Friday, May 23, 2008
IMD: Lessons from a Legendary Investor: How to grow wealth in a responsible and sustainable manner - May 20, 2008
Thursday, May 22, 2008
THE cookie-cutter office building stacked amid high-rise condos and streetside retail is not where you'd expect to find the man who oversees $1.2 billion in funds, and who is said to be Canada's top stock-market bargain hunter. Taped to his door is a plain piece of paper that has been run through a printer: "Chou Associates Management Inc.," it reads, implying that nothing of much importance is happening here.
The door is locked, but jiggle the handle of the door and out pops Francis Chou, whom I have come to ask about the strange decline in the once-dominant school of value investing. It's an investing style once described by the late, great value guru Benjamin Graham as the equivalent of rifling through a store's discount bin. In other words, if you are patient enough to search endlessly and smart enough to know the difference between a true bargain and a bad knockoff, then you can make terrific money.
Warren Buffett, a giant of value investing, has achieved an almost impossible compound average annual return of 21.1% from 1965 through 2007 with his holding company, Berkshire Hathaway Inc. (compared to 10.3% for the S&P 500 Index). Other masters, such as John Templeton and Charles Brandes, have also prospered using this approach, as have Canadian names like Irwin Michael, Peter Cundill, Bob Tattersall and Francis Chou. Until recently, that is. At some point in the past year or two, value investing stopped working. Example: For the 12 months to Feb. 29, three of Chou's five funds were down 17% or more, as compared with the previous year. Could this be the death of value?
Chou seems faintly tired of reaffirming his faith that cheap stocks always come back up in price. "This is something that happens every six or seven years," he says. "The stuff that is cheap gets cheaper, and you have no control over it. Eventually, though, the logic prevails if you buy stocks cheap."
His move from the trappings of Bay Street to this nondescript suburban location several months ago was by no means a retreat from the action. For Chou, it was a decision that meant a shorter commute, and one that squares with his complete lack of affectation. An immigrant to Canada from the town of Allahabad, India, Chou arrived in Canada at age 20. He never attended university, be--ginning his career as a tool-belt-wearing technician stringing wire for Bell Canada. His career as a money manager unofficially be--gan in 1981 when he formed an investment club with six Bell co-workers and $51,000 in seed money. "I was more ambitious than just being a technician and I was reading a lot, trying to see what I could do," he recalls. "One day I came across an article in the paper on Benjamin Graham, and then suddenly the light clicked. I felt that was my line." Chou thinks this may have had something to do with his life as a child in India. "In India, you haggle. And in the stock market, you do the same thing. You're looking at what something is worth and trying to buy it cheaper."
Wednesday, May 21, 2008
[Posted by TMFMattyA on the Motley Fool's Berkshire Hathaway discussion board]Last Tuesday, Buck Hartzell (TMFBuck) and I drove down to Richmond to attend Markel's 2008 Annual Meeting of Shareholders. Below are some of the key takeaways from the meeting, along with our full notes from the proceedings.
(1) Chief Investment Officer Thomas Gayner called the current environment the best he's seen in his 18 years at Markel for buying best-of-breed companies at a discount. Pretty strong words from him there.
(2) Steve Markel thinks Markel should be valued at 2x Book Value. At the current book value (as of 3/31) of $263 Book value, that puts shares at $526.
(3) The culture at Markel is extremely strong. The employee owners (we call them that because they actually buy shares on the open market) are bought in to what Markel is doing. That is an incredible advantage for an insurer, or any business.
(4) Thomas Gayner thanked the underwriting side of the business when he first got up, saying he understands how hard it is to have such discipline and generate the money (float) that his team gets to invest. Their top investing priority is not to lose it.
(5) Thomas Gayner also said that bad times will always come and go. There have been many times in the past when people have predicted the worst (food and energy crises, runaway inflation, economic depression). It usually doesn't happen. :-)
Below are our full notes from the meeting, including the shareholder Q&A and some fantastic quotes from Thomas Gayner:
Wednesday, May 14, 2008
IC = Ian Cumming
JS = Joe Steinberg
How do you protect against political risk in Argentina (referring to recent export taxes)?
IC: They’ve had a successful run in Argentina. A long time ago, we privatized the national insurance company, successfully got out before the dip. It’s never ending. It’s not politically correct, but the old joke is that Argentina is a country with wonderful natural resources, the problem is that it is full of Argentines. We don’t have a great answer, just pray. We paid a cheap enough price, think we will do just fine.
JS: There are two outcomes. The export taxes go away over time or it all blows up and the country slides off into the ocean.
Origins of Fortescue investment? How quickly will that ramp up? What do you think about China investing in Fortescue?
