The Church of Buffett and Munger
The Daily Reckoning PRESENTS: Twice a year, Omaha is beholden to large swarms of out-of-towners. In June, thousands stay for two weeks to see the College World Series. But in May, Omaha belongs to Berkshire Hathaway’s shareholders, and Capital and Crisis’ Chris Mayer was there. Read his full report, below…
THE CHURCH OF BUFFETT AND MUNGER
This year about 24,000 made the pilgrimage to see the Oracle of Omaha and his witty, if reticent, wingman Charlie Munger. The two did not disappoint, as they dished out generous amounts of their folksy wisdom and humor.
This was my first year here, my first close encounter with the Church of Buffett and Munger.
Many of the people that come here are…well, how can I put this kindly? Sheep. They are mindless followers. They laugh hysterically at every corny joke. They laugh at every tired, worn-out aphorism. They say sappy, syrupy, sentimental and silly things about these two old billionaires.
And when it’s time for the Q&A, they ask fawning pointless questions. Of course, only after they’re done saying how wonderful Buffett is and how wonderful Munger is and how they are a beacon of some kind or another and… well, you get the picture. Maybe it’s just me.
Buffett and Munger had lots of interesting things to say, and not all the rabble that lined up to ask questions were sheep.
For example, some of the good questions focused on drawing out their thinking on the current investment climate and in specific areas such as commodities, newspaper stocks, South America and more.
Some value investors have been digging around in the market’s discard pile and coming up with newspaper stocks. Many of the nation’s once great franchises are suffering and their stocks are making new lows. Advertising revenue is falling. Readership is declining.
What does Buffett, a long-time newspaper investor think? Buffett thinks the current woes are part of a longer-term trend that is not likely to reverse. And valuations on newspaper stocks don’t reflect this. As he says, there is always somebody who thinks he sees a robin and the first day of spring.
Instead, newspaper stocks face a long, perhaps permanent, winter. He said he was wrong in thinking newspapers were a bulletproof franchise. It is clear they are not. Munger added that he once thought, years and years ago, that General Motors was a bulletproof franchise.
Bulletproof franchises are a rarity in the investment world. Nearly all businesses face long-term competitive pressures. But the idea of bulletproof franchises reflects Buffett and Munger’s basic desire to own businesses where the fundamentals will not change, or are not likely to change, over a 5-10-year span.
Buffett cited the telecom industry as an example where substantial change is likely. And he also talked about Intel, which Buffett said he could not figure out at its birth and can’t figure out now. That’s another business that is likely to face a lot of change in the future.
Indeed, a good part of Berkshire’s success over the years is in sticking to what they know. Munger added, “We know the edges of our competency better than other people know theirs.” This helps limit mistakes, though all investors make mistakes and lose money at times.
One of the great pieces of advice Buffett and Munger gave was in how they would manage a small amount of money – say, several million, instead of tens of billions: Go to your best idea and measure everything against that. That’s because it is very rare to find an idea that’s going to give you 20% per year for 40 years. In the real world, you have to go with the best ideas you have. And they may not, and are probably not, the best ideas you will eventually uncover. Things change. (As the newspaper saga shows, once-thought bulletproof franchises can suffer major reversals of fortune.)
Buffett sprinkled his talk with lots of other investment wisdom, too. In another instance, he invoked one of the key ideas of his famed mentor, Benjamin Graham: You are right because your facts and reasoning are right and not because somebody agrees with you. This goes back to the idea that you can’t let the market sway you. “Make the market serve you,” Buffett advised, “it’s not there to instruct you.”
And this is one key difference between a bottoms-up (micro) investor and a top-down (macro) approach. The top-down, macro approach takes its cues from the market — hence, the common use of charts. This is very different from the approach in Capital & Crisis and the approach Buffett is expounding.
Buffett said investors should focus on things that are important and knowable. One attendee asked Buffett and Munger a big-picture question involving currencies, interest rates and current account deficits.
I loved Buffett’s answer and I think it helped illuminate some of the differences between his and Munger’s approach (rooted in the old-school tradition of investing) and the more populous speculative arena: “We don’t play big trends. That’s a bit too macro for us,” he said.
Asked about the viability of ethanol as a fuel additive and as an investment, Buffett said it was easier figuring out if more people were going to drink Coca-Cola and eat more See’s Candies. Plus, the fact that ethanol is so hot right now is a deterrent to Berkshire getting involved.
Munger opined that since it takes more energy to produce ethanol than ethanol itself delivers, he didn’t think it was a good idea. He also rolled out his oft-used concept of three buckets. “At Berkshire we have three buckets,” he said, “Yes, no and too hard.”
Ethanol goes in the “too hard” bucket. This is a great concept that I use regularly in investing. You don’t have to investigate everything, or have an opinion on everything. Some investment ideas are just too hard, too difficult, too complex to forge a good, safe investment opinion. On these difficult questions, the investor always has the ultimate safeguard: He can just walk away.
