I just recently returned from Omaha and the Berkshire Hathaway (BRK-A) Annual Meeting, and as a person that has attended several of these meetings, this one was different on several fronts, in my opinion.
Mood
To begin, the mood of shareholders at the meeting was a bit more somber given what has occurred in the markets and world over the last year. To be sure, some folks have been shell-shocked from what has happened, and they were likely looking to Chairman Warren Buffett, and his partner, Charlie Munger for guidance on how to navigate today’s choppy waters. And by and large Buffett and Munger were very optimistic on the long-term future of the US economy and the opportunity of our economic system to create an even better economic future. What’s more, Buffett also seemed to indicate that there are huge opportunities in the world today, and he hopes to take advantage of a few of them for Berkshire. That said, they also said to not to expect any quick recoveries, and this is significant given the wide ranging number of businesses that Berkshire owns, and as such, the amount of “economic data” Buffett sees from Berkshire’s subsidiaries.
New Q&A Structure
Second, this year’s meeting featured a new question and answer session, where shareholders emailed questions ahead of time to a trio of journalists who selected questions for Buffett and Munger. This was alternated with the usual questions at the microphone from members of the audience. Overwhelmingly, the questions were much better and more germane to Berkshire than they have been in years past. For example, Buffett received several poignant questions about Berkshire’s holdings of Washington Post (WPO), Moodys (MCO), Wells Fargo (WFC), and some of its other private businesses.
Comments on Holdings
On Post, Buffett said that despite the newspaper business essentially dying, Berkshire intends to hold its Post stake. He was somewhat positive on Post’s cable TV and educational (Kaplan) business, but didn’t seem to think this would offset the decline of the newspaper business. As for Moodys, he said they had also drank the kool aid of ever rising home prices, which, in my opinion, has dramatically hurt the credibility of their business. Buffett did say, however, that he thinks it still is a good business, despite both he and Munger’s comments, indicated that neither use ratings when evaluating securities. With Wells Fargo, both Buffett and Munger defended Wells’ businesses model and said it was one of the strongest banks in the industry. This is significant, because it is one of Berkshire’s largest holdings, and through their comments Buffett and Munger were essentially defending their position in the stock, especially considering the government’s “bank stress tests” are due out sometime soon. It is noteworthy, though, that they remained somewhat silent about another large holding, American Express (AXP).
As for Berkshire’s private businesses, Buffett spoke in depth about auto-insurer Geico, and his belief that as a low-cost leader in the industry, Geico has several advantages, and that he expects it to grow even more. In fact, Geico has been one of the few of Berkshire’s subsidiaries that has been growing, as consumers seek to reduce their auto insurance costs. He also spoke favorably about Berkshire’s utility businesses, and indicated that he expects Berkshire to do more in this field. The majority of Berkshire’s other businesses, though are experiencing significant weaknesses in the current economic state, which isn’t surprising given that many are tied directly to the consumer. On balance, I’d postulate that some of the questions, were, in fact, better than the answers that were given, which is a marked contrast from prior years, and what I think is an endorsement of the current Q&A model, as it has appeared to more deeply engage Berkshire’s shareholders.
Expectations For Berkshire
For Berkshire, both Buffett and Munger said that the days of 20% growth in the firm are long gone, primarily due to Berkshire’s massive size. They now target growth for the firm of a few percentage points better than the S&P, on average, each year. Buffett also indicated that Berkshire’s most enduring competitive advantages are its culture, business model, and shareholder base. This is very important, as culture is one of the most important characteristics of any business, yet the hardest to value and quantify. Buffett also indicated that his succession plan for an eventual CEO and one, or more, CIO’s hasn’t changed. They didn’t explicitly address succession at the subsidiary level during the meeting.
Market Commentary
Buffett said that the 1974 period was the best for buying stocks. He said that valuations weren’t as cheap then, but interest rates were also much higher then. He also said that the country was in much better shape then, than it is now. Munger further commented that if stocks decline by 40% on average, they are closer to an attractive price than they have been before.
