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The master who trained the master.

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I am in Omaha, Nebraska and attended the annual general meeting of Berkshire Hathaway yesterday. I have been an investor in BRK for six or seven years. I am most definitely a value investor and follow the principles espoused in Benjamin Graham’s “The Intelligent Investor”.

I dabbled in penny stocks in the 1998 – 2000 period and then bought another junior technology stock in or around 2005 / 2006. None of them provided a return commensurate with the risk.

A number of things struck me at yesterday’s AGM:

(1) Warren Buffett has made this event a profit centre for Berkshire’s businesses. For example, today Warren Buffett will be working in Borsheim’s selling jewelry. He personally sold $1.5 million worth of jewelry last year. This year his target is $2 million. I bought a BRK tie yesterday and the exhibit hall was packed with shareholders spending a lot of money – all at Berkshire owned companies.

(2) His principles don’t change. His messaging yesterday is precisely the same as his messaging ten, twenty or thirty+ years ago. Watch a YouTube video of him from 2001 and you’ll essentially hear what I heard yesterday.

(3) Charlie Munger is the silent giant in that partnership. Seeing the two of them interact on the stage provided real insight into how a functional and complementary partnership can work. These two are incredible individually, but together they are the best. The numbers prove this fact!

(4) The biggest challenge facing BRK going forward is its size. Its operating businesses produce so much cash that the holding company is having trouble finding acquisitions large enough to duplicate its returns of the past. This doesn’t scare me.

(5) Some shareholders are calling for dividends to return capital to us and to release some of the company’s cash hoard. I’m not one of these shareholders. Read pages 20 – 21 of Berkshire’s 2012 annual report (find it on-line) to find out why.

(6) Succession planning is a concern for shareholders. Berkshire’s board has been thinking about this for many years and the plan is in place. While I’m sure there will be some self anointed pundits who will scream loudly about BRK’s demise when our Chairman passes away. I’m confident the company is in great shape and that the succession plan will ensure its continued success.

There are more lessons, but I’m going to head out and absorb some more of Omaha before returning home.

Buy things on sale

August 17, 2011

It seems that all the pundits have piled on the “bash the US” bus over the past two or three years.

Unquestionably America has, in the words of Warren Buffet, experienced the economic version of Pearl Harbor. It has been hit hard.

The profligate spending of consumers and government is going to take several years to unwind. While business indicators are generally trending positively, Jane and John Doe are feeling poorer. It’s no surprise given the erosion of paper wealth created when the housing bubble popped.

For those of you who know me you know me to be a resolute fan of the US. Yes, everyone is excited about China and its prospects. I am under no illusion about the positive impact China’s growth with have on the world’s prosperity. I am excited about the possibilities of more than a billion middle class consumers looking for things like toasters, DVD players and microwave ovens.

But I believe that the entrepreneurial spirit, free enterprise system, rule of law, stable democracy and the protection of intellectual and real property rights will always keep America on the leading edge.

Warren Buffet spends fifty minutes with Charlie Rose talking about business, the economy, the US, China, Berkshire Hathaway, succession and the role of government.

I highly recommend watching the interview. But in case you don’t have time then I’ve summarized his main points under the YouTube box below.

(1) People must have confidence that their government can work. This confidence comes from avoiding promises that cannot be kept and by making realistic and achievable plans.

(2) McGraw Hill owns S&P, it’s likely that McGraw has a lot of its money in US T-bills. The US can and will always pay its bills. The downgrade shouldn’t have happened.

(3) China’s criticism of the US is self interested. It owns more than $1 trillion in USD and gets worried about that investment being devalued (through printing more money).

(4) The economy is improving. Across Berkshire’s 70 businesses almost all of them have been growing. Only those related to the housing sector are struggling.

(5) The US has to work off the excess housing created during the binge last decade. It is happening. It will take time because growth in population is baked into the system (people have kids and people immigrate).

(6) In 1779 the population of China was 290 million, Europe 50 million and the US 4 million.  Americans weren’t smarter, they didn’t work harder and they didn’t have better natural resources. They had a system that worked. Chinese were smart back then too, but now they’re learning and employing the system that works.

(7) The world economy is not a zero sum game. It is good for everyone if countries like China and the US prosper. One does not necessarily do it at the expense of the other.

(8) Approximately 19% of revenue comes from taxes and the government can spend 21% if the economy and country continues to grow. What can’t happen is for that 2% deficit (of GDP) to grow as a percentage of income or growth.

(9) A bit tongue-in-cheek, but a good way to get the attention of legislators is to require that unless the deficit is reduced to 3% of GDP (now 10% of GDP) then they are not eligible for reelection.

(10) It’s nonsensical that 60 million people live in households that earn less than $21,000. But through entitlements people like Warren Buffet get a $32,000 per year social security benefit. Entitlements are a problem.

(11) The market system works. Incentives and equality of opportunity being key. The lucky ones prosper disproportionately. A rich society like the US should think about those 60 million people and how to help them.

(12) Two things are needed to keep the financial system from going crazy: (a) limits on leverage and (b) proper incentives for people at the top of important financial institutions.

(13) Buy things on sale. Berkshire spent more money buying stock this past Monday than any other day in 2011. Berkshire has spent $7 billion on capital investment almost all of which is in the US. This is $1 billion more than at any other time in its history.

(14) Seventeen countries joined the European economic union and in so doing gave up their right to print money. The US doesn’t have this problem.

BRK.B

March 1, 2009

There is not much good news being published in the stock and bond markets these days.  While I have no idea when the current economic malaise will subside, I do have hope that we are closer to the bottom than the top (although I don’t believe I am able to time the market, so I don’t try).  

As a class B shareholder of Berkshire Hathaway stock I haven’t been been totally insulated from market meltdown.  I was pleased, though, to see that while the S&P 500 was down 37% in 2008, Berkshire was down “only” 9.6% for a difference of 27.4%.  

Since 1966 there are only five years where the S&P has come out ahead of Mr. Buffett.  Let’s hope Berkshire keeps up this trend even when the Oracle retires.