Friday, May 02, 2008

Pilgrimage, Part IX: Avoiding Catastrophe; Some Bad Advice; and One Unanswerable Question

Note: This was originally published June 6, 2007. We are republishing our series on the 2007 Berkshire annual meeting as we prepare for the 2008 meeting.
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Warren Buffett crooks his arm so he can check his watch one last time.

It is close to three o’clock, more than seven hours since we walked through the main doors into a jam-packed Qwest Center. The arena is now barely half-full. Even the roped-off area on the floor, where directors and their families were seated at the start of the meeting, is almost empty.

In the upper deck, where we have enjoyed the extra space left behind while most others moved closer to the stage, the cement floors beneath the stiff plastic seats are littered with Coke bottles, popcorn bags, and, of course, newspapers.

My trusty, old-fashioned steno notebook—no computers or recording devices are allowed here—is nearly full, stuffed with thirty-three pages of scrawled quotations from the two men still seated on the small stage far below.

There, Charlie Munger sits in his familiar position: arms folded, head bowed. Buffett, after checking his watch a final time, announces the session is finished.

The Berkshire-Hathaway annual shareholders’ meeting is adjourned.

Actually, only the Q&A portion of the meeting is over just now, Buffett tells us. The true business portion of the shareholder’s meeting—in which votes are counted and directors are elected—will start again, after a short break.

In fact, Buffett encourages the crowd to “stick around” for it, because, among other things, that proposed divestiture of Berkshire-Hathaway’s PetroChina holdings—which he earlier told us had been defeated 25-to-1 “even excluding my own vote”—will be debated.

It should be an interesting discussion,” he says, quite earnestly.

But we are not sticking around.

For one thing, while Buffett may be right about the PetroChina debate, the business portions of shareholder meetings are usually very dry and formal affairs—a sort of kabuki without the makeup, involving legal language, calls to order and seconds to nominations.

All that fluff, of course, is required to handle the nuts and bolts of corporate democracy—mainly shareholder votes on such fantastically boring topics as whether or not to reappoint the auditor, as well as board of director elections, which
are normally about as suspenseful as a Kennedy race in Massachusetts.

That is not to say shareholder meetings need to feature Warren Buffett and Charlie Munger sharing a small stage for five-plus hours of high-level Q&A in order to be worthwhile.

Quite the opposite.


In fact, shareholder meetings are often highly informative and well worth attending, especially for small companies that escape the attention of Wall Street’s Finest—the analysts who, for the most part, follow companies the way dogs run: in packs.

For starters, the smaller the company, the more interaction a shareholder can have with management before, during and even after the formal shareholder meeting itself.

Also, small companies tend to attract a loyal contingent of long-time investors who, like the Berkshire-Hathaway shareholders making the trek to Omaha year in and year out, faithfully appear to ask questions of their company’s stewards. And they take that opportunity very seriously.

In turn, the senior executives of those companies usually respect their shareholders’ earnestness as highly as Buffett has shown he does. During many such question and answer sessions, in fact, I have heard CEOs call on the shareholders by their first names—as, I imagine Buffett himself used to do, before he became “The Oracle of Omaha,” and the scene began to resemble an Elvis concert.

Finally, you’d be surprised how much worthwhile information a polite question from an aging retiree can elicit from a CEO.

In the weeks after returning from Omaha, for example, I will attend the shareholder meeting of a small New England-based technology company whose CEO will share with those present the kind of details on order backlogs and revenue targets that no CEO would dare speak of in the presence of Wall Street’s Finest.


He will do this not for the sake of hyping his company’s share price, but merely to explain to serious individuals who could be his grandparents how he plans to return their company to profitability.

It isn’t “The Oracle of Omaha” discoursing with pith and merit on the evils of gambling—“a tax on ignorance”—and the secret of long-term investment success—“avoiding catastrophe.”

But it is worthwhile.


Still, we are leaving the Qwest Center once and for all. Aside from the general restlessness that comes after nearly seven hours of serious concentration, and the fact that the PetroChina resolution to be debated at the business session has already lost, we have a more pressing reason.