Both Munger and Buffett also warned that targeting inflation can be a slippery slope and that dollars will most likely purchase less in 10 years than they purchase today. What is more, Buffett also rightly pointed out that it is China—and not the US taxpayer—that is essentially funding the bulk of the current government debt, and Munger was very complimentary of what China has done economically, and also advocated that the US and China should be very friendly because they are joined at the hip.
Earnings
In the afternoon, Buffett gave a brief preview of Berkshire’s first quarter earnings, and indicated that book value was down around 6%. He indicated that Geico and the utilities businesses have done well, while most others have seen weakness in their businesses. Check back at the end of this week, for my analysis of Berkshire’s first quarter earnings, which are due to be released on Friday.
You might also be interested to know that this newsletter was mentioned in the following Associated Press article, which I have linked here, a Marketwatch article, which I have linked here, and a Bloomberg video, which I have linked here.
I welcome dialogue with my readers, so please send me any questions and comments you have. Also, if you haven’t already done so, please be sure to sign-up for my free email alerts from buffettologist.com by emailing me at Justin@buffettologist.com.
Justin
Copyright © 2009 Buffettologist.com
The content contained in this blog represents the opinions of Mr. Fuller. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business. This content is intended solely for the entertainment of the reader, and the author.
Monday, May 4, 2009
Saturday, May 2, 2009
Greetings from Omaha!
Good morning from Omaha. Shareholders are just filling into the Qwest Center, and this year appears to be again setting record attendance at the meeting. Despite what has been a tough year for Berkshire—and most everyone else for that matter--I’m looking forward to a great day of questions for Chairman Warren Buffett and Vice-Chairman Charlie Munger. Be sure to check back this evening for my analysis and thoughts on 2009’s “Woodstock for Capitalists.”
Justin
The content contained in this blog represents the opinions of Mr. Fuller. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business. This content is intended solely for the entertainment of the reader, and the author.
Justin
The content contained in this blog represents the opinions of Mr. Fuller. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business. This content is intended solely for the entertainment of the reader, and the author.
Tuesday, April 28, 2009
Berkshire Hathaway Annual Meeting: Preview
In now less than a fortnight, throngs of investors will descend on Omaha for the Berkshire Hathaway (BRK-A) Annual Meeting. In my opinion, this meeting has the potential to be incredibly insightful, given what has occurred in the world and markets over the last year. At this forum, Chairman Warren Buffett and his partner Charlie Munger routinely offer their views on the markets, investing, and life--and boy, do they have a lot to comment on this year.
And at this year’s meeting, in particular, we should be greeted with several good questions for Buffett and Munger, given Berkshire’s decision to have shareholders submit questions to a few journalists ahead of time, which will allow these reporters to select questions that are germane to the audience. This is critical, because in the past, several groups have used the forum to push their own agendas, which were often very political in nature. This was unfortunate, because it reduced the learning opportunity that the meeting presents for the majority of attendees. This year, though, should be different, and here’s what I’ll be listening for, and hoping to learn.
To begin, this is the best forum to learn more about Berkshire. I’ll be curious to hear how the businesses Berkshire owns, in aggregate, are performing, given the weakness in the economy, and their exposure to the consumer sector. In addition, it has been a tumultuous time for most in the insurance industry, and it will be interesting to learn about the opportunities for Berkshire, given that its financial strength--while impacted--is still, in my opinion, one of the strongest in the industry. In fact, I would argue that insurance is also Berkshire’s most important business, as it provides Buffett with float—insurance premiums collected but not paid out as claims—to invest in other businesses.
And on the investing front—which is frankly what most shareholders go to hear about—it will be interesting to see where Berkshire has been putting its money. Last year, we heard about mortgages and auction rate securities, and given the continuous dislocations in markets, it is likely Berkshire has continued to be active.
I am also curious to hear about Berkshire’s prospects for additional acquisitions. In the annual letter, Berkshire indicated it is interested in doing more in the utilities space, which isn’t surprising given that utility acquisitions have the potential to soak up a ton of capital, and offer a regulated, fixed-income like, return. More than that, though, given the problems several private equity firms are having these days, its likely that an all-cash buyer like Berkshire can have its pick of the litter, now that company valuations are much lower than they have been in prior years. Each of these opportunities is vitally important, as it has the potential to move the needle on Berkshire’s long-term valuation.
