Reflections on the April 2000

Berkshire Hathaway Annual Meeting - Volume 1

Q&A, Top Ten, chart/quote,disclosures

Introduction and Context

  • Berkshire Hathaway (our largest holding for clients) holds its annual meeting in Omaha, Nebraska every April/May. We attended once again and the event remains a great source for information and insight about an important investment for our firm and our clients. (click here for more info on Berkshire)

  • Irrespective of the price weakness indicated in the price chart, we continue to believe that Berkshire is dramatically undervalued relative to our intrinsic value estimate. Nothing we heard at the annual meeting changes that opinion.

  • We are presenting information, opinions, interpretation, and conclusions gathered from our recent visit to the meeting in a series of "research notes", of which this is the first. We thought it would be useful and interesting to share some thoughts and ideas associated with this visit with our clients, shareholders, prospective clients and other parties in the hope of communicating a greater understanding of the rational, research-based investing that we practice.

  • Our decades long study of Berkshire and long attendance at meetings provide us with a context that we think is vastly more rich, and therefore ultimately more valuable, than that of the average Berkshire "pilgrim." It has always amazed us that more professional money managers or other private investors don’t bother to avail themselves of this opportunity to receive investment wisdom and ideas from arguably the world’s greatest investor (even many avowed value types don’t bother).

Growth and Value Investing

  • We have long contended that those who focus only on the value side of the investing equation – that is, simply seeking out cheap assets according to some measure – ignore at their peril the opportunity and the additional safety cushion created by growth in a business. Buffett echoed his historical viewpoint at the recent meeting, opining that the distinction between the "growth" and "value" investing styles was largely academic and indicating that in his worldview the two concepts are inherently joined at the hip.

  • In an illustrative hypothetical, Buffett calmly called on investors to reverse engineer the arithmetic associated with an unnamed company valued at $500 billion by the stock market. In broad and simple calculations he asserted that an investment costing that much in the aggregate would need to generate a pre-tax annual return of roughly $90 billion in fairly short order - in perpetuity, plus growth - to justify the price paid. Buffett expressed doubt in that prospect that we will paraphrase as: How many companies can realistically do that? How many indeed?

Introduction and Context

Q What can you share with us that might be interesting or different from conventional analysis about what you heard at the Berkshire meeting?

A We have attempted to synthesize a number of relevant issues we gleaned in the course of a five-plus hour Q&A session plus our later impressions. We focus particularly on those points we think:

    • are relevant for Berkshire as an investment,

    • have an impact on other portfolio investments, or

    • resonate particularly well toward understanding aspects of our investment philosophy, which is obviously greatly influenced by Mr. Buffett.

We plan to devise several categories to serve as organizing themes for much of what we heard at the meeting. Over the five-hour Q&A, in the course of answering different questions, a few major areas seemed to repeatedly gather attention. We begin below with the first Q&A exchange of the meeting and plan to publish additional topical pieces including 1) Technology Stocks and Investing, and the Internet, 2) Insurance Industry and Operations, and perhaps others. 

Q Why do you go to the Berkshire annual meeting each year (a description of this event can be found on Berkshire’s website - listed but not linked above - and inside the 1999 annual report)? Are you somehow enamored of Buffett or caught up in some investment nerd cult of personality?

A Investment nerd? We resemble that remark. Seriously, we go to Omaha for a variety of reasons.

    • Primarily because Berkshire Hathaway is the largest holding we own on behalf of clients and shareholders. The annual meeting is the primary – really the only – public forum in which Berkshire senior management addresses the investment and shareholder community. There are no analyst meetings during the year, and Berkshire does not participate in industry-sponsored investment conferences (in fact, they pretty much shun the Wall Street community entirely), and they encourage, no, in fact demand, that their operating units focus on running their businesses rather than talking to investment people. While we applaud this focus on business operations and avoidance of distractions, it makes the annual meeting in Omaha practically the only source (other than periodic published financial results, coverage from one good Wall Street analyst, and of course the Chairman’s letter in Berkshire’s annual report) for information and insight about an important investment.

