My Trip to See Warren Buffett
I hope this letter finds you having a good start to the summer.
Several times per month I attend courses, to hear some of the world's top minds and speakers in order to ensure that I can do my complete best while helping you manage your family's financial affairs. Usually I do this behind the scenes, and do not tell you about the time we dedicate to that quest.
However I just saw one speaker that I feel is worthy to share his thoughts with you.
On the weekend starting Friday May 4, 2007 I travelled to
• Born in 1930
• World's most successful investor
• Sold Coca Cola for $.05 per bottle profit at age 6
• Trading shares at age 11
• Buys cheap high quality stocks and holds
• In 1950 worth $9,800
• In 2005 worth $3.8 billion
• Owns all of, or large parts of the following companies: Geico, Fruit of the Loom, Dairy Queen, Coca-Cola, Solomon Brothers, Justin Boots, NetJets, See's Candies, World Book Encyclopedia, Furniture Mart, Curby Vacuums, Benjamin Moore Paints, etc, etc.
• If you want to buy one stock in his company it would cost you $109,250/share.
• If you invested $100,000 in his company (
It was quite an experience. I walked into his annual shareholders meeting in
Mr. Buffett, who was age 76, was sitting at the front table with his business partner Charlie Munger, who is age 83. Mr. Buffett introduced his board to the crowd, sitting in front of the wooden stage in a very uncomfortable chair was one of his board members named Bill Gates. For eight hours straight, Mr. Buffett and Munger fielded approximately forty-eight questions from twelve open microphones around the arena. None of the questions were pre-planned or screened. Impressive to say the least.
I took thirty-two pages of notes as he spoke. Rather than pass on all those pages to you, I thought I would send you the key points. Please be aware that I am not trying to speak for Mr. Buffett. He is more than capable of doing that for himself. I am simply giving you a brief summary of my notes to paraphrase his message as I thought I heard it. Therefore I can not warrant the accuracy of the below. Here are the thoughts I heard:
1. There will be lower earnings in the
2. He does not believe there is a bubble in private equity as investors cannot leave private equity quickly.
3. There is more problem having the wrong money manager than the wrong fee structure. Paying compensation is better than having a mediocre manager.
4. He does not believe in stock options in corporations. Envy and greed drives this. All you get out of envy and greed is worry and a sick stomach.
5. He only invests in oil stocks where the president of the resource company has proven he can lower production costs. He does not believe Presidents should be rewarded for oil going from $30 to $60 a barrel.
6. He does not believe there is going to be a contraction in money available to lend, as there is more money now. The Federal Reserve was established to make sure that there are no credit contractions to slow the economy as in 1929.
7. He does not believe we will see an event like 1929's Great Depression, however he feels we could have an event like 1998 someday.
8. He feels the present high corporate profits in the
9. He believes there is a large future in gambling and casino's, the human propensity to gamble is huge. He installed a slot machine in his children's room to get their allowance back. He is against gambling as he feels it is a tax on the retired and poor and believes VLT machines are socially repugnant as the government takes advantage of the above groups.
10. He feels the best way to become a better investor is read everything you can. By ten years old he had read every book on investing in the
11. You should not invest in one share of a stock unless you would be willing to buy the whole company.
12. He only buys stocks that are cheap and have sustainable profits, little competition. He used Coca-Cola as an example.
13. When you buy stock in a company, you do not have to be precise on what it is worth, you should be able to predict the future of the business for twenty years though.
14. The healthcare crisis that is coming is not solvable, that is why he is buying healthcare insurance companies with low distribution costs. Presently 15% of the GDP in the
15. He feels one mistake companies make is passing the power from one old person to another old person. They are presently looking for a young person to take over the operation of
16. The secret to making investments grow is to not do many dumb things, and do great things once in a while.
17. He is not a big fan of derivatives. It introduces leverage into the stock market in a invisible way. He feels derivatives contributed to the crash of 1929. Derivatives are dangerous as they have erased margin requirement rules. Derivative use will increase eventually to the point where it does hurt the stock markets. Some day the markets will react badly to this, as well as fund managers leveraging.
18. The percentage of bonds and stocks held by people who can change their mind tomorrow is increasing via short term trading. The turnover rate on the New York Stock Exchange forty years ago was 15%-20% per year. Today it is 100% per year. These conditions will lead to a bad result eventually. Educated people do things that are totally irrational on mass. We saw a bit of that in 2000. Trying to beat the markets day by day is indeed a fool's game.
19. He approaches stock picking by buying businesses the same way he buys farms:
A. How much profit will the farm produce in the future?
B. What ability does the farm have to produce cash and distribute cash in the future? As Esop said, "a bird in the hand is worth two in the bush." Warren Buffett wants to know how he can quickly get the two birds.
20. By trying to chase large returns people are trying to jump over seven foot high-jump bars. He feels he knows how to jump over one foot high-jump bars.
21. He is not a big believer in global warming, however he cautioned you should build a margin of safety even if it is not true. He has done that by buying insurance companies that do not cover just property insurance, for things like hurricanes. He does not believe that global warming will be a calamity for mankind. However he feels that the overreaction by politicians, the press, and the public may cause a calamity for mankind.
