Monday, January 25, 2010

What I Learned Writing a Book about Warren Buffett: Part I


The Mini-Meeting: January 20, 2010, 8:30 a.m.


The most surprising thing about this “mini” Berkshire Hathaway shareholder meeting is the intimacy.

Leaving a raw winter’s morning outside and entering the warm confines of downtown Omaha’s Holland Performing Arts Center, named after Dick Holland, an early Buffett investor (circa 1958) and advertising executive—Buffett would grill him for information before buying shares of advertising agencies in the 1970’s—there are no crowds, no lines, and no spectacle.

There are, in fact, only a handful of shareholders in the lobby.

Some have come by cab directly from the airport—these are East-Coasters, for the most part, wearing suits and ties beneath wool overcoats—while others have driven in from the snowy neighborhoods west of downtown Omaha, wearing parkas or jackets and boots. All are chatting quietly or milling around outside the doors to the 2,000-seat Peter Kiewit concert hall, where the meeting will start in about an hour.

Indeed, so laid back, so folksy and so accessible is this meeting that the reasonably alert observer can see Mid-American Energy CEO David Sokol, Warren Buffett’s heir-apparent (at least, for now: more on this later), chatting it up with a few long-time Berkshire investors from the New York City area.

And there is Mark Hamburg, the Berkshire CFO—head down and papers in hand, moving among shareholders and staff members—but looking more like a harried mid-level accountant for the local electric utility than the CFO of one of the largest companies on earth who happens to be orchestrating a special meeting that will help create more shareholders for that company than its CEO ever cared to have.

Even the CEO himself, Warren Buffett, can be glimpsed in between several moveable screens that were set up to wall off a portion of the lobby from us, the shareholders.

Inside that space Buffett is meeting the press, but if you stand just right you can see him talking animatedly with a half-dozen reporters (all male, for some reason) about the Kraft deal (Kraft has announced an end-around plan in its efforts to buy Cadbury which neuters Buffett, its biggest shareholder, and he is angry), about the Obama tax proposals (the President, whose candidacy Buffett vocally supported, is lashing out at banks, and Buffett is uneasy), and about the economy (stabilized, according to Buffett, but not zooming ahead) while photographers move around him like he is Brangelina, their cameras snapping only a couple feet from his head.

Paparazzi aside, this must be very much like a Berkshire annual meeting back in the days before Buffett created the “Class B” shares and let the riff-raff in.

Ah, but one other difference is now noticeable: a tall, well dressed, man—easily 6’ 4”—stands discretely nearby, on our side of the screens. And though he makes no move to restrict the few curious bystanders edging towards the break in the panels to watch Buffett, we all can see the coiled wire rising from the collar of his dark business suit to something in his ear: he is a bodyguard. So despite the informality of it all, nobody ventures too close to listen to the “Oracle of Omaha.”

Suddenly a woman’s disembodied voice calls out sharply from behind the screens: “Okay, now we’ll do broadcast.”

“Great,” Buffett says in his husky voice, sounding oddly happy about the change despite the fact that he—a billionaire for whom time and money are inextricably linked—is being made to schlep from one group of reporters to another. For a man rooted in the deep-seated sexism of the 1950’s (he once posed his Board of Directors, males and females alike, among the silicone-enhanced staffers of a Hooters restaurant for the annual Berkshire Christmas card), it seems that Becky Quick and Betty Liu are more fun to talk to than a bunch of middle-aged men.

And thus the band of reporters surrounding him disperses, and Buffett moves away from the crack in the partition to an unseen seat in front of unseen television cameras. The few curious onlookers disperse, and the bodyguard relaxes.

It’s time to go inside the concert hall.

But this modest effort requires proving one’s shareholder credentials, which are being checked by two friendly women seated behind a table—a setup more like a church pot luck supper than a shareholder meeting for one of the world’s largest companies. Before entering, you must prove ownership of Berkshire Hathaway stock, otherwise you will not be handed the movie theater-style ticket to the meeting itself (no large plastic “Shareholder” badges here, as at the annual shindig).

