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Author: mhirschey Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 212917  
Subject: 2005 The Warren & Charlie Show Date: 5/7/2006 7:25 PM
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I got back last night from the AM and was too bushed to post. I got up at 4:30 am on Saturday so that a bunch of students and I could rush the stage at 7:00 am to get good seats. Either we're slowing down or the crowd is getting faster…

Anyway, here are my top ten takes from the meeting:

1. On an overall basis, I found Warren and Charlie to be upbeat and voluble. Personally, I don't see how Warren can be so patient and considerate with those questioners who incessantly focus on succession issues, and there were a lot of them. I scarcely worry about the imminent prospects of my own demise, and I wish other shareholder held a common view when it comes to Warren. If the peanut brittle doesn't get him, we'll be fine. BTW, it's the unforeseen risk that gets you. Anticipated risk is taken care of by the intelligent. I believe it is more than fair to assume that Warren, Charlie and the Board have addressed succession in the same intelligent manner that they address other important issues facing Berkshire.

2. Warren is still sensitive to the risk of a derivatives-led meltdown in financial markets. His discussion about LTCM in 1998 and Salomon in 1990—when they were on the verge of bankruptcy filing—was sobering. Both Warren and Charlie continue to believe the potential is there for a big hic-up.

3. Lots of discussion centered on momentum-strategy hedge funds and how their incentive structure led them to swinging for the fences. Warren kindly suggested that few hedge fund managers were worth their fees. Charlie was disdainful.

4. Warren spent a lot of time talking about macroeconomics. It sounded like he'd prepped a speech on the subject of trade deficits, and I'm sure he did. There was only one (unimportant) instance in which I caught him making an incorrect historical reference. I think all of the talk about succession has Warren acting a bit defensively in the sense of causing him to show off a with multitude of historical references replete with obscure facts and figures to back up his well-considered opinions. In this way Warren at the annual meeting reminds me of a very well prepared student committed to perfection on his PhD oral exam. (BTW, he'd earn a “high pass.”)

5. What makes Warren's macroeconomic discussion interesting is that he freely admits that is no way to make investment decisions. BERKSHIRE is, has been, and always will make investment decisions on the basis of sound microeconomic considerations (competitive advantage, economics of scale, barriers to entry, and so on).

6. Warren emphasized the importance of the “opportunity cost” concept. Once an attractive investment opportunity has been identified, that return becomes the hurdle for all other investment opportunities being considered. Once upon a time, Coca-Cola provided that hurdle rate, but Warren did not mention KO as the opportunity cost of present-day investment decisions.

7. Like lots of folks, I had never heard of Iscar Metalworking Cos., the Israeli family-run maker of metal-cutting tools that Berkshire Hathaway agreed to take 80% control for around $4 billion. The company looks very high tech to me, so it will be interesting to see how the “Warren does not understand high-tech” folks spin this one. Top management gave a short speech and showed a brief video concerning the company. Those guys are smooth--very, very smooth. A student of mine spoke with Iscar folks, and said they appeared much more relaxed when speaking Hebrew.

8. Warren and Charlie had very little to say about modern portfolio theory. Of course, everyone expected some caustic comments from Charlie about MPT (“asinine,” he said), and were not disappointed. A well-known author from Wharton got dinged, but that was balanced with Warren's kind comments about others.

9. Warren and Charlie took a shot at the “optimistic” projections contained in mergers and acquisitions documents. The corp fin guys from Wall Street that I was sitting with loudly agreed with Warren's skepticism. Like Warren, they'd like to take bets that such projections would prove overly optimistic.

10. Biggest takeaway: Both Warren and Charlie did their best to downplay the significance of Berkhire's absolutely stunning first-quarter results. I had to shake my head at how unusual such humility is on Wall Street. OTOH, I worry if the average “fool” (including me)is paying attention. The earnings, book value, and economic value of Berkshire has risen very strongly during the past few years whereas the stock price has been stagnant. My gosh, Berkshire's net earnings were $2.3 billion, or $1,501 per share, for the three months ended March 31, compared with last year's $1.4 billion, or $886 per share. Isn't Berkshire a table-pounding buy? What am I missing?

Mark
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Author: markreisman One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 119005 of 212917
Subject: Re: 2005 The Warren & Charlie Show Date: 5/7/2006 8:02 PM
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At the meeting on Saturday, Buffett was asked if his recent decision to buy Walmart and Anheuser-Busch stock, meant that he viewed those stocks as more unvalued than Berkshire Hathaway was, since he chose not to buy back Berkshire stock. At first, Buffett reiterated his reservations about buying back stock, including his concern about being able to buy back a large enough amount and his concern about disadvantaging selling shareholders. He then went on to say that notwithstanding these reservations, he would buy back stock if the price got cheap enough, as it did in 2001. He clearly left the impression that he does not view the current price as a "table-pounding" buy, much to my chagrin and the chagrin of many others at the meeting.

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Author: brrkr Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 119006 of 212917
Subject: Re: 2005 The Warren & Charlie Show Date: 5/7/2006 8:08 PM
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<<<.......as it did in 2001.>>>>

Did you mean year 2000? (instead of 2001)

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Author: markreisman One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 119007 of 212917
Subject: Re: 2005 The Warren & Charlie Show Date: 5/7/2006 8:10 PM
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Sorry, it might have been 2000. Time flies.

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Author: nathu1 Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 119009 of 212917
Subject: Re: 2005 The Warren & Charlie Show Date: 5/7/2006 8:24 PM
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You're not getting slow at all! I was right behind you in line, but you were long gone by the time I got throught the door!

I agree the results are impressive and getting difficult to ignore. I will be shocked if Mr Market fails to respond soon.

