Buffett - Philippine Daily Inquirer

http://business.inquirer.net/money/features/view/20081012-166055/Buffett-style-investing-shines

Market Turmoil - Updates

WEB CNBC interview about Goldman Sachs deal:

http://www.cnbc.com/id/26871327

"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."

On AIG:

"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

WEB Interview by CNBC's Squawkbox August 22, 2008

Six part series of a 3 hour interview with Warren Buffett.

http://www.cnbc.com/id/26337298/site/14081545/

Topics discussed:
1. US Housing sector
2. US Financials
3. Sovereign Wealth Funds
4. US Railroad sector

Berkshire Q2 Results

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.

Value Style? Legg Mason Value Trust

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.

Sir John M Templeton, 95, died on 7/8/08

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.

Lunch with Buffett now costs USD2.1MM

Buffett lunch costs $2.1m, but wisdom is what the fund wants

By David Usborne in New York
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.

Investment Manager of Bill Gates

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.
BILL'S DAD
"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

Buffet bets against Hedge Funds

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."

The People Who Run Berkshire Hathaway

ISCAR

“The culture of ISCAR was set by my father,” said Mr Wertheimer. “Starting with the basics: respect people, ask real questions and know what you want. Over time the business grew and became more complex. We wanted family members to have an option to join rather than feeling an obligation, whilst also maintaining our commitment to employees and customers. We heard of Berkshire Hathaway, investigated the company and knew we had found a match. I told Mr Buffett that I would either sell to him or to no-one.”

Warren Buffett interview - Financial Post Exclusive

IMD Transcript - WEB Q&A

Official IMD Transcript:

I will open the floor to questions now.Question: What margin of safety do you apply when you buy a family business?

When investing in marketable securities you can change your mind tomorrow, and sell them if you feel that you made a mistake. When we buy a business, we buy that business to keep. Our margin of safety is not in the price we pay but being virtually certain that we are buying into a business that has competitive advantage, good economics, one that is run by people with passion, and one that we will run the same way next year the way the family ran it the year before. Our margin of safety gets more into qualitative characteristics than the quantitative aspects you are probably referring to. When you are buying a business you are buying to keep and you better make sure that it is a business you are going to like 20 years from now and a management that you are going to love.

Question: Mr Buffett, do you have any plan to buy any Brazilian companies?

We would certainly buy a Brazilian company. We would buy any business in any country in the world if we understood the country and company well enough. But it would have to be a large enough company to meet the criteria we set forward in the annual report. We are looking for things that are earning at least US$75 million pre-tax. Brazil is a large country, but the smaller the country the fewer the businesses that meet that criteria will be there. We would feel very comfortable however buying a Brazilian company. You may have noticed in our annual report that the Brazilian Real is the only currency we have held outright in the last year and at $1.65, I’m very glad we did so.

Question: You met yesterday with family-owned companies in Germany. Are you going to strike a deal? Are you going to make a deal before the end of the week?

I can guarantee that we will not make a deal before the end of the week.If I’m lucky I might buy one or two a year. We don’t buy when we are ready to buy. We buy when others are ready to sell. If you have a good private company, you are already rich. You do not need us to put a number on it to validate the value of the business. The best thing to do is not to sell. If you have a business it is probably worth a billion dollars, a billion dollars next year and three billion after that. All businesses will get sold eventually. And if they’ve got a reason to sell, I want them to call me.

Question: There has been bad feeling in Europe, especially in Germany about American investors. Why do you think family business should be looking to investors such as yourself for their future growth?

Whether it be businesses with no heirs, or businesses with siblings, or parents who can’t agree who should take over, if it is to simply get the best price they should simply auction it off. If they have been building up their business for decades and decades, if they care, and they want to make sure it doesn’t get sold a few years later based on the fashions of Wall St. they should invest with us.

Question: You have been so far investing in American companies. Now you are looking for good opportunities in Europe. Are you disappointed in US companies or the American way of doing business? What are your main criteria to invest in Swiss companies?

I’m not disappointed in US companies. I hope we buy an American company tomorrow or in the next couple of years. We are better known in the US, even after a trip like this to Europe. A great number of people in the US have sold us a business in the US and we are in the minds of business owners in the US more than here because we have been around so long there. I love buying businesses in the US and in Switzerland. You’ve got some fine businesses here. The criteria are exactly the same. There isn’t a column A for the US and column B for the rest of the world.

Question: We talk about Europe, but central and Eastern Europe is Europe too. Are you going to invest in this part of Europe?

We don’t rule out any country. There are certain countries where we may worry about the rule of law. But apart from that, most countries would qualify.The bigger the country the more likely we are to find a business. I accept phone calls from a lot of countries that I haven’t visited.

Question: Which sectors and companies do you like in Switzerland? Have you an investment target here?

We do not look for specific sectors. We do look for business that we understand. Meaning when I have confidence in my ability to know what they are going to look like 5-10-20 years from now. It is not that I don’t understand the software products. But I don’t know how that industry will develop over 10 or 20 years. I didn’t know that Google was going to come along. Anything that is rapidly developing, I don’t understand Google for example. We are looking for businesses that are quite understandable. For example, Nestlé, anyone can figure out where it will be in 5 to 10 years from now. Nestlé isn’t going to be on the list, but we are looking for businesses like that. I don’t go out looking for steel industry, or whatever, office equipment industry. I can understand that business. I understand the economics, the distribution system, their accomplishments, their competitors. So I will have a fix on their business.

Question: You have been fairly critical in the past about how the US currency is being devalued and how it has been handled by the US administration. How much of your trip is about diversifying away from the US dollar?

It is not really a factor, but it does mean that I’m not worried about buying in at currency rates. 80% of the earnings of this company which we have owned for a long time come from around the world, and it has benefited from the fact that other currencies have appreciated against the US dollar. But I’m not here for that. If the Euro was 180 or 110 I’d be here. I’m perfectly happy to earn money in Euros whether it is through US companies or whether it is through companies domiciled here and I’m not unhappy about buying in Swiss Francs or Euros and earning in Swiss Francs or Euros. It is not really a big factor.