    • Make no mistake about it; there is in fact much insight to be garnered from an attentive visit to Berkshire’s annual meeting. Our decades long study of the company and long attendance at meetings provide us a context that is vastly more rich, and we think therefore ultimately more valuable, than that of the average Berkshire "pilgrim." Given an appropriate framework in which to place them, seemingly minor or subtle points and comments can take on a larger meaning; conversely, "sound-bite" style comments, much loved by the popular media, can be properly framed and often have much less (or perhaps more) significance or even alternative meanings from that which is generally attributed to Messrs. Buffett and Munger. In our view, much mischief can come from the search for meaningful "conclusions" from casual observers who lack an informed history built over many years of analyzing Berkshire and its operations. We cite some examples throughout this piece of interpretations or additional perspective that we think differs from the conventional read on various issues.

    • We like red meat. Just kidding (we do like it, but that’s no reason to go all the way to Nebraska). We certainly look forward to the once yearly opportunity to commune and compare notes with other Buffett admirers, many of whom are fairly well known as among the best investment minds in the value investing community. We find it a unique opportunity to interact with a collection of like-minded investors - individual and professional alike - who similarly converge on Omaha this time of year. It’s sort of like a collection of money-manager-geek swallows converging on their version of Capistrano. If value investing is somehow your cup of tea, you find it all exciting and enjoyable; if not, you wonder what planet these people could possibly come from. Of course we also go partly for the ceremony associated with the weekend’s events, including trips to the various Berkshire subsidiaries (Borsheim’s Jewelry, Nebraska Furniture Mart, etc.), "camping out" early to get a close seat, sampling the various and sundry commercial offerings available at the meeting itself (See’s Candy, Coke, Dairy Queen Dilly Bars, etc.), but these things really are secondary in importance to evaluating Berkshire as an investment and engaging in the cross-pollination opportunities presented by the collection of other value investors we have come to know well over the years.

    • We don’t want to get off on a rant here, but the additional sideshow like trappings of the so-called "Capitalist Woodstock" aside, it is all available wrapped around the primary exercise of receiving investment wisdom and ideas from arguably the world’s greatest investor. Buffett’s track record is tough to argue with and in our humble opinion the average Joe Blow (we think we actually heard Buffett use that term), or Joe Portfolio Manager for that matter, could do much worse than periodically hope for even a slight amount of mental osmosis to occur by listening. It has always amazed us that more professional money managers don’t bother to avail themselves of this opportunity (even many avowed value managers don’t bother). Two thousand bucks for a ‘B’ share gets you an invitation; add another grand for airfare and accommodations and you’ve got a pretty good investment education head start for $3,000. Stack that up against graduate school. Of course that’s just our opinion; we could be wrong.

Growth versus Value Investing

Q (Paraphrased from a shareholder’s question). Can you elaborate on your past description of growth and value investing as "two sides of the same coin?"

A Right from the get go Buffett addressed an issue of great relevance for investors, elaborating in his first response about his view of the "growth" versus "value" investing debate. Buffett has long viewed the distinction as largely academic, indicating that growth and value are intrinsically joined at the hip in his worldview. He resorted to Aesop’s maxim that "a bird in the hand is worth two in the bush" to illustrate the tradeoff of a known current payoff versus a larger but less certain future one that is axiomatic to investment decisions. (Buffet wryly opined that while Aesop identified this issue in 600 B.C., there were practical limits to the man’s wisdom. "He didn’t know it was B. C., by the way" deadpanned Buffett). Charlie Munger tossed in his cent (he is alleged to be too frugal to contribute two cents) observing that "all intelligent investing is value investing. You have to acquire more than you pay for." We have long contended that those who focus only on the value side of the investing equation – that is, simply seeking out cheap assets according to some measure – ignore at their peril the opportunity and the additional safety cushion created by growth in a business. This aspect of our philosophy has created some level of consternation among those attempting to squeeze our investment approach into a tightly circumscribed box according to return patterns or broad portfolio statistics. However, we remain convinced of the wisdom of not quarantining our desire to find growing businesses away from the value investor’s price discipline - the desire to buy that growth at a discount form its long-term intrinsic value.

