Friday, March 29, 2013
ANC On the Money
Vandermir Say, CFA
Posted at 03/28/2013 11:45 AM | Updated as of 03/28/2013 11:45 AM
MANILA, Philippines - Investor Warren Buffett is the fourth richest man in the world according to Forbes magazine, with a net worth of $53.5 billion. The so-called "Oracle of Omaha" didn't become a billionaire through sheer luck, but by following the strategy of value investing".
Thursday, April 21, 2011
Gentlemen, thank you so much for joining us tonight. This has been, as you know, an extraordinary year. This is a year where the rules have been completely rewritten, where we have thrown out the rule books, and we have seen icons collapse. This is also a time when a lot of people have probably wondered about our way of life. People in this very room. That's going to be our focus in just a minute. Gentlemen, before we get to that, the two of you may seem like an odd pair. For anybody who doesn't know you two well --
BUFFETT: You'll think more odd when we get through. [LAUGHTER]
BECKY: What brings you two together tonight? Why you two and why here with these business students here at Columbia?
WARREN BUFFETT: Well, we enjoy working together. Actually, when I left Columbia, they told me I would probably have to come back and repeat a few classes. So here I am.
BECKY: Bill, what about you? You are ready to go with the students?
BILL GATES: Yeah, it will be a lot of fun. Warren and I love getting the questions and talking about our optimism. [APPLAUSE]
BECKY: The reason you two are here tonight is this is a pivotal moment in history. People have questions about the economy, about our entire system of capitalism. And, gentlemen, let me ask each of you, over the course of the last year, was there ever a time that you had doubts about capitalism and about our way of life?
BUFFETT: No, there was not a time. If there had been, last September when we invested a lot of money, that was when the country was looking into the abyss. The money was flowing out of money market funds. The commercial paper market died and everything. We put $8 billion to work in just a matter of a few days then. So I never lost confidence in the system. This country works, you know. We've got 200 years of proof. And it's going to continue to work. [APPLAUSE]
BECKY: Bill, what do you think, Bill?
GATES: Well, we have a complex financial system which we have proven that we can make mistakes. But more fundamental than that is the innovation, the fact that you can create new companies, that people are willing to take risk and invest, that there's great science going on. This country still has the best universities, the best science, and we're going to tune our system of capitalism, you know. The idea that you have a lot of short-term loans covering long-term needs, the amount of leverage that was there, there are definitely some lessons. But the fundamentals of the system, a marketplace-driven system where we invest in education and a great infrastructure for the long-term, that's continued. And, you know, I'll bet there are some inventions that took place in that fall in the darkest hour: People were working on new drugs, new chips, new robots and things to make life better for everyone in the decades ahead. [APPLAUSE]
BECKY: All right. Tonight is all about the students and why don't we start out and get right to it. Why don't you start out. You ready to go?
QUESTION: We are honored to have you here at the university. [APPLAUSE] My question for you is directed to both of you, Mr. Gates and Mr. Buffett. I'd like to know your perspective on whether greed and immoral behavior, unethical behavior, were key causes of the recent financial crisis.BUFFETT: You went out toward the end, Becky.
BECKY: Just wondering whether greed and corruption were behind what happened.
BUFFETT: It certainly played a part. We have always had greed. That didn't get invented in the last few years. And greed, fear in the third quarter -- I mean, the American people were really panicked there for a while. And it affected their -- it started out on Wall Street but then spilled over into the general economy subsequently. But we're never going to get rid of greed. We're never going to get rid of fear. What we do have is a system, as Bill said, a market system where we have the quality of opportunity and the rule of law combined to unleash human potential in this country over the last couple of hundred years to the degree nobody would have believed possible a few centuries before that. There's nothing that's gone wrong with that system. Our economy was sputtering and still is sputtering some. But we've got the greatest engine ever devised. And it's just beginning. Greed will continue. Don't worry about that. Oliver Stone is putting out a second film here pretty soon. Probably get mentioned again in this one with Gordon Gekko making a return. But that is not what drives the American system. What drives the American system is the quality of opportunity in a market system and the knowledge that when you get out of here, you're going to enjoy the fruits of the knowledge you have gained. And it will keep working. I'd love to trade places with any of you.
BECKY: Bill, do you have any extra thoughts on that?
GATES: Well, the best systems are ones where you have good short-term metrics, great accounting, looking at profits, looking at risk and willing to do things long-term. Investing in new research, letting people build new companies. I was a huge beneficiary of this country's unique willingness to take risk on a young person. And, you know, I got to hire people who were older. I got to sell to people who were older. And it was kind of a dream come true. And that kind of thing is -- other countries have seen it and they are trying to create that same dynamic. And that's good for the world. It's excellent that China and India will borrow our ideas about universities, about entrepreneurship, simplification of business. None of us want to borrow this extreme leverage that we got into. But in a sense, that's kind of a -- I don't want to say minor, but it doesn't speak to the heart of why things have worked so well.
BECKY: All right. Let's get to another question. How about right here?
QUESTION: Hello. My name is Accosia Bagima. I am from the Northern Virginia area and I'm a first-year student here at Columbia. And I want to thank, once again, both of you for coming. It's an honor. My question is directed toward Mr. Gates. Mr. Gates, I know you're not in the finance industry, but can you tell us what you were feeling when you first heard that Lehman was filing for bankruptcy?
GATES: I don't follow investment banks, you know, very closely. So it didn't strike me as fundamentally a terrible thing. In the technology business, the two companies I admired the most, Wang Industries and Digital Equipment, had both basically gone bankrupt. Digital actually got bought. And so the fact that there's these ups and downs, certain firms get knocked out, I didn't have any sentimentality over that particular firm. Now, this knock-on effect where other people had debts to them and those were going to be very hard to settle and that complexity might cause things to freeze up, that I called up Warren and I said, "Should I be worried?" And he said, "A little bit." [LAUGHTER]
BECKY: Warren, was it a mistake for the government to allow Lehman to go under?
BUFFETT: It may have been. But I would say overall, the officials in Washington did a terrific job of dealing with really what was an economic Pearl Harbor, as we talked about. So I would say that if Merrill hadn't been bought by the B of A, Merrill would have gone very quickly. And the dominoes were really lined up. And I don't think it was fully appreciated, perhaps, what a big domino Lehman was or how close it was to the next big dominoes. But overall, I give (former Treasury Secretary Henry) Paulson, I give (Federal Reserve Chairman Ben)Bernanke, I give (FDIC Chairman) Sheila Bair, I give (Treasury Secretary) Tim Geithner, I give them very high marks for the fact they took unprecedented action. [APPLAUSE]
BECKY: Let's get to another question. Right back here at the microphone. Go ahead.
QUESTION: I hope this works.
BECKY: It does. It sounds like it.
QUESTION: Hi, my name is Greg Letter. I grew up in Ohio and I'm also a current student, obviously. My question was with Lehman Brothers and Goldman Sachs, this relates to Mr. Buffett, you had the opportunity to invest. I was wondering how you chose to invest in Goldman Sachs [GS 153.98 1.28 (+0.84%) ] and why you chose not to maybe invest in both, or what made you not decide to invest in Lehman Brothers.
BUFFETT: I had more confidence in both the numbers and the management of Goldman Sachs than any other major firm in Wall Street at that time. Now, there could have been things happened that would have made Goldman Sachs be next in line. (Goldman CEO) Roy Blankfein had said I worked 30 seconds behind Morgan Stanley. This is covered very well in the book called "Too Big To Fail" by Andrew Ross Sorken. But I did not think the system was going to go under. I felt Washington in the end would do the right thing. I thought if they did the right thing, Goldman Sachs was -- I thought it was the best-run operation. I thought its figures were the most solid and I thought they would prosper the most in the future ahead. Plus I liked the terms, too. [LAUGHTER]
BECKY: Warren, you said at that time they had the best management and a lot of other things. Did you change your mind since then?
BUFFETT: Pardon me?
BECKY: Have you changed your mind since then? You said at that time they had the best management.
BUFFETT: Goldman, my experience with Goldman goes back to when I met Sidney Weinberg in 1940. I followed the company a long time. They have a discipline around there that I think particularly in their marking to market and all of that, I think probably is the best among the firms in Wall Street. And I thought Roy Blankfein had a very strong appreciation of risk. Now, if the system went down, everybody gets hit. But I felt to a great extent they had factored the best people into the business. So they were my number one choice. I had a few other choices that were offered to me. [APPLAUSE]
BECKY: Let's get to another question, everybody. Another question.
