Chris Edmonds chatted with Robert Hagstrom on RealMoney.com, Dec. 12 at 4 p.m. EST.

CSEonTSC:

Good afternoon, everyone. It' great to be back and, more importantly, great to have Robert Hagstrom with us today. Robert is, in short, a

Warren Buffett

expert! He is the author of

The Warren Buffett Way

and

The Warren Buffett Portfolio

.

CSEonTSC:

And, he has just completed a new book called

Latticeworks

, which is a great treatise on using multiple disciplines in securities analysis; it draws on such great investment minds as

Charlie Munger

and

Bill Miller

to give a more holistic picture of investment analysis. A must read. Great to have you back, Robert.

Robert_Hagstrom:

Good afternoon, everyone, great to be with you. I look forward to your questions.

CSEonTSC:

Hit us with your best shots -- markets, Buffett, energy, REITs, politics ... everything is fair game...

john1677-guest says:

How about ACL as a Buffett-style stock? That is to say, will tech underperform, yet again, next year?

Robert_Hagstrom:

I have no opinion on ACL. We recognize that the reinsurance/insurance business is cyclical, just as is technology. I'm of the opinion that if you have a five-year horizon, selected technologies will significantly outperform insurance in general.

CSEonTSC:

The insurance business is a great business for Buffett because it gives him access to capital float. The cash flow - in a well-underwritten portfolio -- gives Buffett capital to allocate. That is the primary reason for his insurance focus. That said, I agree with Robert on the tech front...

john1677-guest says:

Chris, Most of the gas E&P stocks are overbought; however, an exception might be Devon, any thoughts? Also, EPG seems to retreat from its gains almost everyday, are we peaking?

CSEonTSC:

I think between now and the end of the year you will continue to see some chop in the energy stocks, especially the oil service and E&P stocks. Remember, though, I think a long-term focus on companies leveraged to gas will give you great returns in 2001.

street_dannyboy-gues says:

Who would be the best president for the oil and gas stocks in terms of appreciation?

CSEonTSC:

Good question -- Dan Pickering at Simmons had some very prescient analysis on this --

Gore

probably pushes prices of commodities higher and

Bush

probably pushes them lower. From there, the reaction of the stocks is anyone's guess. Clearly, the smart money is that Bush will develop an energy policy more friendly to the industry than Gore.

vasil-guest says:

Hydrogen gas: now when will this be standard in the gas stations, and what stocks might I benefit from (with) hydrogen gas speculation? Also, a film was made about Buffett entitled

The Oracle of Omaha

. Fantastic documentary. Any takes on Warren Buffett the man? Where does he get his special concentration and special insights from?

CSEonTSC:

The video is worth watching -- especially the interview with that TSC reporter in the first three or four minutes ...(LOL) Actually, it is an independent film group from Illinois and it is worth a look. It really captures the essence of the Berkshire annual meeting.

Robert_Hagstrom:

I think the Roger Lowenstein biography of Buffett, which I think is definitive, paints an in-depth view of a young Warren Buffett, as well as the maturing one. You come away from reading that book with a sense that Warren is capable of isolating the critical facts, focus on those facts, and is unwilling to be swayed away from facts.

Robert_Hagstrom:

I think this discipline has enabled him to make many smart moves that others have viewed questionably. But that's often how you make the most money.

lolden-guest says:

In the book

When Genius Failed

, Mr. Buffett is portrayed as more of an unsavory opportunist who allowed this hedge fund, and ultimately the markets, to be in danger so he could purchase a $4.5 billion-dollar portfolio for $250 million. Have you similarly found Mr. Buffett to be less than the white knight image he portrays? Give us some dirt.

Robert_Hagstrom:

I disagree. I've never felt that Warren was unsavory. I've felt that he has been sophisticated, and has always tried to negotiate the best possible deal for Berkshire shareholders. If negotiating a shrewd business deal gives the impression of being unsavory, I think that's incorrect.

