The Investor's Consigliere

Barry Sternlicht New York Times Profile

Read it here.

2010 Berkshire Hathaway Annual Meeting Transcript

You won't find better notes from Warren Buffett and Charlie Munger's 2010 annual meeting than these, from Ben C. of the Inoculated Investor.

Bridgewater on Leverage

I can't evaluate all of the arguments made in this article, but one thing thing caught my eye:

Zink also points out that, by investing in equities, institutions are investing in leverage, as all companies are leveraged, which is why returns are high.

No evaluation of the leverage of a portfolio (say of a hedge fund) is complete without an evaluation of the leverage contained within the positions of that portfolio. Managers frequently advertise their low portfolio leverage without also disclosing the average leverage of the companies whose stocks comprise the portfolio.

My First Bubble

I wish I could tell you that I was a value investor from the start, that I came out of the womb with a cold-eyed knack for evaluating any investment.

The truth, I'm now reminded, is that I was a total sucker.  I guess just about everyone has their first bubble and mine was baseball cards. There was a classic bubble in baseball cards in the late 1980s and early 1990s and I fell for it completely.

All the stars aligned: the New York Mets, my favorite team, won the World Series in 1986, when I turned 8. They contended again in 1988, when the bubble really got going. About two years later I started to go through puberty, which clouded my judgement even further. I don't know how much money my parents ended up spending on my baseball card collection, which is probably worthless today, but I shudder just thinking about it. It hurts even more to know that during the 1988-1998 period, the S&P 500 returned an average of 28% per year. That was an expensive hobby. Lesson learned.

The funny thing is that as I look back, I don't remember even once thinking about how quickly the supply of baseball cards was increasing into order to cash in on the bubble. To my 10-year old brain, all that mattered was that the 1951 Mickey Mantle rookie card was worth $50,000, and that Mark McGwire was clearly the next Mickey Mantle (actually that wasn't such a terrible prediction, even steroid-adjusted), therefore the Mark McGwire rookie card I just bought for $4 would one day be the greatest investment ever. The scarcity of the Mantle card, and the gross abundance of the McGwire card, were two facts that did not come naturally to me.

David Dreman Fired

Read about it here.

Suppose Dreman were to start a hedge fund now, and that he raised exactly as much money as he used to manage at his mutual funds.  Would you invest? 

James Montier on Risk

A nice essay on how risk should be evaluated from a value investor's point of view.

Two Buffett Transcripts

Via the Manual of Ideas blog.  Here is Buffett on manager selection:

In 1969, I wound up my partnership and I had to help people find someone to manage their money. I recommended Bill Ruane of Sequoia Fund, Sandy Gottesman, who is currently on the board at Berkshire, and Walter Schloss, who I wrote about in “The Superinvestors of Graham and Dodds-ville”. There’s no way they could miss.

But I don’t know many of the newer investors, they’re not my contemporaries. It’s not enough to just look at track records. They aren’t predictive and there will always be a few people that do well. I know guys who can make 50% a year with $5 million, but not with $1 billion. The problem with guys that do well is they attract so much money that it neutralizes their advantage. It’s hard to identify them, and even harder to make a deal to keep them from attracting other capital. It’s like betting on a 12 year old horse that won at 3 years old. It’s also important to avoid managers who use leverage. It’s the reason that investors with 160 IQs flame out.

Jeff Matthews on Berkshire's Equity Portfolio

I'm not sure what Jeff Matthews is getting at in this post about Berkshire Hathaway's common stock portfolio.  He writes the following (bold type is mine, italics are his):

The shocker is this: Berkshire Hathaway’s portfolio of equities—the stocks such as Coke and P&G and Washington Post that Warren Buffett himself, the “Oracle of Omaha,” famously purchased over the years at bargain prices—appears, as of yesterday’s market close, to be worth not much more than Buffett's cost . . .

Yet the fact is, the value of Berkshire’s equity portfolio is not only of enormous economic importance to Berkshire Hathaway and its shareholders, but to investors around the world who watch what Warren does and frequently imitate his moves.

And the fact that it appears to be right back to its cost basis—after decades of not—is startling.