I also expect several shareholders to ask about succession. While I think that succession at the holding company has been addressed, the bigger question in my mind, at least, is about succession at the subsidiary level. Buffett has said in the past that he has Berkshire’s managers submit to him the name of one individual who would take over each of the businesses each year, and that sometimes he agrees with this choice, while other times he disagrees. While I think this approach is prudent, subsidiary-level succession has the potential to be a bigger issue going forward, given that many of the entrepreneurs that sold businesses to Berkshire are, in fact, getting up in age themselves. As such, I’d like to hear a little more about this aspect of succession planning.
Shareholders will also probably have several questions about Berkshire’s derivative positions, because--as I have alluded to previously--these positions do add some shades of gray to Berkshire’s balance sheet. As such, I think that Berkshire will eventually disclose as much about these positions as it can, all without compromising these contracts profit potential. To be sure, this is a delicate balance.
My favorite aspects of the meeting, though, are when Buffett and Munger are asked very general questions about investing and life. Their insights, in my mind, are simple and timeless, and provide of sense of grounding to the attendees. Munger has said in past years that folks come out of Omaha each year to “get religion”, and this year they may be more in need of it, than in year’s past.
Given both Buffett and Munger’s vast experience and voracity for reading, I will be particularly interested to see what parallels in the annals of history and capitalism they use to illuminate what happened in today’s world and markets. It’s usually the comments about the softer aspects, such as peoples psychology or behavior, that is so enlightening, and hopefully there will be a couple of nuggets in this year’s meeting too.
As always, I will also be making the pilgrimage out to Omaha for the meeting, so be sure to check back at the first weekend of May for my commentary and analysis of 2009’s “Woodstock for Capitalists”.
Justin
The content contained in this blog represents the opinions of Mr. Fuller. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business. This content is intended solely for the entertainment of the reader, and the author.
And at this year’s meeting, in particular, we should be greeted with several good questions for Buffett and Munger, given Berkshire’s decision to have shareholders submit questions to a few journalists ahead of time, which will allow these reporters to select questions that are germane to the audience. This is critical, because in the past, several groups have used the forum to push their own agendas, which were often very political in nature. This was unfortunate, because it reduced the learning opportunity that the meeting presents for the majority of attendees. This year, though, should be different, and here’s what I’ll be listening for, and hoping to learn.
To begin, this is the best forum to learn more about Berkshire. I’ll be curious to hear how the businesses Berkshire owns, in aggregate, are performing, given the weakness in the economy, and their exposure to the consumer sector. In addition, it has been a tumultuous time for most in the insurance industry, and it will be interesting to learn about the opportunities for Berkshire, given that its financial strength--while impacted--is still, in my opinion, one of the strongest in the industry. In fact, I would argue that insurance is also Berkshire’s most important business, as it provides Buffett with float—insurance premiums collected but not paid out as claims—to invest in other businesses.
And on the investing front—which is frankly what most shareholders go to hear about—it will be interesting to see where Berkshire has been putting its money. Last year, we heard about mortgages and auction rate securities, and given the continuous dislocations in markets, it is likely Berkshire has continued to be active.
I am also curious to hear about Berkshire’s prospects for additional acquisitions. In the annual letter, Berkshire indicated it is interested in doing more in the utilities space, which isn’t surprising given that utility acquisitions have the potential to soak up a ton of capital, and offer a regulated, fixed-income like, return. More than that, though, given the problems several private equity firms are having these days, its likely that an all-cash buyer like Berkshire can have its pick of the litter, now that company valuations are much lower than they have been in prior years. Each of these opportunities is vitally important, as it has the potential to move the needle on Berkshire’s long-term valuation.
I also expect several shareholders to ask about succession. While I think that succession at the holding company has been addressed, the bigger question in my mind, at least, is about succession at the subsidiary level. Buffett has said in the past that he has Berkshire’s managers submit to him the name of one individual who would take over each of the businesses each year, and that sometimes he agrees with this choice, while other times he disagrees. While I think this approach is prudent, subsidiary-level succession has the potential to be a bigger issue going forward, given that many of the entrepreneurs that sold businesses to Berkshire are, in fact, getting up in age themselves. As such, I’d like to hear a little more about this aspect of succession planning.