On the question of whether or not commodities were in a bubble, the famed duo had some wise advice.
Buffett said, excluding agricultural products, they do see something of a bubble in metals (especially copper) and oil. He said, like most trends, the fundamentals drive it in the beginning. And what the wise man does at the beginning, the fool does at the end. As trends form and gather momentum, they attract a speculative element. Eventually, that element takes over, and then you are in the danger zone. “We are seeing that in the commodity area,” Buffett opined.
How high is it all going to go? Nobody knows. But commodities, Buffett concluded, were a “speculative football.”
On to other topics… What about South America? Buffett said the problem is they have to put a lot of money to work to move the needle at Berkshire, and that greatly limits the number of countries they can invest in. Brazil, for example, is a big country and is not off limits, but they’d have to get a lot of money in a business that they understand at a price lower than comparable U.S. stocks.
They were asked many other questions (What about Russia? “Not interested,” Buffett said), but the above were some of the more interesting topics to me. Since this letter is getting long, I’m going to wrap things up.
I would say the only thing that irritates me about this pair is when they talk politics. For example, is there any more ridiculous spectacle than a billionaire (in this case, Buffett) complaining about how he pays fewer taxes as a percentage of his income than the secretary in his office?
My message to Warren: Hey, nobody’s stopping you from writing a bigger check to Uncle Sam anytime you feel you want to pay more. Sheesh, a billionaire whining about how he wants to pay more taxes!
The other dopey thing Buffett said was about Social Security. When Buffett praises it as “the most successful program in the history of our government,” I can feel the hairs rise up on the back of my neck. And I wonder what he’s drinking besides a can of Coca-Cola. Social Security is a disaster that is bankrupting this country. The sooner people realize that, the better. It also proves the point that genius in one area (in this case, investing) does not necessarily translate into other areas.
Of course, I forgive him for such transgressions. At the end of the day, he and Munger taught us all a lot about investing over the years. Serious investors will study their careers as long as there are markets.
for The Daily Reckoning
May 11, 2006
P.S. In Capital & Crisis, our focus, not unlike Buffett and Munger’s philosophy, is on understanding the individual investments we are in and getting them on the cheap. Even so, this doesn’t mean we have to stick our heads in the sand and whistle out of our rear ends.
Our battle plan at Capital and Crisis is largely unchanged: to invest in sturdy businesses with valuable assets, lots of resources and proven capabilities, able to survive and even prosper in difficult environments. It also helps to have smart people at the helm. Do all this at good prices and you’ll make a lot of money, even in a soft economic environment, even in a flat market. Our track record proves it. We had a great 2005, even though the market went nowhere.
Editor’s Note: Chris Mayer is a veteran of the banking industry, specifically in the area of corporate lending. A financial writer since 1998, Mr. Mayer’s essays have appeared in a wide variety of publications, from the Mises.org Daily Article series to here in The Daily Reckoning. He is the editor of CrisisPoint Trader and Capital and Crisis – formerly the Fleet Street Letter.
The dollar has been too easy with her favors. And now, her best years are behind her. Her last beau, Alan Greenspan, took a lot out of her – reducing her street value by half. And yesterday, the end of the rate increases signaled the beginning of a new and tawdry chapter in the life of the floozy currency.
For the last two years, the Fed has been raising rates…in tiny, “baby steps” of one-fourth a point each time. And yesterday, the Fed did so again. But this time, let it be known that it had reached the end of the line. From here on out, future rate increases will be “data dependent,” meaning the Fed will raise or lower rates depending on which way it thinks the wind is blowing.
It is only these rate increases that have helped the dollar maintain a little dignity. The imperial currency has been getting a little shopworn; she has been showing signs of decay, degeneration, degradation, and corruption. But each quarter point from the pimps at the Fed has checked caddish speculators from dumping the old girl. They figured they’d hang around as long as rates were rising – why not?
Now, the dollar is tumbling. Everyone says so. And everyone approves. It is the only way to restore ‘balance’ in the world financial system, they say.
Besides, who cares? Neither the president, nor her current protector. Neither of the two seem interested in her anymore.
The rest of the world shows neither sympathy nor concern. Following yesterday’s Fed announcement, the dollar wobbled again – especially against her archrival, gold.
“She brought it on herself,” say insensitive investors. “She threw herself at every man who walked down the street, you know, practically giving herself away to anyone who asked. She just didn’t know how to say “no.” What do you expect?”
Meanwhile, gold hit a quarter-century high, with June contracts selling for $705 an ounce.
The yellow metal, buyers noticed, is everything the dollar is not. While the dollar could never say “no,” gold says nothing else: No to debt. No to new spending schemes. No to improving the world. No to re-electing scoundrels. No to bubbles. No to foreign wars. No to trade deficits. No, no, no, no, no.