Another version of the Transcript - was added to VIA earlier.
Warren Buffett IMD Q&A Transcript
(Note: This is all paraphrased by me. Do not take any of this as an exact quotation, but rather a general idea of what was said here . I made this because these videos are difficult to share and take a while to sit through, so hopefully you will find this to be helpful.) from Streetcapitalist.com

Q: How do you evaluate family business acquisitions? same as stocks?
A: When buying marketable securities use Benjamin Graham’s margin of safety
When buying businesses, you buy to keep. Margin of safety is in crossing the threshold of being virtually certain of buying a business with competitive advantage and a passion for the business. Margin of Safety is qualitative instead of quantitative when buying whole businesses. Ben Graham is very quant. focused, buying businesses is a much different look
Q: Any plan to buy stakes in Brazilian Cos because of its new status as investment grade?A: We would buy in any country as long as they understand risks well enough. Has to be a large enough criteria (75mm dollars pre-tax, etc) Would feel very comfortable owning a business in Brazil, owned the Brazilian Real.
Q: Anything you like in Germany? Strike a deal before the end of the week?
A: Guarantee not by end of the week. If lucky, run into two possible deals. We don’t buy when ready to buy — buy when the owner has a reason to sell. Advises owners not to sell their wonderful private businesses, don’t need a number put on it to validate it. Doesn’t call or pester owners to sell. I don’t go around delivering sales talks, wonderful businesses should be kept by owners until there is a reason to sell.
Q: Some bad feeling in Europe/Germany about American Investors. Why family businesses should look to investors like yourself?A: If they have a reason to sell, maybe no heirs, siblings don’t agree — this is a reason to sell. If it’s simply getting a best price, then they should auction it off. If they care about a business over decades and decades, and want it to be in a home where everything will continue as it has before, where they are dealing from great financial strength and never have to see Wall Street - Go to me. Berkshire Hathaway and its culture is what they’re buying into and it’s a very rare and hard to replicate culture. It’s large so a very big business can join. We’re a logical alternative.
Q: Known to invest in American Cos. Why Europe? Are you disappointed by American Cos / American way of businesses? Criteria to invest in Swiss companies?A: Not disappointed by US… will buy a US company probably in a couple years. We’re in the minds of more owners in the US than in Europe. Trip to Europe is a move towards correcting that. I love buying Businesses in the US, but I love businesses in Switzerland too. The criteria for buying in Switzerland is exactly the same as buying that is listed in the annual report. Wherever they can buy they will buy.
Q: You speak about Europe but — Are you ready to invest in Eastern Europe? Are you happy?A: Yes — I am happy. We don’t rule out any countries but smaller companies have less opportunities. Some companies we worry about the rule of law. I accept phone calls from a lot of companies I have not visited.
Q: Which sectors and companies do you like in Switzerland?A: We don’t look for specific sectors. We look for businesses that I can understand. Where I have a high degree of confidence where I can see where they will be 5-10-20 years from now. I didn’t know that Google would come along. Anything rapidly changing I would not understand. I look at businesses that are reasonably easy to evaluate their products - how they will fit in the economic picture - how the economics will look. We’re looking for understandable businesses (like Nestle). But I don’t go out saying I’m looking for the steel industry, etc.
Q: You’ve been fairly critical in the past about how the US currency has been devalued and Handled. How much of your trip to Europe is about diversifying away from the USD?A: Not really a factor but does not mean I ignore currency rates. I’m not here because of small differences in the euro. It’s not a big factor. I certainly feel that overtime — long period (10 years) I do not worry about them (Euro currencies) depreciating against the US dollar. If we don’t change the USD policies we will have weaker currency.
Q: Have you seen any challenges with EU Family businesses / Compared to US Businesses?A: Same challenges, many diverse reasons. Bought twice when there was a successor issue that could hurt the family — I can solve the problem in a way that their solution cannot. There are all kinds of situations that can come up. I would guess that the reasons are diverse in Europe/Asia as they are here, in the US.
If you go 100 years - there will come a time when certain hatreds develop. I had one call some years back from a large family business where they were all hating each other.
I had a call from a young woman, a thousand miles from Omaha, I never met her. She said, “Mr. Buffett the family has some split — we feel that you’re the only person who can come here and solve this.” Then I said to her, “Tell me one thing, do you want to win, or do you want your bother to lose?” She paused and said “Don’t bother to come down.” I was not going to make a solution that could cause anyone to suffer. You get into situations where things break up sometimes. You get great results for family businesses but sometimes it comes to an end.
Q: You’ve teased biz schools for teaching arcane subjects (Option Pricing). What would you teach?
A: It wouldn’t keep all the professors permanently employed. It would teach
1. How to value a business.2. How to think about the market.
As a general part of the curriculum, I would add two subjects not emphasized in business school. I think that the ability to communicate both orally and in writing is enormously important. All students I meet benefit immensely by working on those two skills. They would have a pay off that is enormously disproportionate that would pay off more than learning modern portfolio theory.
The way someone speaks or write can have an enormous impact. Those subjects are under-taught and can have an impact on all schools.
Q: You like real economy - real business. What do you think about what’s going on in the banks. What advice would you give to these bankers?
