Sunday, July 31, 2005

What are the greats doing?

Good story from Mstar on what the great managers are doing, along with links to their recent letters, here. Bookmark those... They make for good reading. No real surprises, but includes a list of stocks common across the portfolios, including Tyco, Comcast, Yum, Brkb, Liberty Media, MBIA, TDS, TWX. An interesting one is TWX, for the AOL unlocking... But YUM with Kentucky Fried Chicken in China is pretty good too. All of them, great cashflows and potential for spin-offs. Steve Mandel's recent shareholder letter (Lone Pine), the cubs tell me, defends his largest shareholding which he is still quite bullish on: GOOG.

Walmart - The Value Pick, and odds and ends

Coming on the heals of Buffett's comments below about Costco, see this link on Wal-mart, and who owns it now. Bloodied and battered, the value boys and girls like it. Personally, I have recently shopped at the big three (Costco, Wmt and Target along same stretch near Norwalk CT) and Costco and Target were beyond pleasant, and Walmart was exceptionally unpleasant. WMT reminded me of the Sears store located near me on the South Side of Chicago while growing up. Out of stock of a number of items (where is that computerized stocking system...?), unhelpful staff, difficult to find items... You name it. Still, it's cheap.

My favorite stock that I have been recommending to my non-investment friends who need a good long term runner -- Navteq (NVT). Pricey, but you tell me when the asset they spent 17 years building (digital turn-by-turn map of USA, powering mapquest, google, you name it) becomes obselete... And my phone will soon be giving me directions. Our cars already do.

Click here for a good reading list for summer vacations for investment types out there. I have been plugging two of those for a while now, and it is nice to see others on the drumbeat: two must reads, Greenwald's On Value Investing and Cialdini's Persuasion. Another list of books recommended by the Berkie duo, here.

Good note on anchoring, and where to start when valuing a stock. Ie, don't look at the price.

When asked what he stays away from when valuing a company, Buffett replied, "I don't want to know the price of a stock as I value it. Knowing the price anchors your thoughts."

Here is a nice comment on holding periods and, in particular, why it might have made sense for Buffett to sit on his hands while KO traded at 65x. Read here about Buffett and utility stocks, and why Rich Bernstein still keeps his day job at ML.

I've recently joined the bull side of the aisle, joining Bill Miller and a few others. (Though I haven't been brave enough to buy Google yet, though my brother did...) For anyone looking for a reason, note cash levels at mutual funds are at a historic high -- a historically reliable indicator. Or maybe I've been watching Asia too closely. The Post reports on it here.

Buffett now owns an RV maker with 1.3bil in sales last year, here. I note the propensity for Indiana firms of late (e.g. dental insurance).

Anyone looking for a good insurance stock to put in the portfolio? How about WTM or MRH (note here on MRH). I wouldn't bet against Jack Byrne -- have you seen his new e-surance ads? Better than the Gecko, that's for sure. And for a recent comment on the manufactured home industry, here, on why Clayton is still looking good, but a couple industry peers are starting to show better numbers. I expect Clayton to be doing the same.

If you thought rugs weren't cool, Mary & Kate Ashley have a new line linked with Shaw Brothers. Maybe they'll come to the next Annual Meeting?!? Buffett embraces wind power, here, and plans to spend $5b capex on PacificCorp if the merger goes through.

Cousin Jimmy is making a movie, here. Hopefully it will be on sale next year in Omaha too.

Friday, July 29, 2005

Buffett Posting on

A very interesting set of Q&A from a recent trip to Omaha, worth reading in its entirety, here. Of particular note, for the recent MBAs and others;

Q: Do you expect the stock market premium to continue to be 6.5% over bonds?

I don't think that the stock market will return 6.5% over bonds in the future. Stocks usually yield a little more, but that isn't ordained. Every once in a while, stocks will get very cheap, but it isn't ordained in scripture that this is so. Risk premiums are mostly nonsense. The world isn't calculating risk premiums.

