Thursday, April 23, 2009

What They Want to Know: Our Top Ten List for Warren Buffett

Well, the questions are in, and we have winners.

74 questions were submitted to our “Top Ten Questions We’d Like to See Warren Buffet Asked” contest, and more than 300 readers voted for their favorite.

Now, we’re unfortunately a little primitive technologically-speaking here at NMTU, and readers could select only one question—not ten, as we originally envisioned—for the list.

As it turned out, however, this had a distinct benefit: it reduced ballot-stuffing, and the leaders really stood out from the rest.

For example, almost half the questions received one or no votes. Three-quarters of the questions got five votes or less. And 85% received fewer votes than any of the Top Ten questions.

So our Top Ten results were unambiguous, and by and large they fulfill Buffett’s own goal of getting questions about the business, not the kind of “What Would Warren Do” stuff that dominated last year’s meeting. (When the high school senior from Germany asked Buffett “what I should do for the rest of my life” it got a little frightening—at that age I wasn’t thinking much beyond what I was going to do the rest of the afternoon.)

Let's consider them one by one.

Question 1, the top vote-getter—whether Buffett has a back-up in mind for Berkshire’s insurance ace Ajit Jain, who operates out of a small office in Stamford, Connecticut yet is responsible for more of Berkshire profits than any individual besides Buffett himself—might seem obscure to those who don’t know much about Berkshire beyond Warren Buffett and Charlie Munger, but it’s a great question, and has never been asked, as far as I know.

While everyone wants to know what Berkshire will do to replace Buffett if he gets ‘hit by a truck,’ nobody seems to wonder what Buffett would do to replace Jain if the truck should appear in Stamford, Connecticut, rather than Omaha, Nebraska.

And it’s a material issue for Berkshire shareholders.

Questions 2 and 9 are Moody’s-related, but each takes a different angle on the subject. The first asks why Buffett doesn’t buy Moody’s and restore the franchise; the second asks why Buffett didn’t use his considerable prestige and clout to rein in Moody’s during the subprime ratings mania.

I like ‘em both.

Question 3—how Buffett justifies holding stocks “forever” when the fundamentals have permanently changed—was asked a couple different ways, and this is the version that won the most votes.

It’s a great question, particularly following a year in which many individual investors, lulled to sleep by the Great Bull Market, saw their pensions vanish thanks to the collapse of former “hold forever” investments such as Fannie Mae, Freddie Mac, AIG and Citibank.

While Buffett had the wisdom to unload his Fannie Mae years ago (he correctly saw the earnings manipulation for what it was: earnings manipulation with potentially catastrophic consequences), many others weren’t so fortunate.

Even The-Prince-Who-Rescued-Citibank in 1990, poor old Al-Waleed bin Talal bin Abdul Aziz Al Saud, “The Arabian Warren Buffett,” got hosed on his “forever” investment when Citibank did what it does best: overleverage its balance sheet and underprice its risks.

I’d bet the Prince—and the Berkshire shareholders heading to Omaha—would appreciate hearing what, exactly, Buffett would say about this topic.

Question 4 is only one of a handful of questions we received that related to Buffett’s high public profile, and it’s a good one. The other questions on this general topic were, however, more pointed, less objective, and seemed eager to take Buffett to task both for his support for Obama (he is a lifelong Democrat: people who are surprised by this haven’t read “Pilgrimage to Warren Buffett’s Omaha”!) and his “Buy American, I Am” op-ed in the New York Times early in the financial collapse.

But our readers are a discerning bunch and showed no inclination to get into the political side of things in these questions. I’m grateful but not surprised that they picked the best question of the bunch.

Question 5 is also one of which we received several on the same topic—the topic being Buffett’s large derivatives bet. Essentially, he wrote insurance against the stock market going down in a big way, not long before the stock market went down in a very big way.

Now, Berkshire has written catastrophic insurance against earthquakes, hurricanes and billion-dollar consumer contests for decades, and has made money doing so. And it is likely Berkshire will make money on the index puts in the long run.

Buffett himself wrote about the derivatives at length in the current shareholder letter, framing them as a low-cost source of capital, which they very likely will have proved to be when they mature decades hence.

Nevertheless, there is a larger issue at play here. It is whether Buffett handcuffed himself by doubling-up on the market near its peak, forcing him to sell stocks into the market decline in order to make investments in GE, Goldman Sachs and Wrigley—and this question frames the issue in a way worth a response.

Question 6 is just plain terrific, and anybody who has followed Buffett's investment career would be interested in hearing his response, for Buffett has, in recent years, invested heavily in regulated energy businesses requiring what for Buffett is anathema: heavy capital expenditures.

Indeed, for the first time in three decades of writing shareholder letters, Buffett boasted about spending more money in these businesses than they earn where he used to brag about how much money Berkshire took out of its businesses.

It would not be an exaggeratation to call that a jaw-dropping moment in the annals of Berkshiredom.

Question 7 echoes Question 3, with a more academic and forward-looking flavor.

