market folly

The Berkshire Hathaway 50th Anniversary symposium just took place and featured conversations with the likes of Seth Klarman, Bill Ackman, Tom Gayner, Byron Trott, Carol Loomis, Roger Lowenstein, Tom Russo, John Phelan, and Whitney Tilson.  The notes were compiled by Jacques Romano, MD.


Notes From Berkshire Hathaway 50th Anniversary Symposium

Carol Loomis (CL) and Byron Trott's (BT) Conversation

Warren Buffett (WB) was invited but he graciously declined explaining his presence would change the nature of the discussions. BT met WB because the GS partner that had handled his account, Tom Murphy, Jr., had retired.  Hank Paulsen told Warren that BT was the only guy for him.  Initial one hour meeting lasted about three hours.  This was in early 2002.

WB created through GS a negative coupon convertible bond of about $300 million called SQUARZ in April 2002, whereby he was paid to borrow money and the institutional holder of the security was able to purchase Berkshire Hathaway (BRK) stock in the future at a higher price.  Charlie didn’t like the idea.

BT represented Pritzker in the Marmon deal and was involved with MacLeans and Pampered Chef transactions.  BT also involved in Wrigley and Mars deal.

BT describes WB as a perfect ten times two.  He has an incredible mind and able to do math in his head and his discipline is incredible.  On the human side, he is humble and has the best sense of humor.  He is someone you want to be with and is always positive about anyone.

Regarding discipline, he cited some KKR transaction that WB could have done for 10-15% more in price while having a cheaper cost of capital but WB felt he could use that cash more effectively at another time.  He waits for his pitch.  “You should see the stuff he turns down over the years”.

WB looks at cash on cash returns and doesn’t factor in leverage.  He looks for durable long lasting cash flow stream businesses.  He realizes that sometimes to get great businesses you have to reach but he is incredibly disciplined and completely unemotional.

WB told BT that CL started as a reporter but is great in accounting and finance and is a stickler for details.  She’s from Missouri.  CL expanded on a vignette about her dating Ty Cobb.  She had come to NYC in 1950s and was on the quiz show Tic Tac Dough where she did well and was subsequently contacted by Ty’s nephew for an invite by Ty to the 21 Club.  “How could a baseball fan turn that down?”  She was his subsequent “date” to Yankee Stadium during an Old Timer’s Game where she was presented with a Mantle, Maris, Whitey Ford autographed baseball.  That’s about where it went.  She was in her late 20s and he was in his late 60s.

In 2008, Goldman Sachs was experiencing a small but daily run on the bank and wanted to raise capital.  BT said it was about a 20 minute negotiation with WB.  In addition to making his BRK investment, WB wanted to make a big statement about being confident in that investing climate.  He subsequently made his GE investment and wrote his Oct. 2008 NY Times op-ed.  One of his points was that markets go up first and that there is reasonable cause to regain confidence.

WB is an American icon.  The world doesn’t understand how important WB was to the solutions during the financial crisis of 2008.  I would describe him as a “pragmatic optimist grounded in reality”.  

Hank Paulson told BT that during a late night phone call, it was Warren’s idea to make TARP capital attractive to banks and for it not to be stigmatized so all the banks should receive it and none look particularly weak or strong.  But he also wanted to make it more expensive for the banks if they kept this capital for a longer period.  

WB was doing this to help the country.  Some may be cynical about this because he owned Wells but Hank knew and everyone else who knows WB knew that he was creatively playing a constructive role.

Warren is disciplined, opportunistic and long term.   Charlie is not my number two; he is my equal and has kept us on the straight and narrow. Warren doesn’t want to do small deals but will do minority deals as long as it is big.

Warren’s the greatest, nicest and most accessible person.  He’s a great teacher and a great student of investing and business.  He provides a safe home for business owners that want liquidity and still passionately want to run their businesses. Warren is one of a kind and will be the best investor of all time and his record will not be beaten. 

He thinks very long term and Berkshire will still be intact a century from now. “Warren, you can’t control things from below the ground.” “Maybe not, but I can try.” The term “investor” is not quite expansive enough to describe Warren.  He’s also a great acquirer, manager and owner of businesses. Matt Rose of Burlington Northern told me that Warren knows more about the railroad now than I do.  And he can interconnect it to everything else.  He makes the complex seem simple.  When I talk to Warren, I feel like I’m 2 steps behind him.

They discussed how Andrew Carnegie is known more now as a philanthropist than as a businessman and Warren may have similar impact and be known more expansively.


Seth Klarman (SK), Bill Ackman (BA), and Roger Lowenstein's (RL) Conversation

Bill went to Larry Cunningham’s Cardoza symposium in 1996 and fortuitously sat next to Suzzie Buffett who invited him to sit next to Warren at lunch!  When he went to HBS, there were not any classes in investing although there were classes in investment management.  There were no investment clubs at that time either.  He read Graham’s Intelligent Investor and then Warren’s annual reports.