QUESTION: It's a pleasure to be here with both of you today. My name is John Lemley. I'm originally from Scarsdale, New York. Given the severity of the economic downturn, which some attribute to systemic breakdown in risk allegation and underwriting standards, a fiercely partisan debate has ensued regarding the appropriate role of government. Can this role be positive and if so, how?
BECKY: What do you guys think about big government?
GATES: Well, there's clearly a role for the government in business cycles. And over time, that's been tuned, you know, mistakes have been made. Now, the question is -- and that's largely measured through inflation and interest rates. Now, there's a question of could there be a measure of risk that would cause them to step in and maybe tax transactions, make the bigger firms put more money aside. That is still really a question of whether you can recognize these situations and actually have government play a very positive role. Now, as things start to fall apart, we know there are ways that taking firms that are going down and handling those in a more expedited way -- there's a lot that can be done there. But the basic idea of, can you spot bubbles? Can the government spot bubbles? That's a great question. Some great economists have some ideas. But it is not a proven territory.
BUFFETT: Last September, only the government could have saved things. The whole world wanted to deleverage. And they were deleveraging under conditions of extreme haste and with guns to their head in some cases. And the only entity that could possibly leverage up at the same time that everybody else wanted to deleverage was the Federal government. And when 200 billion flowed out of money market funds in a couple of days, when commercial paper stopped, only the Federal government could act then. And fortunately we had the people there who recognized that and acted promptly. The government has a huge role. And now going forward, it's a very tricky thing to figure out how to prevent excessive leverage and prevent off-balance sheet arrangements from getting in trouble or for just having people at the top of major institutions that run risks they shouldn't be running. But we're wrestling with that right now. There should be more down side to the head of any institution that has to go to the federal government to be saved for reasons of the greater society. And so far, we have been better at carrots and sticks in rewarding CEOs at the top. But I think some more sticks are called for.
Thursday, September 24, 2009
Friday, April 3, 2009
President, The Baupost Group
by Roger Thompson
Illustration by David Cowles
While other money managers scrambled to survive the financial market meltdown, value investor extraordinaire Seth Klarman (MBA ’82), president of The Baupost Group in Boston, cautiously pursued buying opportunities. After sitting patiently on the sidelines with a mountain of cash — 40 to 50 percent of Baupost’s $14 billion–plus in assets — for several years, the firm’s recent investments have cut its cash stash in half. Distress selling, it seems, breeds the kind of bargains Klarman lives for.
Fresh out of HBS, Klarman didn’t hesitate when Adjunct Professor Bill Poorvu recruited him to help manage a $27 million pool of capital in the newly formed Baupost. While the starting salary was an underwhelming $35K, it turned out to be the opportunity of a lifetime. In 26 years, Baupost has racked up an enviable 20 percent annual compound rate of return, earning Klarman entry into the Alpha magazine Hedge Fund Hall of Fame. The firm has grown from 3 to 100 employees.
A consummate team player, Klarman rarely uses his private office, choosing instead to sit at the trading desk where he works closely with analysts on investment decisions. But work isn’t all-consuming. He makes time for family and outside pursuits. As his three children grew, he coached his daughters’ soccer teams and attended his son’s recitals. And he is deeply committed to a number of philanthropic causes. Klarman recently took time to discuss investing, the credit crisis, and his approach to philanthropy.
When you started with Baupost at age 25, did you already consider yourself a value investor?
Yes. After my junior year in college and right after graduating, I worked for Mutual Shares Corporation, which was run by a wonderful gentleman named Max Heine. I learned a huge amount about value investing. It turns out that value investing is something that is in your blood. There are people who just don’t have the patience and discipline to do it, and there are people who do. So it leads me to think it’s genetic.
Did you ever waver in your investment style?
What gave you the resolve to say no to all the other investment approaches?
There are several answers. First, value investing is intellectually elegant. You’re basically buying bargains. It also appeals because all the studies demonstrate that it works. People who chase growth, who chase highfliers, inevitably lose because they paid a premium price. They lose to the people who have more patience and more discipline. Third, it’s easy to talk in the abstract, but in real life you see situations that are just plain mispriced, where an ignored, neglected, or abhorred company may be just as attractive as others in the same industry. In time, the discount will be corrected, and you will have the wind at your back as a holder of the stock.
Do you set an annual return target?
We think it’s madness to target a return. Return lies in some relationship to risk, albeit there are moments when it’s out of whack, when you can make a high return with very limited risk. My view is that you can target risk versus return. So you can say, I’ll take the very safe 6 percent, I’ll take the somewhat risky 12, or I’ll take the enormously risky 20, knowing that 20 might actually be minus 20 by the time the actual results are known. We just don’t think targeting a return is smart.
You are lead editor of the new edition of Security Analysis, the bible of value investing by Benjamin Graham and David Dodd, first published in 1934. Is their advice still relevant 75 years later?
At no time since 1934 has it been so relevant given the financial turmoil and distress in the world and the possibility that we could be reliving some sort of serious economic downturn. What’s wonderful about Graham and Dodd is that their advice is timeless. And it is not just about investing; it’s also about thinking about investing. It basically teaches you the questions that you should ask, and it makes endless references to the foibles of human nature in the markets.
Given the recent credit market meltdown, have we made much progress in figuring out how to avoid the pitfalls pointed out by Graham and Dodd?
No. What happens is that people always want to believe that this time is different, that there’s something new under the sun, and that through their own ingenuity they can wish away risk. The idea that risk premiums would go to zero, that we’re somehow overcoming human nature, is absurd. The whole reason that our capitalist system works the way it does is because there are cycles, and the cycles self-correct. With too much excess, eventually you get a downturn.
So the explosion in securitized assets was a ticking time bomb?
It’s not amazing that securitized products were created. There are huge financial incentives for the people involved. What’s amazing is that anybody actually bought them. That’s because they’re created with a one-dimensional idea of what the economy and the world are going to do. If you have nothing but good times, then securitization makes tremendous sense. But securitization, for all of the commingling and diversification it gives you, also gives you a lack of transparency. So if you have an environment like the one we have now, the assets that have been securitized actually make you worse off than if they were just held as whole loans.
The unanswered question is how did the smartest people in the world who run the major Wall Street firms not understand that these products were toxic and end up getting caught with them on their books?
As Fed chairman, did Alan Greenspan have a hand in creating the current credit market crisis?
Until recently, Greenspan seemed unaware of his role in influencing markets. As Fed chairman, when he advised people not very many years ago to take out variable rate mortgages, he aided and abetted the housing market excesses. When he said there was irrational exuberance in the market [in 1996], he was basically right. But then he didn’t act even though he had plenty of levers he could have pulled that didn’t have to do with changing interest rates. He could have raised margin requirements, for example. But instead, he came up with the ridiculously lame idea that bubbles need to be allowed to run and that the Fed can clean up the mess afterward, which only had the effect of inflating subsequent bubbles, most notably the housing bubble that came as a result of the easy money. So he’s just been unaware of the impact of his encouragement, and his inaction got us into the terrible mess we’re in today. It’s not all his fault, but I hold him largely responsible for it.
How have Ben Bernanke and Henry Paulson (MBA ’70) done in managing the financial crisis?
They have been dealt an unimaginably bad hand. If any of us were in their shoes, we would be doing similar things, although it is reasonable to assume that part of the problem we are facing today is a result of previous government actions, and today’s government actions will give rise to future problems as well.
The lesson should be that we need to get to a point where we don’t need to intervene in the future, because we realize that intervention also delivers incredibly dangerous messages and creates a giant moral hazard. Bernanke and Paulson have to realize that if we’re going to intervene when things are bad, we’re also going to intervene when things are good and take away the punch bowl before the party gets too far along. One-sided intervention is even more dangerous. It will create an ever bigger bunch of excesses that will require an even bigger bailout next time.
Was the $700 billion federal rescue package, sold as a plan to buy toxic mortgage-backed securities from banks, the right way to go?
Defining the problem you are trying to solve is critical in knowing whether this plan will solve it. The bailout does almost nothing to solve the specific problem of declining housing prices. If the government really wants to tackle that problem, making capital available so that banks can make safe loans is crucial. Injecting $250 billion into the nation’s banks is a big step in that direction.
How do you approach philanthropy?
I’m a big believer in giving back. We all have an obligation to leave things better than where we found them.