A: There are more banks than bankers. I think that the head of any bank or financial inst. needs to be the Chief Risk Officer. You have no biz in running a financial institution if you’re not looking at risks. Unless willing to take on CRO job, you shouldn’t be a CEO. We’re seeing the consequences of people not understanding the vehicles they’re sitting up and the risks they’re facing.
CDOs squared can be 750,000 pages just to understand one instrument. Designed to make money for the seller. Huge mistakes have been made by these institutions and they will make similar mistakes in the future. I’d buy a bank bank depending on banker.
Q:Some criticism towards SWFs. Is it fair? Have you ever looked at a Norwegian co.?A: I’ve looked at one or two Norwegian cos. Not a lot I could put 500 mm in (minimum investment for marketable security). SWFs interesting. We’ll have them as we continue to force-feed dollars to the rest of the world. Not the best policy to blame these people when it’s us who push the dollars onto them.
Q: What will solve the food crisis? Will you invest in food cos like Nestle?A: Some talk of speculators — does not look like a speculator situation. Prices of corn are largely dependent on supply/demand. If producing 86 million bb a day of oil and using 86 million — that is how supply and demand intersect. There has been a case to some degree of corn — part of the corn supply being used on fuel is spilling over, farmers may plant more corn because he sees the the affect on corn, affecting other crops. We’re likely to see higher prices over time if we follow the same policies. We don’t own any commodities, we use them in our businesses. All these factors (price increases) has a real affect on the consumer.
Q: How does it feel to be the richest man in the world? You still friends with Bill Gates?A: Bill and I are extremely good friends. Nothing has changed. I’m giving away the stock as I go along so I wont stay there.
Q: Over the last few years, a number of energy industries have come to Switzerland. Would you own an energy company?
A: Sure. We can understand energy companies. I understand the energy business, we’ve bought stocks and natural gas pipelines. Frequently they’re large so I would not be reluctant.
Q: Why and how do you support Barack Obama? What do you do for the people from Burma and China who have been affected by natural disasters?A: Before both Hillary and Barack were running I told I would support both of them. I told them that I’d hold more fundraisers for them. They are outstanding candidates. In terms of the philanthropic efforts, I’ve outsourced that to 5 foundations. Largest portion goes to Bill & Melinda Gates Foundation. Biggest so far has been health. A portion in there goes towards emergency type relief. In various crises in the past they’ve always contributed something. They handle that. My funds will end up being half what they dispense annually. They handle that. I support them.
Q: You bought a 3% stake in SwissRe. A 20% share in their PnC Business. Do you understand Cat Bonds, Longevity Bonds? What do you think of insurance securities?A: I would prefer to write them for our own account. I’d rather take the risk myself and get paid the premium. There are plenty of people in that business who are good at it. Investment banks have been making cat bonds which is competition against Berkshire.
Q: We’re in Switzerland, the country of Luxury Goods. Would you be interested in buying something here?A: Our Ben Bridge subsidiary is the largest seller of Rolex (I believe). We have 80-90 stores, Rolex is a significant portion of our business. Those are great companies (companies like Rolex). They know my phone no. but haven’t called.
Q: You keep telling us that you want the family owned businesses and want the family owners to call you. What phone number should they use?A: 402-346-1400. I was a little bothered the other day, a letter came in that said Supreme Idiot - Berkshire Hathaway. I see all of my mail. Every phone call that comes in, people are asked what they are calling about. If people are calling about a serious idea, they have no trouble getting through to me or sending a fax. I bought half a dozen companies just starting with a fax. It’s easy to get through. You can call collect if you have a good deal.
Q: One of the most difficult tasks for you must be to find a guy who can get in and follow you?A: There are three people we’ve identified. It’s all we (the board) talk about. The board knows. People on the board have almost 1/2 their net worth in berkshire stock. They care about it. My successor will be a lot better in certain things than I am. They will walk into a very well-defined culture. There will be a little bit of a problem in that people don’t know him yet. That will get overcome.
Sam Walton died 15 years ago, Walmart was Sam Walton, but Walmart isn’t Sam Walton. Walmart was institutionalized. Berkshire’s culture is institutionalized.
Q: A question about your charity activities and corporate activities. Suppose you have corporations that you invest in, that might not be impeccable in corporate governance. Can charity be a balance for a corporate governance flaw?
A: We on stock in companies where I don’t agree with everything, but my children don’t either. We can’t expect 100% adherence. We don’t feel a responsibility about that. If we have control over a company, we want it run in a way that you could describe it on the front of the paper and not feel embarrassed.
For businesses we own, I say keep following your own charitable policies, don’t check in with us. In my own case every share I own will go to charity. But it’s no sacrifice, but it’s what I believe should happen. I don’t believe it is my job to take the shareholder’s money to be allocated to whatever charity I believe in. They should allocate their own funds.
Q: Any calls from finance ministers that you didn’t show up to their countries?A: No. No complaints either! I would be delighted to find the right business in any country. Europeans should feel comfortable about the US. US should feel comfortable about Europe. All of these countries believe in the right things. Wonderful businesses are built all over, no reason to rule one country off the list. I’d be equally to get a call from any company even one I haven’t visited. Call at 402-346-1400.