Fortunately I’ve brought along a copy of my brokerage statement showing the Berkshire shares—the prospectus did say ownership was required—but next to me is a couple from suburban Omaha who, despite having braved the rotten weather, which is just cold enough to turn the sidewalks to a sheet of ice, have nothing relevant to show the ladies.

The couple protests—nicely: this is Omaha, not Manhattan—that they had no idea they’d have to show proof of ownership, and while I don’t wait around to hear what happens, I can’t imagine they won’t get in: “Woodstock for Capitalists” this is not.


It’s more like an old Allman Brothers concert at the Fillmore East, though decidedly upscale, and without the chemistry experiments in the bathrooms, if you get my drift.


Thus it is that I have journeyed again to the heart of Berkshire Hathaway—downtown Omaha, Nebraska—this time on an icy, overcast day, and taking a chance that the so-called Oracle of that very Midwestern city will take questions above and beyond the stated purpose of this simple, straightforward shareholder meeting: to approve a 50-for-1 stock split in the Berkshire ‘B’ shares. (For reasons why Warren Buffett is, in reality, no ‘Oracle’—world’s great investor, yes; Oracle, no—pick up a copy of “Pilgrimage to Warren Buffett’s Omaha” at Amazon.com.)

And it will prove worth the trip.

No, Charlie Munger—Berkshire Hathaway’s acerbic Vice-Chairman and the business partner without whom Warren Buffett would not have created Berkshire as we know it—is not in attendance, although Buffett will make up for Munger’s absence in a particularly Buffett-like manner.

Nor will attendance approach the 30,000-plus faithful that will likely cram into the nearby Qwest Center arena for the annual meeting come May 1.

Nor will Buffett take questions for anything close to the 5-plus hours he and Munger will do at that event.

But there will still be a few goodies today, including the fact that not a single “What should I do with my life?”-type questions will be asked by the more informed shareholders who bothered to come, which means that we will learn a few things about the Burlington Northern acquisition, about Warren Buffett himself, and about why it is that Kraft’s issuance of under-valued stock bothers Buffett mightily, yet the very reason we are having a shareholder meeting is to approve a stock split that will facilitate an acquisition by Warren Buffett using his own under-valued stock.

Stay tuned.



Jeff Matthews
I Am Not Making This Up


© 2009 NotMakingThisUp, LLC

The content contained in this blog represents only the opinions of Mr. Matthews, who also acts as an advisor: 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, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.

Friday, January 22, 2010

Seattle, First City of Disposable Plastic Thermos Containers


Well, Starbucks finally has its act together, if Wednesday’s earnings release is any indication.

At least, its financial act.

Starbucks’ environmental act still leaves a lot to be desired—particularly here in the U.S., where getting a Starbucks coffee in a ceramic mug is harder to accomplish than getting a three-pump, no-foam, half-decaf, non-fat, no-whip, extra-hot moca.

In the U.K., we should note, the situation is quite the opposite. There, instead of automatically serving coffee in a paper cup, Starbucks baristas prepare it in a mug. If you want the paper cup, you have to ask for it.

The environmental friendliness over there stems, no doubt, from the Italian espresso bar—where patrons come in, down a coffee while standing, and then head back out into the world—being ingrained in the European psyche.

Americans, on the other hand, are simply accustomed to getting their morning coffee in what amount to disposable thermos containers made of paper cups and plastic lids—capped off in the case of Starbucks by long green plastic swizzle sticks designed exclusively to plug the tiny hole in the lid—before heading for the office in their Tahoes, Escalades and Tacomas.

Still, you might think that a company based in Seattle—a city that has an “Office of Sustainability and Environment” and calls itself “a national leader in raising awareness and inspiring action on many environmental issues”—would be a little more focused than the average fast-food joint on reducing the detritus of paper cups and plastic caps and plastic cups and paper wraps and long green plastic swizzle sticks designed exclusively to plug the tiny hole in the lid that fill up the trash containers at every Starbucks we’ve ever been to.