The deal came from Jefferies. We noodled on it, waited for awhile, then came back to look at it seriously. We worked on it for awhile. We have an old miner who works for us, guy used to run Kennecott Copper, we went over there and walked the site and took iron ore samples and it tested like they said it would.
Andrew Forrest is a difficult guy, hyperactive, visionary, great at what we does.
We laughed at our calculations when we did them, but we’re now at those numbers.
Thanks to Arpit Ranka for this wonderful link.
Think Mental Models: http://thinkmentalmodels.com
This website, inspired by the work of Charles Munger, provides over 100 checklists that can be brought consciously to mind to aid the thinking process.
Each model is described by at least one distinguished user. Examples include Warren Buffett, Richard Feynman, Robert Rubin and Peter Drucker, among others.
Friday, May 09, 2008
Notes courtesy of Peter Boodell; thank you!
(As is standard, no recording equipment was used to reproduce these notes. My high school typing teacher gets all the credit. As a result, these notes are recollections only – not quotes, and should not be relied upon. –PB)
CM: Testing, can you hear in back? Mr Denham has an announcement.
Denham: We ask you not to use your video recorders, thanks.
CM: Welcome to the 49th annual meeting of shareholders of Wesco Corp. Please register to vote at entrance. Anyone wishing to speak, state name, wait for microphone. List of shareholders, 96% of outstanding proxies received. Election of directors? All in favor? [Aye]. Motion is carried.
Six nominees are elected. There will be a long Q&A preceded by Socratic solitaire conducted by the Chairman. Meeting is adjourned.
We now begin Q&A, starting with a long game of Socratic solitaire. During questions, do not ask what we are buying or selling. Any other question is fair game, but we don't agree to answer them.
Because many of you have come from such a long distance, I will talk before I take your questions. I will address two topics, general investment climate [and learnings from Berkshire Hathaway]. We normally avoid [discussing the general investment climate] like the plague. Most assets are priced to a level where it is hard to get excited. It is hard to get 4% yield on a nice apartment, and it doesn't include replacing the carpets. Bonds of strong corporations are 4% yield. Corporate equities are paying 2% pa, growing 4% per year. Such a world isn't the one that made all of you able to come to the meeting. Last generation has been in hog heaven – some bumps, but it had easiest time getting ahead. In the eighteen years that preceded hog heaven, the purchasing power of Yale's endowment went down 60%. They were getting real investment return of 0%, negative. It is not at all impossible that brilliant investors like Yale get bad results in the future.
People are used to laying money aside and investing in standard fashion, and become quite comfortable. It is easy to forget that this isn't guaranteed. Many have recognized this, but for those running pensions it is difficult [to adjust down assumptions] —like the agony of raising taxes or not looking good as CEO of a company. Some of them wonder if they have signed up for something too hard when running a defined pension plan. That crowd doesn't want to go to a 4-5% assumption, because the pain of the money needed to correct the plan is large. Bonds pay 4%, so they go to alternative investments with profit sharing. They solve the problem by giving 'reasonable return' and sell hedge funds and venture capital fund, mid-stage, late stage, private equity, etc etc etc. They do complex trading strategies, private equity in Africa. They buy timber. [audio system malfunctions] Evidently that machine didn't like the remark. People go into alternatives, and this has worked very well so far. A lot of university endowments have done it – and that is game we are in. If natural return is 5%, getting it to 9% is very unlikely to work well long term. It's going to be difficult for people to have high real returns from deferring consumption. The reason my generation did so well was kind of a fluke, and won't necessarily continue. There will be lots of chicanery in future. Many claim alpha – but really they are just taking earthquake risk. At end of year, when there is no earthquake, they take the money. This is a dishonorable way to invest. It is always easier to get felicity by reducing expectations instead of seeking extreme results.
We have plenty of scandals coming. Lots of rot has gotten into system. It has caused unpleasantness. What is next? I suggest the derivative trading books of the world are next. The accounting allowed in derivative books has been god awful. The morals and intelligence has been god awful. 'I'll be gone and you'll be gone' is phrase they use. What is buried in those books is dangerous, with clearance risks with optimistic assumptions that the accountants allowed. I was at Salomon when interest rate swap accounting was changed. They had a matched book. They were making $7mil, 25m over 18m. Both sides wanted to mark trades profitably. They couldn't retain derivative traders if they didn't have bad accounting. There is a lot of Gresham's law here, where the bad practice drives out the good.
If you run a good bank, and testosterone bank around corner pressures you, there are tremendous pressures to conform. Everyone starts replicating. If every university puts 2% into timber, that can go on a long time. But it is self-fulfilling. When it comes to the unwind, when they all want to get out. A lot of things rely on momentum. Valuations make everyone look good for a while.