Question 8, regarding Buffett's thought process in ramping up his Conoco-Phillips investment at the peak of the oil mania, is one of my favorites, and I hope it gets asked—not because it rehashes what Buffett has already admitted in his letter was a horrible investment (a “sin of commission”), but because it gets at the most uncharacteristic aspect of the investment, which is an apparent lapse in the key ingredient in Buffett’s success: his rationality.

Now, as Buffett himself wrote in his latest letter to shareholders, he wants more questions about the business than he's been getting in recent years, and I think we’ll be giving Mr. Sorkin at the New York Times plenty of good ones, all worthy of the Oracle’s time.

These are 9 rational and dispassionate questions, and aside from #4 they bear entirely on either the Berkshire businesses or Buffett’s investment methodology.

Question 10, however, is different. It’s about the AIG affair—something shareholders have been too timid to bring up in the past.

And who could blame them: would you want to stand up in an arena teeming with 17,000 Warren Buffett fans (and another 10,000 watching from satellite locations), and ask a hostile “What-did-you-know-and-when-did-you-know-it?” question about the biggest black eye in Berkshire’s 44-year history under Buffett?

While the AIG affair is, nevertheless, a business issue, and worth asking about, Question 10 is phrased in a personal, accusatory fashion that I didn’t endorse. When the sender refused to restate it in a manner more likely to generate a response, it stayed as it was.

And since no other questions about AIG were submitted, and since our readers want to know what Buffett would say about the matter, well, the question is as it was submitted.

I apologize for the tone and the implication, but not for having an AIG question on our list. After all, a CEO who didn't blink an eye when he was asked in front of 30,000 people last year if he “believed in God and had a personal relationship with Jesus Christ” could handle this one, too. (If you want to know how Buffett responded to that one, you'll have to read “Pilgrimage to Warren Buffett's Omaha”!)

All in all, I think the contest did what it was intended to do: provide excellent questions worth asking at the upcoming Berkshire Hathaway shareholder meeting. I thank the readers of NMTU for their interest, their thoughtful responses and their votes.

Those of you who see your question below, please confirm your mailing address and whether you would like to be identified should the question be asked at the meeting at

All Top Ten winners will receive a copy of “Pilgrimage to Warren Buffett’s Omaha,” signed by the author.

We’ll be sending these pronto to Andrew Ross Sorkin at the New York Times. Should Mr. Sorkin decide that one or more fits the bill, I look forward to being in the Qwest Center two Saturdays from now and hearing the questions asked...

...and answered!


The Top Ten Questions We’d Like to Hear at the Berkshire Annual Meeting

#1 To what extent does Berkshire's reinsurance business rely on Ajit Jain and is there currently another individual in the division capable of replacing Mr. Jain?

#2 Why not either sell the Moody’s position entirely since the franchise value and moat are severely and possibly permanently impaired (redeploying capital into more attractive investments that no doubt exist); or buy Moody’s entirely and use the Buffett/Berkshire reputation to entirely revamp Moody’s into a highly valuable business again? Berkshire may be one of the only franchises that could install the integrity needed to turn around the ratings agencies.

#3 Washington Post went from being a local paper to a national paper to a learning company. Wells Fargo went from being a conservative bank to a highly leveraged mortgage lender. Moody's went from being a boring ratings agency to a co-conspirator in the mortgage bubble. How do you justify holding stocks “forever” when the original investment eventually becomes unrecognizable in most cases?

#4 You said in your letter the United States' best days lie ahead of it. Upon what do you base that statement: economic data, natural optimism, political pressure, or wishful thinking?

#5 Isn't there significantly more risk than what you are suggesting in your sale of long-dated index puts? If one had sold puts on the Dow from 1927 to 1929 (during the run up, a period similar to when Berkshire sold their options), 15 years later, the market was down from an average of say 300 on the DJIA to approximately 140 a loss of a little over 50%. And if one had reinvested the premium in the market, one would have lost 50% of that. So the cheap financing ( less than 1%) does not end up being cheap. Finally, isn't there a risk of doubling down on the stock market as most of Berkshire's business returns are tied to returns in the stock market?

#6 You’ve written See’s Candies’ beauty rests in the minimal incremental tangible capital required to grow profits. Recently, you’ve expressed excitement for Berkshire’s investments in utilities, insurance and railroads – capital intensive industries potentially facing massive inflation. Can you reconcile these contrasting viewpoints?

#7 What factors, if any, would cause you to change your favorite holding period from “forever” to “sometime in the future” when thinking about the challenges your businesses face?

#8 On Conoco, it seems Berkshire made the uncharacteristic move of buying an asset with a price chart that went straight up, rather straight down. Please explain the decision making process on Conoco and what you learned from this admitted mistake.

#9 Being a major shareholder in Moody's, why didn't Mr. Buffett play a more active role in urging Moody's to change its rating process and save it from disrepute?

#10 How do you sleep at night knowing you sacrificed Ron Furgeson [sic; it is spelled Ferguson] to avoid your own responsibility with the General Re/AIG crime?

