Charlie Munger: A Spade is a Spade

Buffett: "The Biggest Blunder I ever made"

Warren Buffett discusses his worst ever investment on CNBC...

Buffett, Jay-Z on Luck

Insight from Warren Buffett and Jay-Z as they talk about luck and chance in their respective careers, with Steve Forbes of Forbes magazine.

2004 Flashback: The Next Warren Buffett

Came across this 2004 article on Edward Lampert, Chairman of ESL Investments and majority shareholder in Sears.

"Security is tight at Eddie Lampert's office. That's no surprise: Last year he was kidnapped at gunpoint while leaving work and held for ransom for two days before talking his way free. In fact, there is no sign on the low-rise building in Greenwich, Conn., that his $9 billion private investment fund, ESL Investments Inc., is even there at all. There's also no sign on ESL's door upstairs -- and certainly no indication that the man sitting there might be the next Warren E. Buffett".

The rest of the piece is located here.

Read about Eddie Lampert in this Fortune Profile from 2006.

"Lampert's stock picking is a "form of immersion," he says. Before he put a penny into AutoZone, he visited dozens of the auto-parts retailer's outlets and had one of ESL's analysts spend six months calling on hundreds of stores, posing as a demanding customer. "It's probably overkill," Lampert says, but he can't resist."

The End of an Era: Lou Simpson to Retire from Geico

Lou Simpson, the Chicago-based investor with such a stellar track record he once was considered the successor to Warren Buffett, is retiring at the end of the year after decades managing Geico's investment portfolio.

Geico is owned by Buffett's investment vehicle, Berkshire Hathaway. Simpson, 73, who grew up in Highland Park, is the only person other than Buffett who controls Berkshire investments.

"I wish he weren't" retiring, Buffett told me. "Obviously, I would keep him employed till he was 100. I was very surprised when he called me a month ago and said, 'At 74, I'd just as soon turn it over to somebody else.' It was not a happy day at Berkshire. But I'm happy for him."

The two have never delineated their stock picks; Geico's investments are described publicly as Berkshire's. So for about 15 years, reporters and Wall Street analysts often assumed Simpson's moves were Buffett's.

"People are always attributing to me what he's doing," Buffett said.

But here's how to figure it out: "If you see a purchase on a company in the $300- to $400-million range, odds are very good that's Lou's," Buffett said. "I'm going to want to buy at least $1 billion of whatever it is we buy. So Nike, those things are his, while Wells Fargo, Kraft, those will be mine."

While Simpson is not a household name, he is among the most well-connected men in Chicago's financial circles. He manages a $4 billion portfolio that posted annual losses only three times from 1980 to 2004, and outperformed the S&P 500 18 of those years. Berkshire has not reported Simpson's performance separately since 2004, but when pressed, Simpson said his stock portfolio has outperformed the S&P 500 in aggregate since then.

His monthly reports go to Buffett, 79, and Buffett will assume control of Geico's portfolio when Simpson retires, he said.

Buffett and Simpson have similar investing philosophies, although not on life. Both tend to buy and hold stocks. They scour for sturdy but sometimes obscure companies poised for growth. Any other method is considered "a fad."

As for whether Simpson runs investment decisions by Buffett, Buffett said never. But their value-investing approach has led to them on at least two occasions to make identical choices. Buffett said both began buying Tesco, a global food retailer, at the same time. And Simpson said both began selling Freddie Mac in 2001 because of concerns the company was overleveraged.

"My approach is eclectic," Simpson said. "I try to read all company documents carefully. We try to talk to competitors. We try to find people more knowledgeable about the business than we are. We do not rely on Wall Street-generated research. We do our own research. We try to meet with top management."

Simpson, unlike Buffett, avoids the spotlight. Since Berkshire bought Geico in January 1996, Simpson said he has given two on-the-record interviews, this one being his second.

"So many people broadcast what they buy or sell and it works against them," Simpson said. "I'm in favor of people not knowing what we're doing until the last possible time."

Simpson's priorities, friends say, have changed since he met his second wife, Kimberly Querrey, a chemical engineer, at a restaurant in Chicago. Neither was living here at the time; they were here on business.. She persuaded him to move from San Diego to Chicago, as she was looking for a city that offered her more consulting opportunities. They practiced yoga together until she ruptured her Achilles tendon, and now Simpson does so on his own. They intend to spend most of his retirement in Florida and use their Michigan Avenue condo as a second home.

Simpson attended Northwestern University for a short time and, unhappy there, transferred to Ohio Wesleyan and went on to graduate school at Princeton. (Today, he sits on the investment committee of Northwestern's board of trustees.)

