Thursday, April 17, 2008

Pilgrimage to Omaha, Part I: This is Big

Note to Readers:

It is Spring, and our thoughts turn towards Omaha, where the 2008 Berkshire Hathaway annual meeting takes place in a few short weeks.


We thought it appropriate to prepare for Warren Buffett's annual 'Woodstock for Capitalists' by reviewing here our notes from last year's journey to the heart of Berkshire Hathaway, and back.

It is particularly relevant given the public unraveling now underway at GE, whose management has always made a point of announcing, and, until this last quarter, delivering on clearly stated revenue and growth goals so that lazy institutional investors could do less work than they otherwise might if things didn't seem quite so cut-and-dried.

Warren Buffett, knowing that things in the real world are never so cut-and-dried, has always possessed a particular aversion to (and suspicion of) stated growth goals of the GE kind. It is why he sold a large position in earnings-management-prone Freddie Mac well before the stock peaked and subsequently collapsed (although his dim view on such stuff didn't stop Coke from stuffing its Japanese subsidiary with product to make numbers while Buffett sat on that company's Board).

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In any event, what the 'Oracle' might say about the public GE spat that erupted on CNBC yesterday, the Subprime Crisis that somehow didn't "stay in subprime," and, oh, food riots, potash prices, and anything else of note, we eagerly await.
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Herewith our notes from last year's Journey. They owe much to the comments and encouragement of our readers as we published them last year. Any mistakes, errors, omissions are mine alone.

Jeff Matthews 4/17/08
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I first realize how big this is when I'm in Chicago. Specifically, at Gate G-19 in Chicago O’Hare, while trying to switch my afternoon ticket to the late-morning flight to Omaha on American.

“It’s sold out,” the lady behind the counter tells me. “All the flights to Omaha are all sold out. But you can try standby if you want…”

She hands me the standby ticket the way the guy at the 7-11 hands me the Powerball ticket—a look like, “You might as well rip it up right now, my friend.”

Yes, I buy Powerball tickets when the pot breaks $100 million. After all, where else are you going to get a shot at a hundred million bucks for one dollar?

That kind of limited thought-process is not, of course, what is compelling me to fly to Omaha for the Berkshire Hathaway annual meeting. Warren Buffett would, no doubt, toss me out of the Qwest Center if I suggested the Powerball bit.

For one thing, he’d note, the so-called hundred million dollar pot is a grossed-up number, not after-tax. For another, he'd surely point out, that hundred million is an undiscounted future income stream, not its far smaller net present value.

Finally, and most assuredly, he would remind everyone that the odds are with the seller, not the buyer. Not for nothing Berkshire Hathaway has sold insurance policies to corporations such as Pepsi sponsoring precisely the kind of impossible-to-win games of chance on which I toss away ten or twenty bucks a year.

(And Buffett will not disappoint at the annual meeting: he will call the notion that state governments encourage the growth of casino gambling “socially revolting.” More on that later.)

Still, worthless standby ticket in hand, I wait, wirelessly plugged into the world at large via my new Mac. And it is while waiting that I realize everybody else on this flight is going to the Berkshire Hathaway meeting, because they are talking about it with one another like kids going to Disney.

No, these are not the intense young high-tech Bluetooth-wearing laptop-carrying technology warriors I am used to seeing on the JFK to SFO flights; nor are they exhausted mothers and fathers juggling babies and toddlers, as you see in JFK waiting for a JetBlue flight to Orlando or West Palm.

Rather, they are men and women—older couples, mostly, as well as younger men in groups of two or three, and almost all Baby Boomers—eager to get to Omaha.

So eager, in fact, that some will be left behind despite having confirmed seats, because American Airlines appears to have been so caught off guard by its own recent prosperity that it is overselling seats even on these flights, just out of habit.

Unfortunately all the way around, when the ticket agent offers to pay people not to take this particular flight to Omaha, nobody takes her up on it.

As a result, when the doors close and my own long-shot standby ticket expires, one desperate couple and two angry men with confirmed seats watch helplessly as the flight backs slowly away from the gate and gets in line for take-off.

They stand there, the four of them, with that Anxious Ticket Holder look—leaning over the counter while two American ticket agents take turns typing on one of those Ancient Clackety Airline Keyboards and shaking their heads while carefully deploying the Standard Airline Non-Eye Contact look by which they successfully infuriate already-angry customers.

The wife of the stranded couple is so anxious to get to Omaha she suggests renting a car and driving from Chicago to Omaha (467 miles), while her husband, red-faced and exasperated, dismisses the notion and makes calls on his cell phone as if somebody besides the American ticket ladies can do something.

I chuckle inwardly, knowing I have a ticket on the next flight to Omaha.

Turns out, I thought I knew I had a ticket on the next flight to Omaha, because a couple of hours later, after standing patiently in a long line of expectant Buffett-worshipers boarding my flight to Omaha, my ticket kicks out of the bar-code scanner and the ticket agent hands it back saying, “There’s something wrong with your seat.”

Having thus been branded a Loser with a Capital L in full view of a long line of Buffetteers, I shuffle off to the desk to await my fate. Turns out there are five of us who’ve been rejected by the bar code scanner, and the talk turns to alternatives. One man has no alternatives: “My wife is on that plane, expecting me to meet her,” he says. “I’m screwed.”

Nevertheless, we all finally get new seats, although my new seat, it turns out, is exactly the same seat I’d been assigned when I got the stupid tickets three months ago. I figure American Airlines is just messing with my head, because right now they can.

But I don’t care: I’m on a plane bound for Omaha.


Omaha is a peculiarly Midwestern city: you fly over impossibly green fields marked by roads and contoured plowing patterns, then over brown fallow fields muddy from rain, then suddenly more green fields, with an occasional solitary house ringed by trees along a road, and more brown fields and more green farmland.