Shareholders will also probably have several questions about Berkshire’s derivative positions, because--as I have alluded to previously--these positions do add some shades of gray to Berkshire’s balance sheet. As such, I think that Berkshire will eventually disclose as much about these positions as it can, all without compromising these contracts profit potential. To be sure, this is a delicate balance.
My favorite aspects of the meeting, though, are when Buffett and Munger are asked very general questions about investing and life. Their insights, in my mind, are simple and timeless, and provide of sense of grounding to the attendees. Munger has said in past years that folks come out of Omaha each year to “get religion”, and this year they may be more in need of it, than in year’s past.
Given both Buffett and Munger’s vast experience and voracity for reading, I will be particularly interested to see what parallels in the annals of history and capitalism they use to illuminate what happened in today’s world and markets. It’s usually the comments about the softer aspects, such as peoples psychology or behavior, that is so enlightening, and hopefully there will be a couple of nuggets in this year’s meeting too.
As always, I will also be making the pilgrimage out to Omaha for the meeting, so be sure to check back at the first weekend of May for my commentary and analysis of 2009’s “Woodstock for Capitalists”.
Justin
The content contained in this blog represents the opinions of Mr. Fuller. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business. This content is intended solely for the entertainment of the reader, and the author.
Monday, April 13, 2009
Berkshire Downgraded
In the last few weeks, Berkshire Hathaway (BRK-A) has been downgraded from its triple-A rating, with Moody’s being the most recent firm to strip Berkshire of its prized position. While it is never a good thing for a company to lose its triple-A status, I don’t think these moves will have an overly material effect on Berkshire, or the perception of its financial strength in the marketplace.
Over the last year, several companies, such as AIG, and securities, including a bevy of mortgage related investments, that had been rated very highly have been proven out over the past year to have not deserved their previously lofty status. As such, several firms that had bestowed these ratings, now appear to have egg on their face, and as a result, are reviewing their ratings on almost all other companies and securities. In my opinion, this type of review is generally a good idea, and something that should be done constantly, but I also think that current market circumstances are causing some of these firms to now be overly conservative.
And this, in a nutshell, is what I think has happened to Berkshire’s rating. By all appearances, Berkshire still seems—to me, at least—to be a bastion of financial strength. The conglomerate has more than $20 billion of cash on its balance sheet. In addition, it has tens of billions of both equity and fixed income securities that it could sell in the marketplace if it needed to raise capital. Several of its subsidiaries are still sending cash to Omaha for Chairman Warren Buffett to invest, though probably less than last year. And finally, the company has little debt, other than in its utilities and manufactured housing subsidiaries, whose debt does not appear to have recourse to the assets of the holding company.
While I think that all of the elements I just described help to illustrate the soundness of Berkshire’s financial health, there are some things to watch too. Berkshire’s bigger foray into the derivatives market—especially after warning about their risks for years--certainly adds some complexity to the conglomerate’s balance sheet. And even though I think the profit potential of these contracts is good, in an era where simple is now better, Berkshire’s derivative positions do add a couple shades of gray to its financial position. It is important to remember, though, that Berkshire has minimal collateral posting requirements on its derivatives in the event of any sort of downgrade. This is critical, because, if you’ll remember, collateral postings on derivative positions are what led to the downfall of AIG. The other things to watch are not new. Chief among these is succession planning, which has been acknowledged, and, in my opinion, addressed.
It seems that at some point, there will not be any--or maybe just a few--triple-A rated companies left. What that essentially means then, is that double-A will be, in effect, the new triple-A. And if this eventuates, the scale will have just slid down, and Berkshire—even with its recent downgrade—will still have some of the best ratings around.
You might also be interested to know that this article was recently mentioned in a Bloomberg article, which I’ve linked here, as well as an Associated Press article, which I’ve linked here.
