Saturday, May 17, 2014

High Yield Reads - 5/17/14

Summary of recents posts and pieces of interest, sometimes enduring, to investors:

  • Consuelo Mack interviews Chuck Akre on the importance of compounding. He uses Markel as a case study. 
  • More compounding machines: Base Hit Investor mines the intersection of cheap stocks and high quality - "I prefer to find really cheap stocks, but I want them to be businesses that I think can grow intrinsic value."
  • A Wealth of Common Sense of why saving trumps investing - its more exciting to focus on getting a few extra percentage points of investing returns, but you get way better total return by simply increasing the amount you save
  • Neil Woodford supports Astra Zeneca over Pfizer and worries about big oil dividend coverage from Royal Dutch Shell. And interestingly reveals stake in HSBC
  • AT&T's bid for DirecTV looks to be driven by, of all things, a need to fund its dividend going forward. That part clearly makes some sense because DirecTV will probably add around 25% to AT&T's free cash flow
  • Jason Zweig advises looking outside the US for stocks 

Saturday, May 10, 2014

High Yield Reads - 5/10/14

Summary of recents posts and pieces of interest, sometimes enduring, to investors:

  • Bill Mann of Motley Fool Funds - Wandering Fools: Arabian Gulf - on UAE, Dubai, Oman and more. "The United Arab Emirates and Qatar rank just below Japan and above South Korea and Norway in the 2014 Index of Economic Freedom" My favorite part "We came to Dubai because it was the easiest place to meet lots of local companies. In the region, it takes very little to persuade managers to come to Dubai -- so we spent our days talking with executives from companies from Jordan, Saudi Arabia, and Kuwait as well as from the UAE. The refrain for our meetings was repetitive. "Where would you like to meet? Dubai? No problem.""
  • Neil Woodford is hitting the circuit with his new fund opening up. A number of value people avoided the dotcom crash, but how did he also dodge the banks in 08? Woodford: "You must never allow an income target to dictate what you own." It was hard to put together an income portfolio on 05-07 and avoid owning banks, but Woodford managed it.
  • John Huber thoughts on the Berkshire annual meeting. My BRK posts are here and here.
  • Morgan Housel on Where Outperformance Comes From. Includes great Eddy Elfenbein quote - "Successful investing is one of the few endeavors  in which people are convinced it must be more complicated than it truly is."
  • FT: Sad story on Jerome Kerviel in aftermath of SocGen trading scandal. Via @RichardBeddard
  • I have a new post that calculates Berkshire's dividend payments from its top 8 holdings at $1.8B/year and growing. They may not like paying dividends but they like receiving them

Thursday, May 8, 2014

Investor Syntactic Sugar - The Lighter Side of Berkshire

I wrote up my notes for the Omaha trip to Berkshire annual meeting yesterday. The event is a lot of fun, and they ham it up pretty good. Warren and Charlie had a contest to see who could sell the most Heinz ketchup, complete with price war.

Along those lines a lot of the companies have Berkshire themed products. The game company, Mindware, had a Berkshire Hathaway themed version of Qwirkle with different companies like See's, GEICO and Dairy Queen represented.

Brooks running shoes got into the act last year, hosting the Invest in yourself 5k. This year there were two guys running dressed up like Warren and Charlie. The "Warren" guy ran with a 12 pack of Coke and handed cans out to cops who were working the event. This is probably the only 5k where the goodie bags they give the runners contain candy (See's lollipop). It was funny to see after the event these uber in shape people walking around after the finish sucking on a lollipop.

My friend Adrian Lane made the trip to Omaha again this year, he reminded me of one the factors that Munger listed as a key to Berkshire's success - "ignorance removal." That got me thinking, how many billionaires people self administer the hair shirt, talk publicly all about their mistakes and what they learned from them in great detail? Not many that I can think of.

I think the light, fun side of Berkshire serves a purpose too. Both Warren and Charlie have great senses of humor, and they use it to their advantage in getting points across. The basic points they are making are very old fashioned, I mean Buffett basically considers Aesop the definitive investing text for crying out loud. If you just drilled through these old yarns then it would be a yawn for most, but the same message delivered with fun and humor its a totally different story.

A good example was Buffett's response to a question on Forest River RV, which Berkshire bought in 2005. The questioner wanted to know why Forest RIver outperformed its competition. Buffett said he had no idea.

