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Warren Buffett, Chairman and CEO of Berkshire Hathaway, is perhaps the greatest investor of our time, if not ever.  At buffettologist.com, we have been studying, practicing, and learning from the teachings of the Oracle of Omaha for years.  As such, we have created this blog to share our insights on Mr. Buffett, other Buffett disciples, and value investing.

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Friday, April 23, 2010

Berkshire Hathaway Annual Meeting: Preview

In about a week, thousands and thousands of investors and financial professionals will descend upon a mid-sized Midwestern town to listen to two older gentlemen answer questions about the economy, finance, investing, and life.  When it is described this way it seems eerily surreal that people would travel from far and wide to cram themselves into a basketball arena for six hours to eagerly listen to a question and answer session from what an outside observer would call a couple of ornery granddads.  But in the world of finance, this is, in fact, Mecca.  So yes, it’s that time of the year again as the Great Plains emerge from winter and begin to turn green that so many of us make our annual pilgrimage out to Omaha for the Berkshire Hathaway Annual Meeting, fondly known as “Woodstock for Capitalists”.

The past year has again been an active one for Berkshire and Chairman Warren Buffett.  Last fall, Berkshire inked its biggest deal yet, reaching an agreement to purchase the Burlington Northern Santa Fe railroad.  In order to complete the deal Berkshire did a couple of curious things, one of which was paying for the business partially with stock, and the other was facilitating a stock split at the time the acquisition closed.  With the latter, Berkshire’s stock also became included in Standard & Poor’s index of the five hundred leading companies in the country.  As such, Berkshire has received even more notoriety, and also now has many more shareholders, possibly making this the most highly attended annual meeting yet.

I suspect that with this inflow of new shareholders there will be a fair amount of questions and discussion about Berkshire’s business, how it has evolved over time, and how it functions given management’s core operating principles.  This will probably be not unlike Buffett’s annual letter this year, which was basically a review course for long time shareholders, and an introduction to the company for new owners.  In my view, this is probably prudent too, as the company has changed dramatically over the last couple of decades.  Berkshire, under current management, began as your classic leveraged investment vehicle, writing insurance and then investing the premiums into various securities which taken together amounted to a multiple of equity.  Now, Berkshire is a more traditional conglomerate with operations ranging from consumer goods and insurance to railroads and utilities. This evolution has changed the company’s business and its investment characteristics and getting an update on this would probably be a benefit to all shareholders.

As Berkshire has grown, it has also become much more sensitive and tied to the fate of the US economy.  In fact, Berkshire reaches so many parts of the economy, that Buffett can see up ticks and downticks in economic activity almost daily from the data he receives from Berkshire’s various operating subsidiaries.  As such, I suspect many shareholders will be curious to get his take on how and if the economy is emerging from the dark days of late 2008 and 2009.  What’s more, given his long history and unique understanding of human behavior, I think that many shareholders would like to glean his perspective on how to improve the economy, and to get a better understanding of what stage the economy is in the business cycle compared to other times in history.

Investment questions are always part of the meeting as attendees regularly try to pick-up stock tips from Buffett or Munger, or to glean some type of advice on what to do with their money.  Last year Buffett remarked, both at the meeting and publicly, about what he viewed as a bubble in certain classes of bonds, and he also said that just because the economy wasn’t doing well, didn’t mean it wasn’t a good time be investing in stocks.  Given the stock market rally of 2009, his viewpoints from last year seem to be very prescient.  In prior years, he has remarked that given Berkshire’s large size, he is doing different things with Berkshire’s cash than he would have done either when he was younger or when Berkshire was much smaller.  In fact, he had said that for newer or younger investors, investing in smaller companies would allow them to compound money at faster rates than if they only had the small universe of elephants that are available to Berkshire.  This also brings up an interesting point, in that a fair question about investing would be about Berkshire itself.  Given the conglomerate’s large size, is an investment in Berkshire not as appropriate or compelling for the majority of investors as it has been in the past?