I have more than I’ll ever need, and more than my family will ever need. I’m only working now for philanthropy. So everything I do is about giving back. In fact, one of the things we did at Baupost when we recently took on some additional clients was to accept only educational endowments and foundations. We figured we would further benefit the world by helping these organizations rather than individuals. That decision was very important for me and for all the firm’s partners.
Also, given the extremely difficult financial environment we are in, I expect charities will be greatly affected. That’s why it’s incumbent on those who can to step up and help fill the void.
Saturday, March 7, 2009
Team CFA Philippines will compete against Singapore, China and New Zealand in the Finals in Singapore, today.
Sunday, January 18, 2009
WEB on Finding Business Managers:
" I ordered trying to pick out the best manager in this group and under. While everybody. Showed up today we got a 162 ourselves. I can't I I can't tell which one is about I think if you test. Again interview each for ten minutes and rank you. But we -- businesses. Where the managers come -- them almost all the time so when we bought furniture mart. What a three year old -- but I knew that sought under the grandsons and tour and she wasn't going to change. When she's only the business I mean she loved her business. And all I have to do is make sure I don't mess up and I can I I can't improve well the Balkans and the furniture mart. I can take away their enthusiasm for running a prime example you know spend an hour day flag reports and reporting -- some group vice president royalties and they're an atomic forgot that all the money they -- if I had it to him all they loved his money. We're going to be on now. I I -- in their -- and for -- the business like the money at all. A lot of the business but -- the business. -- worked -- amber and I do."
On US Automobile Industry:
" We got Notre Dame. Wondered if we get hear your thoughts and I US auto market. Specifically what's going on in Detroit do you think that you -- for the GM Chrysler's. Should be allowed to fail perhaps reorganize under bankruptcy protection. Or do you think the government should be involved in bail out Turkey and gone down General Motors was the US economy I mean -- when I was. When I was about your age. General -- let everything I mean that would that it was it was the Bellwether for American business there's only two options. And -- option and they need a better business model. And I and you can get that through bankruptcy or you get it for negotiation. Very tough to negotiate I mean you've got. Unions who feel they've given up a lot which they have and they they bargained for those in the past -- agrees they got you is that they give up a lot you've got. You've got a illogical probably. Production and distribution system concern present market shares because they were set up. To be it in a much different situation I got more model -- but perhaps than it be all kinds of things. Now. If they want to bankruptcy. You'll have three separate bankruptcies when their collective kind of thing. Coming out emerging with a proper business model for American auto industry. Would be very very difficult I think if with a very strong president. I think. If I were president. I wouldn't. -- the heads of the companies. I would ask. They'll put to the head of the union. What I would ask -- that come up with the best business plan that possibly could come up whether. And I would -- that was some help from the federal government available. If I had a -- plan that I thought makes sense. And at that they thought made sense and make sure they thought it made sense. I would say to before people involved her power -- that war I would say I want you to put up 75% -- network or some number. And participate in this -- with the government I'll give you more upside so -- but it is some big bonuses but doesn't work out you lose 75% -- network and they. -- and -- a lot of money we got next Berkeley home. What advice would you give to you president elect Obama. To right the economy as well as getting everybody on board to do it required to do that well let. That's going to be a a huge and immediate challenge. Come January 20. You know I don't what you've seen as -- numbers and all -- lately but he said that. You know he's sort of standing back now because he says you know you only have one president of the time but I'm sure got one person that Mike. That that. We we really don't have anybody that's. We don't in effect we don't have a Bush Administration we may even have a -- administration -- could be closer to describe it. Obama will come again. On January 20 he will come men. When people desperately. Need. Kind of measure reassurance I mean there's no sense coming on the promise of that was going to change all -- president has changed much but they have to feel is going to change. In a reasonable time in the future and incidentally it will you know whether. The we we will be in fine shape. The insurer in five years but not in five months and were between depends a lot on policy and not a lot of things that you and I. But we don't understand now people like. Leadership and they they even if they disapprove of the month some specific points they want somebody. Delete them over the top of that next mountain who they think can see on the other side and they're willing want to follow and that. You can lose that but. All while I was very very good he's very smart very articulate. He's got a reassuring. Silent. Legacy and his policies will make sense of the they won't be there won't be magic bullets."
On Taking a Job and Passion:
"Who's next we've got them Berkeley next we want to rescue if you were in a position -- graduate students and really passionate about investing. And what would you do with would you go and IQ did when you're younger and work full mr. Ramos on some other solution I was -- exactly that position. In 1951 when I got out of Colombia and I loved investing I always loved it and and I what -- my professor that that -- Hamlet. -- and I offered to work form for nothing and he said your overpriced. "
" Forty years with a psychiatrist -- got bass. They ask about it but I did get going to work form right -- If you follow your passion you can't -- I mean this group if you think about it. You know if it got everything going for it got it got Granger got energy and you've got it got good schooling that it it's going to work add. Then the important thing to do as do. Is to find something that you loved doing every day when I went to work program. I would by the time government jobs for years later -- was daughter Omaha. I took the job in New York and the number and address we'll -- us by about what I was -- getting paid. When I first paycheck we treat me -- and it didn't make any difference that's what I want to do. And couple years later came back but. During that time. -- and everything else I've done and I jumped out of bed in the morning I was excited about what is going to do and and you know. Shirley -- is right Joel and watch you know -- and death you you know he ought to be doing with things with people -- likened. Doing activities everyday -- that I ice sold shirts and and underwear and that sort of thing at JC -- when I was. 161718. And you know I I I don't care how much they paid me. I didn't want to do address my life. So I would say that. One where they dive in the pool you don't go to work. If you if you can and I've realized that. -- those are going to work out as like perfectly for everybody the first time but. What it try to go to work for an organization -- individual that you admire and respect for your return on -- them and you don't want to be doing things that. Make you -- birdie at the end of the day here. So. I don't go to work for. Pick out our organization -- you like what they stand for a lot of people are and take the job and don't worry too much about our. I got in trouble of those non business school -- told a group -- you know go to work for. What they admire the most and got a call from the dean. Couple weeks later had done. What did you tell those kids who. As a go to work from my reminder of the most of what leveraged buy digital becoming self employed well. But without exception and I and I became self employed -- guilty of -- but the it's that there's really nothing like it and working with people you like in a job."
Wednesday, January 7, 2009
We have contemplated naming Warren Buffett CEO of the Year every year since we created the award, and this year we finally get the chance to officially acknowledge all that Buffett has done for Berkshire Hathaway
Beyond creating a company that treats common shareholders with the utmost fairness and respect, one needs only to look at the long-term value created at Berkshire Hathaway to see why Buffett deserves the award. Since taking the helm of the sleepy textile business 44 years ago and turning it into arguably the strongest conglomerate on the planet, Buffett and his managers have grown the book value per A share from $19 to just over $77,500, as of Sept. 30. This translates to a 20.7% annualized increase in book value since 1965, versus a mere 9.6% annualized return in the S&P 500 (including dividends) over the same time period.
And while 2008 was an exceptionally difficult year for just about all investors, it was much less trying on Berkshire Hathaway and its shareholders. Berkshire's balance sheet equity should be roughly flat from a year ago once the books are closed on 2008. More importantly, the competitive positioning and cash-flow generating ability of Berkshire's businesses remain robust.
Monday, October 13, 2008
Tuesday, September 16, 2008
WEB CNBC interview about Goldman Sachs deal:
"No. I timed this because Goldman Sachs yesterday came up with something that made sense to me. I'm not brave enough, to try and influence the Congress. The other way around, they influence me. And I am betting on the Congress doing the right thing for the American public by passing this bill and not trying to doctor it up with a hundred things that, you know, emotionally they feel should be on the bill but as a practical matter will gum things up."
"They had hundreds of thousands of derivative contracts and I think that top management did not have their mind around what was involved with those contracts. You can do a lot of damage in Wall Street with a pen and a paper." - WEB
Saturday, August 30, 2008
Saturday, August 9, 2008
With very limited exceptions, gains or losses from marketable securities are recorded only upon sale. Berkshire has large amounts of unrealized gains, and sales are never made with an eye to their effect on reported earnings. During the first six months of 2008, our unrealized gains fell by $10.7 billion (leaving us a total of $21.1 billion in unrealized gains at the end of June). That decline of $10.7 billion does not show in our reported earnings. What is included is a realized gain: $361 million pre-tax and $235 million after-tax.
Thursday, August 7, 2008
Legg Mason Value Trust which is run by Bill Miller had an enviable investment track record of over 15 years until about 2 years ago. The fund beat the S&P index every year from 1990 to 2005. Significant mistakes including an investment in Freddie Mac have caused material losses.