Justin
The content contained in this blog represents the opinions of Mr. Fuller. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business. This content is intended solely for the entertainment of the reader, and the author.
Over the last year, several companies, such as AIG, and securities, including a bevy of mortgage related investments, that had been rated very highly have been proven out over the past year to have not deserved their previously lofty status. As such, several firms that had bestowed these ratings, now appear to have egg on their face, and as a result, are reviewing their ratings on almost all other companies and securities. In my opinion, this type of review is generally a good idea, and something that should be done constantly, but I also think that current market circumstances are causing some of these firms to now be overly conservative.
And this, in a nutshell, is what I think has happened to Berkshire’s rating. By all appearances, Berkshire still seems—to me, at least—to be a bastion of financial strength. The conglomerate has more than $20 billion of cash on its balance sheet. In addition, it has tens of billions of both equity and fixed income securities that it could sell in the marketplace if it needed to raise capital. Several of its subsidiaries are still sending cash to Omaha for Chairman Warren Buffett to invest, though probably less than last year. And finally, the company has little debt, other than in its utilities and manufactured housing subsidiaries, whose debt does not appear to have recourse to the assets of the holding company.
While I think that all of the elements I just described help to illustrate the soundness of Berkshire’s financial health, there are some things to watch too. Berkshire’s bigger foray into the derivatives market—especially after warning about their risks for years--certainly adds some complexity to the conglomerate’s balance sheet. And even though I think the profit potential of these contracts is good, in an era where simple is now better, Berkshire’s derivative positions do add a couple shades of gray to its financial position. It is important to remember, though, that Berkshire has minimal collateral posting requirements on its derivatives in the event of any sort of downgrade. This is critical, because, if you’ll remember, collateral postings on derivative positions are what led to the downfall of AIG. The other things to watch are not new. Chief among these is succession planning, which has been acknowledged, and, in my opinion, addressed.
It seems that at some point, there will not be any--or maybe just a few--triple-A rated companies left. What that essentially means then, is that double-A will be, in effect, the new triple-A. And if this eventuates, the scale will have just slid down, and Berkshire—even with its recent downgrade—will still have some of the best ratings around.
You might also be interested to know that this article was recently mentioned in a Bloomberg article, which I’ve linked here, as well as an Associated Press article, which I’ve linked here.
Justin
The content contained in this blog represents the opinions of Mr. Fuller. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business. This content is intended solely for the entertainment of the reader, and the author.
Monday, March 30, 2009
The Crocus of Spring
As I was recently thinking about the crocus of spring, the world outside me is again blanketed by a storm of snow. And while I’m not trying to wax poetical on you (certainly not about investing), this irony does strike me as somewhat indicative of what most have come to expect from today’s market and economy.
Just a few weeks ago, when it seemed like all news was bad news, the market suddenly turned at a right angle and headed up. The last couple days, it has turned back down. And, not surprisingly, the myriad of pundits and prognosticators are now arguing if this is simply a bear market rally, or if this is the start of a new bull market. I suppose they have to find something to talk about. The real answer, though, in my opinion, is that for long-term investors, it simply doesn’t matter.
The strange thing about what you hear in the world today, is that it seems that the great majority of people seem to be more concerned with “calling” the exact market bottom, or even worse, predicting the daily path of securities prices, rather than focusing on making good long-term investments. The truth of the matter is that if someone could actually call a market bottom, or know how stock prices will gyrate daily, why on earth would they tell anyone?
What most people can do, on the other hand, is search for good businesses--those that earn good long-term returns on capital—they understand, wait for them to be at reasonable prices, and then slowly add them to their portfolio. This isn’t that difficult. But what it does require, though, is the emotional temperament and stability to resist the temptation to try to “call the bottom”, and to also have the patience and ability to wait for markets to recover. This, actually, is much more difficult, especially in today’s world, where investors are hit with sensational headlines and media commentary twenty four hours a day, seven days a week.
There is so much noise, in fact, that I’d argue that most investors today can’t seem to see the forest through the trees. What is more, many seem to react violently to the headline of the day, even when much of this information has already been disseminated (think many of the events surrounding General Motors) to the public and may—or may not--even have an impact on some other businesses.