There are also a great deal of philosophical questions about investing and finance.  Given the amount of noise and mis-information that often exists in the marketplace, I think many investors come to Omaha each year to, as Charlie Munger has coined the phrase, “get religion.” In fact, last year an attendee who had just started an investment firm asked about the potential to lock in some gains by selling some stocks and neither Buffett nor Munger told him if this was the right or wrong thing to do, but rather said that he needed to adjust his way about thinking about businesses and investing, which would help to inform the ultimate decision.  In addition, when these philosophical questions generally come up, Buffett often refers attendees to read or re-read a couple of chapters in his mentor Ben Graham’s seminal book, The Intelligent Investor.

Politically motivated questions are always part of the meeting, though less so now that some of the questions are being filtered through the three journalists also on the stage.  That said, neither Buffett nor Munger tend to shy away from these questions even though they are of different political persuasions.  Last year, however, they both voiced support for the government officials who were in the cross hairs of the financial crisis of late 2008 and 2009.  I suspect that this year, there will be more than a few questions about elements of the recently passed healthcare legislation, the proposed financial reform legislation, as well as Berkshire’s Goldman Sachs (GS) investment given that Goldman is presently engaged in a civil case with the Securities and Exchange Commission.

I am frequently asked why I attend the meeting each year, after already having made the pilgrimage for several years in a row.  And it’s true, that at each meeting some of the questions—and some of the answers—are repeated.  It’s also true that one can learn about Berkshire, Buffett, and his models of the world, through his public appearances, op-ed’s, and some of the various biographies written about him.  Despite all this, though, there is still something unique about making the trip each year to Omaha, and meeting and sharing ideas with other like-minded individuals and investors.  The main reason that I continue to attend each year, though, is that I believe that if I can learn just one new thing about investing, finance, life, or frankly any other topic, the trip is more than worthwhile.  So, as usual, I’ll be out in Omaha this next weekend, hoping to learn as much if not more than I have learned in prior years, and I’ll also be there to provide some of my insights about the meeting here on buffettologist.com.  And if you’re planning to attend “Woodstock for Capitalists” as well, perhaps our paths will cross either at the Qwest Center or in downtown Omaha.  I’ll see you there.

As always, please do send me any questions or comments you may have.


Copyright © 2010 Buffettologist.com

The content contained in this blog represents the opinions of Mr. Fuller. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business.  This content is intended solely for the entertainment of the reader, and the author.

12:19 pm edt | link 

Thursday, April 1, 2010

Buffett: Better Investor or Better Businessman?

Berkshire Hathaway (BRK-B) Chairman and CEO Warren Buffett has often written and said, “I am a better investor because I am a businessman and I am a better businessman because I am an investor.”  This is not unlike Buffett’s mentor Ben Graham’s remark in The Intelligent Investor (and I am paraphrasing here) that all investing will be successful to the extent that it is business-like.  And while I couldn’t agree more with either of these statements, it is true that Buffett is probably better known now more as a businessman than he is as an investor.  This obviously begs the questions, if you had to pick one of these traits, would you conclude that Buffett is a better businessman or is he a better investor?

Let’s first examine Buffett as an investor.  For some time now Buffett and the phrase value investing have become synonymous.  He studied under the father of value investing Ben Graham at Columbia University, worked for Graham at the Graham-Newman firm, and then after leaving Graham’s partnership, formed his own firm, which ultimately became the foundation for Berkshire Hathaway. 

Buffett’s partnership was not unlike most modern day hedge funds.  He pooled money from various individuals, and invested their money in what he deemed to be undervalued securities and special situations.  In his partnership letters Buffett referred to the latter as “work-outs.”  Similar to many hedge fund managers of today, Buffett also didn’t take any of the profits for himself until he had earned a certain return on his investors’ capital each year.  This is now known as a hurdle rate.  Buffett’s compensation structure, though, was slightly different from most of today’s hedge fund managers.  Most of today’s managers charge a management fee (1 to 2 percent of assets) and then a performance fee (typically 20 percent of the profits) over the specified hurdle rate.  Buffett, on the other hand, charged 0 percent management fee, but took 25 percent of the profits over his specified hurdle rate.