We want to use what remains of our useful available time today to investigate one of the Berkshire-Hathaway enterprises operating right here in Omaha.

Oddly enough, I have found the last six and one half hours—from the start of the movie to Buffett’s last glimpse at his watch—less informative about the nuts and bolts of Berkshire-Hathaway itself than most annual meetings I’ve attended.

With so much high-level discourse about the state of the world—from the U.S. dollar (“It’s going down”) to the inadequacies of a portfolio theory concept known as ‘beta’ (“Beta is nice and mathematical, but it’s wrong: it is NOT a measure of risk,”)—there has been almost no discussion of the Berkshire-Hathaway businesses themselves.

The names of those businesses have been flashing all day across a bright electronic band ringing the balcony between levels of the Qwest Center arena.


They start with Acme Brick and end in XTRA Corp, and in between are familiar brands such as Benjamin Moore paints, Fruit of the Loom underwear, Dairy Queen, Johns Manville and the Nebraska Furniture Mart, along with many unfamiliar brands.

Familiar or not, we learn almost nothing new about them aside from Buffett’s comment at the start of the meeting, during the brief review of first quarter earnings report, that,

“Most of the non-insurance businesses did fine.”

He does not define “fine,” nor does he give any detail about the impact of the homebuilding downturn on Shaw Industries, Acme Brick and the other residential construction-related businesses within the Berkshire portfolio, except to say they were “hit, and in some cases hit hard” by it.


Then, with absolutely no numbers to back it up, Buffett boasts,

“Compared to other companies in the sector our managers are doing a sensational job.”

Finally, he engages in a bit of crowd-pleasing cheer-leading by concluding his quarterly review with the uplifting message that Berkshire has “the best managers, and the best shareholders, of any company.

The rest of the session has been about the dollar, the stock market versus the bond market, private equity, derivatives, currency speculation, Klamath River dams, Florida insurance regulations, railroad stocks, the virtues of See’s Candies, the intrinsic value of Berkshire-Hathaway stock and precisely what Buffett is looking for in his search for a replacement.

To this last, Buffett says he will be giving billions of dollars to several money managers and watching how they do over a period of time—no gunslingers need apply:

“We will need somebody who basically doesn’t do any dumb things, and occasionally does something [smart].”

While today was a wholly worthwhile and intensive personal immersion in the Buffett philosophy, it is a philosophy I have studied for decades, reading not only his annual shareholder letter, but also the shareholder meetings transcripts as well. Thus I find myself leaving the Qwest Center knowing very little I didn't already know about Berkshire-Hathaway itself.

I am not suggesting Buffett avoided speaking to the topic: I simply don't think anybody in the building particularly cared enough to ask.

After all, if you had a chance to ask Warren Buffett a question, you’re probably not going to ask how Fruit of the Loom is going these days.
You're going to ask about something more along the lines of Buffett's secrets to becoming a fabulous investor.

Still, it is a fact that Berkshire-Hathaway owns Fruit of the Loom, a vertically integrated apparel manufacturer with those cute ads showing, well, fruit. It is also a business that must surely be getting the daylights squeezed out of it by big customers such as Wal-Mart on one end, and low cost imports on the other.

“We do not want to buy a business with a high labor content that can be shipped from overseas,” Munger has said near the end of the afternoon session, yet Fruit of the Loom is mostly that.

We hear not a thing about it—not even an update on how Fruit of the Loom's recent acquisition of U.S.-based fleece-maker Russell Corp has helped, or hurt, its competitive position.

See’s Candies, to pick another brand name from the flashing sign ringing the arena, is certainly not a candidate for low-cost competition from China, as with Fruit of the Loom, but it must certainly be getting squeezed on the expense side of the business.

Fudge, after all, is made with sugar, coco, butter, corn syrup and lots of energy.

Yet we hear nothing about those issues, or about the company’s expansion plans, or where See's fits in a world in which giants such as Hershey and Cadbury are gobbling up the competition in order to spread rising costs over bigger volumes and move into the developing countries that are quickly evolving into seriously big markets.