Another gem:

Be careful that when you buy something for a sound reason, make sure that the reason stays sound.
If you buy GM, you need to write the price and the respective market valuation. Then write down why you are buying the business. If you can't, then you have no business doing it. Quote from Ben Graham: "You can get in more trouble with a sound premise than an unsound premise because you'll just throw out the unsound premise".

Other odds and ends:
Don't worry about mistakes. You'll make mistakes. Get over it. At the same time, it's important to learn from someone else's mistakes. You don't want to make too many mistakes.

Side note: Warren once asked Bill Gates, "If you could only hire from one place, where would it be?" Gate's reply was Indian Institute of Technology.

Q: When did you know you were rich?

I really knew I was rich when I had $10,000. I knew along time ago that I was going to be doing something I loved doing with people that I loved doing it with. In 1958, I had my dad take me out of the will, as I knew I would be rich anyway. I let my two sisters have all the estate.

[On Kmart & Sears:]
We would rather look for easier things to do. The Buffett grocery stores started in Omaha in 1869 and lasted for 100 years. There were two competitors. In 1950, one competitor went out of business. In 1960 the other closed. We had the whole town to ourselves and still didn't make any money.

How many retailers have really sunk, and then come back? Not many. I can't think of any. Don't bet against the best. Costco is working on a 10-11% gross margin that is better than the Wal-Mart's and Sams'. In comparison, department stores have 35% gross margins. It's tough to compete against the best deal for customers. Department stores will keep their old customers that have a habit of shopping there, but they won't pick up new ones. Wal-Mart is also a tough competitor because others can't compete at their margins. It's very efficient.

[On Estate taxes and welfare -- a gem]
If you take away the estate tax, that money will have to come from somewhere else. If not from estate taxes then you inherently get it from poorer citizens. Less than 2% of estates will pay the estate tax. They would still have $50 million left over on average. I think those that get the lucky tickets should pay the most to the common causes of society. I believe in a big redistribution. Wealth is a bunch of claim checks that I can turn in for houses, etc. To pass those claim checks down to the next generation is the wrong approach. But for those that think I am perpetuating the welfare state, consider if you are born to a rich parent. You get a whole bunch of stocks right at the beginning of your life, and thus you are sort of on a welfare state of support from your rich parents from the beginning. What's the difference?

[On demographics:]
Q: What kind of impact will the demographic shift (i.e. baby boomers) have on the United States?

We aren't big on demographic trends. It's difficult to translate that information into profitable decisions. It is hard to figure out what businesses will prosper in the future, based on macro trends. See's candy is for anyone and Fruit of the Loom is for people who need underwear today. We want to be right on something that will work right now, not something that might work in the future. I doubt that Wal-Mart spends a lot of time on demographics. They instead focus on where to put the store and what to put on the shelves. I've never found those kinds of stats useful.

Q: What effect does large institutional ownership have on stock price volatility?

Never has so much been managed by so few that care so much about what happens tomorrow. So much of the world of investing is people who are trying to beat indexes, and they have a willingness and eagerness to make decisions in the next 24 hours. This condition didn't exist years ago. It has created a "hair trigger" effect. An example of this hair trigger effect was Black Monday in '87. The cause was program trading and stop loss orders.

Q: How do you feel about the current real estate environment?

If you are buying to own a home, that is fine. Otherwise, it seems to be getting into bubble territory. We're not excited about real estate because generally there is not enough return at current prices.

[Read the whole commentary here.]

Tuesday, July 26, 2005

More Notes from Omaha

Two more groups make the trek to Omaha to meet with Warren - Kansas and Texas A&M. My favorite question from the Kansas meeting (and one I had meant to ask):

Question: According to a business week report published in 1999, you were
quoted as saying “it's a huge structural advantage not to have a lot of money. I
think I could make you 50% a year on $1 million. No, I know I could. I guarantee
that.” First, would you say the same thing today? Second, since that statement
infers that you would invest in smaller companies, other than investing in
small-caps, what else would you do differently?