Simpson had risen to chief executive of California-based Western Asset Management when his friend Leland Getz, the then-vice chairman of executive search firm Russell Reynolds, called on behalf of Geico in 1979. Simpson rebuffed him twice, acquiescing on the third try "only to get him off my back," he said.

"Geico, operationally, has made a profit most of the 31 years he has been here," said Geico CEO Tony Nicely. "That has given him great flexibility as to how to invest. He had the comfort of knowing he was not going to have to sell equities in an untimely way. But at the same time, his outstanding performance has caused our overall performance to look unbelievably good."

Simpson acknowledges that his more than 30-year association with Buffett and Berkshire has given him entre into circles that might otherwise have been inaccessible. He sits on the boards of two public companies and has been a director of at least nine others. He travels to Allen & Co.'s annual conference for "moguls" in Sun Valley every year.

Yet Simpson's life is simple. He supervises only two employees, an assistant and an analyst, working out of a small four-room office on Michigan Avenue. The walls are sparsely decorated with posters from art museum exhibits. He lives within walking distance of his office. His division's daily report covers less than one-quarter of a sheet of paper.

"Our dinner conversation, I think it's quite interesting, but some people will say quite strange," Querrey said. "Over the weekend, we actually talked about behavior in corporate America, and the behavior at Hewlett-Packard, and the arrogance of CEOs and why they think they are above enforcement of the board. I have investments in Vietnam. So we often talk about the economy in Vietnam versus the United States."

Simpson's compensation is not disclosed, but it is based on his returns over a three-year period. I told Simpson that Buffett often says there are Berkshire stockholders who should be on Forbes' list of the 400 wealthiest Americans but have been overlooked. I asked Simpson whether he is one of them.

"No," he said quickly. But with a sly grin, he added, "But I know who some of them are."

Chicago Tribune

Buffett's Recommended Reading

Over time, he has recommended various books and here is the comprehensive list:

Common Stocks and Uncommon Profits by Phil Fisher: Regarding this book, Buffett said that, "I sought out Phil Fisher after reading his Common Stocks and Uncommon Profits and Other Writings. When I met him, I was as impressed by the man as by his ideas. A thorough understanding of the business, obtained by using Phil’s techniques . . . enables one to make intelligent investment commitments."

The Smartest Guys in the Room by Bethany McLean: This was recommended in Buffett's annual letter from 2003 and details the rise and fall of Enron.

The Intelligent Investor by Benjamin Graham: This is an obvious choice as Buffett has said that this is "the most important investment book" and in particular has highlighted chapters 8 and 20 as essential.

John Bogle on Investing: The First 50 Years by John Bogle. This book is more aimed at the fund investing crowd given Bogle's expertise (Vanguard funds). In the past, Buffett has advocated investors who don't have much time on their hands to invest in index funds.

The Essays of Warren Buffett by Warren Buffett & edited by Larry Cunningham: There's no better way to learn from Buffett than through his own words. Buffett would agree as he says "The most representative book on my thinking is what Larry Cunningham put together."

Sam Walton: Made in America by Sam Walton: Another read Buffett recommended back in 2003, this book details how Walmart was built from the ground up.

And while this next pick is not from Buffett, we wanted to add it to the list because it is an in-depth biography of him. Those of you interested in the investing legend himself should check out The Snowball: Warren Buffett and the Business of Life by Alice Schroeder.

Read more: http://www.marketfolly.com/2009/10/warren-buffetts-recommended-reading.html#ixzz0oOj3I0X3

Wesco AGM Notes: Golden Advice from Charlie Munger

Notes from the 2010 Annual General Meeting of Wesco Financial, chaired by Charlie Munger.

I recommend reading the document as it's filled with genius that only Munger could provide.

Key Comments:

Who else failed us? The academic types thought that diversification was the secret to success. Diversification may be a way of avoiding disaster but does not represent a path to success. A person is not much of a teacher if all he or she can do is prevent disaster. This is why he calls it de-worsification. BRK owns things they know a lot about [instead of blindly. The concept of beta or volatility is asinine. It isn’t always bad ideas that cause bad outcomes but good ideas taken to excess. Obviously if you own very volatile stocks your returns can be volatile day to day. The main problems in life can only be solved when you know what works, what doesn’t and why.

Gilford Glazer [a longtime friend of his], came back from the war and went to HBS. But his father’s little machine shop needed attention and he asked them to defer acceptance for a year so he could help his father. After a year he contacted HBS and asked for another year. The guy from Harvard then asked him how many employees he had last year at this time. He answered 50. Then, when he asked him how many employees he had now, the answer was 900. The Harvard guy laughed and told him he didn’t need to go to business school. That kind of approach is no longer present at HBS. They were probably wiser then than they are now.