While I may rail against this mass-market behavior as somewhat irrational, the bright side is that it continues to create opportunity for the long-term investor to opportunistically add good businesses to their portfolio at reasonable (or in some cases great) prices. This seemingly simple insight seems to be lost on the majority of investors.
I’d like to end this post with one final thought. A couple of years ago at the Berkshire Hathaway Annual Meeting, Berkshire Vice-Chairman Charlie Munger was asked to give his opinion on the investment climate. Back then, he said, as I recall (and I’m likely paraphrasing here) that it was not a time to be swinging for the fences. With the value placed on businesses down, in aggregate, substantially from when he was asked this question two years ago, I wonder what his response this year would be?
In the spirit of the baseball season soon to begin this spring, here’s to hoping he’ll be asked the same question again this May.
You might also be interested to know that buffettologist.com was recently mentioned in a Marketwatch article, which I’ve linked here.
Justin
The content contained in this blog represents the opinions of Mr. Fuller. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business. This content is intended solely for the entertainment of the reader, and the author.
Just a few weeks ago, when it seemed like all news was bad news, the market suddenly turned at a right angle and headed up. The last couple days, it has turned back down. And, not surprisingly, the myriad of pundits and prognosticators are now arguing if this is simply a bear market rally, or if this is the start of a new bull market. I suppose they have to find something to talk about. The real answer, though, in my opinion, is that for long-term investors, it simply doesn’t matter.
The strange thing about what you hear in the world today, is that it seems that the great majority of people seem to be more concerned with “calling” the exact market bottom, or even worse, predicting the daily path of securities prices, rather than focusing on making good long-term investments. The truth of the matter is that if someone could actually call a market bottom, or know how stock prices will gyrate daily, why on earth would they tell anyone?
What most people can do, on the other hand, is search for good businesses--those that earn good long-term returns on capital—they understand, wait for them to be at reasonable prices, and then slowly add them to their portfolio. This isn’t that difficult. But what it does require, though, is the emotional temperament and stability to resist the temptation to try to “call the bottom”, and to also have the patience and ability to wait for markets to recover. This, actually, is much more difficult, especially in today’s world, where investors are hit with sensational headlines and media commentary twenty four hours a day, seven days a week.
There is so much noise, in fact, that I’d argue that most investors today can’t seem to see the forest through the trees. What is more, many seem to react violently to the headline of the day, even when much of this information has already been disseminated (think many of the events surrounding General Motors) to the public and may—or may not--even have an impact on some other businesses.
While I may rail against this mass-market behavior as somewhat irrational, the bright side is that it continues to create opportunity for the long-term investor to opportunistically add good businesses to their portfolio at reasonable (or in some cases great) prices. This seemingly simple insight seems to be lost on the majority of investors.
I’d like to end this post with one final thought. A couple of years ago at the Berkshire Hathaway Annual Meeting, Berkshire Vice-Chairman Charlie Munger was asked to give his opinion on the investment climate. Back then, he said, as I recall (and I’m likely paraphrasing here) that it was not a time to be swinging for the fences. With the value placed on businesses down, in aggregate, substantially from when he was asked this question two years ago, I wonder what his response this year would be?
In the spirit of the baseball season soon to begin this spring, here’s to hoping he’ll be asked the same question again this May.
You might also be interested to know that buffettologist.com was recently mentioned in a Marketwatch article, which I’ve linked here.
Justin
The content contained in this blog represents the opinions of Mr. Fuller. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business. This content is intended solely for the entertainment of the reader, and the author.
Friday, March 20, 2009
Why Bigger Isn’t Better
For some reason the great majority of people seem to think that bigger is universally better. Perhaps if you are buying a chocolate muffin (although a nutritionist would argue with me on this point) or drafting an offensive lineman, bigger is, in fact, better. But if you are investing, on the other hand, I think its much more advantageous to be small fish.
