This year about 24,000 made the pilgrimage to see the Oracle of Omaha and his witty, if reticent, wingman Charlie Munger. The two did not disappoint, as they dished out generous amounts of their folksy wisdom and humor.
This was my first year here, my first close encounter with the Church of Buffett and Munger.
Many of the people that come here are...well, how can I put this kindly? Sheep. They are mindless followers. They laugh hysterically at every corny joke. They laugh at every tired, worn-out aphorism. They say sappy, syrupy, sentimental and silly things about these two old billionaires.
And when it's time for the Q&A, they ask fawning pointless questions. Of course, only after they're done saying how wonderful Buffett is and how wonderful Munger is and how they are a beacon of some kind or another and... well, you get the picture. Maybe it's just me.
Anyway...
Buffett and Munger had lots of interesting things to say, and not all the rabble that lined up to ask questions were sheep.
For example, some of the good questions focused on drawing out their thinking on the current investment climate and in specific areas such as commodities, newspaper stocks, South America and more.
Some value investors have been digging around in the market's discard pile and coming up with newspaper stocks. Many of the nation's once great franchises are suffering and their stocks are making new lows. Advertising revenue is falling. Readership is declining.
What does Buffett, a long-time newspaper investor think? Buffett thinks the current woes are part of a longer-term trend that is not likely to reverse. And valuations on newspaper stocks don't reflect this. As he says, there is always somebody who thinks he sees a robin and the first day of spring.
Instead, newspaper stocks face a long, perhaps permanent, winter. He said he was wrong in thinking newspapers were a bulletproof franchise. It is clear they are not. Munger added that he once thought, years and years ago, that General Motors was a bulletproof franchise.
Bulletproof franchises are a rarity in the investment world. Nearly all businesses face long-term competitive pressures. But the idea of bulletproof franchises reflects Buffett and Munger's basic desire to own businesses where the fundamentals will not change, or are not likely to change, over a 5-10-year span.
Buffett cited the telecom industry as an example where substantial change is likely. And he also talked about Intel, which Buffett said he could not figure out at its birth and can't figure out now. That's another business that is likely to face a lot of change in the future.
Indeed, a good part of Berkshire's success over the years is in sticking to what they know. Munger added, "We know the edges of our competency better than other people know theirs." This helps limit mistakes, though all investors make mistakes and lose money at times.
One of the great pieces of advice Buffett and Munger gave was in how they would manage a small amount of money - say, several million, instead of tens of billions: Go to your best idea and measure everything against that. That's because it is very rare to find an idea that's going to give you 20% per year for 40 years. In the real world, you have to go with the best ideas you have. And they may not, and are probably not, the best ideas you will eventually uncover. Things change. (As the newspaper saga shows, once-thought bulletproof franchises can suffer major reversals of fortune.)
Buffett sprinkled his talk with lots of other investment wisdom, too. In another instance, he invoked one of the key ideas of his famed mentor, Benjamin Graham: You are right because your facts and reasoning are right and not because somebody agrees with you. This goes back to the idea that you can't let the market sway you. "Make the market serve you," Buffett advised, "it's not there to instruct you."
And this is one key difference between a bottoms-up (micro) investor and a top-down (macro) approach. The top-down, macro approach takes its cues from the market -- hence, the common use of charts. This is very different from the approach in Capital & Crisis and the approach Buffett is expounding.
Buffett said investors should focus on things that are important and knowable. One attendee asked Buffett and Munger a big-picture question involving currencies, interest rates and current account deficits.
I loved Buffett's answer and I think it helped illuminate some of the differences between his and Munger's approach (rooted in the old-school tradition of investing) and the more populous speculative arena: "We don't play big trends. That's a bit too macro for us," he said.
Asked about the viability of ethanol as a fuel additive and as an investment, Buffett said it was easier figuring out if more people were going to drink Coca-Cola and eat more See's Candies. Plus, the fact that ethanol is so hot right now is a deterrent to Berkshire getting involved.
Munger opined that since it takes more energy to produce ethanol than ethanol itself delivers, he didn't think it was a good idea. He also rolled out his oft-used concept of three buckets. "At Berkshire we have three buckets," he said, "Yes, no and too hard."
Ethanol goes in the "too hard" bucket. This is a great concept that I use regularly in investing. You don't have to investigate everything, or have an opinion on everything. Some investment ideas are just too hard, too difficult, too complex to forge a good, safe investment opinion. On these difficult questions, the investor always has the ultimate safeguard: He can just walk away.
On the question of whether or not commodities were in a bubble, the famed duo had some wise advice.
Buffett said, excluding agricultural products, they do see something of a bubble in metals (especially copper) and oil. He said, like most trends, the fundamentals drive it in the beginning. And what the wise man does at the beginning, the fool does at the end. As trends form and gather momentum, they attract a speculative element. Eventually, that element takes over, and then you are in the danger zone. "We are seeing that in the commodity area," Buffett opined.
How high is it all going to go? Nobody knows. But commodities, Buffett concluded, were a "speculative football."
On to other topics... What about South America? Buffett said the problem is they have to put a lot of money to work to move the needle at Berkshire, and that greatly limits the number of countries they can invest in. Brazil, for example, is a big country and is not off limits, but they'd have to get a lot of money in a business that they understand at a price lower than comparable U.S. stocks.
They were asked many other questions (What about Russia? "Not interested," Buffett said), but the above were some of the more interesting topics to me. Since this letter is getting long, I'm going to wrap things up.
I would say the only thing that irritates me about this pair is when they talk politics. For example, is there any more ridiculous spectacle than a billionaire (in this case, Buffett) complaining about how he pays fewer taxes as a percentage of his income than the secretary in his office?
My message to Warren: Hey, nobody's stopping you from writing a bigger check to Uncle Sam anytime you feel you want to pay more. Sheesh, a billionaire whining about how he wants to pay more taxes!
The other dopey thing Buffett said was about Social Security. When Buffett praises it as "the most successful program in the history of our government," I can feel the hairs rise up on the back of my neck. And I wonder what he's drinking besides a can of Coca-Cola. Social Security is a disaster that is bankrupting this country. The sooner people realize that, the better. It also proves the point that genius in one area (in this case, investing) does not necessarily translate into other areas.
Of course, I forgive him for such transgressions. At the end of the day, he and Munger taught us all a lot about investing over the years. Serious investors will study their careers as long as there are markets.
Regards,
Chris Mayer
for The Daily Reckoning
P.S. In Capital & Crisis, our focus, not unlike Buffett and Munger's philosophy, is on understanding the individual investments we are in and getting them on the cheap. Even so, this doesn't mean we have to stick our heads in the sand and whistle out of our rear ends.
Our battle plan at Capital and Crisis is largely unchanged: to invest in sturdy businesses with valuable assets, lots of resources and proven capabilities, able to survive and even prosper in difficult environments. It also helps to have smart people at the helm. Do all this at good prices and you'll make a lot of money, even in a soft economic environment, even in a flat market. Our track record proves it. We had a great 2005, even though the market went nowhere.
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The Daily Reckoning Editor's Note: Chris Mayer is a veteran of the banking industry,
specifically in the area of corporate lending. A financial writer since 1998, Mr. Mayer's essays have appeared in a wide variety of publications, from the Mises.org Daily Article series to here in The Daily Reckoning. He is the editor of CrisisPoint Trader and Capital and Crisis - formerly the Fleet Street Letter.
Sucheta Dalal: This piece is unabashedly borrowed with gratitude from The Daily Reckoning. The Daily Reckoning is a highly respected newsletter on investing.
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