with the right values, comp structure secondary.
8. “I wish I could read faster. It’s a huge advantage to read fast. There’s hardly anything more pleasurable then reading, and reading, and reading and reading. Charlie and I do a lot of it, and we continue to do a lot of it, but I don’t do it as fast as I would like to.”
And 53 more…
1. All businesses are doing better, except those related to residential real estate.
2. Sokol affair was “inexplicable & inexcusable”. “It’s a mistake to assume perfect rationality in very able people” – CM (Charlie Munger).
2.b. “You can always tell a man to go to hell tomorrow.” in response to their congenial press release about Sokol
3. Separating the Chairman & CEO roles enables better management/change of management.
4. If were to develop new expertise would want it to be in the tech or energy field.
5. Difficult to identify people with competence in areas we don’t have competence.
6. Ease of entry – always 1st question in determining durability.
7. Standard of living in the past century increased six fold. How can anyone NOT be enthused about this country. Power of capitalism is incredible. Resusitive growth pattern will continue. Our system works incredibly well.
8. Best companies require little capital to grow and can price adjust with inflation (vs. businesses with tons of inventory or receivables)
9. Continuous learning important to success
10. Ideal asset – royalty on sales on inflation adjusted products
11. We don’t view BRK as over-priced. Would use BRK stock unless fairly valued (which isn’t now)
12. Doesn’t like the CAPEX on utilities with inflation
13. Dividends – if can’t reinvest internally, then dividend out. Stock price would go down as an admission of inability to create greater returns.
14. Outlook on banks – returns will be considerably less because of reduced leverage. Have added to their WellsFargo position.
15. M&T bank wonderful company and annual report. Same with Jamie Dimon’s (JPMorgan) letter to shareholders.
16. When BRK started a share was worth $1 of gold, now worth $1,500 of gold today (vs. $120,000 stock price)
17. ALL currencies have declined in value over time.
18. Gold 67 foot cube = all world supply
19. Value is based on what asset will deliver/produce. Invest in good PRODUCING businesses.
20. Rising prices creates excitement. Over time, not way to get rich though.
21. “Doesn’t seem rational to buy an asset that goes up if the World goes to hell” – CM
22. How’d you attract investors? “It helps if you conduct yourself so that others trust and you deserve that trust.”
23. We ARE a conglomerate, but ok if not a stock issuance machine to do it.
24. Legacy? “Fortune fairly won and wisely used” – CM, “Teacher” – WB, “At last I sleep alone” – Wilt Chamberlain
25. No question that purchasing power of all currencies will decline over time (hard to tell which relative to each other). $1 in 1930 worth 16 cents today. “A great civilization has a lot of ruin in it” – Adam Smith
26. Index fund is best if not actively managing. Like BRK at current prices
27. Reduced expectations are best defense for investing.
28. General culture of trust in organization better than big compliance department
29. US has had foot to the floor with both monetary and fiscal policy
30. Residential construction flat-lined – when excess inventory bought up, economy will take off again.
31. Rail shipments (gauge of economy) 1Q06 = 219, 09=150, 11=190
32. Haven’t learned from our recent excesses. Need to more heavily tax undesirable financial activity
33. Oil? 88m barrels/day – finite supply. $ price of most things will go up. Think about productive assets rather than speculating in commodities.
34. “Go to bed every night a little wiser than you woke up.” – CM
35. Need to at least make CEO’s of failed institutions dead broke. Expect more messes in lifetime. Failure due to stupidity not evil.
36. Goodwill should not be used in valuing. Amortization of GW doesn’t make sense.
37. Costco extreme meritocracy that created extreme loyalty. GM – worst – wiped out common shareholders
38. Will not participate in auctions and would pay less if came back afterwards.
39. Make different deals at different times because of different opportunity costs
40. “I wish I could read faster. It’s a huge advantage to read fast. There’s hardly anything more pleasurable then reading, and reading, and reading and reading. Charlie and I do a lot of it, and we continue to do a lot of it, but I don’t do it as fast as I would like to.”
41. Views job as CEO as Chief Risk Manager
42. Shareholder charitable giving program – $/share allocated to 3 charities. Stopped because didn’t want the parent company to be a distraction b/c of social issues they were contributing to.
43. China? – tax laws, customs, shareholder sentiment. Make allowances for lack of understanding. Absurd discounts to cover the risk.
44. Windpower – doesn’t work without subsidies.
45. BRK share of taxes = 2% of all corp taxes in US
46. Improve your own skills – only diploma WB has hanging in office is Dale Carnegie – communication skills.
47. Find what you’re passionate about and then improve your skills there. Didn’t succeed in re-insurance business for 15 years.
48. Beware of the salesman selling a derivative product.
49. Won’t take the risk of going after a really big elephant.
50. Companies issue stock to trade confetti for real assets.
51. Wants to continue buying businesses they know and management they like.
52. “What do we care if we buy a good business that’s lumpy in its profits?” – CM
53. Look at cyclical business the same as would seasonal.