The first--and most obvious reason why this is true--is that the smaller amount of money you have to invest, the greater the universe of opportunities available to you. Berkshire Hathaway Chairman Warren Buffett mentioned this at the last few annual shareholder meetings, when he said he would be doing a lot different things with his capital if he only had $50 million or less to invest, rather than the billions he has to deploy at Berkshire. While he is busy looking for elephants, the majority of folks with much smaller amounts of money can spend time looking under the tiniest of rocks for new investment ideas. This is a huge advantage.
The second reason—although it is closely linked to the first—is that it is much easier for investors with smaller amounts of money to move the needle on their net worth. A company like Berkshire--or perhaps more poignantly a large mutual fund or hedge fund—can have so much capital, that even when they find a good idea, it will hardly ever have the potential to dramatically increase the overall size of their assets. Whereas an investor with only 100,000 dollars to invest, could find several opportunities in today’s markets to potentially double the size of her assets.
The irony is that most mutual funds or other asset managers routinely advertise the amount of their firm’s assets under management. I suppose they believe that the more assets they have—i.e. the bigger they are—will give them the credibility necessary to attract even more assets. And generally, it does. But, in my opinion, this approach incongruous to generating decent long-term returns, as the bigger these firms become, the more modest their overall results will generally be. This isn’t just me pontificating. It is basic mathematics, as size is generally negatively correlated to investment returns.
I’d even take this one step further, and argue that given the role that large financial firms played in the recent market maelstrom, size doesn’t even confer trust to clients anymore. What matters more, in my opinion, is a personal relationship, and the ability to pick up the phone and talk to someone who explains things plainly and honestly. It is not about a big brand or a big size, but rather a single relationship that creates trust among clients. I’d further postulate that now that the tide has gone out on several of the larger firms and money managers, even more folks will find that smaller is, in fact, better.
Now, I’ve painted some large brush strokes, and certainly not everyone is covered. There are many firms that do limit the size of their assets, which helps to ensure that their universe of potential investments is adequate. Other firms choose to stay small so that they can better serve their clients, and attempt to keep their returns better than average over the long haul. I applaud each of these approaches.
But the real benefactors of being small, in my opinion, are still individuals. If an individual doesn’t have the time to invest, they can try to seek out the type of firm I’ve just described above. If an individual does have the time to do the work on their own investments, though, typically looking for smaller companies that one can understand (i.e. within their circle of competence), can help them to produce long-term results that most professional money managers could only dream to replicate.
You might also be interested to know that buffettologist.com was recently mentioned in a New York Times article, which I’ve linked here.
Justin
The content contained in this blog represents the opinions of Mr. Fuller. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business. This content is intended solely for the entertainment of the reader, and the author.
The first--and most obvious reason why this is true--is that the smaller amount of money you have to invest, the greater the universe of opportunities available to you. Berkshire Hathaway Chairman Warren Buffett mentioned this at the last few annual shareholder meetings, when he said he would be doing a lot different things with his capital if he only had $50 million or less to invest, rather than the billions he has to deploy at Berkshire. While he is busy looking for elephants, the majority of folks with much smaller amounts of money can spend time looking under the tiniest of rocks for new investment ideas. This is a huge advantage.
The second reason—although it is closely linked to the first—is that it is much easier for investors with smaller amounts of money to move the needle on their net worth. A company like Berkshire--or perhaps more poignantly a large mutual fund or hedge fund—can have so much capital, that even when they find a good idea, it will hardly ever have the potential to dramatically increase the overall size of their assets. Whereas an investor with only 100,000 dollars to invest, could find several opportunities in today’s markets to potentially double the size of her assets.
The irony is that most mutual funds or other asset managers routinely advertise the amount of their firm’s assets under management. I suppose they believe that the more assets they have—i.e. the bigger they are—will give them the credibility necessary to attract even more assets. And generally, it does. But, in my opinion, this approach incongruous to generating decent long-term returns, as the bigger these firms become, the more modest their overall results will generally be. This isn’t just me pontificating. It is basic mathematics, as size is generally negatively correlated to investment returns.
I’d even take this one step further, and argue that given the role that large financial firms played in the recent market maelstrom, size doesn’t even confer trust to clients anymore. What matters more, in my opinion, is a personal relationship, and the ability to pick up the phone and talk to someone who explains things plainly and honestly. It is not about a big brand or a big size, but rather a single relationship that creates trust among clients. I’d further postulate that now that the tide has gone out on several of the larger firms and money managers, even more folks will find that smaller is, in fact, better.