Warren Buffett Univ. of Florida MBA Talk - Part 1

10 part video of interactive session with WEB

News - A Collection

May 19 (Bloomberg) -- Billionaire Warren Buffett said there are ``far more'' potential takeover targets for his $200 billion Berkshire Hathaway Inc. in Europe than in emerging markets, as he looks outside the U.S. for acquisitions to spur profit growth.
The world's wealthiest person started a four-city European tour in Frankfurt today, seeking to form relationships that may lead to purchases by his Omaha, Nebraska-based investment and holding company.
``There's far more companies that would make sense for us to buy, and for them to sell to us, in Europe,'' Buffett said at a news conference, declining to identify possible targets. ``In emerging markets, there are going to be very, very few businesses that would be earning $75 million pretax. You want to fish in a pond where the fish are and Europe is a much better pond.''
Berkshire has $35 billion in cash and Buffett, 77, has been looking for places to put it. He's invested in China, Israel and the U.K., complaining that there's a dearth of U.S. investment opportunities for a company as large as Berkshire. Berkshire may get more than half its revenue outside the U.S. in 30 to 40 years, Buffett said.
He also said the U.S. economy is less than halfway through a credit crisis that sent home foreclosures to a record and sparked the collapse of Bear Stearns Cos., Wall Street's fifth- largest securities firm.
`Silliest Things'
``I don't necessarily think we're halfway through or necessarily a quarter of the way through the effects throughout the general economy,'' Buffett said. ``The initial effects are felt by the people who really did the silliest things, but you can have a whole bunch of domino-type effects that eventually can get to people who are doing fairly sound things.''
The worst U.S. housing slump in a quarter century sank the mortgage securities market causing banks and securities firms worldwide to amass at least $379 billion of writedowns and credit losses, regulatory filings show. Economic conditions wouldn't stop him from making a new U.S. acquisition if the right company presented itself, he said.
Buffett's trip includes meetings in Lausanne tomorrow and Madrid on May 21, finishing in Milan on May 22. The visit was arranged by Eitan Wertheimer, president of Israel's Iscar Metalworking Cos. -- acquired by Berkshire in 2006 in Buffett's first non-U.S. purchase -- and Angelo Moratti of the family-run Italian energy company Saras SpA.
Buffett owns about a third of Berkshire, which he built over four decades from a failing maker of men's suit linings into a company with businesses that range from candy-making to insurance and a $72.6 billion stock portfolio.
Not a Meddler
He's known for buying well-run, privately held companies with high barriers to would-be rivals, cutting deals on a handshake and not meddling in management. In exchange, he typically pays less than companies could receive in an auction.
Germany is fertile ground for Buffett's investment style because about three-quarters of companies there are family-run. Many were founded as the nation rebuilt after World War II and are now grappling with succession issues as their founders age.
``I want us to be on the radar screen of private companies,'' Buffett said today. ``I hope that when the time comes they recognize that in Berkshire Hathaway they can find things that they can't find anywhere else.''
Buffett, who described his visit to Europe as a ``deferred shopping tour,'' said he's looking for businesses he understands where the management is already in place.
``The bigger the better,'' he said. ``In order to have a meaningful impact on Berkshire we need to make large deals.''
Something `Unique'
Germany's privately-owned companies include Robert Bosch GmbH, the world's largest auto-parts maker, Aldi Group, Germany's biggest discount retailer, and Boehringer Ingelheim GmbH, the world's largest family-owned drugmaker.
``Many families go through certain stages of strategic decision-making and they need to know their options,'' said Iscar's Wertheimer, 56, whose company was founded in 1951 by his father. ``From Warren you get much more than money. You're part of something that's unique.''
Expectations for a weak U.S. currency add to the allure of earnings in other denominations. Since at least 2002, Buffett has made investments with the assumption the dollar will decline, first with direct bets against the currency, and then with the Iscar purchase.
The euro fetched less than a dollar when Buffett first enlisted Moratti in 2001 to advise him on potential European purchases. It traded at $1.5509 at 3:17 p.m. New York time today.
Weak Dollar
``The U.S. is going to continue to follow policies that make the dollar weaker,'' Buffett told reporters at the Berkshire annual meeting in Omaha earlier this month. Americans' preference for foreign goods causes the country to send about $2 billion in ``IOUs'' and assets abroad every day, pressuring the dollar, he said.
Buffett said today the strength of the euro wouldn't deter him from making purchases in Europe.
After paying $4 billion for 80 percent of Iscar, which makes cutting tools for manufacturers in plants around the world, Buffett said he hoped the deal would raise Berkshire's international profile and help him find new candidates in ``the bigger economies.''
An investor who says he buys companies ``for life,'' Buffett looks at businesses he understands and in which he can project performance during the next one or two decades. To familiarize himself with Europe's business culture and issues, Buffett has met Moratti, the Italian energy executive, in Omaha at least four times a year since 2001, Moratti said in an interview last month.
Devoted Following
Buffett has a devoted following, particularly in the U.S. About 31,000 shareholders and groupies from every continent except Antarctica filled Omaha's Qwest arena to overflowing earlier this month to hear Buffett answer questions for hours on topics ranging from the economy to his businesses and philosophy of life and marriage.
During the meeting, Buffett said a subsidiary was ``probably close'' to a ``mid-size'' U.K. acquisition.

Candies and airplanes

See's Candies is a role model

If you want to know how to recognize a great business, you could do worse than look at See's Candies. More than half of its profits have been paid to its owners, with the remaining amount being retained (some people will spin this by saying it was reinvested).

Compare its net profits in the 1970s against its profits in the 1990s and ask how much capital was required to generate all these profits.

It is even more relevant to note that the candy industry is not unlike the airline industry in that almost half of the businesses in this industry are unprofitable. So this is not a case of a high tide lifting all boats. The tide has been out for some time with no promise of returning.

Some trivia that you might not already know

Recently, we came across different kinds of trivia worth sharing with all of you. Not sure which ones you may have already heard before, but we think some of this stuff is pretty new.

TRIVIA

Did you know that Warren Buffett's dad wanted him to apply to Harvard Business School. It was a 10 hour train ride to Chicago where he met with the person who was to interview him, and was told to come back another time when he was older. He was still 19 at the time. So he rode 10 hours back.

Did you know that when Warren Buffett showed up at National Indemnity, there was only one person at work apart from the security guard? Everyone else was home.

When Warren Buffett was 13 or 14, upon moving to Washington, he ran away from home and engaged in some theft.

When Charles Munger was asked how he felt about being old, he remarked "I'm not going to complain about my age because without it, I'd be dead".

Warren Buffett formed his 1st investment partnership at the age of 25.

The CFA Program was first proposed by Benjamin Graham in 1942 as a member of the New York Society of Securities Analysts (NYSSA, founded 1937)

Quotes from Charles Munger

"The ethics of Wall Street will always average out to mediocre at best.... This doesn't mean there aren't some wonderful, intelligent people on Wall Street -- there are, like those in this room -- but everyone I know has to fight their own firm [to do the right thing]."

"Berkshire’s whole record has been achieved without paying one ounce of attention to the efficient market theory in its hard form." - Oct. 2003

"if regulators had banned the phrase, 'this is a financial innovation that diversifies risk,' the financial markets would have been a lot better off."

"the policy of turning American corn into automobile fuel is an incredibly stupid idea."

"A stock option is both an expense AND dilution. To argue anything else is insane."