But you’d be wrong: the average Starbucks, at least in the U.S., recycles as much as the average frat house after pub night.

Besides which, the domestic Starbucks operating manual for CEO Howard Schultz’s beloved “baristas” seems to devote no space whatsoever to ways of minimizing the use of those disposable paper and plastic thermos containers for customers who don't have to drive to the office in their Tahoes, if your editor’s recent interaction is any indication.

That interaction happened in a Philadelphia Starbucks, where we asked for a venti (large, in Starbucks parlance) skim latte in a mug, and then began to set up for an hour’s worth of work in between meetings.

After some efforts behind the counter, the barista called out that their one remaining venti mug—this is in a Starbucks in the city of Philadelphia—was chipped, and would I mind if he….

I didn’t quite catch his alternative above the noise of place, but usually they just put it in a smaller mug, which is no big deal, so I nodded and said “no problem.”

And what he did was this: he filled a smaller mug with three-quarters of a venti skim latte and put the rest—maybe an inch or so of coffee—in a venti paper cup with a plastic lid and a brown paper wrapper around it.

The only thing he didn’t do was stick a long plastic swizzle stick in the hole in the plastic lid.

And we are not making this up.


Jeff Matthews
I Am Not Making This Up


© 2009 NotMakingThisUp, LLC

The content contained in this blog represents only the opinions of Mr. Matthews, who also acts as an advisor: 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, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.

Friday, January 15, 2010

Goldman 8, Public Zero…The Teachable Moment of Bare Escentuals


We’ve been radio silent here at NotMakingThisUp the last week or so, for what we hope will prove good reasons.

The first reason is that for the past week your editor has been in conference meetings at Ground Zero of Healthcare Reform.


Now, Ground Zero of Healthcare Reform is, in our view, not Washington DC, where the legislation itself is being worked out. (And by “worked out” we mean “bribed, weaseled and compromised by ignorant Congresspersons”).

Ground Zero of Healthcare Reform, at least for the last few days, has actually been San Francisco, California. More specifically, it has been the JP Morgan Healthcare Conference—an annual confab of pretty much every CEO, CFO, VC or scientist who ever started up, ran, founded or otherwise had something to do with a company that performs the actual hard work of keeping healthy a nation of 300 million uniquely diverse (at least among the ranks of “developed nations” with which our healthcare quality gets blithely compared) human beings.


The second reason for the radio silence is that we’re gearing up to participate in Bloomberg Television’s coverage of the mini-Berkshire Hathaway shareholder meeting next week, at which Berkshire shareholders will be voting to do something Warren Buffett swore would never happen under his watch: the splitting of Berkshire’s stock.

No matter, this morning’s headlines brought a good reason to break that silence: the acquisition of Bare Escentuals, a publically-traded cosmetics company (ticker BARE) based right here in San Francisco, by Shiseido, a large Japanese counterpart, for $18.20 a share in cold, hard, US dollars.

Now, as far as deals go, this really shouldn’t be an attention grabber, but stay with us while we get to the “teachable moment.”

The winners in the deal are, of course, existing Bare Escentuals shareholders, who happen to include the company founder, a private equity firm, and the many institutions and individuals who bothered buying the stock on their own free will.

The losers would mainly be short-sellers, who according to our Bloomberg are stuck with 5.3 million such shares they must now buy back (“He who sells what isn’t his’n,” as the old Jessie Livermore phrase goes, “must buy it back or go to prison”).

Another class of losers, however, would be pretty much anybody who took Goldman Sachs’ advice to sell their BARE stock just six weeks ago. Indeed, more than 5 million shares changed hands in the two days following Goldman’s early December move from the always-meaningless “Neutral” rating to the rare “Sell” rating, and the stock traded down $2, wiping out $200 million of the company’s valuation.

