Daily Speculations
May 4, 2003
Day 2
By James Altucher
The meeting kicked off at 8am with a video, showing
among other things, a cartoon depiction of The Wizard
of Oz with Warren
dressed as Dorothy, Munger as Toto,
and Bill Gates as the Wizard. Warren/Dorothy saves the
day by calling in a NetJets jet to take him back to
Omaha. The irony only becoming apparent later when it
turns out that NetJets was the only division in the BRK
empire Q1 03 to lose
money (trips to Oz, I guess,
bleeding too much money. )
The official shareholder meeting lasted about 10
minutes. Directors were unanimously reelected, and the
one shareholder proposal (a request for the B
shareholders to be part of the charitable contribution
program of the As) was not even seconded by any of the
15,000 shareholders present so was not voted on. 10
minutes into the meeting Walter Scott (normally known
in his role as founder of Level Three Communications
which BRK invested 100M in this past year in a convert
debt deal) motioned for adjournment and the request was
granted.
Then the fun began. 6 hours of Q&A. The exact specifics
of which I completely forget. Suffice it to say it was
filled with a lot of plain talk, down-to-earthisms like
if management doesnt
want the reader of the 10K to
understand it, then something wrong is going on. and
I know people will
be chewing Wrigley s gum and eating
Snickers bars 10 years from now but I have no idea what
will be happening in telecommunications.
In terms of the two questions I had coming into this
meeting I think I got some fairly clear answers. In
terms of the whether or not BRK is a buy or a short -
Buffett admits he would not recommend it. The risks are
pretty clear and are large enough to make me think the
upside is greater than the downside as a short:
a. the Gen Re
derivatives terrify him. Half the
meeting was about how bad derivatives are. Meanwhile,
he has been trying to unravel the 14,000 or so
derivatives with 600 counterparties that Gen Re dumped
on him. My worry is that either the derivatives cause a
problem (and the annual report suggests that the
counterparties may not be able to pay in some cases) or
the business fails to turn around, although to BRK s
credit, Gen Re did turn the corner and show a profit
this quarter.
B. In terms of a writedown of goodwill on Gen Re,
Buffett noted that he does not think goodwill should be
included in determining the intrinsic value of the
business. I m not an expert on the accounting issues of
this. My only concern is this was BRK s biggest
acquisition ever and goodwill does provide some clues
as to management effectiveness in valuing potential
acquisitions. A writedown of this size would not bode
well particularly since it would be balanced against
several years worth of earnings.
C. The company is definitely making a bet on a widening
lower class (the most recent acquisitions being Clayton
Homes, a provider of manufactured homes, and McLane
Distribution, a supplier of goods to convenience stores
and wholesale stores which Buffett just bought on
Friday from WalMart), greater unemployment, lower
interest rates, and a perpetually sluggish economy. The
primary assets of the company being fixed income bonds
that would be adversely effected by any rise in
interest rates. Munger s greatest fear, which he
brought up in the meeting, was a spiraling down dollar,
triggering perhaps government seizures of financial
assets which we
would not be able to protect against
for reasons I didn t really follow, not really knowing
anything about currencies or extreme paranoia. And
Buffett mentioned that although GDP growth appears to
have been 2% last year it was actually less because
per capita GDP was less since the population grew.
His theory being that we are still in a 2 year
recession.
D. The succession issue is never brought up except
jokingly. Anecdotally, most of the people I spoke to at
the meeting said they would basically sell the day
Buffett dies. I can t imagine who will be buying that
day and given the liquidity of the stock its not going
to be a peaceful fall.
E. All of the retail businesses are slowing and Netjets
continues to lose money.
Clearly Buffett has had some huge successes on the
investing side: Coca-Cola, Geico, American Express, and
Gilette being the largest examples. Although none of
these can be called Graham-Dodd style picks he clearly
waited for the fat pictches, buying great brands when
they were down and out and letting the bets ride. His
famous statements are to always buy what you know and
buy businesses that
will be here 20 years from now.
Hard to argue but I
m not sure Buffett really follows
those suggestions anymore (unless he s been living in
trailer parks and digging up energy pipelines). Most
recently he s been seen scooping up convert debt on
Amazon, Level Three and a host of heavily regulated
energy pipeline companies. Gen Re, which he knew better
than anyone, had massive problems after he bought it
and he had to replace top management despite his
protests that he likes to stay out of the way of
management.
My guess is that Buffett s current investing strategy
is as follows: wait
in my office until someone walks
in and hands me a lot of money for free. For instance,
the SQUARZ bonds that Berkshire issued this past year.
Investors loaned him $200M AND pay Berkshire 1% a year,
resulting in the first ever negative coupon bond. All
this for the right to buy shares of BRK in 2007 at 90K
/ share. Would Buffett have taken the other side of
this deal?
Why doesn t he invest in technology companies? At this
point, no technology companies would want him to.
Almost every deal he does is with illiquid companies or
companies teetering on bankruptcy that cater to his
pawn-shop like demands for collateral and yield. Power
to him that he can get those deals, but they re not the
sort of deals that growing, healthy companies like EBAY
(which BRKa has underpeformed since its high in 1998)
need or want nor are they the sorts of deals which
other investors can hope to do in the safety of their
homes. Already the
large non-management investors of
his most recent deal, Clayton Homes, are complaining
that management screwed them over by selling out to
Buffett.
Every investor does
it, but Buffett s greatest skill
is talking his book and making it a Bible. The economy
is weak, nuclear attack can happen any moment,
Japan-style deflation is possibly upon us, the dividend
tax cut is evil (note that if the tax cut is approved
there will be more pressure than ever for Buffett to
issue a dividend), and ENERGY ROCKS! need to be
examined with great skepticism as to underlying agenda.
That said, when he wants to, 50 years of studying the
market does allow him to let loose with great
investment wisdom,. My favorite from the meeting: The
only way to be loved is to be lovable.