A As an illustration, Buffett calmly (he seems to do everything calmly, though we would observe that some of his observations practically shout for, well, shouting) called on investors to reverse engineer the arithmetic associated with an unnamed company valued at $500 billion by the stock market. Looking at that investment in its aggregate, and assuming a required return on capital of only 10% (would you scrape up that kind of money if you couldn’t get at least that?) implies a need for the company to produce $50 billion in after-tax cash flow in year one. Pushing the date for receipt of the return further out into the future only raises the bar in dollar terms to make up for the compounding effect, so that at the end of year three, $60.5 billion is the required hurdle rate of cash flow ($50 billion compounded at ten percent for three years). That equates to a pre-tax annual return of roughly $90 billion - in perpetuity, plus growth - at current tax rates. Buffett expressed doubt in that prospect that we will paraphrase as: How many companies can realistically do that? Our answer is: "We suspect it is fewer than are currently priced with similar inherent hurdles." In fact if you look at the back-of-the-envelope arithmetic implicit in this simple example for a large well-known company trading in the $500 billion total capitalization range, you can see that the math is not favorable at current prices. The company may do very well in its marketplace, but there is not a compelling value proposition in the economics of the stock, purchased at current prices. That is not to say that no one can make money trading the stock, but simply that in our calculus such a decision has migrated from the lower risk arena of logic and reason into the higher risk proposition of hope and emotion. (Charlie used another combination of names that arguably apply, in his opinion about EVA or Economic Value Added; we foresee a forthcoming section paraphrasing the "Statements of the Day" to provide details on that and other amusing pronouncements).

 Next Installment – Volume 2: Buffett Speaks on Technology Stocks and Investing, and the Internet

 

Important Information:

We present this collection of information, opinions, interpretation, and conclusions gathered from our recent visit to the Berkshire Hathaway annual meeting in Omaha, Nebraska because we thought it would be useful and interesting to share some thoughts and ideas associated with this visit with clients, shareholders, prospective clients and other parties in the hope of communicating a greater understanding of the rational, research-based investing that we practice. We are in an ongoing process of digesting information and drawing conclusions from our recent visit; as such, we will periodically update and augment this information over the next few weeks. While much of the discussion associated with the Berkshire meeting will be general in nature, some of it will be specific to Berkshire as an investment. It is critical that readers understand that we are not making a specific investment recommendation of Berkshire Hathaway or any other specific security.

Any discussion of specific securities is intended to help clients understand our investment management style, and should not be regarded as a recommendation of any security. Displays detailing a summary of holdings (e.g., top ten holdings, etc.) are based on the holdings of the Oak Value Fund as of March 31, 2000. Information concerning the performance of the Oak Value Fund and our recommendations over the last year is available upon request. Past performance is no indication of future performance. You should not assume that future recommendations will be as profitable or will equal the performance of past recommendations.

Statements referring to future actions or events, such as the future financial performance or ongoing business strategies of the companies in which we invest on behalf of our clients, are based on the current expectations and projections about future events provided by various sources, including company management. These statements are not guarantees of future performance, and actual events may differ materially from those discussed herein. References to securities purchased or held are only as of the date of this commentary. Although we focus on long-term investments, holdings are subject to change.

This commentary may include statistical and other factual information obtained from third-party sources. We believe those sources to be accurate and reliable; however, we are not responsible for errors by them on which we reasonably rely. In addition, our commentary is influenced by our analysis of information from a wide variety of sources and may contain syntheses, synopses, or excerpts of ideas from written or oral viewpoints provided to us by investment, industry, press and other public sources about various economic, political, central bank, and other suspected influences on investment markets.

The reference or hyperlinks to other web sites contained in this material are provided for your convenience and information. We do not assume any responsibility or liability for any information referenced in or accessed via links to third party web sites. The existence of links is not an endorsement, approval or verification by us of any content available on any third party site. In making reference or providing access to other web sites, we are not recommending the purchase or sale of the stock issued by any company, nor are we endorsing products or services made available by the sponsor of any third party web site.

This portfolio company research note is being preceded or accompanied by a prospectus for the Oak Value Fund; please read it carefully before you invest.

 

 

 

Top Ten Holdings (March 31, 2000)

Berkshire Hathaway

11%

United Asset Management

6%

Ambac

6%

E. W. Scripps

6%

Washington Post

6%

Aflac

6%

Household International

5%

Progressive

5%

Interpublic

5%

Gillette

4%

Total (does not sum due to rounding)

62%

Industry

Diversified/Insurance

Ticker

BRKa/BRKb

Home Page

See www.berkshirehathaway.com

For additional information, we direct you to (hit your browser’s "Back" button to return here):

Yahoo Chart, Yahoo Quote

Note: These links and references are provided only for your convenience. The inclusion of these links/references should not be viewed as a recommendation, endorsement or approval by us of the web sites or their content.