Thursday, June 11, 2009

“Woodstock” Part 6: One Last, Good Question Asked; One Put-Down Given; and One Mystery Revealed



One Last, Good Question Asked

There is one more terrific question at the 2009 Berkshire Hathaway shareholders meeting—we’re jumping right into this without the usual two or three paragraphs of throat-clearing—that Warren Buffett failed to address.

It came from a Savannah, Georgia shareholder, and it followed up on Buffett’s earlier comment that on a cold November day in 2008, when news reached him that Wells Fargo was trading at $9 a share, he broke with his historical practice of not giving stock tips and told a group of students from the University of Chicago’s Booth School of Business that he’d put his “entire net worth” into Wells Fargo stock at that price.

“What about Fannie Mae, Citigroup, AIG?” asks the shareholder from Savannah, who rightly notes that a lot of people thought those stocks were buys-of-a-lifetime at $9 a share, and that not only did those stocks not rebound, they all went to a buck or less.


Any investor who put his “entire net worth” into those stocks would have been wiped out.

Since many long-time “value” investors and Friends-of-Warren owned those stocks, it is a terrific opportunity for Buffett to describe how he looks at financials and managed to avoid those disasters, while sticking with Wells Fargo, one of the few major banks to make it through the crisis relatively intact.

But he does not.

“It’s what their business is and what their competitive model is,” Buffett says, offering no specifics. “…they each have different models but Wells is the most different.”

Then, without explaining how Wells is the most different, he launches into another mea culpa on his purchase of Irish banks.

“I was wrong on the Irish banks, I simply didn’t understand—and I should have understood-- the incredible exposure they had to land development loans. It was a terrible mistake, by me. I wasn’t paying attention.”

Having already flogged himself in his annual letter over the Irish bank debacle, Buffett is offering no new insight here. He then reverts back to question:

“There were a lot of signs that they”—meaning Citigroup and the rest—“were doing things that a highly leveraged institution shouldn’t be doing,” he says, without describing those signs. “You can get in a lot of trouble with leverage.”


As if America hasn’t already figured that out.


One Self-Promoter, Put-Down

Professionals cannot resist advertising themselves at the Berkshire meeting.

It happened each of the last two years, and veterans say it began in earnest when Buffett issued the lower-priced “B” shares. A lot of stock brokers began attending the meeting, fishing for rich clients.

Despite the new format at this year’s meeting, it happens again, on the 18th question of the day, asked by a young from Illinois.

“If either of you were starting a fund today,” the young fund manager says, throwing out the name of his fund “hypothetically”—to which Buffett interrupts, “You’re gonna get billed for a commercial today,” to scattered laughter—“...would you sell stuff up 100% or hold long term?” the young promoter asks.

It’s a ridiculous question, and everyone in the room—except the young man from Illinois, maybe—knows it. Buffett has owned Washington Post from $6 a share, and didn’t sell even when the stock hit $999.50 on the last day of 2004, long after he had determined newspapers were a dying business.

But Buffett gamely answers anyway:

“We’d own them—our cost basis, except in rare cases, doesn’t have anything to do with it. When Charlie and I ran funds, we didn’t worry about whether something was up or down, we worried about what it was worth. We’d do the same thing 100 years from now.”

Munger, who suffers fools very unhappily, stirs briefly in his chair and says to the self-promoting Illini,


“He’s tactfully suggesting you adopt another way of thinking.”

The laughter swells and the questions continue.


One Mystery, Answer Revealed!

In late February, 2009, a mysterious spike took place in credit default swaps on Berkshire Hathaway.


This sudden rise in the cost of insuring against a default by Berkshire, heretofore unthinkable, made Berkshire, on paper, appear for a few days to be as risky a credit as Sears Holdings.

The irony was supreme, given that Sears happens to be the Berkshire-like investment vehicle for Sears Chairman and hedge fund ace Eddie Lampert, …without, of course, the good businesses, clean balance sheet, and 44 year track record of Berkshire and its Chairman and former hedge fund ace, Warren Buffett.

The credit default moves prompted reporters to scurry around, looking for clues as to why somebody, somewhere, seemed concerned that Warren Buffett’s “Fort Knox” might be vulnerable to the kind of liquidity crisis that had already taken down a good number of financial companies whose problems showed up in the credit market well before the stock market realized what was going on.

When asked about the recent downgrade of Berkshire's Triple-A credit rating, Buffett provided the answer to that mystery.


We’ll examine that in our next, concluding chapter, along with:

One Industry Not to Expect Buffett to Buy Into, and the Most Philosophical Answer to Any Question, at Any Annual Meeting, Ever.


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.

1 comment:

Anonymous said...

Kudos for the critical but honest analysis of Buffett's answers. I for one think that the format of this years meeting is a welcome improvement. I wish Warren and Charlie would rise to the occasion and answer the tougher questions with more detail and clarity. There is a lot we could learn about how he accurately assessed the differences in WF vs, Citi.

Also, was the question ever asked: On what basis do you make the claim - America's best days are ahead