Now, I’ve painted some large brush strokes, and certainly not everyone is covered. There are many firms that do limit the size of their assets, which helps to ensure that their universe of potential investments is adequate. Other firms choose to stay small so that they can better serve their clients, and attempt to keep their returns better than average over the long haul. I applaud each of these approaches.
But the real benefactors of being small, in my opinion, are still individuals. If an individual doesn’t have the time to invest, they can try to seek out the type of firm I’ve just described above. If an individual does have the time to do the work on their own investments, though, typically looking for smaller companies that one can understand (i.e. within their circle of competence), can help them to produce long-term results that most professional money managers could only dream to replicate.
You might also be interested to know that buffettologist.com was recently mentioned in a New York Times article, which I’ve linked here.
Justin
The content contained in this blog represents the opinions of Mr. Fuller. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business. This content is intended solely for the entertainment of the reader, and the author.
Monday, March 9, 2009
The Crisis of Credibility
The accepted mantra in today’s markets is that as a nation we are suffering from a crisis of confidence. And it is true. But the root cause of our “crisis of confidence” is, in my opinion, a crisis of credibility.
Over the last several months, countless individuals, organizations, companies, or government officials have taken actions or made statements that sought to reassure investors, only to have these reassurances blow up in their face in the ensuing weeks and months. While this certainly hasn’t helped to restore confidence, it was also largely out of these folks’ control as their statements where overwhelmed by a tidal wave of economic pessimism. This has had the unfortunate consequence of causing other credible sources to be leery of making any reassuring statements for fear of also being steam rolled. Even though this is understandable, this “sitting on the sidelines” mentality further stoked the already rampant fear and panic in markets.
What has been worse, in my mind at least, though, is that the few credible sources that were willing to speak—or had the power to act—have continuously changed their statements or opinions, which have had the unintended consequence of showing how uncertain these “credible” sources really were about what was going on, and what was going to be done about it. In fact, many of these folks might have simply been better off saying nothing, rather than constantly changing their minds, and further fueling the fire of uncertainty.
Credibility is, in fact, acquired when people, or organizations, are consistent in their statements and policies. In layman’s terms, people become credible, or believable, when they consistently say what they do, and do what they say. To me, at least, it really doesn’t seem that difficult. And when someone acts in this manner, it gives them credibility, which then inspires confidence and trust, which I believe, would help to break the negative psychological feedback loop that most markets and investors are currently experiencing today.
One of the reasons I respect Berkshire Hathaway (BRK-A) Chairman Warren Buffett is because, in my opinion, he understands the importance of credibility both for a person and an organization. I would argue, that one of both Berkshire’s—and Buffett’s—greatest assets is its credibility. And, thankfully, Buffett is spending some this asset by continuing to stand-up and make appearances—such as he did this morning on CNBC—to reassure markets and citizens about the power of our economic system to create an even better economic future. I applaud these actions, and I couldn’t agree more with this stance.
But even Berkshire and Buffett has limits to its credibility, which you have seen played out this year. Buffett’s decision to become more involved with some derivative contracts, especially after warning about their risks for years, has certainly impacted some of Berkshire’s near-term credibility, despite, what I think, are the favorable long-term economic characteristics of these positions for shareholders. And it appears as though the market recognizes this, as Berkshire’s share price has certainly been impacted over the last year, despite its relatively good performance vis-à-vis many other businesses.
I don’t point this out to be overly critical, but I do think that it illustrates part of the fragility of credibility, and the importance of our leaders (both public and private) to be consistent in both word and action. In my opinion, this approach will help build credibility, which may inspire more folks (other than only Buffett these days it seems) to make reassuring statements, thereby leading to more confidence and trust, which ultimately will help to break as Buffett says, “the negative feedback loop” we are currently embroiled in today.
You might be interested to know that buffettologist.com was recently mentioned in a Bloomberg article, which I have linked here.
Justin
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