3 companies in the Top 10 holdings of this fund are in the Internet industry: Amazon, eBay and Google.
WEB can't value Internet businesses.
Sunday, July 20, 2008
Sir John Marks Templeton, investment analyst and philanthropist, died on July 8th, aged 95
IF, ON any day over the past few decades, you had chanced to be strolling in the early morning at Lyford Cay in the Bahamas, you might have seen a wiry, determined figure power-walking in the sea. Keen as a whippet, his thin arms pumping, he headed into the prevailing swell. In his 80s, he would do an hour of this. In his 90s, he still managed 25 minutes.
Sir John Templeton spent his life going against the flow. In September 1939, when the war-spooked world was selling, he borrowed $10,000 to buy 100 shares in everything that was trading for less than a dollar a share on the New York Stock Exchange. All but four eventually turned profits. In early 2000, conversely, he sold all his dotcom and Nasdaq tech stocks just before the market crashed. His iron principle of investing was “to buy when others are despondently selling and to sell when others are greedily buying”. At the point of “maximum pessimism” he would enter, and clean up.
It took fortitude, he would say, to do the opposite of what the crowd was doing. At the very beginning, a southern boy on Wall Street against the east-coast preppies, living in a sixth-floor walk-up filled with $25-worth of furniture, it was almost foolhardy. But he learnt to look at shares distinct from the flow and emotion of the market, and his contrarian habits brought him huge success. A sum of $10,000 invested in his Class A portfolio in 1954, when he set up the Templeton Growth Fund, would have grown to $2m by 1992, when he sold his stake. That represented an annualised average return of 14.5%.
Sir John knew what he liked. Common stocks, like Dow Jones industrials, were unglamorous but usually dependable. Government bonds were steady, if you picked a country with no trade or fiscal deficits and a high savings rate. He disliked speculation, and any instrument over-geared to make money. But he was open-minded. Some moments were good for Treasuries, some for equities, some for blue-chip stocks. Late in life, he favoured market-neutral hedge funds. Diversity was important, in countries as well as instruments. A journey in 1936 round Europe and the Middle East, sleeping on open decks and chewing dry bread to save money, taught him that investment opportunities lay everywhere he looked.
But most of all Sir John went long on God. As a lifelong Presbyterian with a devout and curious mind, he reckoned that the market price of the creator of the universe was probably 1% of its actual value. The crowd might have lost interest in this underrated stock, so dully and unerringly recommended by theologians and priests down the centuries, but Sir John bought it up on the firm expectation of stellar future earnings. Indeed the divine, he once said, if approached in a humble spirit of inquiry, might turn out to be 3,000 times more than people imagined it was.
Love and money
The Templeton Foundation, set up in 1987 and now endowed with $1.5 billion, was another sort of growth fund, monitoring God’s performance in various religions and seeking proofs of divine agency in every branch of science, from chemistry to astrophysics. Scholars helped by Sir John’s money investigated whether prayer and health were connected, whether water was fine-tuned to promote life, whether purpose guided the universe. (Intelligent Design was embraced, then abandoned.) The Templeton prize, a neat $1m, was awarded for individual achievement in “life’s spiritual dimension”. Sir John made sure it surpassed the Nobel prizes, in which spirituality was ignored. His asset might be infinite, but he meant to build it up, doing whatever he could to “help in the acceleration of divine creativity”.
Sir John revered thrift and had a horror of debt. His parents had taught him that in small-town Tennessee, instilling it so well that in his white-columned house in the Bahamas, overlooking the golf course, he still cut up computer paper to make notebooks. But he made an exception for love, which needed spending. You could give away too much land and too much money, said Sir John, but never enough love, and the real return was immediate: more love. The Institute for Unlimited Love, founded with his money, was set up to study this dynamic of the spiritual marketplace. His own charity, though, was harder-edged. On earth a free capitalist system was the only way to enrich the poor. No safeguards were needed: an unethical enterprise would fail, “if not at first, then eventually.”
Critics of Sir John considered him a God-obsessed right-winger. It was noted that, for all his selflessness, he fled to the Bahamas and took British citizenship in 1968 to avoid American taxes. Yet Sir John gave his money to individuals, not governments. And, with his restless, buoyant curiosity, he resisted pigeonholing. Interviewers found that they were peppered with questions and keenly listened to, and to the end the analysis was sharp: in 2003 Sir John foresaw the housing crash, and pronounced the stockmarket “broken”.
From his sofa decorated with butterflies (“None of us know what’s going to happen after we die, any more than that caterpillar knows”), he continued to yearn for the reconciliation of science and religion. And in the mornings he took to the sea again, striding against the flow.
Thursday, July 17, 2008
Buffett lunch costs $2.1m, but wisdom is what the fund wants
Tuesday, 1 July 2008
Zhao Danyang, an investment fund manager from Hong Kong, hopes he will get more than heartburn when he finishes having lunch with Warren Buffett at the famous Smith & Wollensky steakhouse in Manhattan shortly. As well as a very large bill he will need to leave with some newly gained wisdom.
Expensive it will have been. Mr Zhao made himself somewhat famous (and somewhat poorer also) at the end of last week by placing the winning bid in a charity auction on eBay for the privilege of taking lunch with Mr Buffett on a day of his choosing at the Midtown eatery.
True, Mr Zhao, whose fund is called the Pureheart China Growth Investment Fund, will also be allowed to bring along seven friends to enjoy the occasion. Even so, the amount he ended up paying – just over $2.1m (£1.05m) – seems a lot for great cuts of meat and decent conversation.
Indeed, it ended up, according to the folks from eBay, being the richest charity auction ever held on the site. Thus, whether or not it enriches Mr Zhao, it is very good news for Glide, the charity it will benefit, which is run by a United Methodist Church in San Francisco to help the city's many homeless people.
Wednesday, July 9, 2008
One Family's Finances: How Bill Gates Invests His Money Like a lot of people, he's got stocks, bonds, and a money manager. But there are differences. For one thing, his personal portfolio is the size of a large mutual fund.
By Andy Serwer Reporter Associate Jeanne Lee
March 15, 1999
(FORTUNE Magazine) – On the eastern shore of Lake Washington, halfway between Seattle and Microsoft's sprawl over in Redmond, sits a modest, three-story office building inhabited by some pretty remarkable characters. Two of Seattle's hottest venture capital firms are there. Down the hall is the billionaire cellular visionary Craig McCaw. On the same floor is Teledesic, McCaw's futuristic satellite company. But perhaps the most intriguing person of all works behind a door marked only by a tiny sign that reads "BGI." Inside is a boyish-looking 39-year-old with a brush cut who could well be the most powerful man on Wall Street you've never heard of.
His name is Michael Larson. And BGI stands for Bill Gates Investments. Larson is Bill Gates' private money manager. He runs the entirety of Gates' fortune not invested in Microsoft stock. That sum, which sits in Gates' personal account and in two huge foundations, now amounts to $11.5 billion, and counting. Though this is a fraction of Gates' wealth--his 18.5% stake in Microsoft is worth some $76 billion today--it is still by any measure a huge chunk of money. About $5 billion of the $11.5 billion that Larson manages is in Gates' personal investment portfolio: that is roughly the same size as the Fidelity Value fund, a big mutual fund with 412,000 shareholder accounts.
As for Gates' foundations, well, the combined $6.5 billion he has sent their way in recent years has swiftly elevated them to the ranks of the very largest foundations in the world. His William H. Gates Foundation, with an endowment of $5.2 billion, is right up there with those founded by Ford, Kellogg, and Mellon. But while it took those pre-info age giants decades and decades to create the kind of wealth necessary to fund a great foundation, Gates has amassed his fortune in less than 13 years. His foundations, practically nonexistent at the beginning of Bill Clinton's second term, suddenly are sitting on endowments so large that they will have to give away some $325 million a year just to comply with tax laws on charitable giving. That figure is more than the median net income of the companies in the FORTUNE 500 last year.
The most amazing thing about Larson's job, though, is that it's really just beginning to gear up. As you've probably heard, Gates says he plans to give away nearly all of his wealth in his lifetime. It's an outrageously large fortune, the largest the world has ever known in current terms, and disposing of it presents huge challenges. "Giving away $1 billion is tricky," says one wealthy philanthropist. "Ted Turner is giving that much to the U.N., and you can always give to a major university, but they would just put up new buildings. There just aren't that many organizations that can really do the right job with that kind of money." Says Gates: "Effective philanthropy requires a lot of time and creativity--the same kind of focus and skills that building a business requires."