And Buffett’s partnership results were fantastic, handily trouncing most widely accepted benchmarks (Dow, S&P, etc), and tending to do much better in down markets than in up markets.  This success meant that when most other money managers were busy trying to recoup losses, Buffett was able to further pull away from the pack.  He put fresh capital to work during down markets, thereby giving an even bigger boost to his long-term returns.  Not surprisingly, these results made Buffett fabulously wealthy by most standards.

Yet, by the late 1960’s amid a massive bull market, Buffett began to have trouble putting capital to work with new ideas—and was also likely tired of the money management business in practice—so he eventually closed down his partnership, and returned capital to his investors.

This action set the stage for the building blocks of what today is known as the investment conglomerate, Berkshire Hathaway.  While running Berkshire, an old New England textile manufacturer, was certainly more of an entree into running a business, Berkshire’s early results were fueled by its acquisition of insurance company National Indemnity.  And insurance became Berkshire’s compounding machine, as Buffett became able to source capital and low to negative costs, and invest it in undervalued securities—and eventually wholly owned business—with the benefit of insurance leverage (investable assets as a multiple of equity).

Thus, one would rightly argue, that in the first decade of Buffett’s control of Berkshire, the company’s growth was driven more by his prowess as an investor than his abilities as a businessman.  In fact, it wasn’t probably until the mid-1980’s, as more and more of Berkshire’s earnings were attributable to its wholly owned businesses that Buffett became known more as a businessman.

Over the ensuing years, this earnings stream has become a bigger and bigger component of Berkshire’s net worth, as the conglomerate now owns everything from utilities to insurance to retailers to railroads.  With this expansion, not only has Buffett’s reputation as a businessman grown, but he has become a go to source for commentary on the state of American—and in some cases global—businesses.

And while I generally agree with his reputation as a source of economic insights—and certainly follow his commentary myself—given his more than 60 years of studying businesses, economies, and human behavior, as well as the fact that he is seeing data almost daily on all of Berkshire’s businesses, I for one, still think his success is derived more from his abilities as an investor than as a businessman.

At Berkshire, Buffett doesn’t run any of the businesses on a day-to-day basis.  Nor does he individually manage the thousands of employees that work in all of the Berkshire subsidiaries.  In addition, I do not suspect that he regularly meets with individual clients face to face, nor does he likely regularly meet with regulators or suppliers or any number of other constituencies that most people running businesses (either large or small) have to deal with on a daily basis.           

What Buffett does do--and he has repeatedly said this himself--is to make major capital allocation decisions either in business acquisitions or in securities purchases.  In addition, his schedule is relatively open, which allows him to read a lot and to study other potential businesses that might fit under the Berkshire umbrella.  Throughout his career, he has worked through other managers by encouraging them and by giving them resources, and then sharing in their successes and failures.

And most likely, that is Buffett’s strong suit, staying back and making decisions, rather than having to get his hands deep in the mud like so many other businessman and leaders must do.  To that end, if you were to write a job description for him, it would probably sound more like a securities analyst than a typical CEO.

Given his track record and his job description, I tend to think of Buffett as a better investor than a businessman, though his investing is very much as Graham said, “business-like.”  And in a way, he selects investments for Berkshire in the same way as he ran the Buffett partnership.  The main difference, however, is that Berkshire exists in the public domain, which in my mind has made people more aware of him as a businessman, even though he seems to still be an investor at heart.

I’d love to hear your thoughts on Buffett as a businessman or Buffett as an investor, so please do send me any comments or suggestions you may have.


Copyright © 2010 Buffettologist.com

The content contained in this blog represents the opinions of Mr. Fuller. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business.  This content is intended solely for the entertainment of the reader, and the author.

1:07 pm edt | link 

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Justin Fuller, CFA provides his market and investment commentary on this website.  Justin has been following and studying Warren Buffett, Berkshire Hathaway, and other leading value investors for years.  If you'd like to be put on his distribution list, or to send him any questions or comments, he can be reached at:  justin@buffettologist.com.


The content contained in this blog represents the opinions of Mr. Fuller. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way.  This content is intended solely for the entertainment of the reader, and the author.