Daily Speculations
Day 1
By James Altucher
My intent was to come into today's events and tomorrow's
meeting with a
completely open mind. Looking at the positives, its an
understatement to say
that Warren Buffett has met with some degree of investment
success during his
career. He's also made quite a bit of money for his initial
followers. I met one
guy tonight who bought 300 shares of Berkshire Hathaway at
$40 / share in
January, 1976. He sold 200 of them at $80 after a nice 100%
return and decided
to ride the remaining 100, which are now worth $7M. Also,
Buffett's apparent "aw
shucks" way of explaining finance has won the hearts of
his current shareholders
to the extent that 15,000 people are expected to show up for
this shareholder's
meeting. With 15,000 people all interested in stocks, I'm
pretty hopeful I'm
going to have some interesting conversations. I've never
been that good at
picking apart and analyzing fundamentals and the BRK
shareholders, as a group,
take particular pleasure in that and I hope to learn much. I
asked quite a few
people today and yesterday why they were so attracted to
Buffett and why they
wanted to hear him speak. Almost universally they responded
with , "he's
humorous." While saying that "there is a 100%
chance of nuclear attack on US
soil ", as Buffett said in the days following 9/11,
doesn't particularly strike
me as funny, that's just me.
Also, its unclear to me how many people here have actually
made money on
Berkshire Hathaway stock. Since its 1998 high the stock has
underperformed the
S&P index and greatly underperfomed some of the highly
innovative technology
companies that Buffett has scorned such as MSFT, EBAY or
YHOO. Even over the
past decade the stock has not done much better than most of
its large
conglomerate peers including GE.
During the past two days I attempted to soak up the Buffett
experience. I went
to the Nebraska Furniture Mart which my cab driver told me
was the largest
furniture store in the world. Buffett owns 51% of it. In a
famous story about
Buffett written by Adam Smith in 1972, Smith describes how
the 40 year old
Buffett was giving him a tour of Omaha, pointed out the
Furniture Mart and said,
"one day I'm going to own that store." The store
itself was mind boggling in its
size but the few products I tried to buy were out of stock.
This evening I
attended a party thrown by "the Yellow BRKers"
which is an Internet
quasi-religous group devoted to Warren and then I went to a
party at Borsheim's
where I joined most of the other 15,000 attendees to stare
at some jewelry and
watch Warren pass through and shake some hands before he
moved onto the local
Dairy Queen. The highlight of my evening was watching a line
of people put in
orders for a complete set of World Book encyclopedias (World
Book being a
division of BRK) which gave me a nostalgic twinge for those
fantastic
pre-Internet days when all the knowledge of the universe was
kept captive in
those books.
Two questions/answers I hope to get out of the meeting:
a. Is Berkshire Hathaway a Buy or a Short? Every shareholder
here has a
different method of analyzing the company, whether it's a
sum of the parts, some
multiple of return on capital, discounted cash flows, etc.
I've heard numbers
ranging from $44,000 to $120,000 when estimating what the
"intrinisc value" of a
BRKa share is.
My problem in general is that the operating businesses that
Buffett is famous
for buying, managing, and generating profits from are not
really a big component
of Berkshire's assets. By far the biggest assets on the
books are $38 billion in
fixed income securities, most of which will be heavily
impacted by even a modest
rise in interest rates. In addition, there is the
uncertainty of over 14,000
derivative contracts with 600 different counterparties that
Buffett is
desperately trying to liquidate. Although he did not take a
goodwill charge on
his Gen Re purchase this year its very likely that he will
eventually have to if
the value assigned to these derivatives proves to be
incorrect or even
worthless. Considering that this was his largest purchase
ever the size of any
goodwill charge can easily wipe out several years of
earnings on the books.
In addition, there is the taboo topic of "what happens
when Buffett dies". His
own official statment is that his retirement age is "5
years after my death".
He's a very funny guy of course but at $70,000 a share it
would be nice to get
the facts on succession. Given the lack of liquidity in the
stock plus Buffett's
own admission that book value is around $40K per share plus
the clear reverence
which most shareholders have of him its quite possible that
a "change in
management" could lead to a 50% decline or more in the
stock.
.
b. Giving him the benefit of the doubt on a lot of issues
that have been raised
in this forum and elsewhere, is there any way that an
investor can learn
someting from his style and perhaps model it, test it,
emulate it?
I'm not a big believer in the idea that "he's
lucky." That said, its unclear to
me that any of his homespun advice works. His attempts at
"Buy what you know"
seem to have blown up in his face with his biggest
investment ever, the
acquisition of Gen Re, where they underreserved for losses,
mishandled
derivatives, and had a host of other difficulties that
Buffett has now spent the
past few years trying to correct. His idea of buying "2
dollars for 1" has never
really worked out and even he's admitted that his worst
investment ever was in a
little textile mill called Berkshire Hathaway which he
thought he was buying for
half of book value. Even Graham never really hit it big on
what Buffett calls
his "cigar-butt stocks" (you find one on the
ground and smoke one puff and that
puff is pure profit) and made almost all of his fortune on a
nice little growth
stock called Geico in the 40s. A stock that also became
Buffett's biggest
success when he bought it 30 years later.
My plan is to arrive at the shareholder meeting very early.
My faithful cab
driver, Bob, who has now driven me all over Omaha, is taking
me to the
convention center at 5am tomorrow so I can get in line (and
it should be quite
big by then) in order to get a good seat. The meeting itself
is over 5 or 6
hours, by the end of which I might be a card-carrying BRK
shareholder, or at the
very least a proud owner of a set of World Book encyclopedias, from A to Z.