To give his money away, of course, Gates will have to dispose of huge chunks of Microsoft stock. In fact, Gates has already begun his big push. As first reported by Fortune.com in early February, Gates recently gave some $3.3 billion to his two charitable organizations, the William H. Gates Foundation and the Gates Learning Foundation. And now FORTUNE has learned that Gates has given another $1 billion to the William H. Gates Foundation.
These are staggering sums of money, among the biggest charitable gifts ever made, and they bring to mind an interesting paradox. With all the turbulence swirling around Microsoft these days--the trial in Washington and the prospect that PCs might become obsolete, to name just two--a simple fact about this company is sometimes overlooked. Microsoft continues to be one of the great stocks of our time. Since Microsoft went public in March 1986, the stock has compounded 59% annually, with much of its fastest growth coming over the past five years. For instance: In August 1995, rival Netscape Communications went public at $28 a share. Since then, that company's stock is up 151%. During that same stretch, Microsoft shares climbed 584%. And believe it or not, Microsoft's stock is up some 56% since its antitrust trial began in Washington this past October. Today, Microsoft's market capitalization is around $400 billion, making it the most valuable company in the world. Thousands of investors have become ridiculously wealthy buying and holding MSFT.
Until very recently, Bill Gates wasn't the richest man in the world; he was just a really rich software CEO. If you go back six years, Gates' Microsoft stock was worth around $7 billion. Gates had no foundations or philanthropic infrastructure then. As for his personal wealth, well, that was managed very informally. But as his wealth continued to grow exponentially, those arrangements became problematic.
On the philanthropy front, critics began muttering that Gates was miserly. And then, on the money-management front, came a real blow. On March 4, 1993, the Wall Street Journal published a story reporting that Gates' money manager at the time, Andrew Evans, along with his wife, Ann Llewellyn, had years earlier been convicted on charges related to bank fraud. Evans was an old friend of the Microsoft CEO, and Gates was said to be helping him out by employing him. In any event, the article created an uproar. Gates' mother, Mary, a powerful influence on Bill, was said to be disturbed that her son had a former jailbird running his personal portfolio. Evans had to go. Gates needed to find a new money manager.
CALLING MR. LARSON
This new portfolio manager would have to be smart. He would have to have a killer track record. But Gates was looking for more than that. "Since Microsoft is my primary focus, I wanted someone who could operate on their own," he says. "I also wanted someone with a conservative philosophy about investing. I needed to have complete faith in the person I picked, since I didn't ever want to have to look over their shoulder." One more thing about the new money manager: After the Evans imbroglio, he would have to be as clean as a whistle. So Gates didn't mess around. He hired a headhunter named Bert Early, a former executive director of the American Bar Association. Early heard about Larson, then 33, from some investors in Tacoma and gave him a call.
Michael Larson, the son of an industrial engineer, grew up in North Dakota and then in Albuquerque. When he graduated from high school, he wanted to join the Coast Guard but couldn't because he was only 16. He attended Claremont College, finishing in three years with a degree in economics, and then went directly to the University of Chicago, where he picked up an MBA at the age of 21. From there Larson went to work for Arco doing mergers and acquisitions. Then he shifted gears and joined Putnam Investments in Boston, managing bond funds. After two years he struck out on his own. He was trying to buy a money-management firm in Chicago, without much luck, when Bert Early rang him up.
"He told me I would be working for a wealthy guy in the Pacific Northwest," Larson says, in his office in front of a huge window with a view of the rain-swept lake. "I actually thought it was Craig McCaw." No, Early told him, it's Bill Gates, and could he please have the names of 13 references. "I thought it was the old FBI trick," chuckles Larson, "you know, ask for 13 and randomly pick three. But Bert called all 13 and kept each of 'em on the phone for an hour." Apparently Larson didn't have as much as an unpaid parking ticket in his file (has he considered running for office?), because Early gave him the thumbs-up.
"Actually, when I heard it was Bill, I wasn't sure I wanted the job," says Larson. "I think he had just fired some people, and I thought he would be difficult to work for. But I had to meet him." So he came out, and the two men hit it off. They talked about Albuquerque--Microsoft's hometown in the early days--about risk management, and about investing, of course. "The interview was what really sold me on Michael," says Gates. "He's bright and very inquiring, and has a strong performance record."
Though the wired-in Larson works out of this Lake Washington office, he has become Bill Gates' eyes and ears on Wall Street. The two men e-mail each other frequently and meet to talk investing every six weeks.
You might think that running the investment portfolio of the world's richest man would make a person squirrelly or vain. Larson is neither. He's relaxed, grinning all the time. His demeanor lies somewhere between "gee whiz" and "gosh" (the latter is a favorite utterance). "A lot of people in Larson's position would let the job go to their head," says Silicon Valley superinvestor Roger McNamee, who runs money for Gates farmed out through Larson. "But Michael's level of humility is amazing." Says Larson, trucking around his office with a megamug of Starbucks: "You hear people say this sometimes, but for me it's really true: I have the best job in the world. It's pure investing. No marketing. Not much management. And client relations is limited to one guy."
The word on Wall Street about Larson is frankly admiring, and not just because everybody wants a piece of his business. Last year Larson outperformed the Dow, even though he had over half his money in cash (some trick). "I think Gates is incredibly lucky to have Larson," says John Griffin, a top New York hedge fund manager. "He's really good. And he's someone Bill can really trust."
When he signed on with Gates in 1994, Larson set up a company called Cascade to be the principal vehicle for Gates' investments. Why the name Cascade? "It's real generic-sounding in the Pacific Northwest," says Larson. (Sort of a Seattle version of Acme.) At that point Gates' non-Microsoft portfolio was about $400 million--barely enough to achieve critical mass in the investment-management business--but Gates assured Larson that if Microsoft continued to grow, so would the assets in Cascade. Meanwhile, Larson explained to Gates--who insists on knowing how everything works--some of the fine points of modern portfolio theory. Larson drew a pie chart for Gates with a single tiny sliver carved out of it. The pie is your Microsoft stock, Larson said to Gates, and the tiny sliver is Cascade.
Of course, that sliver is now a multibillion-dollar fortune in its own right. So how does Larson invest that money? "Well, I'm not a risk taker," he says. In fact, he's an old-fashioned value investor with a macro view. Larson doesn't restrict himself to stocks; he looks at bonds, currencies, commodities, land, and direct investments in companies--we'll get to the details presently. "My most important job is asset allocation," he says. "That's where the real money is made." Larson is iconoclastic yet fundamentally conservative, which, if you think about it, is a pretty good description of his only client.
Wired in though he is, Larson keeps a very low profile. His business card has no company name on it. The voicemail at his office says that you've reached "the investment office." As recently as a few years ago he'd call a Wall Street firm and identify himself, only to be asked, "who the heck are you?" But now that he's been around for a few years with all that money under management, he's finding that happens less often. He's been hitting the conference circuit too. He goes to Herb Allen's Sun Valley mogul-fest and Salomon's annual infotainment gathering. A golf freak with a ten handicap, Larson recently came back from a conference at which he played a round with Paul Hornung and Jake ("The Snake") Plummer. Wayne Huizenga flew him over in a helicopter to play on Huizenga's private course in Florida.
With the hiring of Larson, Gates had solved his money-management problem, but his philanthropy efforts were still undeveloped. For this problem, though, Gates didn't have to employ headhunters. He had a solution much closer to home.
"Basically, requests [for charity] would end up coming to my office," says Bill Gates' father, a retired lawyer. "I told Trey [a family nickname for Bill] that we needed to set up a real foundation." Bill Gates' dad, as you might expect, is a formidable guy. A spry 73 and about 6-foot-6, he's taller and bigger than his son, though their faces are mirror images, 30 years apart. Bill's dad actually was born William H. Gates Jr. (Bill is William H. Gates III.) But as the son became nearly as famous as Michael Jordan, he became known as the junior Gates, and his dad was called Gates Sr.
While Gates the younger can come across as the ultimate icy computer wonk, Gates Sr.--even though he was a corporate lawyer--seems folksy, even warm and fuzzy. He can't hide his pride in his son--the two have always been close--and chokes up when talk turns to his late wife, Mary. And the elder Gates likes nothing better than to go for coffee down at the Burgermaster near the University of Washington campus. (The shakes there are pretty good too.) Senior, along with Mary, had always been active in charity--both led United Way campaigns. So as he stepped back from his work--he retired at the end of 1997--it was only natural that he head up his son's philanthropy.
