The Rude Awakening
Omaha, Nebraska
Friday, May 11, 2007 ------------------------- - Buffett on hedge Funds,
- Buffett on private equity,
- Buffett on commodities, housing woes, corporate profits and even romance…
------------------------- Joel Bowman, from bonny Scotland… Was it because Chris Mayer wanted to submit a by-line from Omaha, Nebraska for today's edition of the Rude Awakening? Or was it because he wanted to snare some insights for you from the world's greatest living investor, Warren Buffett. Either way, the by-line is above, Warren's Wisdom is below…enjoy! --- Final 3 Days ---
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By Chris Mayer There are two events that strain the capacity of Omaha, Neb., to accommodate visitors. One is the College World Series. The other is the Berkshire Hathaway Annual Shareholders Meeting. More than 27,000 people filled Qwest Center on a cloudy Saturday on the fifth day of May. All of them came to hear two remarkable investors, Warren Buffett and Charlie Munger. The duo sits before the assembled throng and tirelessly answers questions put to them. In two parts, this extended Q&A runs about five hours. There are the inevitable grandstanders with their political statements and nutty questions. Then there are the sappy odes of hero-worship. "Oh, Mr. Buffett, thank you so much! You are my hero! My wife is pregnant and we are naming our son Warren after you!" I silently wished the Earth would open and swallow him whole. No such luck. Maybe they ought to have a tough moderator to break in and say things like: "Sir, your question, please." There also seemed to be a lot of Germans asking technical questions about how Buffett and Munger calculate "intrinsic value," as if making billions investing was an engineering problem. Investing is not like building BMWs. Despite these distractions, enough sensible questions slipped through such that the duo seemed to touch on every major issue on the financial scene today. From my notes, I have stitched together some of the comments I found most interesting or wise. On the housing market woes, Buffett noted how Berskshire's housing-related businesses are getting hit. Unlike many overeager investors today, who feel compelled to run into burning buildings by buying flaming housing-related stocks on the theory that the worst is over, Buffett offered a contrary view: "My guess is that it continues for quite a while." No elaboration on how long is "quite a while." But these guys think in glacial terms. Long-term is a lifetime. Therefore, "quite awhile" could mean at least "years." On the private equity bubble - which involves so-called private equity firms raising huge pools of money and then borrowing a lot more to buy whole companies - Buffett noted a great flaw in the scheme. Private equity firms have a "great compulsion to invest quickly." That way, they can go out and raise another fund and keep the fees coming in. Basically, private equity firms are paid for activity, not results. And the nature of the business means that we won't know who is successful until many years have passed. Buffett said the "score card is lacking." On management compensation schemes, Buffett put the issue in perspective: "There are more problems from having the wrong management than having the wrong compensation structure. It's more important to have the right people." On the record level of corporate profits in America, Buffett acknowledged the all-time high. He noted it is a weird world we live in where companies are getting 20% returns on tangible capital in a world where the long-dated T bond is yielding 4.75%. "At the moment, Corporate America is living in the best of all worlds." History shows that these episodes don't last. Munger added that much of the record profit growth stems from the massive financial center, a fact that "has no precedent." On the best way to become a better investor, Buffett advised: "Read everything you can… after that, you have to jump in the water." He said the difference between investing with play money and investing with real money is like the difference between reading a romance novel and doing something else. On the health care mess, Munger said: "It's too tough." Buffett added: "We look for easy problems." That may sound like a cop-out to some, but it is the core of a brilliant idea about the nature of good investing. Buffett commented how their success is not because their winners were any bigger than anyone else's. It's that they managed to avoid big setbacks. He mentioned a guy who was smart 99 times out of 100, but that 100th time did him in. Gotta avoid that. On derivatives, Buffett noted how derivatives increase leverage - a "largely invisible leverage." That could make a crash or downturn even worse, like adding gasoline to a fire. This is one of the big risks in the market today - the heavy derivative use by many firms. These instruments are untested in a crisis. We really don't know how they will act or what they will cause people to do. Buffett invoked the '87 crash as an act of forced selling. "We may not know where the danger begins or ends" with regard to derivatives. Munger added that the accounting for these instruments was deficient. People are getting paid for profits in which they are taking huge risks, like the proverbial picking up pennies in front of a steamroller. On the increasing short-term thinking of market participants, Buffett talked about an "electronic herd" that thinks decisions in their portfolio must be made every day or every hour. "Nothing evil about it, but it means they are playing a different game… and it has different consequences than a buy-and-hold environment." On global warming, Buffett said, "The odds are good that it is serious, but I'm not a scientist. I can't say I am 100% or 90% certain, but it would be foolish to say that certainly it isn't a problem. Once it manifests itself to a significant degree, it is too late to do anything about it. I think you should build the arc before the rains come. If you are going to make a mistake, you should err on the side of the planet… To which Charlie Munger replied, "Carbon dioxide is what plants eat, and so generally it's a little more comfortable to have it a little warmer instead of a little colder. It is not as though vast groups of people trying to move to North Dakota from southern California. It is not at all clear that it would be worse for mankind in general to have the planet a little hotter…You'd have to be a pot smoking journalism student to think it will be a calamity." On fears of a crash or meltdown or bad things happening in the market, Buffett offered wise words: "Something bad will happen, but you could go back at anytime in the last 100 years and say the same thing… you can freeze yourself out indefinitely." Every investor must play the hand he is dealt. On different investment structures, Buffett said, "Investment results are not a matter of form." Hedge funds, mutual funds and private equity firms - none create good investment returns. People making good decisions do.Hinting perhaps at his next purchase, Buffett talked about reading the annual report of a big oil company. He also mentioned on more than one occasion that finding and development costs were the most important things to know about an oil company. On ethanol, Munger said, "The idea of running cars on corn has got to be the dumbest idea I've ever heard." On investing in metals as protection against inflation, Buffett said, "We don't look at metals as protection against inflation." The best protection against inflation is your own earnings power. The second best is to own a wonderful business. On the long-term decline of the dollar, Buffett said the "fundamental forces of the dollar's decline are very strong." Americans didn't have to think about currencies before. That world has changed. On commodities in general, Buffett said, "We have no opinion on commodities." Munger added, "We're going to invest in businesses, not commodities." They invest in companies because they think there's value, not because they have an opinion on the commodity. "If I thought oil was going higher, I'd go buy oil futures." So there you have it. Some of the wit and wisdom from two of the world's greatest investors. --- The Next Berkshire Hathaway - A Special Report --- America's most famous investor has ALREADY made over $550 million holding this stock… And he's still got $839 million in shares… making it one of the biggest positions in his portfolio… It's not a household name - I'd be shocked if you'd even heard of it - but holding it right now could be as smart as taking a time machine back 40 years ago… and snatching up shares in one of the greatest blue chip stock stories of our time… The Full Report Is Yours Right Here: Introducing the Next Berkshire Hathaway - by Chris Mayer | 