Now, there was good reason investors took Goldman Sachs’ advice to sell their BARE stock.


After all, it was Goldman Sachs who led the Bare Escentuals public offering back in November 2006, pricing 16 million shares at $22.00 a share.

And it was Goldman Sachs who successfully led a 12 million share secondary at $34.50 in early 2007, which Goldman’s crack Equity Research Team quickly followed by slapping a “Buy” rating on BARE stock, with a target price of $44.00 a share.

“But wait, there’s more!”


Three months later, it was Goldman Sachs who, once again, plugged the Street with more stock, this time selling 8 million shares of BARE at $36.50.

Finally, the Street had had enough of Bare Escentuals: the stock sold off ten points that summer and never really recovered.

But this did not deter Goldman’s Equity Research Team, for in the manner of equity research teams everywhere, Goldman’s Finest changed their “Buy” rating to a “Neutral” only after all the deals were done.


And Goldman's Finest stuck with that “Neutral”rating even while the stock performed in a decidedly non-Neutral fashion: it cratered all the way down to $2.45 a share in March 2009.

Now, you might think such a ridiculous price would have merited an upgrade: that $2.45 per-share valuation amounted to only 3-times EBITDA, a steel-company multiple for a non-steel-company-like 70% gross margin, 28% operating margin business.


Besides, if you liked it a $36.50, shouldn't you love it at $2.45?

You might think that, but you'd be wrong. In fact, Goldman kept its “Neutral” rating and thus missed a 425% rally in shares of BARE until the stock hit $13.00 a share—where Goldman’s Finest deemed the shares an outright “Sell” just over a month ago.

By our count, that’s three overpriced stock offerings and four bad research calls, for a score of Goldman 7, Public 0.

And it is here now that we get to our Teachable Moment.


You might think this sort of performance would hurt Goldman Sachs—i.e. that there might be some sort of loss of credibility in the matter of Bare Escentuals which would have a negative financial implication down the road for Goldman Sachs, Inc.

And you would already be wrong.

Because the financial advisor to Bare Escentuals in its acquisition by Shiseido is none other than…

Yes, you got it.

Goldman 8, Public 0.


Jeff Matthews
I Am Not Making This Up


© 2009 NotMakingThisUp, LLC

The content contained in this blog represents only the opinions of Mr. Matthews, who also acts as an advisor: 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, and should never be relied on in making an investment decision, ever. Also, this blog e at NotMakingThisUp, and for what we hope will prove good reasons.
is not a solicitation of business: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.




Monday, January 04, 2010

New Year’s Resolution: Think For Yourself


It was a cool Florida evening one year ago next month when your editor joined a distinguished investment strategist, familiar from near-constant CNBC exposure, and a third market observer on a makeshift stage in the dining room of a country club to discuss the economy and the prospects for the stock market—such as they were, in those gloomy days—before a solemn group of Chartered Financial Analysts from the local financial community.

The crowd had reason to be solemn.

The news was horrible and getting worse. Indeed, the financial crisis then gathering steam outside the tree-shaded windows of the club would not reach a peak for another four weeks before finally culminating in that apocalyptic March, 2009 print of “666” on the S&P 500.

The lessons of Warren Buffett—whose high-profile, crisis-defying investments in Goldman Sachs and GE were looking pretty stupid—seemed quaint, old-school and positively out-dated as we faced the crowd.

Who wanted to “put all your eggs in one basket and watch that basket,” as Buffett liked to say, when Buffett acolytes such as Bill Miller—his so-called “Value Trust” fund had lost a third of its value in the previous ten years—were watching their concentrated portfolios getting crushed in the financial collapse?

And so it came as no surprise that your editor was figuratively elbowed aside when the Famous Strategist took control of the discussion, delivering in a loud and booming voice a vision of the future that no doubt made the hot coffee turn to ice in the throats of the gathered host.