Charlie thinks GS has the best morality and best wisdom of all of the banks. Accordingly, the government should not jump on the bank that is the best. The government just stumbled into this SEC investigation and it is not an appropriate response. He thinks the world would work a lot better off without this stuff [derivatives]. It worked well without them before.

The George Washington of Singapore, Lee Kuan Yew, decided to marry the smartest girl in his class. Their son is now the PM of Singapore. He was a very practical man. He didn’t want people dying of Malaria so he drained all the swamps and didn’t care if a little fish went extinct. He didn’t like the drug problem and he looked around the world to solve the drug problem. He found the solution in US by copying the US Military’s policy. Any time you can be tested and if you fail you go to jail. If something was going to grow like cancer he would check it hard with the wrath of God. He turned a country with no resources or agriculture into a prosperous country, starting from 0 mph. We need to pay more attention in our country to the Singapore model.

There is Alice and Wonderland and nut case accounting in the US. These people need to be thrown out and people who think more like Lee Kuan Yew need to be installed. Jamie Dimon of JP Morgan is actually complaining about this but he is the only one. Charlie takes his hat off to him but his derivative book needs to go away. He should not run a gambling parlor next to a legitimate business. Actually, in recent years, some of our banks actually bought casinos. “Why run a casino in drag when you can run a real casino?” When it comes to casinos, maybe we should have these things but we should minimize them. Casinos work so well--no inventories and no accounts receivable. It’s like god gave you the ability to print money. But real casinos have huge CAPEX and asset requirements. On the other hand, on Wall Street they can create a casino without those requirements. How many of us could resist those temptations to print money?

Don’t go where the big boys have to be. You don’t want to look at the drug pipelines of Merck and Pfizer Go where there are inefficiencies in which you can get an advantage and where there are fewer people looking at the stocks. Go where the competition is low.

Read the full notes here (courtesy Inoculated Investor)

Buffett: The Good, The Bad, The Unknown

The Good

In 1976, Berkshire began accumulating an equity stake in auto insurer Geico, 24 years after selling an earlier stake for $15,259. It finished buying Geico in 1996. The acquisition brought aboard Tony Nicely, who still runs Geico and whose leadership Buffett has lavishly praised, and Lou Simpson, whom Buffett has said could replace him as Berkshire's chief investment officer but for the fact that he, too, is in his 70s.

In 1989, Berkshire bought $600 million of preferred stock in Gillette, the razor blade maker that had been hurt by the introduction of disposable razors. In 2005, Gillette was acquired by Procter & Gamble . Berkshire at year end still held a 2.9 percent stake worth $5.04 billion, and for which it had paid just $533 million.

Berkshire owns 200 million Coca-Cola shares, an 8.6 percent stake it had amassed by 1994. The stake was worth $11.4 billion at year end. Berkshire paid $1.3 billion for it.

The Bad

In 1993, Berkshire bought Dexter Shoe for $433 million in stock. Eight years later, it folded the struggling company into another business.

In 2008, Buffett amassed a large stake in oil company ConocoPhillips , not expecting oil prices to fall by about three-fourths from their record high. Berkshire spent $7.01 billion on Conoco shares, but has been reducing its stake.

The Unknown

Buffett has entered into derivatives contracts, most of which are essentially bets on the long-term direction of stocks and junk bonds. Berkshire has four major types of contracts

Berkshire has equity index "put" options tied to where the Standard & Poor's 500, Britain's FTSE 100, Europe's Euro Stoxx 50 and Japan's Nikkei 225 trade between June 2018 and January 2028.

Berkshire has contracts tied to credit losses in higher-risk "junk" bonds, which at year end were on average expected to mature in two years.

Berkshire wrote credit default swaps on various companies, mostly investment-grade.

Berkshire entered into tax-exempt bond insurance contracts structured as derivatives.

In September 2008, at the height of the financial crisis, Berkshire acquired $5 billion of Goldman Sachs preferred shares that throw off a 10 percent dividend, plus warrants to buy an equivalent amount of common stock. The warrants carry a strike price of $115.

Link to Article

RE:CM on Economic Moats

Buffett: "So we think in terms of that moat and the ability to keep its width and its impossibility of being crossed as the primary criterion of a great business. And we tell our managers we want the moat widened every year. That doesn't necessarily mean the profit will be more this year than it was last year because it won't be sometimes. However, if the moat is widened every year, the business will do very well. When we see a moat that's tenuous in any way - it's just too risky. We don't know how to evaluate that. And, therefore, we leave it alone. We think that all of our businesses - or virtually all of our businesses - have pretty darned good moats. And we think the managers are widening them. Charlie?"