Then the fields come to an end at a bank of trees along a muddy river, and now you are over the river and above grass and suddenly concrete, which becomes a runway; then the plane bangs down and you’ve landed.

The jet taxis toward a low, brown building—no runways to cross, no waiting for the traffic at the gates to free up. It arrives at the gate, the door opens and you’re out onto a gangway and into a building that must have been built thirty years ago and spruced up a little over the years, with a Krispy Kreme stand and a Hudson bookstore selling, among other books, an unusually high number of biographies and hagiographies of Warren Buffett.

There is no line for cabs, and I get one without breaking my stride. It is your basic cab, windows open, hot from the mid-day sun, with sagging seats and an unsafe feel as the driver pulls away from the curb.

I had noticed a soccer ball on the front seat as I got in the back, and ask the driver about it. He is from East Africa by way of Minneapolis, and plays a lot of soccer in his spare time with friends in town. He likes Omaha: “It’s cheap here, you know.”

As we drive, his friends keep paging him on his Nextel. It isn’t official business: they're trying to get a game together, but this has been a busy day, “just like they told us it would be busy.”

There is no highway to get on—the airport is that close to the city. The city streets are wide—very wide—but not very full of cars. There’s not much action on the streets, either. No cabs idling outside restaurants, no limos waiting outside the shops, no FedEx trucks unloading. And very few pedestrians.

The buildings are a mix of old brick or granite classics and not-so-old generic office buildings. Despite the wide roads and the lack of traffic, we move slowly because the traffic lights aren’t coordinated, so you stop a lot, but eventually you get there.

“There” is the Doubletree Hotel, and it is pretty much your basic Doubletree—everything feels slightly out-dated. Still, I expect more activity, but there is only a short line at the front desk. You would not guess this is the biggest weekend in Omaha’s year.

Thanks to the crack TSA regulations safeguarding our skies, of course, I’d had to throw out the potentially dangerous tube of Crest from my overnight, so after check-in I seek out the gift shop in the lobby. It has a “Closed” sign hung over the door. The lady at the front desk says it reopens at 4:30 p.m. I don’t ask why.

That night, I meet up with an investor from California and we walk to the Old Town area for dinner. It is a quaint, busy few blocks full of bars, restaurants, odd stores and people making their plans for the next day.


The next day dawns wet and raining, and so we drive to the Qwest Center, even though it is only a few blocks away. Doors opened at 7 a.m.; we pull in by 7:45 but the main lot is full and crowds are walking from satellite parking lots that handle the overflow.

I had been told that so strong is the Buffett draw from surrounding farms and ranches that there would be pickup trucks among the Lincoln Navigators in the parking lots. I look for the pickup trucks, but I don’t see them.

The crowds are, as were those I saw waiting for our flight, mostly white (more on this later), mostly middle-to-old aged, and mostly couples, dressed casual-nice, with men in short-sleeved shirts and women in pant suits. In addition to the couples there are those young-to-middle-aged men who look like they’re going to one of the Police reunion concerts, so eager are they to hear the teachings of the Master first-hand.

A Hilton Hotel is attached to the Qwest complex, and from its doors a more prosperous, jacket-and-tie group of shareholders is walking into the arena. The Hilton, I am told, is where the Buffett elite stay, and it is impossible to book no matter how far in advance the average shareholder tries.

In fact, there is a pecking order to the entire affair that will persist all weekend, at each event: an individual’s status is determined by the length of time the person has been attending a Berkshire meeting.

This is clear the minute we enter the giant, glass-walled complex. We have no chance of getting a seat on the floor—there is a roped-off area up front for directors and their immediate families; while the remaining floor seats have long been taken by Buffett regulars who mingle comfortably by their seats like the old friends and family they probably are.

So we go up the escalators and find what looks to be good seating on the first level—but it turns out the seats are all spoken for, with hats, jackets, and newspapers placed on them, and I realize where all those people we'd seen in line at the concession stands for coffee and pastries are sitting. Then we find one of the microphone areas where shareholders may ask questions when called on by Buffett himself (no Investor Relations flak here), but those have long since been taken, too.

We finally find open seats on the upper level, a bit cramped and almost vertical, but with a good view of the small table where Buffett and Charlie Munger will sit, a bowl of See’s Candy between their microphones (more on that later), and answer questions for more than five hours (a little under three hours in the morning, a little more than two hours in the afternoon).

Then we settle back and wait, and observe the crowd. And I notice something I have not seen in years.



To be continued...



Jeff Matthews
I Am Not Making This Up

© 2007, 2008 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.



5 comments:

Mithrophon said...

A cliffhanger?? You can't end that post on a cliffhanger like that! What is this, Grey's Anatomy?

Mrk2Mrkt said...

I really appreciate you taking the time to write about your trip. It was a great break from studying to read Part 1 of your trip report.

John said...

Jeff, You write the most excellent travels commentaries. I really enjoyed your last one about the trip to memphis and the visit to the civil rights museum.

I will offer as my guess to the cliffhanger about what Jeff has not seen in a few years as Jeff is seeing a room full of mostly white people with very little diversity (Jeff could have forshadowed this in the early part of the post).

Looking forward to reading the conclusion and especially any insightful comments offered by Mr. Buffet & Mr. Munger (I think Charlie is quite underated or in the words of wall street "under-owned"...)

Tim Knows How to Make Stuff Up said...

One of your top posts. Reminds me a little of the serial installments by Dickens when he authored Bleak House. The wind is definitely not in the east.
Tim

Aaron said...

I hope you'll discuss the recent (and decent) quarterly results posted by MidAmerican in your next post - looking forward to it!