This blog post originally appeared on RealMoney Silver on March 1 at 8:01 a.m. EST.
"Come by rail." -- Warren Buffett, annual letter to Berkshire Hathaway shareholders (Feb. 29, 2010)
In an obvious reference to
recent acquisition of
, the Oracle of Omaha concludes his annual letter to Berkshire Hathaway shareholders with a postscript that implores them to attend the May 1, 2010 Woodstock for Capitalists by rail.
is again full of common sense and humor, and in a reversal from 2008, it was a
Most noteworthy is that Buffett spends little time discussing the state of the U.S. economy, although he wrote that "within a year or so, residential housing problems should be largely behind us."
The company's gain in net worth last year totaled $21.8 billion, or about double what Berkshire lost in 2008. Per-share book value rose by 19.8% vs. a 25% gain for the
Remarkably, over the past 45 years of Buffett's leadership, book value has grown from $19 a share to $84,487 a share, for a compounded rate of 20.3%.
There will never be another
, and I always qualify my Berkshire Hathaway observations, especially when there is some questioning of strategy involved, by saying that I literally worship the Oracle's body of work, his unprecedented investment success in compounding Berkshire's book value and his wealth!
Nevertheless, concerned about Berkshire's large financial exposure and his derivative market bets (shorting puts on the S&P and other indices), I
Berkshire's shares back in early 2008 at around $140,000 a share and shortly thereafter
the rationale for my view in a
interview. I eventually covered the short at around $110,000 in late 2008. I covered too early as it was on its way to approximately $70,000 a share into the teeth of the financial crisis in first quarter 2009.
Currently, it is my view that Berkshire's shares are fairly priced. Back in November 2009, I
that an interaction of several factors will lead investors to valuing Berkshire Hathaway more like a closed-end fund (which typically sells at a discount to its net asset value) and less like the premium and prized possession that it has been over the past 40-plus years.
My favorite column that I wrote on the Oracle was when I
New York Times
op-ed from October 2008, "
But back to the Oracle's letter.
I started reading Buffett's annual letters back in the early 1970s, and my old annual reports that contain Buffett's avuncular quips are all dog-eared by now.
Among my favorite quotes (and I have routinely used them in columns here and in interviews on
) over the last two decades include the following:
- "Beware of geeks bearing formulas."
- "Derivatives are financial weapons of mass destruction."
- "I buy expensive suits. They just look cheap on me."
- "Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1"
- "Be fearful when others are greedy. Be greedy when others are fearful."
- "When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is usually the reputation of the business that remains intact."
- "In the business world, the rearview mirror is always clearer than the windshield."
- "Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results."
- "The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money. After a heady experience of that kind, normally sensible people drift into behavior akin to that of Cinderella at the ball. They know that overstaying the festivities -- that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future -- will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There's a problem, though: They are dancing in a room in which the clocks have no hands."
- "Why not invest your assets in the companies you really like? As Mae West said, 'Too much of a good thing can be wonderful.'"
- "I don't look to jump over seven-foot bars: I look around for one-foot bars that I can step over."
- "Try to buy stock in businesses that are so wonderful that an idiot can run them because sooner or later one will."
- "Price is what you pay. Value is what you get."
- "You only find out who is swimming naked when the tide goes out."
- "The investor of today does not profit from yesterday's growth."
And here are some pearls from this year's letter:
- "Our defense has been better than our offense, and that's likely to continue."
- "Charlie and I enjoy issuing Berkshire stock about as much as we relish prepping for a colonoscopy."
- "All I want to know is where I'm going to die, so I'll never go there."
- "Its managers -- fine people and able bankers -- not unexpectedly began to behave like teenage boys who had just discovered girls."
- "Sing a country song in reverse, and you will quickly recover your car, house and wife."
- "When it's raining gold, reach for a bucket, not a thimble."
- "Too big to fail is not a fallback position at Berkshire."
- "An old Wall Street joke gets close to our experience:
Customer: Thanks for putting me in XYZ stock at 5. I hear it's up to 18.
Broker: Yes, and that's just the beginning. In fact, the company is doing so well now, that it's an even better buy at 18 than it was when you made your purchase.
Customer: Damn, I knew I should have waited."
- "Are we supposed to applaud because the dog that fouls our lawn is a Chihuahua rather than a Saint Bernard?"
And, of course, I save the best for last, the subtle postscript with which I started today's opening missive: "Come by rail."
This blog post originally appeared on
on March 1 at 9:10 a.m. EST.
In a thoughtful three hours, Becky, Joe and Q conducted a wide-ranging interview with the Oracle of Omaha on
"Squawk Box." I watched the show high above the Atlantic Ocean on a
flight this morning in route to New York City.
During the course of "Squawk Box" (conducted at Piccolo Pete's Restaurant in Omaha), Buffett expressed a number of important views and observations (not in order of importance):
- While we have gotten beyond an economic Pearl Harbor, one should always be prepared for extraordinary times.
- Berkshire Hathaway is solidly positioned for outlier financial and economic outcomes.
- The world's economies will recover at a modest pace, but he offered a generally cautious view of the domestic economy.
- Within a year, housing will have stabilized as household formations catch up to the excess in home supply for sale.