If building a great fortune is like scaling a mountain, then figuring out how to give it away is like climbing down. That is to say, the disposition of great wealth has its own set of risks. The problem isn't just being flooded with requests. Take the issue of planning how much money to give away. How do you figure that out when your wealth is growing the way Microsoft's stock has? Consider that in 1994, when Gates and his father set up the William H. Gates Foundation (the Gates Learning Foundation was established in 1997), Microsoft stock traded at between $10 and $15 a share, split adjusted. It now trades around $160, though it had slipped a bit as FORTUNE went to press. "Of course we never imagined it would get this big," says Gates Sr. with a slightly awed look on his face. "No one could have."
When Gates made his first gift to the William H. Gates Foundation--$106 million in 1994--an informal protocol was established. Gates Sr., working out of his basement office, would screen grant proposals and send the promising ones on to his son. The younger Gates would pick from his dad's picks--usually approving them--and send them back to Gates Sr., who would then send a fax to Larson requesting that he draw up the checks. The system worked, and so even though the assets of the foundation have now grown to some $5.2 billion, that's basically how things operate today.
There have been a few changes. Gates' wife, Melinda, has become an equal partner in deciding which grant requests are worthy of funding. Last year Gates Sr. drew down a salary for the first time--$40,000 a year, plus $2,520 for expenses--and he now has an assistant, Suzanne Cluett, an old friend of the family. Of course the number of proposals keeps growing. Cluett says she now receives about 100 requests for grants every week (and responds to every single one). "We send about 25 to Bill and Melinda every three months or so." The dollar amounts of the grants have climbed too. By federal law, a charity must distribute at least 5% of its assets each year. Ergo: "We will be giving about $325 million each year," says Gates. "And we will be increasing the size of these foundations over time."
No matter how much Gates gives away, though, critics are bound to make him a target. Remember, they bashed him at first for not giving enough away. Then, after he made initial donations of software, PCs, and services, they cried that this was a ploy to get future generations hooked on Microsoft products. Now, as he pushes his philanthropy into the big leagues, he is accused of using charity as an expensive PR campaign to soften his cold-blooded monopolist image and to influence the outcome of the trial in Washington. Is that true? "Baloney," says Warren Buffett, a close friend of Gates, who has discussed philanthropy with him at length. Gates Sr., in an interview in his old law offices at Preston Gates & Ellis, says, "All I can say is that it ain't true. It just doesn't have anything to do with it." One goad that seems to have had an impact, Gates Sr. says, was Ted Turner's challenge to other wealthy Americans to be as competitive about giving as they are about accumulating. "Trey never said anything to me, [but] the Ted Turner thing may have had some effect," he says.
So why did Gates wait so long before he gave money? "Most people do not start giving significantly until they are late in their career or retired, or when their will comes into force," says Gates. "Five years ago, I thought I would wait until I was in my 60s to do major giving. However, as I learned more about opportunities to make a big difference now, I decided not to wait." Buffett says it's a good thing Gates waited as long as he did. "If he had given away 90% of his money ten years ago, it would have been at a huge cost to society," says Buffett. "Giving away that money early on might have cheated the world out of $100 billion. Instead he has been running the best-performing endowment fund in the world." The counter-argument is that there is a time value of money to charity as well. That is, if Gates had given away, say, $50 million ten years ago to eradicate a disease, and that money had found a cure, and the cure had saved 100,000 lives, let alone saved $1 billion in health-care costs, how do you assign a value to that? There is no right answer, of course.
Already, the value of the assets in the William H. Gates Foundation places it squarely in the top ten largest American family foundations (see table). If Gates does in fact give nearly all his wealth to his foundations, he will easily top the list, unless of course Microsoft's business is completely eclipsed, which isn't likely anytime soon.
Gates' two foundations have very distinct goals and functions. The William H. Gates Foundation is a trust, with Gates the sole trustee. It's a grant-making organization--it doesn't implement programs--with three basic thrusts: world health, education, and giving in the Pacific Northwest. The list of grants is a bit of a hodgepodge, ranging from smallish gifts, like $10,000 to Girls Inc. of Sioux City and $1 million to the Oregon Shakespeare Festival Association (Gates Sr. is on the board), to $20 million to Duke University (Melinda was a Blue Devil), to the recently announced $100 million children's vaccine program. To date, the William H. Gates Foundation has given away, or committed to give, some $222 million. "We give to projects we think can improve the lives of people," says Gates. "Our goal is that millions of people will receive the benefits of new medicines and the empowerment of access to information."
Consider Gordon Perkin and his organization, PATH (Program for Appropriate Technology in Health), located right in Seattle. PATH develops inexpensive, easy-to-use medical tools for developing countries, like home birthing kits for women in Nepal and low-cost tests for infectious diseases. The William H. Gates Foundation has pledged or given to PATH some $3 million--and has asked it to oversee the $100 million children's vaccine program. In fact, PATH may well become the conduit through which much of Gates' giving on health will flow, and Perkin has become Gates' chief consultant on world health issues. Since that is a primary focus of the William H. Gates Foundation, PATH and other groups could transform Seattle into a new center of medical programs and research.
Gates' other philanthropy, the $1.3 billion Gates Learning Foundation, is headed by Patty Stonesifer, a hard-charging former Microsoft executive who ran the company's consumer-products group before stepping down 2 1/2 years ago to spend more time with her kids. Unlike the William H. Gates Foundation, the Learning Foundation is an operating entity, which means it runs most of its own programs. During the past two years the Learning Foundation has given more than $32 million--mostly in the form of computers, support, and services--to bring information technology and access to the Internet to libraries in low-income areas in the U.S. and Canada. (Gates calls it an "Internet Peace Corps.") "We used Census Bureau numbers to target areas, and then we went in and worked with the librarians to implement the technology," says Stonesifer, sitting in the foundation's offices next door to a pawnshop in Redmond.
It's no coincidence that Gates' focus on libraries matches the interest of one of the nation's greatest philanthropists, steel baron Andrew Carnegie. The Scottish immigrant built more than 2,500 libraries--1,700 in the U.S.--between 1881 and his death in 1919. Gates has studied Carnegie and read his classic book, The Gospel of Wealth. In fact, Gates has already wired some libraries that Carnegie built. So far, Stonesifer's troops have hooked up libraries in 28 states. Now Gates and Stonesifer have plans to carry the project beyond libraries to community centers and even farther afield. "We're giving it a more global focus," says Gates, "and seeking other partners to bridge the gap between the haves and have-nots."
TENDING THE INVESTMENT POOLS
As Gates converts billions of dollars of Microsoft stock into philanthropic tender, Michael Larson will be shepherding the funds every step of the way. He will manage the foundation portfolios until the dollars are expended on syringes, scholarships, and software. "People have no idea the kind of pressure that Michael Larson operates under," says Roger McNamee. "For one thing, he's running money for two of the largest foundations in the world. The better he does, the more good works can be done."
Here's how Larson's job works. He's in charge of three large pots of money: the two foundations and the $5 billion or so in Gates' personal portfolio, which is mostly invested through Cascade, though there are other smallish accounts also under Larson's auspices. Each of these three pools is discretely managed, with its own objectives and investments. And there's one thing both Gates and Larson want to make perfectly clear. "Michael and I talk regularly about general investment matters, but he has full discretion over the portfolio." Gates says. Larson, his usual grin gone for a second, says, "I wish everyone understood that. When people find out that Cascade has made an investment in something, that's not Bill Gates. I'll call Bill about something I'm buying if he needs to know, but Bill might not have any idea what Cascade owns." (There are exceptions to this rule. For instance, Gates makes his own investments in biotech--more on that later.)
So what's in the portfolios? The Learning Foundation is the simplest. Because Patty Stonesifer and her crew have a fairly constant need for cash, Larson keeps this portfolio mostly in short-maturity U.S. government and corporate fixed-income securities. The William H. Gates Foundation is a little more complicated. Though it may have a smattering of stocks at any given time, it too is almost entirely in bonds--about 75% short-term U.S. governments and corporates. "The portfolio is pretty conservatively positioned right now for a couple of reasons," says Larson. "First, it reflects my view of the markets. And second, we just had an inflow of a couple of billion dollars." Another reason bonds are attractive to Larson is that as new money streams in, scaling up in the fixed-income markets is much easier than in stocks.