Munger: "How could you say it better?"

Buffet: "Sure. Have some peanut brittle on that one."
From the 2000 Berkshire Hathaway annual meeting

"We suggest the margin of safety concept may be used to advantage as the touchstone to distinguish an investment operation from a speculative one."

Benjamin Graham

Every once in a while a news item comes along that makes one sit up and take notice such as the shock announcement that Kumba Iron Ore has decided to rescind its agreement to sell iron ore to Mittal Steel at cost plus 3%. Another example is that Hulamin announced that BHP Billiton is not only ending the very attractive (from Hulamin's perspective) pricing agreement for aluminium, but that they will completely stop supplying Hulamin with aluminium.

The consequences of this news are important for the future of the SA economy. Two very large and important businesses, namely Kumba Iron Ore and BHP Billiton, have decided to end long-standing contracts. These contracts have effectively subsidised the competitiveness of a portion of South Africa's exports, at the expense of the two businesses' shareholders and taxpayers. The two events highlight the difference in time horizons between the capital investment decisions of business, which is often very long-term, and government's efforts to attract investment to meet their own objectives, which is often quite short-term. This discrepancy in time horizons always carries the potential to permanently destroy significant economic value. Although we have our own views about how government should attract investment (and avoid rent seeking behaviour), these are largely irrelevant from an investment standpoint. No one knows how government will act.

Key Thoughts:
• There are very few businesses with true moats.
• Moats are not absolute and vary in strength.
• "In the long run everything is toasters." The historic return of a business is not necessarily an indication of the future as businesses seldom earn a positive economic return indefinitely. When assessing the strength of the moat, even more important than the level of excess returns is the time period over which it can be sustained.
• Stick to what you know. Investors can reduce risk and improve returns by focusing their efforts on companies for which they can predict the future economics.
• A competitive advantage based on less permanent arrangements requires a higher margin of safety.
• Management plays a central role in investment outcomes.
• Rising electricity costs are a reality and will have a major negative impact on profitability and the feasibility of new and existing capital projects in South Africa (in the case of price taker industries like many resources companies) and inflation (in the case of quality businesses that are able to pass on such effects to customers).
• When government facilitates an advantage for business it should ensure that it is lasting. If it does not, the government's own (legitimate) objectives will suffer.
• In the long run the SA economy will most likely be better off if government focuses on bringing down the cost of doing business while the private sector decides on where to allocate capital.

Continue to the Direct Link

Paul Sonkin on Value Investing, Small Caps and the Information Advantage

Mohnish Pabrai on Forbes.com

Mohnish Pabrai, founder of Pabrai Funds and author of Dhandoo Investor, talks to Steve Forbes:

Full Video

Pabrai talks about his funds, his investment style, how he picks stocks, his "free" analyst network, and his afternoon naps...

Bruce Greenwald on Shorting and Current Opportunities

Buffett: Charlie is Too Pessimistic

Warren Buffett on Charlie Munger's "Sad Parable"

South Africa's Wealthiest Entrepreneur - Natie Kirsh

In 2003 Kirsh went to US investor Warren Buffett, the world’s third-richest man, and offered him a 27% stake in his 100%-privately held US trading business, Jetro Cash & Carry. Buffett saw the potential in Jetro and accepted a minority holding, against his normal rule of buying control. But they could not agree on the terms.

In the next few years, Kirsh transformed Jetro into one of the largest private companies in the US, worth more than US3,5bn . Now Jetro — modelled on SA’s Metro Cash & Carry, which he once controlled — dominates the distribution of food and dry goods to small stores in big cities. It is his cash cow.

At 78 he has quietly built a private global empire spanning about a dozen countries, worth well over the R20bn or so wealth of each of the three South Africans — Patrice Motsepe, Nicky Oppenheimer and Johann Rupert — on the latest Forbes list of global billionaires.

Direct Link

The Wisdom of Great Investors

Don’t Attempt to Time the Market:

“Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in the corrections themselves.” - Peter Lynch

Avoid self-destructive behaviour:

“Individuals who cannot master their emotions are ill-suited to profit from the investment process.” - Benjamin Graham

Crises are inevitable:

“History provides a crucial insight regarding market crises: They are inevitable, painful and ultimately surmountable.” - Shelby M.C. Davis

Disregard Short-term Forecasts and Predictions:

“The function of economic forecasting is to make astrology look respectable.” - John Kenneth Galbraith

The Wisdom Of Great Investors (direct link)

Pay for Non-Performance at GE

I came across an article by Jeff Arends in the Wall Street Journal recently. The article outlines the differences in executive compensation between Berkshire Hathaway (BRK.A) CEO Warren Buffett, and that of General Electric (GE) CEO Jeff Immelt. As of the date of this writing and for some context, Berkshire is valued more than General Electric at $205 billion market cap against $195 billion for GE.

