I attended the Berkshire Hathaway Annual shareholder meeting last Saturday and had a chance to listen to the master investor for the second time. The discourse was not just entertaining but superlatively educative.
Probably sensing the mood of the crowd and the number of questions directed at few of his all time great investments Mr. Buffett turned Socratic and offered a firsthand view of the fundamental theses he employs while picking stocks. I would like to share with you some of the best questions that came across during the meet and the master’s responses for those.
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You have often commented about the ineffectiveness of curriculums that impart financial knowledge, Can you elaborate?
In my opinion- “The Efficient Market Theory” doctrine has become highly fashionable, almost like a holy scripture in academic circles. Since the 70’s the theory has been propagating that analyzing stocks is useless because all public information about them was appropriately reflected in their prices. In other words the market always knew everything.
As a corollary, the professors who taught EMT said that someone who threw dart at the stock table could select a stock portfolio having prospects just as good as once selected by the brightest, most hard working security analyst. Amazingly, EMT was embraced not only academics, but by many investment professionals and corporate managers as well.
Observing correctly that the market was frequently efficient, they went on to conclude incorrectly that it was always efficient. The difference between these propositions is night and day.
In a way we at Berkshire are enormously indebted to those academics: what could be more advantageous in an intellectual contest – whether it be chess, bridge or stock selection- than to have opponents who have been taught than thinking is a waste of energy?
In the last few months we saw one of the worst crashes and in the last few weeks we saw one of the smartest recoveries in the equity market, how do we predict it?
Occasional outbreaks of those two super contagious diseases fear and greed will forever occur in the investment community. The timing though would be un-predictable. And the market aberrations produced by them will be equally unpredictable, both as to duration and degree. Therefore, it is futile to anticipate the arrival departure of either of the aforementioned disease. Our goal at Berkshire is modest; we simply attempt to be greedy when others are fearful and fearful when others are greedy.
Berkshire owns 80 odd firms ranging from GEICO to Dairy Queen to Benjamin Moore paint, what is the main mantra at Berkshire to acquire a firm?
Nothing as such. Of all the activities at Berkshire, the most exhilarating for Charlie and me is the acquisition of a business with excellent economic characteristics and a management that we like trust and admire. Such acquisitions are not easy to make but we look for them constantly. In the search we adopt the same attitude one might find appropriate in looking for a spouse. It pays to be active, interested, and open minded, but it does not pay to be in a hurry.
In the past, I’ve observed that many acquisition hungry managers were apparently mesmerized by their childhood reading of the story about the frog kissing princess. Remembering her success, they pay dearly for the right to kiss corporate toads, expecting wondrous transfigurations. In my early days as a manager, I too dated a few toads. They were cheap dates, I kissed and they croaked.
Since then we have adopted a strategy to seldom buy into companies that are turn around players, because turnarounds seldom turn. Unless until there is a very compelling reason that the market had overlooked. We try not to fall into the generally accepted conventions of acquisitions or mergers and do not practice the same rules that other acquirers do to buy into a firm.
Probably sensing the mood of the crowd and the number of questions directed at few of his all time great investments Mr. Buffett turned Socratic and offered a firsthand view of the fundamental theses he employs while picking stocks. I would like to share with you some of the best questions that came across during the meet and the master’s responses for those.
-- - - - - -
You have often commented about the ineffectiveness of curriculums that impart financial knowledge, Can you elaborate?
In my opinion- “The Efficient Market Theory” doctrine has become highly fashionable, almost like a holy scripture in academic circles. Since the 70’s the theory has been propagating that analyzing stocks is useless because all public information about them was appropriately reflected in their prices. In other words the market always knew everything.
As a corollary, the professors who taught EMT said that someone who threw dart at the stock table could select a stock portfolio having prospects just as good as once selected by the brightest, most hard working security analyst. Amazingly, EMT was embraced not only academics, but by many investment professionals and corporate managers as well.