CSEonTSC:

Buffett hides very little except his strategy. That is what makes him such a great investor. What he does is simply good business and good investing. You could apply that same analysis to all great investors. Robert is right on point.

elot-guest says:

Mr. Hagstrom, rnjoyed all of your books, including the new one which I read yesterday. The WB Portfolio was my favorite. The Munger probability stuff is great. Do you think that Buffett's folksy style belies his relentless search for opportunities and massively high IQ?

Robert_Hagstrom:

That's a very good question. As Chris pointed out, good business, investment savvy, is demonstrated among a number of investors, in different parts of the country, and in different parts of the world. Sometimes we hear a style that is different from our own, and might perceive it to be a "shroud" for what they are truly after. But, in fact, it is just part of their personality and behavior. I wouldn't underestimate Buffett's ability, based upon mannerisms. That's not seeing the complete picture.

tr8derman-guest says:

Will a hedging energy play such as ENE have less bumps in stock appreciation than a purer play in gas and electric such as EPG or DYN or CPN?

CSEonTSC:

Enron is a great play, if not a bit pricey (I'm long Enron). Enron really relies on price volatility as opposed to direction. However, the other names like El Paso and Dynegy have a similar component. Calpine is really the only pure-play generator you name and there is plenty of additional power needed, especially in California in the next several years.

CSEonTSC:

The real issue with many of these is simple valuation. You have to decide if Enron is worth 45x 2001 estimates, etc. However, they are clearly the leader, at least for now, in their part of the energy world.

gratefuled_aol_com-g says:

Chris, do you foresee any regulatory relief for EIX and PG&E on the "undercollections" they've incurred as a result of the western energy volatility? FERC seems to have dealt them some harsh blows, and given that tomorrow's PX prices cleared at $1,400 (on peak), what others avenues are left to them?

CSEonTSC:

The California PUC is reluctant to grant any relief immediately. However, if they face the potential of bankruptcy or severe financial problems, I think you will see a compromise. The PUC will have little choice if they want to expand the transmission capacity in the future, which is part of the long-term solution in California and something the FERC has been reluctant to deal with.

StockerMan says:

We're still waiting on the Supreme Court to make a decision. 1)Do you think they're holding out to keep from affecting the market and have a better prime time audience? 2) What do you think'll happen?

Robert_Hagstrom:

I think the front page of

The Wall Street Journal's

article on the Supreme Court best describes the dilemma that faces the court. Unquestionably, there are some personal and political and philosophical issues among the members that could prejudice their decision. However, I think that is the farthest thing that they want to have happen, because despite the outcome, none of the members are interested in debasing the integrity of the court.

Robert_Hagstrom:

As far as what's going to happen, I really do think it's a coin flip, and my best guess is that this thing is still not over.

CSEonTSC:

I do think that, at least subconsciously, there is some concern from the court about the impact on the markets. I am not at all surprised that we didn't see a decision during market hours today. And, I don't think there is any guarantee you will see a decision yet this evening.

Robert_Hagstrom:

Chris, how long is the debate between the judges, do you know? How long does the debate between the judges typically last before they vote?

CSEonTSC:

I don't know -- from talking to former clerks, it varies widely, depending on the issue. And, procedure and appearance remain very important to the court. I think there is likely to be as much discussion about the form and substance of the opinions as there is regarding the actual decision. They know the gravity of the situation and will react accordingly. The first decision -- finding a way to "hide" the vote, is close. Again, the first decision was without a justice count and I think that was important.

montyd422-guest says:

Robert, What is the major lesson about buying that you learned from W.B.?

Robert_Hagstrom:

Good question! You may be surprised at the answer. But I think the most important thing that I learned from Buffett is how critical, that you understand the company you are about to analyze or purchase. When Buffett said, I only want to buy the simple and understandable, I don't think he's meaning simple per se, but simple for him to understand. Because unless you get the description of the company exactly right, your analysis will be faulty. And one of the important lessons in Latticework is a quote, "the failures to explain are caused by failures to describe."