As for the other 25% of this foundation's assets, Larson has made investments running the whole gamut of the bond market. He holds some inflation-protected Treasury bonds called TIPs, and plain-vanilla corporate bonds like Ford, Du Pont, and Time Warner (parent of Time Inc., FORTUNE's publisher). He also has a position in junk bonds and foreign government bonds--Danish, German, Canadian--as well as foreign corporates, gobs of mortgage-backed securities, and all sorts of hedging investments. Larson farms out some 15% of the overall portfolio to bond managers at Morgan Grenfell, PIMCO, Miller Anderson & Sherrerd, and Western Asset Management. "These guys have discretion over the money we give them, but if I don't agree with their take on interest rates or the yen, I'll override them by hedging," Larson says.
Gates' $5 billion personal portfolio is another matter. First, there is the question of how much Microsoft stock Gates should own. "The money I have outside Microsoft is less than 10% of the total," says Gates. "Since we are obviously heavily weighted with Microsoft, we will sell stock periodically in order to get more diversity. It's basically the same strategy most individual investors engage in." (As if!)
Because Microsoft stock has soared over the past few years, Gates and Larson have had to sell huge amounts of stock to maintain even the semblance of a diversified portfolio. Since the company went public, Gates has sold an average of five million Microsoft shares a quarter, adjusted for splits. That works out to around 80,000 shares every single trading day, though Larson sells through a "blind program" during legal windows to avoid insider-trading charges. Larson tries to sell as quietly as he can through his favorite brokers, including DLJ, Goldman Sachs, and Allen & Co. Gates has sold some 256 million (split-adjusted) shares of Microsoft stock over the past 13 years, for about $5.16 billion. He has given away another 76 million shares.
If Gates continues to sell and give away Microsoft stock, will he still hold sway over the company? "Losing control of Microsoft isn't an issue as I give the money away," says Gates. "No one person controls Microsoft. The board and the shareholders decide whether they want to have me as CEO." (Sure, Bill.) Actually, Gates' ownership of the company has declined steadily over the years. At the time of the IPO, he owned 44.8% of Microsoft's stock. He now owns just about 18.5%. About half of that decline is due to dilution, brought about by the issuance of millions of shares to Microsoft employees exercising options, while the other half is due to stock sales and gifts.
As for the actual content of Gates' $5 billion portfolio (drum roll, please), it turns out to be not that exciting. And for good reason. "If you think about it, 90%-plus of Bill's wealth is in a single technology stock. He really doesn't need much, if any, equity exposure at all," says Larson. "Right now his portfolio actually looks somewhat like a big old bond fund." In fact, a recent snapshot of Gates' personal portfolio looks like this: Larson has 70%, or $3.5 billion, invested in short-term governments and corporates, with a small weighting in foreign bonds. He also owns some emerging-market debt and high-yield issues. "Basically we are short on the yield curve right now," Larson says, again reflecting his wary view of the markets.
What about the other 30%, or $1.5 billion? About half of it--$750 million--is in what Larson calls private equity; that's buyout funds and direct investments, such as Gates' stake in Teledesic, McCaw's satellite company (Larson is on its board). That figure also includes funds run by outsiders. About 5% of Gates' portfolio is farmed out to managers like McNamee's Integral Capital Partners and Blue Ridge Capital, a New York hedge fund run by John Griffin, former right-hand man of Julian Robertson at Tiger Management. Larson also has a significant amount of money in short positions--actually more than usual right now--which reflects his view that many stocks are fully, if not overly, valued. He also has a small amount of money with Bill Fleckenstein, who runs a short-selling fund.
Of the nonbond portion of Gates' portfolio, another $250 million is in what Larson calls "real stuff." He means real assets, like commodities (he's been in and out of crude oil futures) and real estate, such as investments in the Reserve, a real estate and golf course development near Palm Springs, and in the Cliveden hotels in England.
The remaining $500 million is in stocks. Given Gates' huge position in Microsoft, why does Larson own equities at all? "Because I think some stocks have behavior patterns that run counter to Microsoft," says Larson. "For instance, if and when the air comes out of tech stocks, food and oil stocks could hold up real well. The other reason we do equities is because we have some expertise in certain areas, and we make money at it." It so happens that one of Larson's interests is media stocks. He favors cable stocks such as TCI and Liberty Media, as well as Cox Communications and Barry Diller's USA Networks. Larson also holds Berkshire Hathaway--he owned 300 shares last year and recently bought a bunch more--which he thinks became particularly attractive after its Gen Re acquisition. "Gen Re was in the S&P 500. Berkshire isn't. So after the deal, index managers had to sell Berkshire, depressing the price."
Gates does make his own investment decisions in biotech. Says he: "I've always been interested in science--one of my favorite books is James Watson's Molecular Biology of the Gene. I'm an investor in a number of biotech companies, partly because of my incredible enthusiasm for the great innovations they will bring. I serve on the board of ICOS [which develops drugs to fight inflammatory diseases]. I continue to make a number of investments in this area." At various points Gates has owned stock in other biotechs--including PathoGenesis, Targeted Genetics, and Chiroscience--but he is out of all those stocks now. He recently bought a stake in a company called Advanced Medicine, a private biotech firm.
As for tech stocks, "we pretty much don't own 'em," Larson says, "not with Bill's other asset." It could be awkward, of course, if Cascade owned, say, 3% of a small tech company that Microsoft's strategic planners later decided they wanted to gobble up. Or if that small company felt inclined to sue Microsoft at some point. Gates does, however, own some tech stocks through his investments in McNamee's partnerships. And Larson concedes that he might be short some tech names. "I do think the market is high right now, and there is an awful lot of excitement about tech stocks," says Larson. Whoa! Does that mean he thinks Microsoft is overvalued? "I wouldn't bet against [Microsoft]," he says.
Larson continues: "I just think at some point the cycle is going to turn. We'll have some rotation. There will be some trigger event that will change the equity market's point of emphasis. Agriculture, for instance, will come back. Stocks like Deere & Co. [which he owns a bit of] will make out. Oil looks interesting. There are some opportunities in that sector, and I don't think oil has to go back to $20 a barrel [for oil stocks to work out]."
What about interest rates? "I think they will trend higher. It's true we don't see much inflation now, but wage inflation is evident, and everything is in such high gear right now. I think long rates could climb 100 basis points, which could be a shock to the market. It could also make for a real nice buying opportunity." But Larson knows he has to go easy. "Sure, I could torque up the portfolio," he says, perhaps a little wistfully, "but that's not what I'm paid to do. The point wasn't for Bill to become richer than the Sultan of Brunei." No, but that happened anyway, not because of anything Larson did but because of Microsoft's explosive growth (and a little imploding on the Sultan's part).
The point is that the real growth engine is Microsoft. Just how big will the company, and therefore Gates' fortune, become? How much will Gates end up giving away? No one knows, of course, not even Gates. But consider this: If Microsoft's stock compounds over the next 20 years by merely 10%, Gates' fortune, even assuming some selling, could be worth $400 billion. Impossible, you say? Well, what would you have said 13 years ago--the day of Microsoft's IPO, when Gates' holdings were worth $234 million--if someone had told you he would be worth $80 billion before the end of the millennium? Impossible.
Andrew Carnegie was regarded in his day not just as a robber baron but--after the Homestead Strike of 1892, in which hired guards killed seven striking steelworkers--as a plutocrat with blood on his hands. He reshaped his image by giving away most of his fortune during his lifetime, and today he is remembered less for the strike than for his phrase "the man who dies...rich dies disgraced."
Today, Bill Gates is known variously as the creator of Microsoft, as the richest man in the world, and as a monopolist hell-bent on world infotech domination. Hard as it may be for some people to swallow, future generations may remember Bill Gates instead as the greatest philanthropist the world has ever known.
REPORTER ASSOCIATE Jeanne Lee
Monday, June 9, 2008
Buffett's big bet
The celebrated investor wagers a tidy sum that even carefully chosen hedge funds won't return more than the market over time.
By Carol J. Loomis, senior editor at large
(Fortune Magazine) -- Will a collection of hedge funds, carefully selected by experts, return more to investors over the next 10 years than the S&P 500?
That question is now the subject of a bet between Warren Buffett, the CEO of Berkshire Hathaway, and Protégé Partners LLC, a New York City money management firm that runs funds of hedge funds - in other words, a firm whose existence rests on its ability to put its clients' money into the best hedge funds and keep it out of the underperformers.
You can guess which party is taking which side.
Protégé has placed its bet on five funds of hedge funds - specifically, the averaged returns that those vehicles deliver net of all fees, costs, and expenses.