Observing correctly that the market was frequently efficient, they went on to conclude incorrectly that it was always efficient. The difference between these propositions is night and day.
In a way we at Berkshire are enormously indebted to those academics: what could be more advantageous in an intellectual contest – whether it be chess, bridge or stock selection- than to have opponents who have been taught than thinking is a waste of energy?
In the last few months we saw one of the worst crashes and in the last few weeks we saw one of the smartest recoveries in the equity market, how do we predict it?
Occasional outbreaks of those two super contagious diseases fear and greed will forever occur in the investment community. The timing though would be un-predictable. And the market aberrations produced by them will be equally unpredictable, both as to duration and degree. Therefore, it is futile to anticipate the arrival departure of either of the aforementioned disease. Our goal at Berkshire is modest; we simply attempt to be greedy when others are fearful and fearful when others are greedy.
Berkshire owns 80 odd firms ranging from GEICO to Dairy Queen to Benjamin Moore paint, what is the main mantra at Berkshire to acquire a firm?
Nothing as such. Of all the activities at Berkshire, the most exhilarating for Charlie and me is the acquisition of a business with excellent economic characteristics and a management that we like trust and admire. Such acquisitions are not easy to make but we look for them constantly. In the search we adopt the same attitude one might find appropriate in looking for a spouse. It pays to be active, interested, and open minded, but it does not pay to be in a hurry.
In the past, I’ve observed that many acquisition hungry managers were apparently mesmerized by their childhood reading of the story about the frog kissing princess. Remembering her success, they pay dearly for the right to kiss corporate toads, expecting wondrous transfigurations. In my early days as a manager, I too dated a few toads. They were cheap dates, I kissed and they croaked.
Since then we have adopted a strategy to seldom buy into companies that are turn around players, because turnarounds seldom turn. Unless until there is a very compelling reason that the market had overlooked. We try not to fall into the generally accepted conventions of acquisitions or mergers and do not practice the same rules that other acquirers do to buy into a firm.
When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is usually the reputation of the business that remains intact. You should invest in a business that even a fool can run, because someday a fool will. Never invest in a business you cannot understand. I learnt it the hard way.
What is the way out- How can the real estate crisis be resolved?
Well, unfortunately there is no silver bullet to quickly get out of something that took us years to get into. With conservative estimates the US market still has 3 years worth of the real estate still unsold. Without that moving it is tough to estimate and predict the upward swing.
Are you satisfied with the government’s actions to jumpstart the economy?
Yes and No. The government has realized the gravity of the situation and has done all the necessary things. But serious situations demand seriously unified response. And there has not been any unified response from our elected officials. What’s happening in the financial world right now is nothing less than an Economic Pearl Harbor. And in 1941 after the Pearl Harbor attack we did not create 4000 odd ear marks on the declaration of war.
Moody’s the Credit rating agency recently downgraded your Aaa rating to Aa2? As a major shareholder of Moody’s, did Berkshire try to present its case?
No we did not. Even as a major shareholder or as part of the Board in some firms we do not have a decisive say in the firm’s major decisions. If we did had a say many of the Derivatives would not have got a high rating from Moody’s in the first place.
Berkshire is the holding company for nearly 80 firms and many of the firms might be valued far more if they were spun off, would you ever decide to spinoff any of the firms to generate extra cash? In fact Berkshire does not even have contracts with the previous owners that should make things easier.
We would never do that. There might not be any visible synergies between the firms Berkshire holds, but all the firms were built brick upon brick by its owners with lot of passion. There is lot of history, and personal relationship attached with each of our firms and we are very proud of the tradition each of the firms bring to Berkshire.
Besides, before integrating the firms with Berkshire, we always try to also bring in the owners as Executives as they are the best people to lead the firms they nurtured. We only buy to keep. We like to think of Berkshire as the New York Metropolitan Museum, we don’t throw away things just because they are old, or sell things because they would fetch us lot of money from a private collector.