Jeff Matthews
I Am Not Making This Up

© 2009 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 investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way: such inquiries will not be responded to. This content is intended solely for the entertainment of the reader, and the author.


Randy said...

Aren't the answers pretty obvious?

#1 Assuming the billions Warren has invested in cloning research fails, the philosophy will remain and guide successful operation of the business.

#2 LOL at Buffett leading a turnaround at Moody's. I think he'd rather eat a salad for lunch every day.

#3 I think Buffett has always conditioned his forever statement by the idea that the same business moat exists. Obviously he's sold stocks before. And LOL at the mischaracterization of Wells Fargo.

#4 Isn't wishful thinking the fount of all statements?

#5 Your first mistake is comparing selling long dated puts on the market when it was trading at a 30 PE (34 in 1929) to selling them at a 17 PE. Secondly, dividend payouts were close to 100% of profits in the 1930s, this provided great shareholder returns (anyone buying at a reasonable PE, say at the end of 1931 made nice returns throughout the depression), but prevented index values from growing. A casual reading of the annual report indicates that Buffett has language protecting from high dividend payouts. Either way, if Berkshire had sold puts at the same market PE (in 1931), we would have ended up paying nothing, even without adjusting for dividends.

#6 You’ve heard that Buffett now runs one of the largest portfolios in the world, and that high return little candy companies no longer move the needle, haven't you?

#7 The same factors that lead him to regularly sell stocks.

#8 Obviously the mistake was not reading any Julian Simon.

#9 And why didn't he get it renamed Happy's? Moody's just doesn't strike the right tone, does it? I think they could have flown under everyones radar if only WEB had been more active in renaming the company.

#10 The truth is Ron Ferguson was controlled by WEB. Buffett used advanced ESP techniques to secretly to force Ron, against his will, to help AIG commit fraud so Berkshire could make another nickel per share. LOL.

Masked Financier said...

A great post Jeff.
And as I'm developing my Texas Holdem Investing method which goes completely against ever holding an investment "to infinity and beyond" I can't wait for the answers to 3 and 7.
You can read my thoughts at my blog.

An Intelligent Investor Wannabe said...

I am not experienced enough to give answer them in detail, but here is how I would imagine Buffett answers the questions based on my little understanding of Berkshire and Buffett..
1. I don’t think Buffett will give any more answer to that question unless he knows he isn’t leading Berkshire any further. He would probably give the same answer again, “I have four guys that I like. In due time, I will release the information.” Either way, I feel that Berkshire cannot grow as it used to. Like you commented a few months at our event, because of the board’s loyalty to Buffett, the company won’t be changed for a while, which is a recipe for slow growth as the company can’t deal with new challenges.
2. I don’t think Buffett is interested in fixing companies, especially after Solomon. He is never a private equity guy. I also imagine there would be some antitrust hassles he has to go through with JOD. Why take a chance on a company that needs fixing when you can buy a company at that is dirt cheap.
3. I don’t know if Buffett wants to admit this, but this model doesn’t work. Simply because there isn’t a company that is able to be owned forever. Coca Cola is a great company, but it has been a disappointment since Goizueta’s untimely death in 1998. This is what the stock market is for. It provides liquidity when the company has reached its intrinsic value.
4. The American higher education system is still the best in the world, and there are still international students who are interested in making a living in America, should the laws permit. Overall the US is still attracting immigrants who are the driving force of the US. The US workforce on average is still more educated than countries that have the potential to beat us (China and India)… etc etc
5. I am not knowledgeable about Berkshire’s bet to comment
6. Buffett was betting on the fact that oil price would keep increasing. Energy business is also relatively easy to value. It is tangible. Since the product is not differentiable, the companies have to focus on being efficient, which different metrics can quantify. The most important indicator investors should look for is price of oil. I would be interested to find out what he would say to say about that.
7. Already answered.
8. Maybe Buffett wanted to park his cash somewhere and felt that he was uncomfortable with the momentum of oil price? Buffett did make a mistake buying an airline, another capital intensive industry.
9. Already Answered.
10. No comment.

easystar said...

#3. "I don’t know if Buffett wants to admit this, but this model doesn’t work. Simply because there isn’t a company that is able to be owned forever. Coca Cola is a great company, but it has been a disappointment since Goizueta’s untimely death in 1998. This is what the stock market is for."

KO was so massively overvalued at 1998/9 (PE 80) and WEB knew that. But out of his loyalty (and of course that cost both the US IRS money (unrealsied profit), and us, as the shareholder. But I would see that as one of his hobby/pass time and let him have that.

But if you look at the intrisic/earning, KO has continue to improves that. At PE20, it is a a lovely company to own.

#6 - If you read his shareholder letter carefully, he said he expected future oil to trade at $60ish range. That was where the valuation was based. Anything more would be an bonus and obviously no one can predict the short term movement of oil prices. With these QE going on, we loyal Berkshire shareholders might just have to thank you for his foresight few years from now.