Robert_Hagstrom:

So when Buffett decides to buy a company, I believe he has the most complete and accurate description of exactly what he is buying. Hence, there are very few surprises. However, I've observed many other investors, who have many times been surprised, when what they bought did not ultimately turn out to be as they initially suspected.

techie60661-guest838 says:

Robert, did Buffett ever regret not buying out the distressed Long Term Capital in 1998?

Robert_Hagstrom:

The impression that I get from Roger's book, and from talking to Roger, is that he very much wanted to buy Long Term Capital Management. But because he was on vacation, and somewhat out of touch, and there was a deadline to make a decision, it made it very difficult for him to succeed. But, if he could do it all over again, and he was sitting in Omaha, and had not days, but a week or two to think about it, he might have been able to close that deal.

libowers-guest says:

Any thoughts on

George Soros'

recent book and views?

Robert_Hagstrom:

Haven't read it, but planned to. I've always thought that Soros worked with accurate descriptions of how markets work.

CSEonTSC:

It was on my list, but got bumped down the list by

Latticework

!

libowers-guest says:

Is Berkshire stock fairly valued here? (A or B)

Robert_Hagstrom:

We liked it better at 40 and 50 thousand than closer to 70. I think the general consensus among analysts who follow Berkshire smartly is that the stock is worth between 65 and 80 thousand per share. But from that point going forward, as Warren has confessed, it's likely that Berkshire would only earn a marketlike rate of return, plus one or two points.

CSEonTSC:

The "B" stock was created for a number of reasons, but it does give individuals a chance to own a piece of Berkshire they'd otherwise not be able to. However, if you are going to invest in the company and can afford an "A" share, don't think you might find some additional value in the "B" shares. They trade in the 30-1 ratio they are supposed to and have never meaningfully separated from that standard.

timurphy-guest says:

For those of us who have focused on tech, isn't it dangerous to buy insurance, health care, etc., since they are at the top and probably going down soon?

Robert_Hagstrom:

I think you are beginning to frame the question correctly. Which, should always begin with, "what is the organic growth of my company/industry over a multiyear period, and how does that relate to my benchmark?" You know, specifically, the S&P 500. So I think you first have to look at what do you believe is the underlying economic return, and then, what price are you going to have to pay for it?

Robert_Hagstrom:

If you buy a company/industry whose long-term economic return is at or less than what the market rate of return will be, the only way to generate an excess return is to buy the asset at a large discount to intrinsic value. But once the asset reaches intrinsic value, you are left with a conundrum, which is to sell, and seek out another investment, or hold on to an average performing stock.

Robert_Hagstrom:

I think Buffett's preference has always been to seek out better-performing economic businesses compared to the S&P 500, and then wait patiently until he can then buy those businesses at a big discount and thus receive a turbo-return from that purchase.

CSEonTSC:

Well said . . .

capy07a-guest says:

Chris, What do you think of SO? Build a position on weakness?

CSEonTSC:

First, I'm long SO and the recent spin-off of SOE. I do think that if you want to own the traditional utility biz, that there are few utilities that understand the business better than Southern and have been able to build a franchise in a region like they have. Clearly, however, once the Southern Energy unit is completely gone, they will face the growth challenges of any utility.

CSEonTSC:

As an aside, interesting that Buffett is now very interested in the electric power business, any thoughts about that, Robert?

Robert_Hagstrom:

We thought that soon after the Mid-America Energy purchase, that we would see a number of additional acquisitions with the idea that combining the energy companies would create efficiencies that would generate higher returns than those companies achieve separately.

Robert_Hagstrom:

This was the strategy described by David Sokol, but, surprisingly, there have been no further purchases. And my guess is, that with these utility companies up very much in price, it's unlikely that we will see Buffett purchase any of them in the near term. Do you disagree, Chris?

CSEonTSC:

I spent some time with David Sokol, MidAm's chairman last week, and he simply said he can't find a lot of good value in the power business today. And, he told me he would never be able to spend the capital Buffett wants him to spend in the coming year. Looks like he will wait for better opportunities.

vasil-guest says:

What are your thoughts on the auto-parts industry? Are bicycles to soon replace cars? And, please, gas has to make a top here: tell me exactly how much money I should wager on a bet in the futures market on a top on natural gas.