Seth Klarman took a job at Mutual Shares after college and “Warren” was common parlance once I got into the business.  He thought Warren’s Superinvestor article was very logical.  SK feels that there must be some type of gene that makes people have an affinity for value and value investing.  He told a story about a friend of his whom enthusiastically tried value investing full time but three months later ended up quitting:  “It doesn’t work”.  

BA says some of the things he tries to emulate are Buffett’s focus on quality, durability and concentration.  Although given “my” experience in Valeant, perhaps I should change one of his aphorisms to “be fearful when others are fearful”.  

Making good investments is not about performing discounted cash flow analyses or reading footnotes but more about assessing the moat in our dynamic world. Many of Buffett’s investments in the 1970s like encyclopedias and newspapers did not hold their advantages.  You can’t “just buy and hold”.  The world has changed rapidly.

The difficulty is the qualitative assessment and the implementation. Railroads now seem to pass the 100 year test but how many businesses can pass that test? Lowenstein made the point that Wall Street loves those 99:1 bets but not WB.

SK said that the maxim of “don’t lose money” does not mean at every time and in every instance but to the extent that it puts you out of business.  Sometimes you can bet or invest in favorable expected value situations where you lose the bet.  This is similar to an insurance operation.  Some investments in a portfolio will lose but you don’t put the operation at risk.  

SK: In the 1980s you could actually buy quality inexpensively; you didn’t have to pay up.  I remember Nabisco selling for 7 times after tax earnings.   You can’t just kneel at the temple of Graham and Dodd, you and the world will change.  We will evolve and ought to evolve because the world requires us to.  WB teaches us how to make our own map.

I don’t know WB well enough to know how he feels, but I suspect that he feels that him being held as an investing demigod is a bit silly.  WB isn’t about that. WB is not about giving you a formula.  “Business is hard.  Everything is overlaid with judgment”. WB has been fortuitous to invest at a time when you could get quality inexpensively.  He has built on certain advantages.  No one else gets the calls that he gets. Some people are overly focused on him as opposed to understanding how he thinks.

BA: Buffett has made more people rich than anyone else in history.  And he gives it all away.  He’s one of the great educators. I believe in response to a questioner, BA went into a diatribe about Coca Cola (KO).  It does enormous damage to society and people consume too much sugar contributing to obesity and diabetes.  He wouldn’t be against supermarkets that sell coke.  And he owns Mondelez: all things in moderation.  But Coke doesn’t seem to have had a bad effect on Buffett.  I believe he has said WB hasn’t had water since the 1950s!  He thinks Coke has great distribution and marketing but it is not good for children to get too much sugar water.

There was some discussion that the BRK model with insurance, concentrated positions and possible illiquidity may have problems in future.  You need to be a fortress and inspire confidence and trust with regulators.  Will that survive Buffett? Conglomerates do not have a great history.

Buffett is a fabulous communicator.  He has stayed on the right side of politics and has avoided becoming a target of Washington.  It is not automatic that the next CEO will be able to tell the story of the company as well. SK said he stole the idea of writing meaningful partner letters from WB.  And he feels that the overall quality of fund letters in general has improved because of Buffett’s lead.  Consistency, reassurance, and transparency give shareholders comfort.

BRK can be a Warren centric model.  He is uninvolved in the management of the businesses and there may be an opportunity for “optimization”.  With 3G he is “outsourcing” the less attractive aspects of the business. Catastrophic risks can destroy enormous amounts of value.

SK: excessively raising prices on drugs may not be illegal but there are social costs.  Capitalism may face a more constrained environment as a result of bad behavior. WB has conducted himself generally beyond reproach.  He has not become a target.  The next CEO may not get a pass so easily. Value investing is nuanced but we will always have it.  “Human nature will not yield”.  Greed, fear and lack of intellectual honesty will result in bargains from time to time. There is always going to be a share of the investment business that is following the crowd.  There are those watching over their shoulder and who have misalignment of goals.  They may be forced to do things they may not want to do for human reasons.

Someone asked SK if he wanted to be an investment manager at BRK or if he had any discussions about this with WB.  He said he was never a candidate and loves his job. He said he was surprised on the upside with WB’s decisions about investment managers.  It was hard to do and it has gone incredibly well.  


Berkshire Shareholder Panel: Tom Russo, Paul Lountzis, Whitney Tilson

“Only WB can fill a room without even being in it”.

Whitney Tilson has been adding to his BRK position.  It is safe, cheap and with decent growth.  He puts fair value about $267,000 give or take 10%.  You can find his slide presentation on the Internet (there were no slides at this conference).

Tom Russo said there are no agency costs and an extraordinary alignment of interests.  WB owns 30% of the stock and makes $100,000 for managing. The corporate form allows for tax efficiency with respect to capital allocation.   He has the willingness to do anything if it makes sense and the capacity to do absolutely nothing if conditions warrant.  Great businesses can find a home at BRK where they will be protected.