See’s “international” operations consist of two stores in Hong Kong, three in Japan, and some sales in Mexico. How much future sales and profit potential might See’s—and future Berkshire-Hathaway shareholders—be missing out on by settling for life as a fabulously profitable, money-dividending, niche product?

As for Iscar Metalworking, the Israel-based company Buffett acquired last year, footage of whose human-free factory floor drew wows during the movie, there is not one word about its current business or the potential return on the $5 billion Berkshire-Hathaway plunked down for a controlling share.

If Buffett isn’t going to say anything about this, and if no shareholder is going to ask—at least, no shareholder who got in line at 1 a.m. the night before in order to get one of the precious seats at the microphones—then we’re going to have a look for ourselves at one of the most highly spoken of stars in the Berkshire firmament.


We head down escalators along with most of the others leaving the Qwest Center and walk out into the warm, humid air—the remnant of overnight storms that are due to get more serious later tonight and on into tomorrow morning, when I plan to fly home.

The rental car is hot and stuffy—and bizarrely we can’t unlock the doors using a regular old door-unlocking clicker. The driver has to use the key to unlock the driver door, and then he has to scootch over the front seat to unlock the passenger door from the inside.

I am not making this up.

General Motors, in what appears to be a last-ditch attempt to restore profitability to precisely the kind of business Warren Buffett wouldn’t touch—high labor content products made by low-cost foreign competitors—has apparently concluded that one way to solve the fact that it loses money on each car it sells is to try to discourage people from buying them in the first place.

How else to explain the fact that the passenger has to wait outside, sweating, for the driver to physically unlock his door, and then stretch across the seat to open the passenger door from the inside?

Not only that, but in order to put our gear in the back seat, we have to climb over seats to unlock the back doors from the inside.

If GM’s intent is to showcase terrible cars through their rental fleets, they are succeeding.

It actually feels like it's taking more time to get inside the stupid car than it will to drive out to the Nebraska Furniture Mart on the western outskirts of Omaha, which is where we are heading.

Eventually, we're behind the wheel and in minutes leave the modern aluminum-and-glass Qwest Center behind for the more familiar, plain-spoken look of the brick and granite high-rises in the city center.

After a few more minutes and a half-dozen traffic lights, we leave behind downtown Omaha entirely. The office buildings have given way to bars, insurance brokers, and apartment complexes.

As I look out at the cracked sidewalks and brick buildings, I wonder about the advice Buffett had given to the girl from Kentucky, who asked in a timid but clear voice “What would a ten year old do to make money?

Buffett wisely suggested she “look for what people don’t want to do for themselves,” before describing some of the many various enterprises he had tried at that age, and then concluding with a suggestion that reveals more, I think, about his age than about the real world:

“A paper route is a good idea.”

In fact, a paper route is a pretty lousy idea these days, what with the demise of afternoon newspapers, the automobile-demanding sprawl of suburbia and the decline of 1950’s style Leave It to Beaver-type neighborhoods, all which make the early-morning distribution of heavy reading materials by a 10 year-old girl on foot or by bicycle a complete non-starter.

Not to mention contract labor issues and all the potential legal liabilities that come with sending a minor out on foot into stranger’s houses.

In fact, most newspapers these days require route prospects to have a valid drivers license and insurance, and frequently hire only those 18 years or older.

Picking up on Buffett’s observation that nobody would invent the newspaper in today’s Internet economy, I would have suggested the girl find something to do with the latter, not the former.

But I am not Warren Buffett, and only one bum response out of the thirty-plus questions thrown at him is a sensational ratio for anybody of any age—especially considering that with only two exceptions Buffett answered every question at length and in varying degrees of detail.

The first exception was a question about the merits of the New York Stock Exchange merger with Euronext, which elicited a brief, non-committal answer from Buffett, followed by a classic bit of dialogue between him and his partner:

Charlie Munger: “I don’t know anything about it.”

Warren Buffett: “I don’t either, I just took longer to say it.”