It is true that we don’t create contracts when we buy a firm. We do not want relationships based on contracts. Just imagine, if we buy and they don’t deliver, no contract can save us. Our contracts are based on seamless web of trust, the Hollywood model wont work.
Our country is witnessing one of the worst economic slumps, how optimistic are you about the future?
United States took its first census in the year 1790; we were a little over 3.5 million people then. Someone told me earlier today that in this stadium right now there are 35,000 odd people. So we as a group are 1 % of the 1st census. Just 100 such groups fought, created and shaped a democratic, economic and social powerhouse called the United States. Just imagine, they did not have the technology, defense, imagination that we today have at our disposal but only had vision about how their country needs to be.
In the last century alone, we fought 2 major wars, had a crippling depression, oil shock, had lots of social and political unrest and still managed to increase the standard of living by 7:1 of an average American. The ingredients that have sculpted this country always unleash a human potential within us that generates superlative results especially when we are down. Take it from me; we will be better off 10 years from now than we are now, we will much better off 20 years from now than we would be 10 years from now.
You have always invested in firms that have a sustainable business advantage. Berkshire’s major advantage over competition is the leadership- you and Mr.Munger provide and you are not sustainable. Would you invest in Berkshire if you were an outsider?
However complimentary it might sound, unfortunately we are not the competitive advantage of Berkshire or any of its subsidiaries. We do provide guidance’s and help shape the vision but we don’t keep our managers on a tight leash to extract results. We do not endorse the quarter to quarter stupidity employed in many other firms that always expect better results each quarter irrespective of ground reality.
I have tried to quiz a few CEO’s in the past about the list of things they might do if the firm they lead, is owned by them. They have always managed to come up with a laundry list of things they would like to do.
We at Berkshire have always made sure that our executives never need to have a laundry list of things to do if they own the firm. We have encouraged our leaders to not allow themselves to be weighed down by the difficulties of the present but to be rather focused on the possibilities of the future.
We rather always encourage them to behave like owners and to motivate them to do so we have designed compensations according to their ambitions and capabilities. We realized pretty early that Managers eager to bet heavily on their abilities usually have plenty of ability to bet on.
The market has seen some huge changes in terms of valuation in the last few weeks; do you think the macroeconomic factors or the Fed’s policies might have signaled the bottom of this slump in March?
We do not know. We never make predictions about the market’s lows or highs nor do we care about the macroeconomic factors. We would buy a stock or business if it is trading at a discount to its intrinsic value and if the business model is predictable and simple. We just try to buy a stable, steady business that makes products, people never stop needing, recession or otherwise. There is no point in deploying high end valuation methods that takes into consideration interest rates and inflationary predictions if the business we are interested in is extremely overpriced.
Picking bottom is not our game, pricing and valuing is our game.
You have always been a critic of waste, how do you view the value of advertisement and brand building?
I think it was Joseph A. Campbell when asked about the huge expenditure on advertisement commented that- “On advertisements, we waste half of what we spend, Iam not sure which half”.
Advertisement is important and effective only when there is sync between the product’s potential and what the company thinks that products potential is. It took decades for Coca-Cola to develop an ad strategy and a brand exercise to take Coke to where it is now. I do not think that RC Cola can ever help a customer visualize an image of happiness or fun at a beach with a can of RC Cola!
I understand Brand building is a promise; we invest millions every year at GEICO advertising its core competence, which is low cost. And this year during a recession time our customer base has swelled at never before levels, mainly due to the brand recall of GEICO with low cost.
Iam a PHD candidate in Economics and over the years I have tried to develop an understanding of how most of the industries function apart from studying about the financial aspects of running and investing in businesses. What else do I need to know to be successful?
Investment success is not a matter of how much you know but how realistically you define what you don’t know and avoiding it how much ever irresistible that might be.
