I suppose that now is as good a time as any to make a post - no, I'm not dead. I had been waiting and hoping for the point of maximum pessimism and despair, some blood in the streets, and not quite sure if that time is now or in the future – now will suffice. Someone told me that my name came up on the board and I appreciate the kind words, and to kweetal for posting the piece on my dad – it brings back some memories – one of which was the story of my grandfather who got “wiped out” in the depression and recovered quite remarkably in the depths by buying some high quality stocks at insanely cheap prices – to the point where he was better off afterwards than prior. The family investment philosophy could have been written by Munger. To dispel rumors of my demise or attainment of glory, I am presently stationed in a former Soviet Union country doing things that if I described I’d have to kill you… :-) As it’s been awhile I shall try to make this both meaningful and not too long and will probably fail on both but I think that now is a good time to go back and look at what brings us all together and why Berkshire transcends its existence as a mere stock or collection of fine companies. Philosophy - That soft, imprecise topic that one might associate with hippies, acid trippers, and those who want to party their way to a college degree. Why is philosophy so important? It’s the art of arts I think - a major for false philosophers wrapped in pseudo intellectualism - about as unscientific and mathless as one can imagine. There are many who absolutely despise and hate it. I find it somewhat shocking why so few take the time to develop a grounding philosophy as without it they are prone to change at the absolute worst time – falling prey to the loudest or shiniest theory to come along. Fools. Let’s take a look back to a few years ago – before the financial world went into meltdown and has left many of us wondering whether the capitalist system will even survive. When I began this journey to understand Warren Buffet, Charlie Munger, and Berkshire Hathaway in a quest to investment expertise I never thought that I would find the key deeply imbedded in something where I had long held suspicions. Yet the more I read and studied and put the pieces of the puzzle together the more I began to realize that underpinning it all, the critical center of gravity, was a deep, profound philosophical vane that tied it all together. I first expected that my quest would end in a brilliant investment formula dug out of some obscure book or writing. I never expected the quest to end where it did - that the philosophy is EVERYTHING – the guiding light that shines from on high – to guide, lead, and protect during the best of times and especially the worst of times. It tells you what to do when you’re not so sure and when you are bombarded with contradictory and competing information. When I read back through all of the Berkshire annual reports, and sat at the BRK and Wesco meetings, upon reflection I realized that the best part wasn’t to be found in some stock discussion or to hear about that year’s economy. Rather, it was to cram more of the brilliant philosophy of these two men into my little, right-sided brain. It’s all right there – said repeatedly through all of these years – again, and again, and again – and reinforced with powerful examples. Yet, I have also long realized that the Berkshire philosophy is still poorly understood and underappreciated by many who read the words and attend the meetings – any review of questions on a CNBC interview or an article by supposed Buffett fan Doug Kass says a lot about philosophical ignorance. I’ve stopped trying to figure out why it persists. Several months ago a good friend sent me the following link from The Fool Berkshire board that we all had on “bad luck” and it got the two of us to talking about how one should approach things and how now more than ever it all rings true. It is one of my favorite threads for it occurred right before all of this chaos and it highlights the essence of my still developing philosophy and what I might naively assume is shared in large part by the man whom I most admire - Munger: http://boards.fool.com/Message.asp?mid=24356387&sort=who... And in that running thread at the end I sort of summed it up with, “It sure will be interesting to see comments two years from now - will we get chaos or not? And if so how are people going to psychologically handle it.... “ Well it’s here. We all had our choices before it began and we have opportunity on how to respond now that the chaos is upon us.. And hedge fund managers and mutual fund managers face the exact same reality we do. One response is to go negative - it’s all too familiar. Those CDS spreads sure look “bad” right now do they not? And many an author (even the imbecilic Peter Eavis has crawled out of his hole) seems hell bent on ignoring the good, highlighting the bad, and doing stupid analysis on Buffett and Berkshire. And let's face it, there’s plenty of ammo for the narrow minded and short term centric - Buffett made his sins of omission and bought