"People tend to forget how well the system worked when we had rules that prevented this complexity and aggression"

Munger's Commencement Speech

These are quotes taken from Munger's Commencement Speech at USC School of Law on 13 May 2007. Instead of copying the entire speech, it seemed more productive to pick out the best pearls of wisdom for your ease of reference. What do you guys think of these?

• The safest way to get what you want is to deserve what you want.
  
  
• Deliver to the world what you would buy if you were on the other end.

• There is huge pleasure in life to be obtained from getting deserved trust. And the way to get it is to deliver what you would want to buy if the circumstances were reversed.

• There’s no love that’s so right as admiration based love and that love should include the instructive dead.
  
  
• Wisdom acquisition is a moral duty. It’s not something you do just to advance in life. As a corollary to that proposition which is very important, it means that you are hooked for lifetime learning. And without lifetime learning, you people are not going to do very well. You are not going to get very far in life based on what you already know. You’re going to advance in life by what you learn after you leave here.
  

• I constantly see people rise in life who are not the smartest, sometimes not even the most diligent, but they are learning machines. They go to bed every night a little wiser than they were when they got up and boy does that help, particularly when you have a long run ahead of you.
  
  
• ...so if civilization can progress only with an advanced method of invention, you can progress only when you learn the method of learning.
  
  
• Nothing has served me better in my long life than continuous learning.

Quotes from Warren Buffett

"Don't try to catch a falling knife until you have a handle on the risk"

"Cash combined with courage in a crisis is priceless"

"The role that Charlie and I play in the success of our operating units can be illustrated by a story about George Mira, the one-time quarterback of the University of Miami, and his coach, Andy Gustafson. Playing Florida and near its goal line, Mira dropped back to pass. He spotted an open receiver but found his right shoulder in the unshakable grasp of a Florida linebacker. The right-handed Mira thereupon switched the ball to his other hand and threw the only left-handed pass of his life - for a touchdown. As the crowd erupted, Gustafson calmly turned to a reporter and declared: "Now that's what I call coaching."" - Chairman's Letter 1991

“My most surprising discovery: the overwhelming importance in business of an unseen force that we might call ‘the institutional imperative." WEB elaborated “for example: (1) as if governed by Newton’s First Law of Motion, an institution will resist any change in its current direction; (2) just as work expands to fill available time, corporate projects or acquisitions will materialise to soak up available funds; (3) any business craving of the leader, however foolish, will be quickly supported by detailed rate-of-return and strategic studies prepared by his troops; and (4) the behaviour of peer companies, whether they are expanding, acquiring, setting executive compensation or whatever, will be mindlessly imitated.”- 1989 Letter to Shareholders

"What the DeBeers did with diamonds, the Arabs are doing with oil; the trouble is we need oil more than diamonds." And there is the population explosion, resource scarcity, nuclear proliferation. But, he went o­n, you can't invest in the anticipation of calamity; gold coins and art collections can't protect you against Doomsday. - WEB 1974, Forbes

"I call investing the greatest business in the world," he says, "because you never have to swing. You stand at the plate, the pitcher throws you General Motors at 47! U.S. Steel at 39! and nobody calls a strike o­n you. There's no penalty except opportunity lost. All day you wait for the pitch you like; then when the fielders are asleep, you step up and hit it."
But pity the pros at the investment institutions. They're the victims of impossible "performance" measurements. Says Buffett, continuing his baseball imagery, "It's like Babe Ruth at bat with 50,000 fans and the club owner yelling, 'Swing, you bum!' and some guy is trying to pitch him an intentional walk. They know if they don't take a swing at the next pitch, the guy will say, 'Turn in your uniform.'" Buffett claims he set up his partnership to avoid these pressures.
Stay dispassionate and be patient, is Buffett's message. "You're dealing with a lot of silly people in the marketplace; it's like a great big casino and everyone else is boozing. If you can stick with Pepsi, you should be O.K." First the crowd is boozy o­n optimism and buying every new issue in sight. The next moment, it is boozy o­n pessimism, buying gold bars and predicting another Great Depression.

Derivatives:

“Derivatives are dangerous because they can be so mispriced. You have interconnectedness in financial markets like you’ve never had before. Trillions are held by people which, if they get a trigger, they’d all behave the same way.” It’s a crowded trade with out people knowing it’s crowded.“It’s like the portfolio insurance doomsday machine on October 19, 1987- failure should’ve been predicted. It was less than 1% of the market but took 23% off the market and the market was almost closed. It’s now the electronic herd all over the world, waiting to act on a stimulus and it’s accentuated by derivatives.”Additionally, total return swaps “are financial weapons of mass destruction” because they create chaos in the markets. “It’s amazing the trouble people can get into with leverage.”

The Gift to the Bill and Melinda Gates Foundation:

“It was an absolute no brainer for me. They’ll keep running it decades after I’m dead.” “There are plenty of people who want to put their name on a building for $10 million and that’s great but it doesn’t do anything for me.”

---

“The point is to engineer backwards from where you want to be and do what you must to get there. It’s like a country song, you should sing it backwards so you get your home back, your car back, your dog back……….”

Q: Aside from winning the “ovarian lottery” as you’ve called it, what was the most important year in your life and why?

“When I proposed to my wife.” It also happens that that year was when I was taking the Carnegie public speaking course. They would give pencils every week to theperson who had improved the most and the week that I proposed, they asked me, ‘Did she say yes?” And that was the week I got the pencil.

Miscellaneous Questions and some other thoughts and asides from Mr. Buffett:Municipal insurance:

“Municipal insurance might be more risky in the future than it’s been in the past.” If municipal bonds get insured, then often cities will default more frequently just because they are insured.
“Be very careful using historical information in business”, like looking at historical default rates on municipal bonds. The default rate is very different, for a reason, during a period when a project or a city is insured vs. when it’s not.

