Saturday, May 02, 2015

Sgt. Pepper! Joe Cocker! Jimmy Page! Oh, and Warren and Charlie...

                  The best part of this year’s Berkshire meeting—except seeing Charlie Munger in good form, which we’ll get to in a bit—was the movie.
            Not the movie itself, but the end of the movie, when the sing-along tribute to Berkshire’s managers, which always used to be set to the tune of “My Favorite Things,” turned out to use “Sgt. Pepper” instead.
            That’s some good taste there.
    But, actually, the best part of the Beatles-themed piece of the movie came as it died out and, miraculously, the “Sgt. Pepper Reprise”—the best two minutes of The Beatles ever recorded, in your editor’s opinion—began to play during the credits.  
   (Yes, we know—Dear Prudence…Across the Universe…Revolution…Oh! Darling…Something…Everybody’s Got Something To Hide…The End—are up there, but it all depends on what mood you’re in, right?   And the mood we were in was, “Hey, this is seriously good taste.”)
            But that was before the absolute best part of the entire meeting actually occurred, which was when the Sgt. Pepper Reprise died out and the house lights stayed dim and suddenly that willowy organ introduction—Can they really be playing this?—to Joe Cocker’s full-throated ¾-time version of  “With a Little Help From My Friends” began to coil above the sound of 20,000 or so Berkshire shareholders shifting in their seats waiting for Warren and Charlie to hit the stage, which they did as The Grease Band came in over the organ with a bang, young Jimmy Page leading the charge on electric guitar…
            It doesn’t get any better than that.
            And it didn’t.

            Not that it wasn’t a good meeting.   It was a very good meeting.  It just was kind of all downhill from there—at least when it comes to the energy of the thing. 
            Substance-wise, Warren and Charlie sat for the usual five-plus hours of thoughtful questions (for the most part) and thoughtful answers (with a bit of deft tap-dancing on Warren’s part, particularly when the enormously touchy subject of 3G—the Brazilian takeover artists whose Berkshire-financed slashing-and-burning at Heinz has turned a sleepy-but-modestly-profitable ketchup company with declining sales into a hugely profitable ketchup-and-potentially-mustard company with declining sales—came up).
            Naturally, Carol Loomis did the bringing up, because a) Carol is a terrific journalist, and b) Carol has no fear, while she also knows that Buffett can rationalize anything.
            And rationalize 3G he did, saying “I don’t think you can ever find a statement that Charlie and I have made…where we’ve said more people than are needed should be working at our companies.”
            That’s not the point, of course: the point is that if 3G ran Berkshire it would very likely have substantially fewer than 300,000+ employees in short order, no matter how often Buffett points to the 25 FTEs at corporate headquarters as proof that Berkshire doesn’t have any fat.
            (Buffett later, and ludicrously, claimed that if Berkshire operated as a normal bloated American company it would have a huge corporate headquarters staff which 3G would be entitled to slash if it ran Berkshire—thus ignoring the corporate headquarters functions scattered throughout all the various Berkshire companies, which naturally have their own CFOs and Treasurers and controllers and legal et al.)

            But we came to praise Buffett and Munger, not to criticize them, particularly Charlie, who got in his usual wonderfully concise, pointed observations after Buffett had frequently wandered around the metaphorical map on various topics ( and Charlie participated in literally every question asked during the first half of the session).
For example:
            On why Clayton Homes (criticized in a recent Seattle Times “expose”) has some customers who default: “If we made the default rate zero we wouldn’t be lending to people who need it.”
            On what investment formula Buffett and Munger could provide to evaluate companies: “We don’t have a one-size-fits-all system.”
            On his and Buffett’s less-than-healthy diets: “The way I look at it, if I die earlier I’ll just avoid a few months of drooling in the nursing home.”
            On why Van Tuyl has been wildly successful in the notoriously nepotistic car business: “Van Tuyl has a system of meritocracy where the right people get the power and the ownership.”
            On why Berkshire changed over time as it did: “We were always dissatisfied with what we knew…we wanted to learn more.”
            On how to succeed without a business degree: “Play the hand you’ve got.”
            And on what he and Buffett look for in business partners: “The trustworthiness is more important than the brains.”