The second exception was a question about healthcare. Specifically, “What can Berkshire-Hathaway do to solve the healthcare problem?” a shareholder from Salinas, California wanted to know.

This elicited the briefest responses of the day. Buffett simply shrugged and said, "It’s too tough." Munger added, “We can’t solve that one. We try to look for easy problems.”


The apartment buildings yield to grassy blocks and houses, and then the University of Nebraska campus suddenly appears on both sides of the street.

A very busy intersection signals that we are approaching our destination, and we turn off there and see in the distance a motley collection of huge buildings out of the airplane-hanger and lumber yard schools of architecture.

We follow a line of cars snaking into one of the many parking lots, find a space, go through the laborious process of manually locking every door in the car, remind ourselves that we are never buying a GM car EVER, and look for signs guiding us to the nearest entrance of the largest retail enterprise I have ever seen.

It is the Nebraska Furniture Mart, and inside its cavernous walls I will see a stunning assembly of merchandise and hordes of eager buyers, in an environment that, in certain respects, seems nearly as out of date as Buffett’s advice to the 10 year-old girl from Kentucky—“a paper route is a good idea.

I begin to wonder just how healthy these businesses we have learned almost nothing about might be.


To be continued…



Jeff Matthews
I Am Not Making This Up

© 2007, 2008 NotMakingThisUp LLC

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.

10 comments:

HoosierDaddy said...

If you mean lots of shoppers in the Nebraska Furniture Marts, that would be hordes of shoppers.

Royce said...

You know, GM does sell cars with things called options. I realize it might be hard for big shots like yourself to understand, but some people would be willing to have the unbearable (for the aforementioned big shots) task of unlocking doors manually if it meant the got to pay less for a car. I concede its a lot to ask of someone busy researching the Star Wars obsessions of an insane CEO, but maybe you could point some blame towards the person who rented the car. If it wasn't up to the big shot standards of the driver a replacement could have been requested.

As for me I'll take cheap daily rentals with the, apparently, soul crushing pain of having to actually do some menial tasks.

Jack Straw said...

Ah, the appointing of Directors to the Board and confirmation of the auditor... how nice it is to be back in a post-Enron/WorldCom, etc world where these things can be considered routine and boring. I guess everything really does move in cycles.

Thomas said...

Hordes--recalling those from the steppes of Mongolia; evoking the image of barbarians; meaning shoppers with no taste.

Tahoe Kid said...

As the "big shot" who rented the the car in question, my standards are low and I neither return rental cars over such obvious design flaws (as making manual locks a "standard item" in 2007) nor do I send wine back at restaurants. It wasn't "...a soul crushing pain of having to do some menial tasks" as 'royce' stated. Rather it was simply an example of a needless oversight by GM. And for the record, I happen to be darn good at menial tasks.

punchcard said...

Awesome. First critical yet insightful piece on the Berkshire meeting I've ever come across. Every other review reads like a Trekkie just back from the Vegas convention, or a Tony Robbins fan fresh off a weekend seminar ("I believe!")

I'm a big Berkshire fan but each piece of yours leaves me dying to read more.

The Epicurean Dealmaker said...

Jeff -- Whatever you do, do not lose your notebooks. You have at least two New Yorker-length (and quality) articles worth of material already, and for all I know another ten chapters of publishable material.

If your day job ever pales, try becoming an author. You have the gift.

Aaron said...

I'm looking forward to your next post Jeff on the Nebraska Furniture Mart because I wonder whether there is any statistical correlation (i.e., negative) between sales for home furnishings and new home sales? Keep up the great work!

Navin said...

Keep it coming Jeff! This stuff is brilliant.

Even Buffett can be out of touch and miss a step surely? I guess we'll never know the true stateof the non-insurance units until the dude passes on.

Jack Straw said...

Jeff - check this link out. It's a great article/interview with Buffett that is very complementary to what you are rehashing here. I thought it was incredibly telling that he would never buy a business at an auction. Thanks.

http://money.cnn.com/2008/05/01/news/companies/Buffet_Q_A_at_Wharton.fortune/index.htm?postversion=2008050209