"There is a woman in Omaha in her 80s, she's Polish Jew, she's a wonderful person, she's a friend of mine, when she was a young teen, she was in Aushwitz, with other members of her family, not all of whom came out, and she says, Warren, when I look at someone I am slow to make friends because at the back of my mind, the question always is "Would they hide me?" Now I would say this, if you get to be 60 or 70 or my own age, 77, and you and you have a lot of people that would hide you, you are a success and if you don't have anyone that who would hide you, no matter how rich you are, no matter how many honorary degrees you have been given, no matter what hospitals are named after you, you're a failure. And its another way of saying how many people love you, basically. And I have not seen anyone who has the love of dozens of people as they get older, who is not a success or who doesn't feel that he's a success." - IMD, May 2008

"You have certain things you want to achieve, but if you don’t have the love and respect of people, you are always a failure. That is the one thing you must earn, it can never be bought. No one that has the love and respect of others is ever a failure." - Nebraska Business 2001

"Only buy businesses that are so good that someone with Alzheimer's can manage them!"

"We see change as the enemy of investments, if it wasn't the richest people would be librarians"

"Charlie and I believe, however, that the macro picture is dangerous and getting more so. Large amounts of risk, particularly credit risk, have become concentrated in the hands of relatively few derivatives dealers, who in addition trade extensively with one another. The troubles of one could quickly infect the others. On top of that, these dealers are owed huge amounts by nondealer counterparties. Some of these counterparties, as I’ve mentioned, are linked in ways that could cause them to contemporaneously run into a problem because of a single event (such as the implosion of the telecom industry or the precipitous decline in the value of merchant power projects). Linkage, when it suddenly surfaces, can trigger serious systemic problems." - FORTUNE, March 3, 2003

"By far, the most important quality is not how much IQ you've got. IQ is not the scarce factor. You need a reasonable amount of intelligence, but the temperament is 90% of it."

"The simple test of good ethics, is how would you feel about any act, if a reasonably intelligent, but unfriendly reporter were to write it up and put it in tomorrow’s paper for everyone to see. If it passes that test, it’s okay, and if you have to think about it, it probably isn’t the right thing to do." - Nebraska Business 2001

"How long does the management have to think before they decide to raise prices?"

"I would suggest that the big successes I’ve met had a fair amount of Ben Franklin in them. And Donald Trump did not." - Notre Dame Faculty, 1991

"Every business student you have has the requisite intelligence and requisite energy. Integrity is not hard wired into your DNA. A student at that age can pretty much decide what kind a person they are going to be at sixty. If they don’t have integrity, they never will. The chains of habit are sometimes too heavy to be broken." - Nebraska Business 2001

"The two biggest weak links in my experience: I’ve seen more people fail because of liquor and leverage – leverage being borrowed money. Donald Trump failed because of leverage. He simply got infatuated with how much money he could borrow, and he did not give enough thought to how much money he could pay back." - Notre Dame Faculty, 1991

"I would say, follow what you are passionate about. I think it is crazy to be someplace where you feel your ethics or whatever is out of sync with your work. You really want to be in a place where you jump out of bed in the morning and you are all fired up to get to work. I have always felt that way, basically," - Nebraska Business 2001

"The natural heroes are the parents. Kids usually emulate their parents, and if the parents behave well, the kids are very, very likely to behave well." - Nebraska Business 2001

“I realized that technical analysis didn’t work when I turned the chart upside down and didn’t get a different answer.” - Vanderbilt, Jan. 2005

"Capitalism without failure is like Christianity without hell."

“There is nothing wrong with a ‘know nothing’ investor who realizes it. The problem is when you are a ‘know nothing’ investor but you think you know something.” - Vanderbilt , Jan. 2005

"I think everybody in business school should really know accounting; it is the language of business. If you are not comfortable with the language, you can’ t be comfortable in the country. You just have to get it into your spinal cord. It is so valuable in business." - Nebraska Business 2001

"The advice doesn’t promise enough…it’s not a “get rich quick” scheme, which is what a lot
of other philosophies promise" - Vanderbilt, Jan. 2005 (On why more people don't follow his advice)

"I can only tell you that the secret has been out for 50 years, ever since Ben Graham and Dave Dodd wrote Security Analysis, yet I have seen no trend toward value investing in the 35 years that I've practiced it. There seems to be some perverse human characteristic that likes to make easy things difficult." - 1984

"Rule No.1 is never lose money. Rule No.2 is never forget rule number one."

"Shares are not mere pieces of paper. They represent part ownership of a business. So, when contemplating an investment, think like a prospective owner."

"All there is to investing is picking good stocks at good times and staying with them as long as they remain good companies."

"Look at market fluctuations as your friend rather than your enemy. Profit from folly rather than participate in it."

"We make no attempt to predict how security markets will behave; successfully forecasting short term stock price movements is something we think neither we nor anyone else can do."

From the Tuck Investment Club site:
Q: In one of your letters to shareholders you reference Byron Trott grudgingly as "an investment banker who earns his fee". What do you feel Wall St. does well and doesn't do well?

A: Wall St. makes money well. Per incremental unit of energy and IQ, you will make more money on Wall St. than anywhere else. Wall St. is very good at selling things and at auctions, they're good if you're selling a business. On the other hand, there are so many products that Wall St. has created and not all of them are good. There's a pervasive sense of 'if you don't do it someone else will'. There's an HBO movie coming out in October called Last Best Chance, it's about a nuclear crisis precipitated by a Russian soldier who is bribed by terrorists stealing a weapon. He almost didn't go through with it but they told him 'if you don't do it someone else will, so you may as well be the one to get the money'. This type of thinking has gotten people into trouble, like CEOs managing earnings. In 1985 a Cleveland firm, Scott & Fetzer [a conglomerate that included World Book encyclopedias] was selling their business, First Boston was their advisor and they sent pitches to twenty buyers without anyone biting. Berkshire didn't get a pitch, but I sent the seller, Mr. [Ralph] Schey, a letter saying we were interested and did the deal. Since First Boston was due a fee from any transaction, at a closing dinner they offered Charlie [Munger] their pitch book with pages of analysis, Charlie replied 'no thanks'. We only buy companies where the seller cares about where the business goes.