Your editor kept only a few notes of the session, being seated on a stage next to the Famous Strategist and being more concerned with addressing the questions at hand, as opposed to writing down what the Famous Strategist was advising the CFAs in attendance, but we did jot down enough to preserve the gist.

And it was not pretty.

“The economy is gonna be an underachiever for several years…the consumer has adjusted to a new reality,” was one line. So far, nothing shocking here: both statements are quite reasonable, even for stock-market optimists.

“There’s another trillion dollars in losses that are gonna be taken by the banks.”
Now, pessimists would argue that the verdict on this statement isn’t in yet—that the Alt-A mortgage time bomb has yet to explode, for one thing.

But by our Bloomberg, the combined trailing-12-month losses of the 21 institutions that comprise JP Morgan, Citigroup, BB&T, Bank of America and the whole rotten crew of banks described by our Famous Strategist, amount to not-losses at all, but profits.

Specifically, they amount to operating profits of $10 billion and net income of $5 billion for the twelve months encompassing the worst of the crisis—from fourth quarter 2008 through the first three quarters of 2009.

Of course, JP Morgan alone has taken $30 billion in loan loss provisions during that time, and the rest of the bunch has likewise been taking losses along the way on their Bubble-Era loan books. So, “another trillion dollars” of loan loss provisions, as predicted by the Famous Strategist, may well be the final tally when the cycle is concluded.

But, thus far, those losses have been more than made up for by profits.

As for investment advice, our Famous Strategist couldn’t have been clearer: “The financials are a graveyard of bad investment, and they’re illiquid, most of the large ones…” he warned the audience. “The government can say what they want, but they’re gonna have to nationalize these institutions—treat ‘em like Fannie and Freddie, which is the walking dead.”

Since those words were spoken, however, the “walking dead” have acted more like sprinters: BankAmerica was trading around $5 that dark night, and can’t be had for less than $15 as we write this. So too JP Morgan, a share of which cost $25 then, but now fetches more than $40. Wells Fargo, which was $17, is now $27.

Only Citigroup, among the big banks, and was trading at $3.50 at the time, costs less today. And not one has been nationalized.

Hard to imagine a better batch of investments than the large financials in the last twelve months.

But it was, perhaps, the career advice our Famous Strategist gave to the CFAs that resonated most loudly, and most threateningly, that dark night: “We live in an era of reduced expectations,” he said, and that included equities.

Pointing out the lousy ten-year history of the S&P 500 (which made the papers during the last few weeks of 2009, the concluding year of the stock market’s first-ever negative decade), he suggested the CFAs focus on fixed income and safety for their clients. “Get used to it,” he said. “It’s going to last for years.”


Now, the real lesson here is not, to be clear, that a Famous Strategist could be dead wrong—like, 99% wrong—and that Warren Buffett, who would eventually turn a profit on his Goldman Sachs investment, is usually, eventually, right.

Hey, Buffett actually sold puts on the markets near their all-time highs. Yes, they’re “European” puts and don’t get exercised for another decade, and yes, he’ll probably make money on them. But the fact is the best investor who ever lived actually sold insurance on world markets at their all-time peaks.

Nor is the point here that the Financial Crisis was a short-term blip whose after-effects will be smoothed over by the subsequent near-doubling in the S&P 500 from its 666 low in 2009, and great things to come in 2010.

If anything, the Crash of 2008 appeared to us to mark the end of US economic supremacy, much as the Crash of 1929 marked the end of Great Britain’s, and our displacement by China is something we will be dealing with for decades.

The lesson is something all investors eventually learn, and it is this: think for yourself.

Those CFAs who took the Famous Strategist’s advice that dark February night and dumped their financials and stashed the proceeds in safe Treasuries are certainly wishing they had.




Jeff Matthews
I Am Not Making This Up


© 2009 NotMakingThisUp, LLC
The content contained in this blog represents only the opinions of Mr. Matthews, who also acts as an advisor: 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, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author