Investing is not about IQ it is about temperament. Avoid doing things that land other people in trouble. If you have read financial history, you would have noticed that most the crashes and crises occurred due to un-believable levels of greed and over confidence of people about their abilities. To make money that they dint have and dint need people essentially risked things that they did have and did need. That’s foolish. Today so many banks are on the brink of failure and so many homes are on foreclosure because the owners always thought the upward cycle would never end and risked things that were important to them and leveraged on it.
History has always taught us that if you risk something that is important to you for something that is unimportant to you, it is unwise.
--- ---- ---- -----
Some of his responses to questions were class act, I could not blog many of those questions mainly because I was listening to Mr. Buffett, spell bound.
What is the way out- How can the real estate crisis be resolved?
Well, unfortunately there is no silver bullet to quickly get out of something that took us years to get into. With conservative estimates the US market still has 3 years worth of the real estate still unsold. Without that moving it is tough to estimate and predict the upward swing.
Are you satisfied with the government’s actions to jumpstart the economy?
Yes and No. The government has realized the gravity of the situation and has done all the necessary things. But serious situations demand seriously unified response. And there has not been any unified response from our elected officials. What’s happening in the financial world right now is nothing less than an Economic Pearl Harbor. And in 1941 after the Pearl Harbor attack we did not create 4000 odd ear marks on the declaration of war.
Moody’s the Credit rating agency recently downgraded your Aaa rating to Aa2? As a major shareholder of Moody’s, did Berkshire try to present its case?
No we did not. Even as a major shareholder or as part of the Board in some firms we do not have a decisive say in the firm’s major decisions. If we did had a say many of the Derivatives would not have got a high rating from Moody’s in the first place.
Berkshire is the holding company for nearly 80 firms and many of the firms might be valued far more if they were spun off, would you ever decide to spinoff any of the firms to generate extra cash? In fact Berkshire does not even have contracts with the previous owners that should make things easier.
We would never do that. There might not be any visible synergies between the firms Berkshire holds, but all the firms were built brick upon brick by its owners with lot of passion. There is lot of history, and personal relationship attached with each of our firms and we are very proud of the tradition each of the firms bring to Berkshire.
Besides, before integrating the firms with Berkshire, we always try to also bring in the owners as Executives as they are the best people to lead the firms they nurtured. We only buy to keep. We like to think of Berkshire as the New York Metropolitan Museum, we don’t throw away things just because they are old, or sell things because they would fetch us lot of money from a private collector.
It is true that we don’t create contracts when we buy a firm. We do not want relationships based on contracts. Just imagine, if we buy and they don’t deliver, no contract can save us. Our contracts are based on seamless web of trust, the Hollywood model wont work.
Our country is witnessing one of the worst economic slumps, how optimistic are you about the future?
United States took its first census in the year 1790; we were a little over 3.5 million people then. Someone told me earlier today that in this stadium right now there are 35,000 odd people. So we as a group are 1 % of the 1st census. Just 100 such groups fought, created and shaped a democratic, economic and social powerhouse called the United States. Just imagine, they did not have the technology, defense, imagination that we today have at our disposal but only had vision about how their country needs to be.
In the last century alone, we fought 2 major wars, had a crippling depression, oil shock, had lots of social and political unrest and still managed to increase the standard of living by 7:1 of an average American. The ingredients that have sculpted this country always unleash a human potential within us that generates superlative results especially when we are down. Take it from me; we will be better off 10 years from now than we are now, we will much better off 20 years from now than we would be 10 years from now.
You have always invested in firms that have a sustainable business advantage. Berkshire’s major advantage over competition is the leadership- you and Mr.Munger provide and you are not sustainable. Would you invest in Berkshire if you were an outsider?
However complimentary it might sound, unfortunately we are not the competitive advantage of Berkshire or any of its subsidiaries. We do provide guidance’s and help shape the vision but we don’t keep our managers on a tight leash to extract results. We do not endorse the quarter to quarter stupidity employed in many other firms that always expect better results each quarter irrespective of ground reality.