Q: How will the expensing of stock options affect entrepreneurship and small business?

A: Not much at all. Berkshire has never used options as compensation in our companies. At The Pampered Chef [a Berkshire acquired cooking utensil company], our employees value travel awards as a kind of extra compensation. Often the recipients of stock options don't place the same value on them as the giver does, or should. In the 90's when we were involved with Salomon Brothers instead of granting stock options to employees I offered to sell them options at 80% of their present value. They turned it down.

From 1998 CNBC interview:
As part of his coverage of the 1998 Berkshire annual meeting, Scott asked Buffett about the then high-flying U.S. stock market.

Buffett: Things that go up, and stocks, don't necessarily have to come down. I mean, businesses get worth more over time and they should sell for more over time as they become worth more. But the real question is, if returns on equity would return to 13 or 14 percent for American business or if interest rates went up substantially, then we would look back and say this was a time of overvaluation. But, I don't know the answer on that today and I've never said I knew the answer.

Scott Cohn: You're putting your bets on things like commodities, silver, oil, bonds ..

Buffett: Those are minor positions. No, our big money is in businesses. We own, at present market, 15 billion dollars worth of Coca-Cola and we own a number of operating businesses. So we love to own great businesses run by people we admire and trust. So that's, the other stuff is around the edges.

Scott: I guess what I'm wondering though is, the money that you have parked there, you've made a decision to do that. Is that something that people should follow your lead. Can they be as successful as you seem to have been in those areas?

Buffett: No, I think people should follow their own lead. They should decide what they know and understand and what they have competence in. And then they should do that, whatever that may be.

Scott: Let me ask you about Berkshire Hathaway stock. It seems to keep going up and up and up. You've talked before about whether you'd buy it ... You've been silent on that this year. Would you buy it at this price?

Buffett: I haven't bought a share of Berkshire Hathaway in a long, long time, but I haven't sold a share either.

On May 3, 2008 (Morningstar):

Mr. Buffett said that the most important investment you can make is in yourself, because an individual's potential often exceeds realization. He further said that he asks high school students that if they could buy one car for their entire life, how would they treat it? He then drew an analogy to caring for an individual's mind and body. Mr. Buffett said that the reason people are effective in life is because other people want to be around them and work with them.


2006 Letter BRK/A:

"When someone with experience proposes a deal to someone with money, too often the fellow with money ends up with the experience, and the fellow with the experience ends up with the money." - WB

WB May 4, '08:

"There's going to be more pain, sure," Buffett said. "The action of the Fed, in terms of Bear Stearns, prevented in my opinion the contagion where you're essentially going to have bank runs on the investment banks ... The idea of a financial panic ... has been pretty well taken care of. That was a watershed event."

OMAHA (Money Magazine) -- On Sunday, May 4, I attended the press conference where Berkshire Hathaway Chief Executive Warren Buffett and vice chairman Charlie Munger took questions from print reporters for two hours, then went off and did more interviews for TV.

Buffett, who composes his thoughts at blazing speed and speaks in long and complex paragraphs, spent the entire weekend talking. Munger, who is as laconic as Buffett is loquacious, saves his voice - speaking, as always, only a handful of words at a time.

Buffett and Munger, aged 77 and 84 respectively, have the mental energy and sharpness of someone half their age.

Here are some highlights.

Building a philosopy
In response to a question from Barbara Kiviat of Time on how he and Munger control their emotions, Buffett replied: "[It] comes about from having an investment philosophy grounded in the idea that a stock is a piece of a business. If you look at it that way, there's no reason to get excited whether some analyst is recommending it or the company is splitting the shares two-for-one, or whatever. The only way to drive the extraneous thoughts out of your mind is to have a philosophy. And for us that philosophy comes from Benjamin Graham and The Intelligent Investor, especially chapters 8 and 20. It's not very complicated stuff."

"You have to have the right temperament. I tell the students who come visit me that if you have more than 120 or 130 I.Q. points, you can afford to give the rest away. You don't need extraordinary intelligence to succeed as an investor. You need a philosophy and the ability to think independently...It doesn't make any difference what other people think of a stock. What matters is whether you know enough to evaluate the business," he opined.

"You should be able to write down on a yellow sheet of paper, 'I'm buying General Motors at $22, and GM has [566] million shares for a total market value of $13 billion, and GM is worth a lot more than $13 billion because _______________." And if you can't finish that sentence, then you don't buy the stock. [Note: Buffett mentioned GM for illustrative purposes only.] All this requires some temperamental detachment from other people's behavior. Both Charlie and I have a natural instinct in that direction. We value our opinions more than others' -- perhaps to an extreme!"

Kiviat followed up by asking whether they mind being regarded as "a bastion of calm" by others. Buffett simply stated, "I think they're probably right," while Munger was more loquacious: "Not only are they right, but it's a huge advantage to us to get the reputation of being wiser and stronger than other places. Would any of you object to being considered wiser and stronger when you're trying to get anything in life? The key is not to be seduced by crazy ideas, but instead just stick to the fundamentals year after year. Academia doesn't get too interested in us -- we're too simple. What would the professors do? A great many of the formulas [they use to analyze securities and markets] are dead wrong. They exist purely to give the intellectual class something to do. We don't do anything just exercise our intellectual proclivity for mathematical formulas."

Then Buffet said one of the most remarkable things I've ever heard him say: "There's no reason we should become fearful if a stock goes down. If a stock goes down 50%, I'd look forward to it. In fact, I would offer you a significant sum of money if you could give me the opportunity for all of my stocks to go down 50% over the next month."

Look at that sentence again. What Buffett is actually saying is that most people's emotions work backwards: They get greedy when stock prices go up and fearful when they go down. Instead, if you are a true investor, you should shop for stocks the same way you shop for anything else: Look for sale prices, and never regard falling prices as inherently bad news. Instead, falling prices create the opportunity to buy even more of something that was already worth owning.