I don't disagree with his facts or his calculations, but rather with what he appears to be implying:  That after years of work building a common stock portfolio that appreciated greatly over time, Buffett is now right back where he started.

It's difficult to draw any conclusions about the aggregate market value of the portfolio relative to its cost basis because much of the portfolio is recently purchased, and because the cost basis column in the report does not break out which "vintage" a given purchase belongs to--they are all lumped together.  Of the 14 positions named, eight were purchased in the past few years, representing one half of the total cost basis of the portfolio.  To say that this portfolio within a portfolio is below its cost is true but not very meaningful, certainly not "jaw-dropping" as Matthews writes, and has nothing to do with the words "over the years" and "decades."  If I start out penniless and build a company that I eventually sell for a billion dollars, then invest the proceeds in stocks that decline by 20% in a year, then my current portfolio is worth way less than its cost basis; but I've still gone from 0 to 800 million.

Of the remaining six positions, which Berkshire has indeed held for years, three (Coke, P&G [formerly Gillette, whose cost basis was grandfathered in when it merged with P&G], and the Washington Post Company) are still way above Berkshire's cost basis, so Matthews' point does not apply to them. 

Only the remaining three, all financials--Amex, US Bancorp, and Wells Fargo--are good examples of what Matthews was trying to say.  He's owned them all for a long time and, dividends aside, now has little to show for it.  Which perhaps counts as "jaw-dropping," but nevertheless is a more modest statement than the one he makes.

Hat tip to Felix.

Disclosure: Long Berkshire Hathaway.

Update:  The Matthews post was picked up in the WSJ's "Overheard" column, which concluded with the line "The buy-and-hold mantra never looked so shaky." 

The New York Times Fails Buffettology 101

From Warren Buffett's 2008 Letter to Shareholders:

We're certain, for example, that the economy will be in shambles throughout 2009--and, for that matter, probably well beyond--but that conclusion does not tell us whether the stock market will rise or fall.

From the March 1, 2009 New York Times article by David Segal describing the letter:

But [Buffett] also needled regulators and an assortment of chief executives as he predicted that fallout from the credit crisis would leave the stock market a shambles through 2009.

Not a minor error. 

Berkshire Hathaway Letter to Shareholders

is here!  Raise your hand if you sat there clicking "reload current page" until the 2008 letter showed up. I'll have a longer commentary later, but here are some initial thoughts:

1)  Your consigliere is on record saying that value investors who venture into macroeconomics do so at their peril.  I was afraid, I'll confess, that Buffett would do just that in his letter.  But he didn't.

2)  Buffett is well-known for preaching against diversification, but states that one of goals is for Berkshire to maintain "dozens of sources of earnings and cash" and that another is to find "new and VARIED streams of earnings."  In fact, Berkshire is probably the most diversified company in the world.

3)  Kremlinology alert--I'm about to read too much into Buffett's wording:  On page 4 Buffett very precisely writes that the three large PIPE deals he made were "In our insurance portfolios."  Meaning they were funded in large part by cheap/free float.  So a 10% coupon on one of these deals is less than the return on equity to a Berkshire shareholder from doing the deal. 

4)  Berkshire's large equity put portfolio can be understood as partly a bet on future inflation, as they were written on indices that reflect nominal currency values.  There is a chart on page 206 of Barton Bigg's Wealth, War and Wisdom that I'm too stupid to know how to reproduce.   It shows that from 1932 through mid-1957, a period that included both the Great Depression and World War II, the Italian stock market enjoyed near-uninterrupted growth.  But it's a nominal index--in real terms the market fell.  But if you'd written a long-term put on that index on similar terms as the ones Buffett made, you would not have had to pay anything.  Of course Buffett must also navigate inflation when trying to invest the premium he's received on those puts.

5)  Berkshire Hathaway the stock declined 32% in 2008.  Berkshire Hathaway the company declined only 9.6%, as measured by book value.  Keep in mind that the company is now largely in the business at "borrowing" money from policyholder at very low/free/negative rates in order to invest in regulated utilities.  Those two parts of the business did very well.

More later.