22. He would not comment on the stability of Chinese banks as he knows nothing about them.
23. He said long-term he would always buy stocks over bonds. He does not know where the market will be in three years, but knows where it will be in twenty years. Up!! There will always be short-term disruptions in the market. He counsels that you should not worry about waiting for stocks to get cheaper as you may freeze yourself out of the market and accept that your stocks will fluctuate.
24. He believes you should give you money back to society some way in the end. He has given a lot of his away.
25. One of his secrets to success was hiring top notch advisors around him, as he said "when he needs teeth pulled, he goes to a dentist."
26. He does not feel the sub-prime mortgage defaults in the
27. His advice to a twenty-five year old in the crowd to be successful was:
A. Read everything.
B. Learn from wealthier people.
C. Have discipline in your investment program which is setup to make sure you do not lose money. Be disciplined against big losses.
D. Do not try to guess when stocks will go up. Look for inefficiencies in the market and invest where other people are not. These are the true opportunities. There will always be opportunities in life, but some days you will feel like there are none.
28. He cautions the oil industry to not get too comfortable. If tens of thousands of people (voters) are unhappy about an industry profits, the government usually always steps in. If gasoline costs go too high there may be an attempt to socialize oil companies.
29. When asked why he invested five billion dollars in stocks in the first quarter, he responded, "If you hadn't had a date for a month you might date a girl you wouldn't have." They were not buying because the markets were flat. They buy businesses they like. They do not care where the Dow or indices are.
30. He cautioned that returns on the market will not be as high as the last 15 years. It is a different world and we should have more modest expectations.
31. He does not believe volatility is a measure of risk and hence return. For example he bought farm land at the bottom when it was highly volatile (it had dropped from $2000 per acre to $600 per acre). Beta, or volatility was high, however his risk was very low due to the fact that it just dropped. He believes risk come from:
A. The nature of types of businesses.
B. Not knowing what you are doing.
C. Paying a price that is not sensible for a stock.
32. Smart people do very dumb things. He has tried to figure out why and who it is so he could avoid them.
33. He does not like annual reports of oil companies as it is often a product of a outside third party. He would avoid buying stocks in companies where the president is not willing to talk to you directly in the annual report. He purchases resource stocks where the exploration and production costs per MFC is being lowered.
34. A good manager of a corporation cannot turn around a bad business like Ford Motors as he is dependent on too many good things happening in a row.
35. When asked where we are in the stock market cycle now, he said he would rather have stocks than long bonds as he feels stocks will outperform 4.75%. In 1999 10%-12% per year returns on stocks were extrapolated, he feels this is a totally unrealistic expectation now.
36. When asked about stock brokerage costs and fees, he responded that they are a fraction of what they were in 70's.
37. He will not talk to investment advisors who promise 20% return as that is unrealistic. He feels some pension funds and some wealthy people are gullible to those type of salesmen.
38. He says when he encounters a problem that is too hard to solve, if the problem is optional he puts it into a file folder on his desk and leaves it there.
39. He says he has several role models. He believes choosing heroes is very important and that you should associate with people who are better than you. He believes you should marry up in the hope you can find someone who will marry down. He stated his role models have never let him down.
40. He is not a proponent of ethanol production, and believes running automobiles on corn is dumb. Weird decisions are always made by governments under pressure. Ethanol production (corn) will simply cause the cost of food to rise and will ruin topsoil. You burn as many hydrocarbons making ethanol as burning fuels in cars.
41. Your earning power is the best protection against inflation. Be the best at your profession.
42. He believes that in the future rail stocks will not be all that exciting. However rails competitive position has improved over the last twenty-five years due to:
A. Trucking diesel prices rising, which will affect truckers four times more than rail.
B. There is no new capacity in the rail business. Rail is a capital intensive business but will have good returns in the future, not great.
43. When asked how young people can earn money, he said he had tried twenty businesses by the time he had got out of high school. Business success is correlated with:
A. The age you started your first business.
B. Make sure you do something that people do not want to do for themselves. Grades do not decide the success of a young person. The best thing to do to make yourself successful is quickly make yourself a reliable person.
44. Use the best hour of the day to improve your mind and sell the rest to other people. Make sure your sell yourself the best hour though.
45. He was asked what the best stock would be to buy in the future based on the
46. He believes that the U.S. dollar will continue to decline, and he is presently buying foreign currencies. They are focusing on buying companies that earn money in other currencies than the U.S. dollar. The
47. He was asked to comment on what his long-term view is on commodities, oil prices, steel, and coal. He has no opinion on commodities and has not bought oil futures. He buys good companies and low cost producers. For example he bought Sees Candy which is a business that requires a very small capital expenditure. He believes it is better than any steel or commodity business.
48. He cautioned to stay away from newspaper stocks as circulation is dropping each week.
49. Areas of investment doesn't make opportunities… brains make opportunities.
I hope the above is helpful. As I said before I am summarizing an eight hour meeting into one letter, therefore I cannot warrant accuracy of the above and am definitely humble enough to know that I am not speaking for Mr. Buffett and may have heard him incorrectly. However I thought it was important to pass on these jewels of wisdom to you.
If you have any questions please give me a call at any time.
Sincerely yours,
Brad Gustafson, B.Sc., CFP
Partner
Tel: (403) 355-6060
Fax: (403) 355-6109
Toll Free: 1 (866) 867-7735
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