Thursday, January 26, 2006

Students meetings and more deals

Warren is really hammering out the student meetings this year. Some common themes emerge (some new, some not so new). His admiration for Bill Gates comes though as always; Gates clearly has affected Warren’s thoughts on philanthropy, and Buffett clearly has influenced Microsoft's capital allocation policies (See large special divided, buy backs, expense options, shift from options to restricted stock.) In three of the meetings he mentions his Korea investments, his new go-to anti-efficient market example outside of Washington Post circa 1973. Twice he mentions that we live better than Rockefeller did. His thoughts on philanthropy continue to evolve, methods for doing deals remains the same, and most interestingly - and I would have bet heavily against this - he owns an Ipod. I would love to know what his on his “Top 25 most played” list – next student group in Omaha be sure to ask him. I’m guessing there are a few Jimmy Buffett tunes in there, and perhaps., “Omaha” by the Counting Crows.

And his sense of humor remains well intact…“There once was a Wall Streeter who missed two years of bonuses. To save money, he suggested to his wife that if she learned to make dinner, they could get rid of the cook. She responded, “And if you learn to make love, we can get rid of the gardener.”

First up for meeting notes: UCLA & USC:

If I had $10 million (or $1 million) to invest I would crush the S&P; I’d look to beat it by at least 10% per year; with $10 billion, I will eek by it.

Next Kansas:

My broker at Citigroup told me to look through this Korean version of the Moody’s guide. He said it would look just like 1951. He was right. I began flipping through the pages and found a lot of good companies trading at very low multiples. In 5-6 hours I put together a small portfolio of 20-25 stocks – about $100 million total. One example was DaeHan Flour Mills. It has a 25% market share in wheat flour in South Korea. Book value was 206,000 Won and the company had 201,000 Won in marketable securities and was trading at 2x earnings. The market is clearly not efficient all the time. There are certain opportunities that can make you fabulously rich.

First, you need two piles. You have to segregate businesses you can understand and reasonably predict from those you don’t understand and can’t reasonable predict. An example is chewing gum versus software. You also have to recognize what you can and can not know. Put everything you can’t understand or that is difficult to predict in one pile. That is the too hard pile. Once you know the other pile, then its important to read a lot, learn about the industries, get background information, etc. on the companies in those piles. Read a lot of 10Ks and Qs, etc. Read about the competitors. I don’t want to know the price of the stock prior to my analysis. I want to do the work and estimate a value for the stock and then compare that to the current offering price. If I know the price in advance it may influence my analysis. We’re getting ready to make a $5 billion investment and this was the process I used.

(Walmart? Some rumors out there that it is Lloyds.)

I listen to an iPod while I’m on the treadmill just like you can.

And Harvard:

On the Forest River acquisition: The business earns $100MM pretax. Warren asked the founder what salary he wanted. He told the founder, “You name a salary that makes you feel good.” The founder thought for a minute. He said, “I looked at the proxy and I saw you make a $100K a year. I wouldn’t want to make more than you.”

Shorting is just not a smart game. All of the math is for you on the long side, and all of the math is against you on the short side.

Warren and Charlie will not drop their discount rate below a certain level (based on terribly easy money from the Fed), but will adjust it upward.

They don’t measure buying businesses against a 4.75% long bond, but they are still impacted by the 4.75% long bond.

And University of Nevada…no notes from them yet, but a few more warnings on the trade deficit…

Right now, the rest of the world owns $3 trillion more of us than we own of them," Buffett told business students and faculty Tuesday at the University of Nevada, Reno. "In my view, it will create political turmoil at some point. ... Pretty soon, I think there will be a big adjustment," he said without elaborating.

Fifteen years ago, the U.S. had no trade deficit with China, he said.

"Now it's $200 billion. If we don't change the course, the rest of the world could own $15 trillion of us. That's pretty substantial. That's equal to the value of all American stock," Buffett said.

"That's the big danger. Our national debt does not bother me. Our public debt is not at a crazy level," he said.

One of the legendary Berkshire lieutenants has stepped down. Charles Huggins, after 55 years at See’s, and at the age of 80 has called it a career.

It took me 15 seconds to decide to make Chuck CEO and president, and to this day I wonder why it took so long," said Buffett in a statement. "Chuck combines the discipline of a fine analytical mind with intuitive marketing savvy, and a moral sensibility that is rare in the 21st century."

Buffett hand-picked Kinstler as Huggins' successor and has trained him, stressing the importance of quality and company tradition."I will miss all our employees and the legions of loyal customers throughout the world who I have come in contact with," Huggins said. "The stories they tell about their love of See's are always astonishing."”

Finally, the Berkshire deal machine rolls on , picking up the Business Wire for an estimated $400 million.

The deal was done in typical Buffett fashion:

Bussiness Wire president and CEO Cathy Baron Tamraz and executive vice president of marketing and business strategy Michael Lissauer wrote a letter to Buffett on Nov. 21 after reading an article entitled, "Warren Buffett, Unplugged," in The Wall Street Journal's Weekend Edition.

"He called us back the Tuesday or Wednesday after Thanksgiving and asked for financials," Lissauer said in a phone interview. "And by the week of Dec. 12, we had our initial offer."

Friday, January 13, 2006

Making better decisions

Buffett has done a spectacular job separating emotions from investment decisions. In fact, that’s a trait many outstanding investors possess. Paul Schoemaker, who wrote the books Decision Traps and Winning Decisions quickly summarizes his thoughts on making better decisions. Click here (it’s a video, by the way)

The furniture business is becoming increasingly competitive. But the Nebraska Furniture Mart still does well. An article from the Kansas City Star that discusses the closing of a competitor.

Refreshers of outstanding articles we have posted in the past (I'd suggest saving these files to your hard-drive for future access)

The Superinvestors of Graham and Doddsville. Buffett takes a jab at efficient market theorists.

Charlie Munger’s discussion of building mental models to become a better investor. This one is a must. Click here.

“The Warren Buffett you don’t know” from BusinessWeek