On the other side, Buffett, who has long argued that the fees that such "helpers" as hedge funds and funds of funds command are onerous and to be avoided has bet that the returns from a low-cost S&P 500 index fund sold by Vanguard will beat the results delivered by the five funds that Protégé has selected.
We're way past theory here. This bet, being reported for the first time in this article (whose author is both a longtime friend of Buffett's and editor of his chairman's letter in the Berkshire annual report), has been in existence since Jan. 1 of this year.
It's between Buffett (not Berkshire) and Protégé (the firm, not its funds). And there's serious money at stake. Each side put up roughly $320,000. The total funds of about $640,000 were used to buy a zero-coupon Treasury bond that will be worth $1 million at the bet's conclusion.
That $1 million will then go to charity. If Protégé wins, it has asked that the money be given to Absolute Return for Kids (ARK), an international philanthropy based in London. If Buffett wins, the intended recipient is Girls Inc. of Omaha, whose board includes his daughter, Susan Buffett.
And who's holding the money, by way of owning the zero-coupon bond? That's an esoteric institution most readers of this article will never have heard of, the Long Now Foundation, of San Francisco, which exists to encourage long-term thinking and combat what one of its founders, Stewart Brand (of the Whole Earth Catalog), calls the "pathologically short attention span" that seems to afflict the world.
Six years ago the foundation set up a mechanism for - what else? - Long Bets. The foundation receives wagers as donations, oversees the bets until they are decided, and then pays off the winner's designated charity. For this work, the foundation normally gets a $50 fee from each side and then shares fifty-fifty with the charitable winner-to-be in the returns earned on the funds being held. In the Buffett-Protégé bet, however, there will be no such sharing; each side simply made a $20,000 charitable gift to the Long Now Foundation.
To see today's Long Bets listings, go to http://www.longbets.org/. Some bets catalogued there sound as though they were made in sports bars: Actor Ted Danson garnered $2,000 for a charity when the Red Sox won the World Series before a U.S. men's soccer team won the World Cup.
On a more cosmic front, Lotus founder Mitchell Kapor and inventor and futurist Ray Kurzweil have a $20,000 bet on the proposition that "by 2029 no computer - or 'machine intelligence' - will have passed the Turing Test," meaning that a computer won't have successfully impersonated a human. Kapor made that prediction; Kurzweil disagrees with it. Each man, following the rules of Long Bets, has supported his point of view with a brief statement that is posted on the Web site. Buffett's and Protégé's arguments will appear there as well (and are listed here).
Through 2007 the Kapor-Kurzweil bet of $20,000 was the largest on Long Bets. The Buffett-Protégé bet obviously vaults the stakes to the stratosphere. And to that there is a certain history, which began at Berkshire's May 2006 annual meeting.
Expounding that weekend on the transaction and management costs borne by investors, Buffett offered to bet any taker $1 million that over 10 years and after fees, the performance of an S&P index fund would beat 10 hedge funds that any opponent might choose. Some time later he repeated the offer, adding that since he hadn't been taken up on the bet, he must be right in his thinking.
But in July 2007, Ted Seides, a principal of Protégé but speaking for himself at that point, wrote Buffett to say he'd like to make the bet - or at least some version of it.
Months of sporadic negotiation ensued. The two sides eventually agreed that Seides would bet on five funds of funds rather than 10 hedge funds.
Seides, stepping way beyond his usual stakes - say, the cost of a meal - suggested that he and Buffett make the bet for $100,000 (which, he noted, was Buffett's annual salary). Buffett, not knowing then that Long Bets even existed, said that considering his age - he's now 77 - and the complications that a 10-year bet might add to his estate's being settled, he'd only be interested in wagering at least $500,000. Even then, he wrote Seides, "my estate attorney is going to think I'm out of my mind for complicating things."
If $500,000 seemed too steep to Seides, Buffett (for whom it's obviously more of a trifle) had no problem with Seides recruiting partners to help out. And that's what in effect happened, by way of Protégé Partners LLC making the bet rather than Seides.
Protégé, which manages around $3.5 billion, is principally owned by Seides, 37, and two other men, CEO Jeffrey Tarrant, 52, and Scott Bessent, 45. Each has a strong investment background, and two of the three have worked with well-known market practitioners: Seides learned the world of alternative investments under Yale's David Swensen; Bessent worked with both George Soros and short-seller Jim Chanos.
Upon its founding in 2002 by Tarrant and Seides, Protégé set up a fund of funds and began recruiting the kind of sophisticated investors - both institutions and wealthy individuals - who put their money in such funds.
Very aware that the Securities and Exchange Commission prohibits broad-scale marketing by hedge funds and funds of funds, neither Seides nor Tarrant will disclose the precise names of the funds they now run, much less their performance records.
But a London publication, InvestHedge, whose parent runs a hedge fund database, provided Fortune with several years of returns for the firm's flagship U.S. fund, Protégé Partners LP.
From its inception in July 2002 through the end of 2007, the Protégé fund gained 95% (after all fees), soundly beating the Vanguard S&P 500 index fund's 64%.
Protégé's performance was hugely helped by the fact that by mid-2006 the firm was extremely bearish on subprime mortgage securities, including CDOs, and had dispersed its investments in hedge funds to capitalize on that opinion. Most significant, it made an investment in Paulson & Co.'s hedge funds, which under John Paulson made a highly publicized killing in 2007 by short-selling securities linked to subprimes.
All that's history, of course, so let's get back to the bet: Buffett and Seides agreed that they'd periodically disclose where the wager stood. Seides wanted this disclosure to take place whenever the market fell by 10%, because he believes that one of the virtues of hedge funds is their ability to weather tough times. Indeed, in the first quarter of this year, during a down market, Protégé Partners LP fell by only 1.9%, while the Vanguard fund dropped 9.5%.
Buffett insisted, though, that the logical time for disclosure was at Berkshire's annual meeting every spring - and that was the final agreement.
Just how much Buffett will have to say about the bet every year may be limited by one fact: The names of the five funds of funds that Protégé has selected are to be kept confidential. Of course, Buffett knows what the names are, because Protégé must supply him with the audited results of these funds every year. But other than that, the designated funds of funds saw no advantage (at least for now) to declaring their participation in the bet and agreed to go along only if confidentiality was promised. The first fund that Protégé tried to recruit, in fact, wouldn't sign up even then.
Seides and Tarrant do have a few general things to say about the five funds picked. They are equity-oriented (favoring stocks over bonds), tend to invest in hedge funds that avoid in-and-out trading, and are run mostly run by seasoned investment folk rather than tenderfoots.
And we can probably assume that Protégé Partners LP is one of the five, if only because its exclusion would leave the firm with the difficult job of explaining to its investors why the firm didn't care to bet on the success of its own hedge fund choices.
Fees: Big hurdle for Protégé
As for the fees that investors pay in the hedge fund world - and that, of course, is the crux of Buffett's argument - they are both complicated and costly.
A fund of funds normally charges a 1% annual management fee. The hedge funds it puts that money into charge an annual management fee of their own, which for funds of funds is typically 1.5%. (The fees are paid quarterly by an investor and are figured on the value of his account at the time.)
So that's 2.5% of an investor's capital that continually goes for these fees, regardless of the returns earned during a year. In contrast, Vanguard's S&P 500 index fund had an expense ratio last year of 15 basis points (0.15%) for ordinary shares and only seven basis points for Admiral shares, which are available to large investors. Admiral shares are the ones "bought" by Buffett in the bet.
On top of the management fee, the hedge funds typically collect 20% of any gains they make. That leaves 80% for the investors. The fund of funds takes 5% (or more) of that 80% as its share of the gains. The upshot is that only 76% (at most) of the annual return made on an investor's money accrues to him, with the rest going to the "helpers" that Buffett has written about. Meanwhile, the investor is paying his inexorable management fee of 2.5% on capital.
The summation is pretty obvious. For Protégé to win this bet, the five funds of funds it has picked must do much, much better than the S&P.
And maybe they will. Buffett himself assesses his chances of winning at only 60%, which he grants is less of an edge than he usually likes to have.
Protégé figures its own probabilities of winning at a heady 85%. Some people will say, of course, that just by making this bet, Protégé has acquired some priceless publicity.
But then, Protégé clearly wants to win, and it's up against a man who hasn't made a lot of losing bets in his life.
Seides himself sees one strong ray of light: "Fortunately for us, we're betting against the S&P's performance, not Buffett's."