            And that’s just the first half of the meeting, because we left at the lunch break, never to go back.  Readers who wish can call up Charlie’s bon mots on Twitter and on the “live-blogs” of any of half a dozen financial news outlets that covered the event, but we’re not going to pretend to have been when and where we weren’t.
            Why now?
            Maybe it was seeing the NetJets pilots and attendants, dressed to the nines in their uniforms and walking quietly and respectfully in a very long oval outside the CenturyLink Center the entire meeting, so different in seriousness and demeanor from past “Hey look at us!”-type protests at the Berkshire meeting; maybe it was Buffett’s inability to admit publicly, “Well, yes, it’s true, the 3G guys are more Mr. Potter than my George Bailey, but so what?”; maybe it’s the fact that Business Insider—Henry Blodgett’s quite wonderful online vision of what would happen if People Magazine covered the business world (with occasional great scoops thrown in the mix)—published a reporter’s visit to Warren Buffett’s Favorite Steakhouse (here), complete with photos of the actual type of steak Warren likes to order…
            We don’t know, but after hearing Joe Cocker (1944-2014, sadly) singing his guts out on the heels of Ringo and The Boys slamming it, the whole thing just seemed like enough.
            And so, enough.

Jeff Matthews

Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”
(eBooks on Investing, 2015)    Available now at

© 2015 NotMakingThisUp, LLC

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


Anonymous said...

I don't blame you for bailing out at lunch. I once thought that I wanted to make the pilgrimage to Omaha at least once before I or Warren died. I've since changed my mind. The whole thing has become so corny.

Dan said...

Oh, well. better short and half than none at all. I don't really understand why you left half way? Though you seem to imply that it was simply a show you've seen before.

More interestingly, on 3g, it is not so clear to me that Buffet is being disingenuous. He has always been a low cost guy. He has said, something to the effect, that one question he asks about a prospective acquisition is, would he like to compete against them? That is a ruthless criteria. I don't think Buffet's criticism of PE in general has to do with cost cutting per se. I think it has to do with short-termerism and extracting financial value out of a business at the expense of the business value.
Buffet has also obviously always focused on the management team.

My impression is that 3g first has an infinite investment holding period, which Buffet likes.
And are good operators, whom Buffet would not like to compete against.

I think the interesting question would be to know if those companies that Buffet has controlling interest in have leaner operations than the average company in their respective business.

In general Buffet has always been very flexible in the particulars and details - pretty much anything that generates a sustainable return on investment seems to be consistent with one or another of his pithy aphorisms.

Jeff Matthews said...

All true, but Buffett didn't say that. He trotted out the old "We only have 25 people in our headquarters" mantra to demonstrate how low-cost he is, which is silly given that every Berkshire company has its own HQ, CEO, CFO, Treasury function, IT, etc. So there is a lot more overhead in the mix than 25 people at HQ, and there's a LOT a 3G would do to rip out cost that Buffett doesn't bother with. (Recall he used to praise Chuck Higgins' tenure at See's...a year or two after Chuck retired he praised Chuck's successor for raising profit margins 50%.)

Moreover, last year when they were asked about 3G Munger said he didn't mind if a good business "spilled a little," and both he and Buffett were more upfront that 3G was a different model. But that was before 3G laid off 4,000 people at Heinz and got themselves on the front page with Kraft.

So this is just spin, which was different versus past meetings. Buffett never really did spin. And there's no point hanging around for another 2 hours of spin. I can get that on the GE earnings call.


Dan said...

Well he's had a long run. Even he doesn't really know what will happen once he's gone, and increasingly the argument will be made that Berkshire should just be broken up. What does Berkshire add to BNR, or BNR add to Berkshire... soon enough. I can see why he wouldn't want to highlight the extra layers of management embedded in the Hold Co structure.

The other question I had, and perhaps you have addressed it somewhere, but curious why Buffet never really got into real estate? Maybe there was just no way for him to take advantage of the tax advantage of REITS?