- The depth in home and stock prices has produced an American consumer that has lost some of his aspirational buying habits.
- U.S. unemployment remains a drag to growth and will for a while longer. Only when the slope of demand improves will companies begin to hire.
- If Buffett retires tomorrow, Berkshire will likely "farm out" the investment responsibilities to three outside managers. A representative of the Buffett family will likely be a nonexecutive Chairman of Berkshire. The Board of Directors is prepared to appoint a CEO if Buffett retires, and the pool has grown as the company has made acquisitions.
- If Geico CEO of Capital Operations Lou Simpson retires tomorrow, Buffett would take over the investment responsibility at Geico.
- Berkshire has been unaffected by the Standard & Poor's and Moody's downgrades in its debt from AAA to AA.
- This year's annual letter to Berkshire Hathaway shareholders was intended as a manual to provide the company's new shareholders with a good understanding and education of Berkshire, its business components and its strategy.
- While the bottling business is capital intensive and has some execution challenges, Buffett endorsed Coca-Cola's (KO) - Get Report acquisition of its bottling operations.
- Berkshire Vice Chairman Charlie Munger has the best 30-second mind extant. Microsoft's (MSFT) - Get Report Bill Gates' knowledge is all-consuming and remarkably broad. Berkshire's manager of the reinsurance business, Ajit Jain, knows probabilities like no other.
- Buffett's holding period remains "forever." His enthusiasm for stocks is in direct relationship with the value that has been created on share price declines. So it follows that both stocks and bonds are less attractive than a year ago.
- The cost of health insurance in the U.S. is like a tapeworm eating at our economic body. The cost of the health system is a drag on growth and, unless changed, will reduce our standard of living and reduce our competitiveness. National health care legislation should be singularly focused on costs.
- Today's huge deficits, while a necessary Keynesian response to economic weakness and a financial crisis, will have important and negative long-term consequences.
- Buffett would have preferred to have offered all cash for the Burlington Northern acquisition, but putting $22 billion into the Burlington deal made sense and offered Berkshire a good but not great opportunity.
- Chapters 8 and 20 of Intelligent Investor provide the best lessons for the individual investor. In Chapter 12 of General Theory, Keynes might have had the "animal spirits" and the acquisition of Kraft (KFT) in mind.
- Under the circumstances that existed a year ago and based on the form of the investment made (which was done on favorable terms to Berkshire), Buffett is pleased with his investment in Goldman Sachs (GS) - Get Report. Lloyd Blankfein is a superior investment manager and is too maligned by many observers (especially of a media kind).
- Stocks are sold out of Berkshire's portfolio (Moody's (MCO) - Get Report, Procter & Gamble (PG) - Get Report, ConocoPhillips (COP) - Get Report, ExxonMobil (XOM) - Get Report, etc.) when:
- they are fully priced;
- there are better alternative investment opportunities available; or
- the company wants to maintain a cushion of liquidity (just in case).
- A "heads they win, tails they win" executive compensation at leading financial institutions is wrong and should be changed, especially if large errors in trading expose our society to systemic risks.
- An expansive and comprehensive mortgage policy must be developed after the "rogue" government-sponsored enterprises (Fannie Mae (FNM) and Freddie Mac (FRE) ) have blown up. The GSE's disproportionate role in residential mortgages must be addressed posthaste.
- There is a large incentive for the E.U. to assist in solving Greece's current debt crisis. It will be temporarily resolved as the consequences of not finding a solution are far greater than exists today.
- State and municipality economic problems continue apace, providing a further drag to domestic economic recovery.
- No Pepsi (PEP) - Get Report, Coke, for Warren Buffett!
My view on Warren Buffett remains unchanged. He is an investing legend. No, he is
single most accomplished investor in modern financial history. Buffett's straightforwardness and logic of argument are constant reminders that simple works better than complicated and complex is often the enemy of the rational investor. Importantly, Buffett sticks to his knitting. He knows what he doesn't know. His willingness to delegate responsibility and executive autonomy is a key feature to Berkshire's success over the past half century and should serve as a template to every senior manager in industry and in finance who has too much pride in his / her own decision-making authorship.
My view on Berkshire's shares also remains unchanged. Given Buffett's age, the Oracle (by definition) moves closer and closer to relinquishing the reins of Berkshire. When he retires, no one should or will be accorded the respect and wide berth that Buffett has earned throughout his lifetime. Moreover, the Burlington Northern acquisition completes Buffett's canvas, at least for the foreseeable future. As a result of these factors (and others), my view is that Berkshire's large investment holdings will slowly lose their "Berkshire premium" as, in the fullness of time, the shares move closer toward being valued at a discount typically accorded the average closed-end equity fund.
From my perch, this morning's "Squawk Box" was most rewarding to viewers and represented one of the finest three hours ever for the
show. Becky, Joe and Q peppered the Oracle with intelligent questions and let Warren Buffett recite his gospel.
Doug Kass writes daily for
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At the time of publication, Kass and/or his funds were long Procter & Gamble and PepsiCo in the stocks mentioned, although holdings can change at any time.
Doug Kass is the general partner Seabreeze Partners Long/Short LP and Seabreeze Partners Long/Short Offshore LP. Under no circumstances does this information represent a recommendation to buy, sell or hold any security.