Arends writes that under Immelt, shareholder value creation has been a “disaster”. Since Immelt has been in charge of GE, for almost a decade now, shareholders have not made any money in the stock and have in fact lost tens of billions of dollars.

“The stock, which was $40 and change when Immelt took over, has collapsed to around $16. Even if you include dividends, investors are still down about 40%. In real post-inflation terms, stockholders have lost about half their money”, the article said.

Despite such a loss in value, Immelt has been paid about $90 million in salary, cash and pension benefits. This amount does not include the $5.8 million cash bonus he was “awarded” in 2009, or the bonus he skipped in 2008. Regardless Immelt still went home with $3.3 million in base salary during fiscal 2009 and total compensation of $9.9 million. For the last three years, Immelt has earned $33.5 million in compensation, or an average of $11.16 million per year.

“Since succeeding Jack Welch in 2001, Immelt has been paid a total of $28.2 million in salary and another $28.6 million in cash bonuses, for total payments of $56.8 million. That's over nine years, and in addition to all his stock- and option-grant entitlements.

It doesn't end there. Along with all his cash payments, Immelt also has accumulated a remarkable pension fund worth $32 million. That would be enough to provide, say, a 60-year-old retiree with a lifetime income of $192,000 a month”, an upset Arends wrote.

Immelt has been with GE for 27 years but that pension is ridiculously high and would not be available at almost any other company for a 27 year employee. Immelt also has personal use of company jets (that’s personal use, such as vacations, weekend getaways and so on), which cost GE $201,335 last year. GE also spent $36,000 and change leasing Immelt's car. That's three grand a month. It’s not known what car he drives (Rolls Royce?).

“The critical issue is that this is what the chief executive got because the stock did really badly. This was his consolation prize. It's a case of heads he wins, tails he gets ... $90 million and free trips to Hawaii. As of the end of last year, he had accumulated equity exposure, including stock options, performance stock units and the like, equivalent to about 6 million shares. Of these, just 836,000 shares have been bought with his own money while chief executive. (Some more may have been bought with his own money before he became chief.) What's more, Immelt's just been granted another 2 million options that will vest in stages during the next five years”.

Ironically it was under Immelt’s watch that the company had to seek out emergency capital, which arrived on harsh terms from Warren Buffett. Sadly for Immelt, the large Berkshire provides a damaging contract for GE. “Buffett makes billions when his investors do well. But he also loses billions when they do badly, because he has nearly all his money tied up in stock. His cash salary comes to a mere $175,000 a year, or less than Jeff Immelt spent just on his personal use of GE's aircraft”.

GE is one of America’s greatest companies, but such reward for non-performance is not sustainable. Good corporations and leadership comes from the top, from the board through the CEO. I agree with Arends in that such large pay cannot possibly be justified for a company that is worth less now that it was ten years ago.

Published at BestCashCow.com

Warren Buffett MBA Talk

Buffett speaks to a group of MBA students, May 2007.



Be sure to see Parts 2 - 10 in addition to this video.

Why is Buffett selling?

"Buffett’s selling is therefore necessary in order to raise liquidity in the business and maintain ratings high enough for insurance purposes, the bulk of the company’s business. It’s by no means a sell sign and investors holding stocks in any of the above-mentioned companies should not panic and consider selling (unless they too are buying railroad companies)."

See the link here.

Prem Watsa: The New Warren Buffett

Watsa is a long-term conservative investor who makes investments based on value relative to price. His record so far has been outstanding and it is not unreasonable to think he can at least produce returns in excess of the risk free rate. This cause for optimism can be summed up by Watsa himself, who said in his 2009 Letter to Shareholders, “For the first time in more than a decade, we are very excited about the long term prospects of our common stock investments and believe that these investments have been purchased at prices well below their intrinsic values. This, of course, does not mean stock prices cannot go lower! Mark-to-market gains or losses on these investments will make our book value more volatile, but in the next five years, these investments should be a major reason for our success”.

More available here.

Taleb: Buffett is Lucky

“I don’t want to spend too much time on Buffett. George Soros has 2 million times more statistical evidence that his results are not chance than Buffett does. Soros is vastly more robust. I am not saying Buffett doesn’t have skill—I’m just saying we don’t have enough evidence to say Buffett isn’t doing it by chance.” - Nassim Taleb

Read about why I strongly disagree.