I have tried to quiz a few CEO’s in the past about the list of things they might do if the firm they lead, is owned by them. They have always managed to come up with a laundry list of things they would like to do.
We at Berkshire have always made sure that our executives never need to have a laundry list of things to do if they own the firm. We have encouraged our leaders to not allow themselves to be weighed down by the difficulties of the present but to be rather focused on the possibilities of the future.
We rather always encourage them to behave like owners and to motivate them to do so we have designed compensations according to their ambitions and capabilities. We realized pretty early that Managers eager to bet heavily on their abilities usually have plenty of ability to bet on.
The market has seen some huge changes in terms of valuation in the last few weeks; do you think the macroeconomic factors or the Fed’s policies might have signaled the bottom of this slump in March?
We do not know. We never make predictions about the market’s lows or highs nor do we care about the macroeconomic factors. We would buy a stock or business if it is trading at a discount to its intrinsic value and if the business model is predictable and simple. We just try to buy a stable, steady business that makes products, people never stop needing, recession or otherwise. There is no point in deploying high end valuation methods that takes into consideration interest rates and inflationary predictions if the business we are interested in is extremely overpriced.
Picking bottom is not our game, pricing and valuing is our game.
You have always been a critic of waste, how do you view the value of advertisement and brand building?
I think it was Joseph A. Campbell when asked about the huge expenditure on advertisement commented that- “On advertisements, we waste half of what we spend, Iam not sure which half”.
Advertisement is important and effective only when there is sync between the product’s potential and what the company thinks that products potential is. It took decades for Coca-Cola to develop an ad strategy and a brand exercise to take Coke to where it is now. I do not think that RC Cola can ever help a customer visualize an image of happiness or fun at a beach with a can of RC Cola!
I understand Brand building is a promise; we invest millions every year at GEICO advertising its core competence, which is low cost. And this year during a recession time our customer base has swelled at never before levels, mainly due to the brand recall of GEICO with low cost.
Iam a PHD candidate in Economics and over the years I have tried to develop an understanding of how most of the industries function apart from studying about the financial aspects of running and investing in businesses. What else do I need to know to be successful?
Investment success is not a matter of how much you know but how realistically you define what you don’t know and avoiding it how much ever irresistible that might be.
Investing is not about IQ it is about temperament. Avoid doing things that land other people in trouble. If you have read financial history, you would have noticed that most the crashes and crises occurred due to un-believable levels of greed and over confidence of people about their abilities. To make money that they dint have and dint need people essentially risked things that they did have and did need. That’s foolish. Today so many banks are on the brink of failure and so many homes are on foreclosure because the owners always thought the upward cycle would never end and risked things that were important to them and leveraged on it.
History has always taught us that if you risk something that is important to you for something that is unimportant to you, it is unwise.
--- ---- ---- -----
Some of his responses to questions were class act, I could not blog many of those questions mainly because I was listening to Mr. Buffett, spell bound.
His sense of timing is exemplary and legendary not just in his witty communique but mainly in his investment style. This year marked a set of historical investments from him when he invested a few billions in GE, Goldman Sachs, companies that he has always admired but never invested in. His sense of patience to wait when everyone was partying and throwing away huge amount of money on in-consequential deals, helped him in gaining huge pounds of flesh both from Goldman and GE in terms of value for his shareholders.
In essence, rather than blowing its ammunition hunting squirrels a few years ago, Berkshire was able to shoot the proverbial elephants walking by. With that he practiced exactly what he preaches-
Never count on making a good sale, have the purchase price to be so attractive that even a mediocre sale would give you great results.
Thanks,
Ravi Bhaskaran
Ravi Bhaskaran
1 comment:
Dude, amazing that you have written such a big article. Did you take notes? Or was it all from your memory?
You seem to be a true Buffett devotee. Sri Buffettaya Namaha!
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