COP too early and jumped into WFC around $22 in his private account and bought some Irish banks he probably shouldn’t have – all look pretty stupid right now. “Bad luck” as per our earlier thread? No. Those were rational choices – perhaps those choices will look a lot more prescient as time passes, perhaps not, but the naysayers won’t be around to correct their mistaken criticism if wrong – they’ll just fade away – moving on to the next target. In the depths of despair, it always seems to happen that the weaker species turn towards what one might call, “rabid dogism” in that they see fit to viciously and repeatedly attack those who were “lucky” – the winner - pointing out every flaw and almost giddy that they can point to the failures of men and women far superior to themselves. And as she sinks, the wounded body of Berkshire now gets kicked by a rabid mob when she’s down. So we’re left with our choice – do we believe the skeptics and the naysayers or ignore them? Berkshire’s share price seems to confirm everything they say –it’s “proof” that they are right and Buffett and Munger are wrong. Which brings us to the operative question for us shareholders - Is Berkshire really down? The market has sunk and along with it Berkshire’s PRICE has declined. We know about it – most of us probably peek every day. But again and again Buffett tells us that it’s not important. I guess we all know better than Buffett and keep looking and using it as a measure of effectiveness. But there can also be no doubt that in addition to its stock price, Berkshire the business has been "hit." We all know about the earnings fall. We know about the derivatives bet on broad market contracts out a few decades that have scared some folks. And as mentioned, we also know about the fall in the equity portfolio – The naysayers LOVE to focus on that equity portfolio. Did I forget anything? Oh yea, Buffett is getting older and we all know that things all go to hell when he leaves the scene. Berkshire and bad luck just seem to go together? I will impart this thought fwiw – all of those naysayers and all of those negative articles and all of the nit-picking on the unimportant variables would never be written and would never be said if Berkshire wasn’t worth thinking about. Why is Berkshire even worth thinking about and criticizing – especially now? I’ll argue that it’s because Berkshire has won – one of the only left standing – dictating mouth-watering terms. And the critics and the losers and Wall Street absolutely HATE it – their champions lie in smoldering ruins – helpless as they are being eaten alive. I return to the grounding philosophy. When it comes to Berkshire, I think one should be more at home now than ever. This is what it was always all about. To go wobbly now, at such a pristine moment of chaotic perfection, would be an abomination of the core grounding philosophy. The “bad luck” thread I think gets to the essence of Berkshire and what I think is the Buffett/Munger philosophy – embracing chaos as opportunity - and that philosophy shows that Berkshire, despite some of the damage and mistakes taken on the fringes – is deploying capital in a depressed market and getting exceptionally attractive terms – just as it was all supposed to be. And time being the best friend of the superior business, all we have to do is discipline ourselves and wait. A test of will and of discipline.The weaker species and philosophically ungrounded are incapable of this and will suddenly see all of the faults and weaknesses as being dominant - I half think that Buffett ignores the stock price and lets it drop to cleanse the base of the riff raff. In that light, all is well with the world and things are functioning just as they’re supposed to. As the price has suffered, Buffett has been deploying capital and the Berkshire businesses that one can now buy for free are strengthening their moats and posturing themselves to thrive in a changed competitive landscape. Munger might refer to survival genes with a brilliant adaptability. It was all planned by Buffett and Munger long ago – nothing else explains the massive buildup of cash over the years. It is a time like now where the “Sage of Chaos” can do his thing…the sweet spot of investment capitalism. http://boards.fool.com/Message.asp?mid=24313494&sort=who...And I’d say that for the most part he has done exactly what he was wired to do and for what he prepared for so long to do. How could it be any other way? All of the above was Buffett’s and Munger’s choice and it was our choice either to invest with them or not to and our choice on how much of our capital to allocate towards Berkshire. Buffett and Munger prepared us well in large part by NOT doing a lot of things – again, a core part of the grounding philosophy. The avoidance of catastrophe is key – one wants to seize opportunity in chaos – not to be overwhelmed by it. Berkshire’s choice to avoid risk highlights all of those alternative choices which are rooted in competing philosophies. The wrong philosophy, though it can look great for long periods, can destroy you in the end. We have what is