Thursday, May 08, 2008
Saturday, May 3rd, 20083:05 p.m. An Insightful Day
I hope that you enjoyed today's discussion as much as I did, and I encourage you to contact me with any additional questions or insights you may have.
3:00 p.m. Hopes for Berkshire
A shareholder asked Mr. Buffett what he hopes for Berkshire is that the culture stays strong and that it remains a home for businesses that were built by families over time. He also hopes that the company will continue on as it is now by being a home for great businesses. I'll note that culture is one of the most valuable parts of any business, but the most difficult to quantify. In Berkshire's case, Mr. Buffett views sharpening the Berkshire culture as his chief objective, and in my view this culture will give his successor(s) an advantage in continuing to build the company for decades to come.
2:55 p.m. Pharma Stocks
Mr. Buffett said that he thinks pharma stocks as a group will do well, but given that it is very difficult to value what is in the pipelines of these companies, he thinks investors would be best served by buying a basket of pharma stocks. I'll note that Berkshire's equity portfolio has positions in J&J, Sanofi-Aventis, as well as GlaxoSmithKline.
2:50 p.m. Envy vs. Gluttony
Mr. Buffett said that envy is the worst of the sins because if you become envious you feel worse, while the other person is the same--or even feels better. He said, tongue-in-cheek, that gluttony on the other hand has upside.
2:35 p.m. Dividends for Berkshire?
A shareholder asked Mr. Buffett about the potential for dividends at Berkshire, and he said that as long as he can continue to create more than $1 of value with every $1 of retained earnings, Berkshire will not pay dividends. Given that Mr. Buffet has been putting a lot of capital to work lately with the Marmon Group, Mars/Wrigley, additional equity investments, and, more recently, new fixed-income investments, I think there are heaps of potential for Berkshire to still create wealth by retaining all of its earnings.
Q: Amount of derivatives now, something like $30 trillion?
A: When BRK unwound Gen Re's derivatives book, it was shown as positive but the money disappeared when we tried to reach for it. Net result was a loss. Accounts on both sides of transaction show profit, but that can't be. Will end badly. Repeated point of not being able to buy insurance on someone unless you have an insurable interest.
Q: Clarify comment about BRK earning more in an inflationary environment?
A: If a business has a competitive advantage, constant margins imply that increasing prices will translate to more profits. CM would much prefer no inflation to earning more in this fashion, however.
Q (from Tilson): No questions about the Q1 earnings drop at the BRK meeting?
A: Yes, significant - like Sherlock Holmes pointing out the dog didn't bark when it should have. Maybe it's all part of the "seamless web of trust" we've been talking about.
Wednesday, May 07, 2008
This is the afternoon session of the Warren Buffett/Charlie Munger question-and-answer session with shareholders at the Berkshire Hathaway Annual Meeting at the Qwest Arena in Omaha, Nebraska on Saturday, May 3, 2008 as live-blogged on CNBC.com's Warren Buffett Watch. All times are Central.
1:12 pm: Warren Buffett and Charlie Munger are back on stage taking more questions from shareholders. There are a few more empty seats than in the morning session, but the arena is still mostly full.
1:14 pm: Buffett says he's made a lot of mistakes over the years, but none of them could have been prevented by "conventional due diligence."
1:15 pm: Buffett says that when Berkshire says financing is going to be available, it's available no matter what, "even if Ben Bernanke runs away to South America with Paris Hilton." Big laugh line.
1:16 pm: In response to a question on his religious beliefs, Buffett says he's an agnostic. He just doesn't know if there is a God and he doesn't know if he'll ever find out.
1:20 pm: Asked about Kraft, Buffett says that he thinks most of the big food companies have good assets. He uses Coca-Cola as a good example. Hard to take it on because of the power of its brand built over decades. "We feel good about branded products when they're runaway leaders in their field."
1:30 pm: Buffett says we run Berkshire in a way that is not dependant on anybody else. We want the company to keep working even if the rest of the world stops working the way it did the day before.
This is the morning session of the Warren Buffett/Charlie Munger question-and-answer session with shareholders at the Berkshire Hathaway Annual Meeting at the Qwest Arena in Omaha, Nebraska on Saturday, May 3, 2008 as live-blogged on CNBC.com's Warren Buffett Watch. All times are Central.
8:31 am The lights have gone down in the arena. Buffett, on video tape, is introducing this year's movie. We asks that no one do any video recording, and all cameras are banned from the arena.
8:39 am: The film is a humorous cartoon that has Charlie Munger running for President. How will you fight global warming, he's asked. Everyone gets Dairy Queen ice cream!
8:41am: The cartoon is mentioning just about every Berkshire Hathaway property. Munger campaigns on NetJets, of course.8:44 am: As the credits roll, every name is Charlie Munger. Produced by, directed by .. the entire technical crew ..