In that single sentence Buffett captured the difference between investing and speculating: An investor, like Buffett, wants the price of a stock to fall below the value of its underlying business so he can buy even more and hold for as long as possible. A speculator (like Jim Cramer) only wants the price of a stock to go up, with no regard for the value of the underlying business at all, so he can sell as fast as possible. To the investor, the market's opinions do not matter. To the speculator, they are the only thing that matters.


Bond insurers beware

In what may spell trouble for bond insurers MBIA and AMBAC, Buffett said, "We see every day that people are coming to us and paying more than they paid the original bond insurer to see that they have an insurer." Berkshire wrote $400 million in municipal-bond insurance in the first quarter of 2008 and is already licensed to operate in 49 states. "This is entirely a secondary-market business," said Buffett, "where people are telling us, 'We'll pay you just to back them up.' "

Note carefully what is going on here: People who already have insurance on a very low-risk investment (municipal bonds) are coming to Buffett and asking him to ensure that their existing insurance will be adequate. It is like a man who is already wearing a belt paying you to put a pair of suspenders on him. This is the kind of business that Buffett loves. Without naming names, he criticized MBIA and AMBAC for ravaging their own capital by insuring too much dicey mortgage debt: "If they keep writing the business at any price, eventually the secondary market is likely to reflect that in the price [of bonds that carry their insurance]. And if you're writing business to pay for yesterday's losses, you'll be sorry."

Then Buffett marveled at the fact that "You have one bond insurer whose stock went from $96 to $4 [AMBAC (ABK)] and they're still rated AAA. The other one issued 14% paper with Treasuries at 4% [MBIA (MBI)] and they're still rated AAA." At that point, Munger elicited laughter from the room by intoning, "The rating agencies, with 20-20 hindsight, could have done better."


Korea and China vs. U.S. regional banks

When a Korean journalist asked whether Berkshire would buy any other Korean companies in addition to its existing holding in steelmaker Posco, Buffett revealed that he had bought "a number of" Korean stocks for his personal portfolio "a few years ago," when "that stock market got about as cheap as any market I've seen in my lifetime."

But most Korean stocks are too small to have a significant impact on Berkshire's portfolio, so Buffett and Munger don't expect to put much money there. Nevertheless, "Korea represents sound value," said Munger, and Buffett added: "It's one of the better stock markets in the world."

Later, in answering a question about whether the credit crisis has turned regional bank stocks into good values, Buffett said: "It's hard to get much conviction on how [the management] will behave and whether they tell the truth. There's a lot of leeway [in the accounting procedures and the reported financial statements]. Talking to the CEOs isn't very useful. When they're lying, they believe it themselves a lot of the time. I want to see how people behave in different situations."

In short, Buffett is not bullish on regional banks. Munger, however, was more upbeat: "For somebody who's very diligent, you've identified a prospecting territory that has some promise. It wouldn't necessarily work for us [because BRK needs to buy very large blocks of stock], but it might work for others."

Buffett wasn't done criticizing the impervious financial statements of US banks: "If you had $1 million," he retorted to Munger, "it would be easier to go through a manual of Korean stocks than to select a few good American banks." This time Munger agreed: "I'd take the Korean stock market so much faster than the American banks that it'd make your head spin."

I don't think, by the way, that Buffett and Munger were trying to say that the Korean stock market is a steal. They were, instead, merely pointing out that investors need to think for themselves and to cast a wide net. If you run out today and buy a bunch of Korean stocks without researching them first, you're not following Buffett and Munger's advice, you're violating it.

A Chinese reporter asked whether Berkshire will be buying more stocks in China now that its market has fallen by almost half, and what the next year will hold for Chinese investors. Buffett's answer held a lesson for investors based anywhere. "We're not in the business of forecasting what the market will do in the next year," said Buffett. "But if a market goes down, we like that. There's no way Charlie and I get upset when stocks go down. We like it, because falling prices give us the opportunity to buy more good businesses at better prices."

"We don't predict stock prices," he went on to day. "All we know is, the lower they go, the more interesting they get. I think it was Agatha Christie, who was married to an archeologist, who said: 'I don't mind getting older, because the older I get, the more interested my husband becomes in me.' Well, the lower stock prices go, the more interested we get in them...We are not looking at any stocks in China now, but China will always be on our radar screen."


Valuing stocks

Asked how he evaluates financial stocks when so many have balance sheets complicated by derivatives, Buffett said: "There are some that I can't value. I probably couldn't value them even if I worked there, even if I were in charge, and even if I had a year to do it. It's just too complicated [with such large positions in complex derivatives]....Most of them, I'm agnostic. I guess that means I don't trust them. When you're buying stock in a financial institution, you should have a reason to be quite comfortable with the risk-assessment capabilities of the people in charge...to have a real fix on the people running the institution. We can't do that with a lot of [banks]. We just can't figure out what they're doing most of the time.... [the accounting doesn't] really spell out where the institution stands. So you'd better know more about the people running it than any set of figures can give you."

Buffett added that not long ago, he read the 270-page 10-K annual report of a bank he was curious about. "After a couple of hours," he said, "I had about 25 pages marked with big question marks that I couldn't answer." (This raises the obvious question: If Warren Buffett can't understand the financial statements of big banks with derivatives, who can?)

Munger summed up the complexity of derivatives this way: "Wall Street is always going to go where the money is and not worry about the consequences. First they invent things they shouldn't sell to anybody, then they end up selling them to their grandmothers."

Munger commented later, "Many of the present troubles were richly deserved. A lot of financial institutions behaved with a combination of stupidity and over-reaching, and that's not a good combination. I think the world is right to exact a large penalty. Capitalism wouldn't exist without failure."

Added Buffett: "Capitalism without failure is like Christianity without hell. These institutions not only brewed the Kool-Aid but drank it. [Some of the banks and mortgage companies] were like an arsonist who got caught in the house after he set it on fire."

Munger's final word on the subject: "In some of these institutions, the main product is not banking, it's testosterone."