"Pete Liegl is not an MBA type at all. He's a terrific guy. I've never been to Forest River. It's based in Elkhart, Ind. I hope it's there! It's now a $4 billion business.  I've probably had four or five phone calls with him the whole time. It's his company. I couldn't run an RV company. We don't have anybody at headquarters who could run one."

That answer to me encapsulates what is great about the weekend and about Warren and Charlie's style. Its one thing to espouse principles, you can talk about decentralization or buy smart or delegation or people matter in the abstract, but its way more fun and interesting to hear the context and learn from examples, and a little fun (at the expense of MBAs) is a nice bonus.

Some people dismiss all the hokey stuff and custom products as gimmicks. Of course they are. That's the whole point! When your basic message is - buy simple companies with great products/services, run by high caliber people at a good price, well it could not be much simpler.  How do you get 38,000 people to fly in to Omaha to listen to that?

But there's a lot of value in the great crowd that assembles to hear the fundamentals. In computer programming there is a concept called syntactic sugar, the basic premise is to make complex things simpler, easier for humans to understand. Buffett and Munger are great teachers and they know how to use all the tools including humor, stories, examples, Ketchup sales contests, some See's and an overall fun event atmosphere to get their simple message across and to make it resonate with a wide cross section of people. 

Wednesday, May 7, 2014

Omaha Trip Report

The Berkshire Hathaway weekend is a lot of fun, its great to hang out with friends and talk and learn together. Every year there is something new. This year, I completed what I call the Omaha Triathlon part 1 - Berkshire Hathaway meeting, part 2- the 5k run, part 3- the Markel meeting.

When I first started going to the meeting some years ago, I assumed that I would come back with all these investing ideas and stocks to buy. Well, it does not really work that way. There are a great many takeaways, but they are more philosophical and reinforcing concepts with new examples rather than - "hey I think I should buy some more US Bank."

Some of my notes:

  • Buffett really enjoys working with 3G (Heinz), would not be surprised to see more collaborations. 3G is way more active than Berkshire and Heinz could be a model for more deals with 3G and Berkshire partnering up front while things are rationalized and Berkshire providing the long term home for the company. It seems like a good fit for both companies' strengths
  • Munger: "We're way better off without adding to the culture of envy in America. I would say that envy is doing the country a lot of harm."
  • Buffett said that See's has been a great investment on its own, but its larger impact on Berkshire was to orient towards quality. Specifically, he said they probably would not have bought Coke (~15 years later), one of their all time most successful purchases, if they had not learned the value of paying up for quality with See's. Munger chimes in: "If there's any secret to Berkshire, it's that we're pretty good at ignorance removal and the good thing about it is that we have a lot of ignorance left," 
  • Buffett: "Berkshire is about growing earning power"
  • Munger: "If you're not confused, you probably don't understand it very well."
  • Munger commented that a key to his success was when he realized he would not be a professor at Caltech, and that instead he needed to "compete with idiots and that luckily there is a huge supply."
I mentioned that I do not really come back from Omaha with a set of specific ideas for investing candidates, well there is one exception. The Markel meeting is a treat. What they are doing is so simple - taking the Berkshire playbook and running it.  At the Markel Q and A, one shareholder asked Tom Gayner "Why don't more people do this?" Gayner replied: "Shhhhhhh."

Gayner said the Alterra acquisition is for all practical purposes 99% done. This transaction significantly increases Markel's float. The Alterra portfolio was primarily in bonds like most insurers, so moving this to a more Markel-like allocation is a great opportunity. 

Like Buffett, Gayner looks for clean balance sheets, or "prudent use of debt" in his words. Gayner quoted Shelby Davis as saying "if you want to avoid doing business with crooks, avoid companies with debt."

A question came up on the insurance side as to other insurers that the Markel folks admire, they said they like smart competitors, because they make for a rational pricing environment. Steve Markel specifically mentioned Progressive which has managed to keep its combined ratio in the low 90s, a remarkable feat.

The third leg of the stool after insurance and investments is wholly owned business, Markel Ventures. Gayner said there is nothing to report and did not sound too encouraged about near term prospects for adding to the stable of companies here in the near term. Too much private equity competition. They do better at buying when conditions are bad.

Last year Gayner recommended a terrific book Genghis Khan and the Making of the Modern World. No book recommendation this year though.

Overall, I continue to be impressed by the steady progress and consistent approach at Markel.