In a presentation he made to students at the Wharton School earlier this month and a subsequent interview with Fortune, Warren Buffett shared his thoughts on everything from the economy to the credit crisis and the Bear Stearns bailout.
In this Web exclusive, we present further excerpts from his talk with the students, in which the megabillionaire offers his insights on judging managers, buying businesses, what metrics - if any - he relies upon, and why he views his job as similar to painting the Sistine Chapel.
Q: You said before that one of the things you look for in businesses you're buying is good managers who are honest, capable, and hard-working. To me, that's a hard judgment to make if you haven't known him for long on a personal level. How do you go about figuring that out about somebody, and how long does it take you to make that evaluation?
WB: Well, almost always, we're buying businesses where the managers come with it, so I do have a record [I can judge]. If I had to pick out the five people in this group here who would be the best managers, I wouldn't know how to do it. I mean, you all have great IQs, you have great academic records. You've all shown the energy to get into school and push hard and all that. So you'd have all these attractive qualities.
Can I pick out the five best? I don't think I can do it. What I can do, when I've seen somebody run a business for 20 years, is decide whether they're going to keep behaving in the future as they have in the past, if I keep the conditions that caused them to behave that way in the past. So when I buy a business - it's the biggest question I ask myself if I decide it's a good business - is "Do they love the money, or do they love the business?" Now, if they love the business, we can do business. If they love the money, we can't.
Now, let's say they love the business, as our managers do. They sell me a business for a billion dollars and can hardly wait to get to work in the morning.
In that situation, I'm the only guy that can mess it up. I can take that out of them. I can't put it into them. But I say to myself, "Why do I go to work in the morning?" I've got enough money. I've got Social Security now, even. [Laughter] I'll make it, you know? The kids won't get much, but that's their problem. So I say, "Why do I go to work in the morning?"
Well, there are two reasons. I love painting my own painting. I come down to the office, I get on my back, and I start painting. And I think I'm in the Sistine Chapel. It's my painting. Now, if somebody says, "Use more red paint instead of blue. Paint a seascape instead of a landscape," I would hand them the brush in five seconds and I'd say-I'd say a few other things, too - but I'd say, "Do your own painting. I'll go paint what I want to paint." I get to do my own painting. And then I get applause - if I deserve it. And I like that. I like having the painting admired, and I like to get to paint my own painting. That's so much more important to me than getting my golf score down three strokes or beating somebody at shuffleboard or something. I mean, it is the ultimate pleasure.
Tuesday, May 06, 2008
Typewritten notes courtesy of Peter Boodell
(As is standard, no recording equipment was used to reproduce these notes. As a result, these notes are recollections only – not quotes, and should not be relied upon. –PB)
A short introductory skit – Susan Lucci from All My Children walks on stage:
CM: Where could he be?
Susan Lucci: Detained at the TV studio. Hi Charlie, I'm Susan Lucci. He's going to be a big star.
CM: You have some important qualities that Warren lacks.
SL: There are some changes we need to make. We need to change our dividend policy. We are so cheap to our shareholders.
CM: Sounds good to me.
SL: And I want guidance on earnings, weekly. And we need to pay our directors more than $900/yr. [directors stand up and applaud]
[WB walks in]
WB: What's that talk about dividends? My show is Berkshire Hathaway – All My Children can't do without you, and I can't do without Berkshire.
SL: The deal is off?
WB: You've brought me back to my senses. Pick out anything you would like at Borsheim's, and charge it to Charlie.
WB: We are going to follow usual procedure. We are going to answer questions between now and then, based on who gets lined up at microphone first. Our best estimate is 31k people are here to today.
We have Charlie Munger - he can hear and I can see - we work together for that reason. Hold your applause until the end. Howard Buffett, Bill Gates, Don Keogh, Tom Murphy, Walter Scott, Don Olson. The best directors in America.
We'll take a break at noon.
Q1: Rajesh Vora, Bombay India. I salute your 100% honesty. What key states to correct crowd mindset?
CM: He wants to know how to become less like a lemming.
WB: Since you repeated the question, I'll let you give first answer.
CM: He wants to invest less like a lemming.
WB: I started investing when I was 11. I believe in reading everything in sight. I wandered for 8 yrs with technical analysis. I read Intelligent Investor, chapters 8 and 20 I recommend, and if you absorb it you won't be a lemming. I read it early in 1950, and I think as good a book now as then. You can't get a bad result if you follow it. There is another book out there, Food You Will Enjoy about the Buffett family grocery store. Neither of us were any good at groceries. You don't want to pay attention to my Grandfather's advice on stocks. It has three big lessons, a) stock is a part of a business b) market serves you doesn't instruct, and c) margin of safety. Berkshire holders are better than most at understanding that they own a part of a business.