Robert_Hagstrom:

The auto parts industry is on the wrong side of a cyclical downturn. The automobile business, including General Motors, is (hold your breath!) a commodity business. I have always believed that the automobile business, with 30 worldwide manufacturers, making 600 makes and models each year, has way too much capacity, and as such, find it very difficult to profit, except in the few periods when demand is temporarily high.

Robert_Hagstrom:

I don't know anybody who has ever been able to make money buying and holding auto stocks. But if you are a successful trader, I guess you could have picked your points, but that is not what Buffett teaches us.

CSEonTSC:

Don't know anything about you or your portfolio so I can't wager to guess how much, if any, you should put into Natural Gas futures. I will say I don't think that the current spikes in natural gas are sustainable longer-term. Sure, you may see $13 gas in the coming months, but it will come back as supplies increase and new gas is located. Be careful in the commodities market, in other words.

Marketguy says:

What do you gents think of GM's latest news? Not sure I'm going to miss Oldsmobile.

CSEonTSC:

Clearly, it's not your father's Oldsmobile!

Robert_Hagstrom:

Actually, the problem is that it

is

your father's Oldsmobile!

street_dannyboy-gues says:

What are the main holdings in Buffett's mutual fund? It has had a good run ... is it still a buy?

CSEonTSC:

First, it's not a mutual fund. Buffett is the chairman of a company, Berkshire Hathaway, that owns a number of operating businesses and, a portfolio of common stocks. He does own substantial positions in Coca Cola, Gillette, American Express, Freddie Mac, Wells Fargo and Washington Post. But, as Berkshire has grown, the impact of that portfolio vs. the impact of the operating companies like GEICO, his reinsurance business and others have diminished. And, as Berkshire continues to grow and Buffett continues to acquire additional businesses, the impact of the stock portfolio on Berkshire's operating results will continue to shrink.

montyd422-guest says:

Robert, how long before you write a book about Cramer?

Robert_Hagstrom:

All of my writings have been nonfiction. My take on Cramer is that he is a great fictional character. And, a talented writer could do wonders. :-)

CSEonTSC:

Robert, if you decide to do it, let me know. I know some pretty good sources and I'll do my best to get you in the door! :-)

Robert_Hagstrom:

LOL! Thanks Chris!

vasil-guest says:

What would it mean, and would it take, to be "the next Warren Buffett?"

Robert_Hagstrom:

I'm of the opinion that the market and its participants are rapidly becoming smarter. In addition, with the Internet and the inclusion of all investors small and big, dumb and smart, the market is more often accurately priced than inaccurately priced. That is not to say it is perfectly efficient, it is just, however, very, very competitive. The pockets for outperformance are becoming fewer and fewer, and appear to last less and less time. That's why I think most of the money that has been made in the market has gone to high-frequency traders that seek to exploit minute to minute, hour to hour, type mispricing.

Robert_Hagstrom:

This is not to say that a smart buy and hold investor cannot earn returns greater than the market. But, my guess is, the time period for which Warren Buffett made Herculean returns, is fading into the distance.

CSEonTSC:

I think the best evidence of that, from Buffett's perspective, is his move away from investing in marketable securities and more in businesses that he thinks he can make more efficient and grow at a reasonable rate. What it says to me is Buffett finds more inefficiencies in the private markets than in the public markets. That speaks volumes about the competencies required to be the next Warren Buffett.

CSEonTSC:

However, if history tells us anything, Ben Graham was followed by Buffett and Buffett will be followed by someone ...

Robert_Hagstrom:

Well said!

TSC-RealMoneyLaura:

Thanks for a great hour, Robert and Chris, Any final thoughts?

Robert_Hagstrom:

As usual, the questions were outstanding. I've always been impressed with this chat group. I wish you all continued success, and thanks for the conversation!