Sunday, May 14, 2006

Wesco Annual Meeting

"The amount of brain power going into money management is a national scandal." - Charles Munger

Selected points mentioned by Charlie Munger at Wesco's Annual Meeting, held on May 11, are listed below.

Complete notes are located here. [PLEASE DO NOT LINK TO THIS FILE. THANKS]

On Diversification:

An introductory text in economics says people makes decisions based on their opportunity cost. There is this company in an emerging market that was presented to Warren. “I don’t feel more comfortable buying that than I do of adding to Wells Fargo.” He was using that as his opportunity cost. No one can tell me – tell me why I shouldn’t buy more Wells Fargo. Warren is scanning world, and trying to get his opportunity cost as high as he can so that his individual decisions better. Why is freshman economics class so inconsistent with what so many experts are doing, and they are charging a fortune. I believe in crazy waves of mental conformity based on social approval. I believe in baptism. I’ve seen it done. The worshipping at the temple of diversification is really crazy. 10 securities can make you rich. Why do you need 300 securities with huge fees to get rich? How can you be so unskeptical about human nature?
On Berkshire's Float, which has grown very quickly over the past few years:

Q: How do you value the float at Berkshire Hathaway? Characteristics of equity, or discount it?

CM: We love having the float at Berkshire. If we didn’t have it, it would be worth than it is. It will grow more slowly in future than the past. Not enough float around in world casualty market [for us to grow faster]. We think it will be big advantage. We don’t think it is a model that will help with other investment opportunities.

Tuesday, May 09, 2006

The Meeting

Attendance came in at 24,000 shareholder partners, a new record.

Complete notes are posted here, courtesy of Peter Boodell.

A few quotes that are worth mentioning:

CM: "I think he’s demented", comments Munger, when asked to discuss one of Siegel’s books that argues for high sustained returns on common equities.

WEB: "Envy is the worst sin. With lust and gluttony, at least you get something out of it.", commenting on Wall Street compensation practices.

CM: "We know the edge of our competency better than most people do. It’s not a competency if you don’t know the edge of it."

Saturday, May 06, 2006

April is the cruelest month

Unless, of course, you're into Buffett. Amidst the buildup to "Woodstock for Capitalists", Buffett and Berkshire were heavily featured in the popular press, with admiration and doubt being administered in equal measure.

In early April, in what may have seemed like an out-of-character move, Buffett made a substanial $14B bet on the global stock market by selling long-duration equity index puts. Given that he's referred to derivatives as "financial weapons of mass destruction" in his 2003 Berkshire letter it may seem incongruous that he'd take such a large position. However, the contracts are structured in such a way that,
For Berkshire to lose the $14 billion that the company says is at risk, all four indexes covered by the puts would have to fall to zero, according to Gary Gastineau, managing director of ETF Consultants LLC, a research firm in Summit, New Jersey. That's unlikely given historical trends.
And, let's not forget that Buffett has had success with derivatives in the past. Witness the opposite bet made on the S&P 500 in 2002 that netted $60M, or the bets on the widening U.S. trade deficit that has since brought in $2B in investment gains. Let's face it - what are selling puts, except another form of aggregating float? Collect income now and invest it in the interim. This is a concept with which Buffett is intimately familiar.

And what to do with this cash? Buy a sportswear company, that's what. In mid-April, Russell Corp. agreed to be acquired by Berkshire Hathaway for nearly $600M, adding to Berkshire's existing apparel holdings. And on May 5th, Buffett's entry into the exciting world of metal-working, with his $5B purchase of Israeli firm Iscar (not to be confused with the universally bad idea, Ishtar). The Iscar deal demonstrates another classic Buffett move - buy a family-owned company and then leave them the heck alone.

Different takes on Buffett cropping up post-Letter, pre-Woodstock.

Point: Jon Markman calling for the Oracle of Omaha to be renamed the Natterer of Nebraska, based on recent flat performance by Berkshire.

Surely there was a time when Warren Buffett was a chief executive worth studying, and even investing alongside. But it sure seems like that time is long past...
And the counterpoint? A defense of the Oracle by Jim Jubak, who, in addition to providing a nice summary of the logic behind Buffett's insurance holdings, rightfully points out that
Deciding whether Buffett is the greatest living investor may be an interesting parlor game, but it has nothing to do with whether or not you should own Berkshire Hathaway stock right now.

As always with a stock, it's not how the stock has done in the past that counts but how it's likely to perform in the future. Yes, Berkshire Hathaway's performance in 2004 (a 4.3% return) and 2005 (flat for the year) was pretty lame. But I think you want to own Berkshire Hathaway now precisely because 2004 and 2005 have positioned the shares very nicely for solid profits in 2006.
All of the opinions aside, it's Woodstock down in Omaha this weekend, and the topics on everyone's mind are succession and acquisitions. What's next for Berkshire? What to do with all the cash? Names being tossed into the mix include: Harley-Davidson, Mattel Inc., PG&E, Mercury General Corp., and more.

And last, to prove that Mr. Buffett isn't all business, a few items for fun. First off, Buffett will be involved in a children's animated series entitled "The Secret Millionaires Club" designed to teach the youngsters all about investing. Second, if anyone has a burning desire to buy a Buffett-owned musical instrument, the ability to do so is only a click away. Buffett is auctioning off an autographed ukelele on eBay later this month, with proceeds going to the Omaha Children's Hospital. Click through to the article, folks. The picture alone is worth the price of admission.