shaping up as a beautiful stratification of winners and losers – a return to natural law where not every kid gets an A. In that world (more of a natural, kill or be killed sort of place) I want my moat, I want my superior businesses, I want my robust cashflow, I want integrity, and I want expertise at the helm. All of those things emanate from the grounding philosophy. Many fund managers owned Citigroup, Lehman, Merrill, Fannie, Freddie and others - their philosophy had a fatal flaw - where qualitative factors that Munger has long loved meant little. The only explanation is that they focused on what they saw as value and were incapable of seeing how the numbers were derived and what it all meant to the viability of the enterprise. Buffett and Munger did not make that tragic mistake. I think there's good reason for that. Which brings us to the conclusion – philosophically speaking, this world is what we LIVE FOR – not succumbing to the “assumptions of stability” that many of us still have. It is the essence of why we are here and it's chaos where we must wire ourselves to thrive. I said two years ago that chaos is not to be feared or dreaded and that it wasn't "bad" - only that it was inevitable at some future point. It always comes. Rational man prepares for it. Emotional man fears it and hates it or at worst denies it. Berkshire was built for this very sort of scenario. Did the other investment managers dotting the mutual fund landscape blithely assume that it would never come? Did they assume that all that could happen is that we would bounce around a little bit on our way to the stars? DOW 35,000? The world doesn’t work that way damn it. The predator sometimes kills the weakest wildebeest and shares the scraps with its young – a clear victor, and a clear vanquished (sometimes mistakingly referred to as “victim.”) Someone mentioned that things will never be the same... that people are going to leave the market - devastated and crushed - and never come back. Completely demoralized. Woe is me. I rhetorically ask, is this such a bad outcome? I will never forget the feelings of helplessness as Wall Street went bonkers in a frenzy of upward momentum - EVERYONE looked good. Everyone did well. All kids got an A on their report card. I thought it was an abomination of natural law and I never care to see it again. If no one loses, then no one wins – that dichotomy is essential – something that world governments would do well to remember. Who is THRIVING in all of this? Let's go back and look at the philosophy - who is built for chaos? Who was prepared? Who had the real moats? Berkshire? Would you rather have had that dividend or would you rather Buffett waited and got the GE and Goldman deals or did the Mars deal? And it’s not just Berkshire. We did a lot of discussion of Wal Mart a few years ago - how its moat is superior and built for crisis and tough times. It’s been absolutely beautiful to watch WMT in the recent retail landscape. I amuse myself watching TarJay struggle to get its footing as Wal Mart thrives. Coke? Isdel did a stupendous job turning that company around. McDonalds? I recall many a discussion on why the MCD moat was vastly superior to BK and Wendys and MCD is now really kicking it in as many restaurants who deserve to fail go under.If Berkshire is our winner then who is on the other side? AIG? Deserved it. Lehman? Deserved it. Merrill? Deserved it. Citi? Richly deserved. MBIA? Deserved it. Fannie? Deserved it. Freddie? Oh yea. During this latest season on the brutal plains the herd got culled of its lame and its weak and its sick – as is supposed to occur. They were not prepared. They assumed status quo. They failed to worst-case things. They failed to see the big picture and their place in it. They were short-term oriented. They didn’t properly plan. They were too slow – and ultimately vulnerable to reality. The weakest link and now they’re essentially dead – and it was a painful death:Fair warning… blood and gore (aka – reality) children need to leave the room: http://www.youtube.com/watch?v=xSl86frZtr4&feature=relat... Which goes to show: Moats matter. Defining them and their sustainability is a huge, massive part of the game and the core philosophy and as Munger has said, it’s where the vast majority of intellectual capital should be applied on investment. In military terms I’d call that target identification. Having the cash to seize them at the right time is likewise profoundly important (the Sage knows when to pull the draw string and when the time is ripe for release). There is always a pristine moment where release of the tension has maximum impact and effect on the environment – Buffett’s buildup of the cash hoard while patiently waiting for the right targets to appear increased the tension on that string. We’ll all know later on how close those arrows came to the proper targets.. Take a look at many of the other “value investors” who haven’t done so well – it shows in spades that it’s all a hell of a lot more than just “value investing”… It’s all deeply philosophical.
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