Jeff Matthews said...

Great question. Buffett has bought real estate for himself but not as a Berkshire asset class. I don't believe it's ever been asked at the meeting.

Jeff Matthews said...

Great question. Buffett has bought real estate for himself but not as a Berkshire asset class. I don't believe it's ever been asked at the meeting.

Dan said...

something of a Real Estate deal, though he only held it for about 5 years, it seems he sold NHP to Harvard Management in 1990.

Still, if the question ever gets asked/answered, I would much enjoy reading about it at the best source for information about Buffet.

NHP, Inc.

Last year we paid $23.7 million for about 50% of NHP, Inc.,
a developer, syndicator, owner and manager of multi-family rental
housing. Should all executive stock options that have been
authorized be granted and exercised, our equity interest will
decline to slightly over 45%.

NHP, Inc. has a most unusual genealogy. In 1967, President
Johnson appointed a commission of business and civic leaders, led
by Edgar Kaiser, to study ways to increase the supply of
multifamily housing for low- and moderate-income tenants.
Certain members of the commission subsequently formed and
promoted two business entities to foster this goal. Both are now
owned by NHP, Inc. and one operates under unusual ground rules:
three of its directors must be appointed by the President, with
the advice and consent of the Senate, and it is also required by
law to submit an annual report to the President.

Over 260 major corporations, motivated more by the idea of
public service than profit, invested $42 million in the two
original entities, which promptly began, through partnerships, to
develop government-subsidized rental property. The typical
partnership owned a single property and was largely financed by a
non-recourse mortgage. Most of the equity money for each
partnership was supplied by a group of limited partners who were
primarily attracted by the large tax deductions that went with
the investment. NHP acted as general partner and also purchased
a small portion of each partnership’s equity.

The Government’s housing policy has, of course, shifted and
NHP has necessarily broadened its activities to include non-
subsidized apartments commanding market-rate rents. In addition,
a subsidiary of NHP builds single-family homes in the Washington,
D.C. area, realizing revenues of about $50 million annually.

NHP now oversees about 500 partnership properties that are
located in 40 states, the District of Columbia and Puerto Rico,
and that include about 80,000 housing units. The cost of these
properties was more than $2.5 billion and they have been well
maintained. NHP directly manages about 55,000 of the housing
units and supervises the management of the rest. The company’s
revenues from management are about $16 million annually, and

In addition to the equity interests it purchased upon the
formation of each partnership, NHP owns varying residual
interests that come into play when properties are disposed of and
distributions are made to the limited partners. The residuals on
many of NHP’s "deep subsidy" properties are unlikely to be of
much value. But residuals on certain other properties could
prove quite valuable, particularly if inflation should heat up.

The tax-oriented syndication of properties to individuals
has been halted by the Tax Reform Act of 1986. In the main, NHP
is currently trying to develop equity positions or significant
residual interests in non-subsidized rental properties of quality
and size (typically 200 to 500 units). In projects of this kind,
NHP usually works with one or more large institutional investors
or lenders. NHP will continue to seek ways to develop low- and
moderate-income apartment housing, but will not likely meet
success unless government policy changes.

Besides ourselves, the large shareholders in NHP are
Weyerhauser (whose interest is about 25%) and a management group
led by Rod Heller, chief executive of NHP. About 60 major
corporations also continue to hold small interests, none larger
than 2%.

Max Flower said...

hi mr. matthews,

my name is max flower, and i met you right before the movie started. we were just outside the tunnel on the ground level.

thanks for providing contrary views to the meeting, and to some of buffett's tap-dancing.

also, i'm a huge beatles fan, so i appreciate your comments.

you are probably aware of these 3 amazing beatles clips on youtube, but i've included links just in case.

1. deconstructing "sgt. pepper"

2. george martin deconstructs "a day in the life"

3. george martin re-mixes "god only knows" with brian wilson (@ 5:04, wilson declares martin has created the perfect mix!!)

from one beatles fan to another, enjoy!