Paul Lountzis tries to understand BRK broadly and deeply.  There is embedded optionality in BRK.  Regarding Berkshire, he is reminded of the Ralph Waldo Emerson quote: “Every institution is the length and shadow of one man.”  We try to understand it now and in the future. He mentioned that Geico is on the books for $2-3B but is worth 10-15 times that.

WT told WB that he is his role model in Jan. 1999 and he tries to emulate how he runs the business.  Given how WB communicates, BRK is the opposite of a black box.  He has incredible humility and even looks for ways to self-flagellate.

PL:  WB is a wonderful human being and exemplifies consistency and loyalty to a high degree.  He focuses on permanence over the long term and looks out 10-20 years. His example impacts everything you do both personally and professionally.  BRK values permeate seamlessly and consistently throughout its business. Despite the fact that BRK has gone down by 50% several times it has still been extraordinarily rewarding.

Few businesses have great reinvestment opportunities.  If you can defer taxes on unrealized gains, this is a great advantage. The problem with many public companies is their inability to take advantage of some of their potential opportunities, unlike family controlled companies.  Public companies may need to make earnings estimates as opposed to investing in opportunities that may penalize current earnings.  They may worry about activists.

BRK is a unique public marriage between private and public investments.  BRK gets $1.5B month in free cash.  It is effectively a source of permanent capital and a robust re-investment engine. During times of stunning market drops, WB was never forced to sell. Permanent capital is very valuable. The ability to do nothing is valuable in the investment business. Operationally, they can turn down the noise of Wall St. Buffett has the flexibility to do nothing.  He is unique and special and combines analytical strengths with strong people skills to a degree that is very rare. He has unique qualitative insights. You don’t see the 99% of opportunities he says “no” to.  

Buffett plays a very important cheerleading role.  Many company CEOs are rich and old and feel personally loyal to Buffett.  Are they going to be as loyal to the next CEO? There is somewhat limited corporate governance but Buffett holds it all together.  

What is the next BRK? The best BRK is BRK. One interesting point that was made: investors that held the S&P 500 going into the financial crisis more than likely sold when everyone was running for the hills.  But given their understanding of and loyalty toward BRK, shareholders were much more likely to garner the full return of the company and not otherwise sell low and buy high.  This is a point that can be missed when one compares BRK returns to the index.  The index’s returns are more likely illusory and less likely realized. Other companies “wave people in at the peak”. 


Partnership Session With Markel's Tom Gayner and John Phelan

John Phelan.  We don’t take 1% or more positions without visiting the company. Should you locate far from Wall St?  Mindset trumps location.   We think we have semi-permanent capital.  There is always a balance between the short term and long term. Our benchmark is not the S&P 500.  Our benchmark is to make money.  The risk free rate is your benchmark. We have the luxury of not being invested all the time. Simplicity is a virtue and we have fewer problems that way. If you hire someone that is not from a top school, they are less likely to think, “You’re lucky to get me”.  Some of our best hires are from the military.  They know how to get things done. We currently have 18% cash which is on the high side. We are company focused and not market focused.

Tom Gayner: “Good meat priced right is better than poor meat priced cheap”. JP worries about the credit markets.  Now a $250M 10 year Treasury trade moves the market whereas before $1B wouldn’t make it blink. We are defensively positioned but not bearish on the US economy.  We are seeing wage pressure in our companies.   The best hedge is a great attractively priced business. Paying up for a business is counter-intuitive.  It costs more but may be worth a lot more.

Lawrence Cunningham: Buffett’s presence here would steal the stage and by electing not to come, he is letting us have the conversation. LC organized a conference at Cardoza Law School in 1996.  One questioner asked what happens to the shareholders when Buffett dies.  Buffett said, “it won’t be as bad for you as it will for me!” BRK looks a lot different today than it did then but the core values have stayed the same.  He has created an institution that goes beyond him in the quality of the people, businesses and values and that is the best succession plan possible.

BRK gets funds from internal generation and insurance float versus the cost of borrowing to make acquisitions.  The float is currently $85B with no due dates, covenants or banker negotiations.

The Board is not there to monitor management but to partner with it.  They have no options, liability insurance and bought stock with their own cash. Company CEOs have clear and simple mandates.  Called out Bruce Whitman, CEO of Flight Safety who was at the conference. He has never sold a subsidiary and sometimes business sellers accept a discount compared with offers from other business buyers. We would rather bear the visible costs of a few bad decisions than suffer under stifling bureaucracy.

GenRe would have gone bankrupt after 9/11 without BRK! Dexter Shoe was another “mistake”. BRK sometimes is a juicy target for journalists-recently Clayton Homes and National Indemnity.

He spoke about a recent acquisition called Detlev Louis from Germany that sells motorcycle gear.  Similar to See’s being a small deal but defining the future of the company, he sees this company as a possible harbinger of future deals in Europe.  He points out that it only has about $40M in earnings which is less than WB’s minimum size but he made an exception to get a toehold in Germany and Europe.

He made mention that Pampered Chef’s sales have considerably decreased and that there is some turmoil in the capital intensive business of NetJets.

Don’t focus on beating the market but in finding the greatest discrepancy between price and value.