Rakesh

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Author: mhirschey Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 119021 of 212917
Subject: Re: 2005 The Warren & Charlie Show Date: 5/7/2006 11:14 PM
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mark,

Also recall that Buffett said he could not buy a lot of BRK.A at anything like the current price.

That is comforting to nibblers like me.

BRK.A is cheap.

Mark

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Author: Goofyhoofy Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 119032 of 212917
Subject: Re: 2005 The Warren & Charlie Show Date: 5/8/2006 9:14 AM
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7. Like lots of folks, I had never heard of Iscar Metalworking Cos., the Israeli family-run maker of metal-cutting tools that Berkshire Hathaway agreed to take 80% control for around $4 billion. The company looks very high tech to me, so it will be interesting to see how the “Warren does not understand high-tech” folks spin this one.

Cutting tools and machine tools have been around since the dawn of the industrial revolution, and that's being charitable because you could count the cannon borers that were used in the 1300's.

Iscar may use some "high tech" in their business but that doesn't make them "a high tech business" any more than thinking that Net Jets is a high tech business because they fly jet airplanes. (They're a really fast limo rental service, best I can tell.)

Now I don't know anything about Iscar either, except from their website which shows only a wide selection of "cutting tools", and that's certainly been a stable and important business for a couple centuries across the globe. I found nothing about the high-tech end of the business, which is a potential disruptor to the traditional machine tools business: rapid prototyping (and manufacturing) by additive fabrication, wherein the product is produced by positive addition of material via computer lithography versus the traditional cutting away of a big block of material to achieve the desired result. Mostly those techniques have been used in plastic and composites, but they are moving with some success into metalwork, which might have an impact - someday - on the traditional machine tools industry.
 


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Author: ballingarry Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 119055 of 212917
Subject: Re: 2005 The Warren & Charlie Show Date: 5/8/2006 12:36 PM
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Share buy-back.

Berkshire's cash mountain has an anchor effect on the value of Berkshire's shares. A proposed share buy-back might be good for the value of the shares but it would do little to put a hole in Berkshire's cash mountain which is the real challenge. This is primarily because at the current level of share turnover (14%) Buffett would not be able to buy a meaningful amount of shares. Also, presumably once he announced the buy-back, the shares would start going up as this would signal Buffett's view that the shares are undervalued which would have the effect of reducing the number of shares available to buy at the 'undervalued' price. He's a bit stuck on this one or have I missed something?



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Author: RaplhCramden Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 119057 of 212917
Subject: Re: 2005 The Warren & Charlie Show Date: 5/8/2006 1:06 PM
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Also, presumably once he announced the buy-back, the shares would start going up as this would signal Buffett's view that the shares are undervalued which would have the effect of reducing the number of shares available to buy at the 'undervalued' price. He's a bit stuck on this one or have I missed something?

The reason to announce a share buy back is to bring the price of the stock up. So whether he actually has to buy the shares to raise the price, or whether the announcement itself is sufficient, the goal is accomplished.

Buffett would want to raise the share price IF he believed it was wildly too low. He views fairness to shareholders as this: that they be able to buy or sell at something like the "right" value, that they not be screwed more than a certain amount by Mr. Market's peccadilloes. The fact that he is not announcing a share buyback, indeed that he is not even leaving teacups around with tealeaves in them that MIGHT be read as calling for a buyback, is surely meaningful. Buffett DOES NOT believe Berkshire is "wildly" undervalued, all things considered.

Wildly probably means MORE than 25%. 25% is "margin of safety" territory. Buffett is the kind of guy who doesn't like to buy things with less margin of safety than 25%.

****

So of all the tea leaf readers you will find on this board, here is my interpretation of the leavings:

Berkshire may be undervalued by 20%, it MIGHT be undervalued by 25%, but it is not more undervalued than that, in Buffett's opinion.

*****

Given its PAST 25%/year growth, its recent 17% (IIRC) growth in book value, for many of us, even at 15% to 20% margin of safety, it is still a great buy.

But if you are thinking it is more undervalued than that, there is a strong case to be made that you disagree with Warren Buffett.

Not that there is anything wrong with that.

IMHO,
R:)

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Author: ballingarry Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 119060 of 212917
Subject: Re: 2005 The Warren & Charlie Show Date: 5/8/2006 1:13 PM
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Yes, I think your precentages are about right.

Ballingarry

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Author: EsamMoney Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 119283 of 212917
Subject: Re: 2005 The Warren & Charlie Show Date: 5/11/2006 8:49 AM
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Buffett would want to raise the share price IF he believed it was wildly too low. He views fairness to shareholders as this: that they be able to buy or sell at something like the "right" value, that they not be screwed more than a certain amount by Mr. Market's peccadilloes. The fact that he is not announcing a share buyback, indeed that he is not even leaving teacups around with tealeaves in them that MIGHT be read as calling for a buyback, is surely meaningful. Buffett DOES NOT believe Berkshire is "wildly" undervalued, all things considered.

So of all the tea leaf readers you will find on this board, here is my interpretation of the leavings:

Berkshire may be undervalued by 20%, it MIGHT be undervalued by 25%, but it is not more undervalued than that, in Buffett's opinion.


I'm not saying that it is definitely more undervalued than 25%, as I don't care much exactly how undervalued it is (although I do believe it IS undervalued.) I agree with you that Buffett does not like to see the stock "wildly" undervalued. But is it possible that Buffett doesn't feel the need to announce that he would be willing to buyback shares because he believed that his announcement of (and excitement about) the major Iscar acquisition would be enough to raise the share price to a more reasonable level? Or if not the Iscar acquisition, maybe some other acquisitions in the works? Or simply the consolidation of Pacificorp and some of the other recent purchases into the operator earnings? It is a possibility that he just didn't feel it necessary to get the effect he was looking for, or that it could possibly even be overkill.

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