While the dollar was a good-time girl for everyone, gold barely said a word; she never lost her head, never held a press conference, and never made any promises. Not surprisingly, it was Dame Dollar that crowds called for; it was she whose telephone rang. It was she who got invited out, and she who showed up at every party.
That was then; this is now. Martin Feldstein writes in the Wall Street Journal that the dollar can perfectly well fall down. And why should we care? We’ll be better off with a cheaper dollar. Ben Bernanke says he can manage without a strong dollar. And Larry Summers is going around the world telling small nations to get rid of their dollars before it is too late: “Do something with them,” he advises.
So now what? The poor dollar is like day-old bread…or yesterday’s dog-eared newspaper. Who wants her?
That, dear reader, is what we are about to find out. No longer sustained by rate increases, no longer supported by public officials, no longer in demand from central bankers and speculators – we are about to witness an important event in financial history. The great reserve currency is certainly going down – one way or another. The surprise will be that she won’t go down gently…or gracefully. Instead, like a brothel Madame with a good diary, she’ll take a lot of people with her.
More news from The Rude Awakening…
Eric Fry, reporting from Wall Street:
“While awaiting that delightful Armageddon that might propel gold to $2,000 or $3,000 an ounce, we gold bulls will certainly endure a large number of “down days.””
And more views, coming to you from the building with the giant gold balls on the roof – on the banks of the Thames…
*** Penny Sleuth’s James Boric and Chris Mayer of Capital and Crisis fame recently trekked to Omaha for the 2006 Berkshire Hathaway shareholder’s meeting.
James reported that Buffett and his sidekick, Charlie Munger, felt that commodities were not the area of the market to put your money right now.
“One annoying shareholder (who’s piercing voice blared through the speaker system at a decibel level that may have deafened some) asked if investors would be smart to invest in countries where there is an abundance of natural resources per capita,” recalled James.
“Buffett responded by saying, ‘We don’t play big trends. That’s too macro for us.’
“And Charlie Munger finally chimed in to end this big-picture discussion by saying, ‘We failed to profit from the recent commodities boom.’
“Buffett never invested in tech stocks in the 1990s. And he still doesn’t regret it. As he explained to the crowd, we know what we are good at and we stick to those things. In the Olympics, you can win a gold medal if you can run 100 meters faster than anybody. You don’t have to throw the shot put as well.
“The same is true in investing.
“You don’t have to get everything right. You just have to know what you do well and stick to that.”
*** Copper is soaring. “A little noticed fact,” explains the Guardian, “is that every 2 pence piece made before 1992 is 97% copper – meaning that each coin contains 6.9g of the metal Collect together 145 of them and you’ve got kilo’s worth of copper. Now, just find another 999kg, a total of 145,000 coins, and you’ve got a [metric] tonne.
“On their face value, those coins are worth just 2,900 pounds sterling. But taking them to a scrap merchant and selling them on the open market for the metal content will make you a cool 1,500 pounds sterling profit.” As it turns out, each two-pence coin is worth about three pence.
What this means in America is that copper pipes must be disappearing from construction sites and low-income housing as fast as value disappears from the dollar.
*** A colleague wrote that he was shocked by the cronyism of the Bush Administration. As near as we can tell, the War on Terror and the Department of Homeland Security are little more than public works projects – designed chiefly to enrich favored industries and supply employment for the masses.
This is the way it is supposed to work. Government steals from its citizens; the citizens then steal from the government. It is all part of the great cycle of public life.
But in the advanced stage of an empire, the whole thing ceases being charmingly corrupt and becomes disagreeably corrupt. The amounts of money are larger. The corruption itself becomes less quaint and naïve – more nasty and vulgar. It is one thing to steal money from taxpayers to build inefficient and unnecessary schools; it is another thing to send young men to get their legs blown off.
From a financial point of view, the interesting thing about the present case is that the United States cannot afford its current level of corruption. It has to borrow – on an accrual basis – nearly $800 billion to make up the difference between what it steals from its citizens and what they steal from it. Meanwhile, the whole nation runs a similar deficit with the rest of the world, $800 billion is the difference between what the nation buys from overseas and what it sells. In other words, the nation must borrow from the rest of the world in order to pay for its own corruption. Who can doubt that this will end in misery?
But on the downward slope of civilization, the lumpen are ready to go along with anything – as long they have their bread and circuses. God lives in their hearts, but Mammon reigns in their lives. Their only culture is the celebrity culture of TV and Internet. The depth of their politics is measured by campaign slogans. Their wealth is nothing more than a promise made by elected public officials, to rip off future generations for the benefit of voters today.
At this stage of imperial development, there is nothing but misery for the public-spirited citizen. Only a philosopher with a perverse sense of humor can still find amusement in it.