Answer: Yes, I would still say the same thing today. In fact, we are still earning those types of returns on some of our smaller investments. The best decade was the 1950s; I was earning 50% plus returns with small amounts of capital. I could do the same thing today with smaller amounts. It would perhaps even be easier to make that much money in today's environment because information is easier to access.You have to turn over a lot of rocks to find those little anomalies. You have to find the companies that are off the map - way off the map. You may find local companies that have nothing wrong with them at all. A company that I found, Western Insurance Securities, was trading for $3/share when it was earning $20/share!! I tried to buy up as much of it as possible. No one will tell you about these businesses.

Start turning over some rocks. Let me know if you find anything.

Also, value guru Ron Muhlenkamp of Muhlenkamp Funds recently hosted a Q&A with some of his clients, and as usual he presents a slightly unconventional view of the world. He still likes homebuilders, despite expecting the real estate bubble to burst, enjoys buying Buicks at Chevy prices (Buicks? time to update your metaphor Ron), and argues that France and Germany are so interested in maintaining the status quo that they are killing themselves.

Thursday, July 07, 2005

Bill Gross's Latest Doom and Gloom

Of note this week, Bill Gross' latest missive, that starts with a Billy Joel quote just to keep things interesting. I'd say this is a must read for those investors who like to consider economic theory as icing to a practitioner's cake. He argues that the asset-backed economic expansion will shortly run out of gas due to the floor of real rates at zero, with the likelihood for deflation growing. Any sane observer of housing prices could only consider that the probability for a down move as better than 50/50, but every magazine still says there is a bubble, so I figure the housing bull still has legs. Even so, I am a renter.

And, if you didn't see it, a great article about the latest trends in indexation, towards accounting based index compilation techniques (rather than market cap). Since 'beta' exposure has gotten so cheap (10bps at FIDO to retail punters!) and alpha is all the rage (hedge funds at every corner), then we need a new and improved 'beta' or average. Here is the new & improved model. The NY Times had a good article about it too, here.

Empire Building

Tom Brown of absolutely blasts Bank of America CEO Ken Lewis for doing the MBNA deal here and here. Very entertaining stuff. And something that should be said more often:

"The individual running your company, Kenneth D. Lewis, is an egomaniac set on enriching himself entirely at your expense, by using your equity (and, employees, by putting your jobs at risk) to cobble together as large a company as he can get away with. Ken doesn’t care how unwieldy your company is. Or what businesses it’s in. Or how fast it grows, or how profitable. He only cares that it be big. For in Lewisland, big makes for lots of CEO goodies, like corporate jets, fat options deals, and multi-million dollar “appreciation awards.” Big provides the cover to screw your shareholders in broad daylight—which, come to think of it, is exactly what I believe Kenny boy has been doing since he became CEO of BofA in 2001. Guess what? It’s only going to get worse."

Reminded me of a bit from Berkshire's 1981 annual report:

We suspect three motivations - usually unspoken -
to be, singly or in combination, the important ones in most high-
premium takeovers:

(1) Leaders, business or otherwise, seldom are deficient in
animal spirits and often relish increased activity and
challenge. At Berkshire, the corporate pulse never
beats faster than when an acquisition is in prospect.

(2) Most organizations, business or otherwise, measure
themselves, are measured by others, and compensate their
managers far more by the yardstick of size than by any
other yardstick. (Ask a Fortune 500 manager where his
corporation stands on that famous list and, invariably,
the number responded will be from the list ranked by
size of sales; he may well not even know where his
corporation places on the list Fortune just as
faithfully compiles ranking the same 500 corporations by

(3) Many managements apparently were overexposed in
impressionable childhood years to the story in which the
imprisoned handsome prince is released from a toad’s
body by a kiss from a beautiful princess. Consequently,
they are certain their managerial kiss will do wonders
for the profitability of Company T(arget).

Friday, July 01, 2005

The price of a good lunch

"Thursday evening, one lucky bidder put in the winning bid of $351,100 for lunch with the Oracle of Omaha, beating the next highest bid by only $100. "

Not too shabby. :-)