I might be going dark for a while as I fall into the rabbit hole of the CNBC Buffett Archive. Before I disappear into the nebula of Berkshire Hathaway enlightenment, I wanted to flag it for your attention as it is really a neat resource.
So, there’s a link to the home page in my resources widget along the right side of the homepage. But here’s another handy link to the archive. For each annual meeting there is a highlight reel that is a couple of minutes long. I have watched all of those. I am now watching the 1994 meeting and working my way forward. Below are some notes and observations from this meeting.
Citi
Bill Ackman asked a question about Berkshire Hathaway’s investment in Citi. First it was amusing because WEB didn’t really seem to know who Ackman was. This was after the Citi crisis and WEB introduced some of the managers he had to bring in after cleaning house due to the prior management’s misrepresentations to the Fed. Here’s a really great account of the Citi culture of that time:
If you’ve never read the book, check it out. So Ackman was challenging the “quality business” prong of the BRK investment philosophy as applied to Citi. He pointed out the high leverage and the low ROE’s of Citi. Basically, he turned out to be right on Citi, as BRK sold out of the position within a few years.
If you think about it, Ackman’s view kind of makes sense and would seemingly dictate that WEB and CTM wouldn’t really like banks at least when its capital base wasn’t yet so massive. Yet, they have pretty much always had investments in financials, even after the “pivot” to quality.
Maybe, the most interesting thing was Warren’s response to Ackman, that Citi (and banks) are less leveraged than they appear on the balance sheet (or more levered) “depending on how you look at it.” This just made me wonder if perhaps WEB adjusts the leverage for banks based on some analysis of the stickiness of the deposit base, maybe using like an average or a low point. If you did that, it might look a whole lot like float. This would also square with his preference for banks with stronger deposit franchises (more durable, higher value, float). Anyways, I’m certainly no expert on that, but something perhaps to noodle.
Dexter Shoes
They also talked a lot about the wonderful Dexter acquisition, which was clearly a big mistake, as he has noted. It was interesting that he got a question about the shoe industry overall and he noted that it was kind of uncertain/crappy. He didn’t have an opinion on Nike or Rebook, etc…
Sounds like he was enamored of management and their track record and he thought the less trendy, work related categories they were in would be somewhat insulated. Maybe this led him to bolster his conclusion reflected in his quote “When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.” Dexter management was pretty savy to swap out their shoe co stock for BRK stock at that point, so maybe they very justly deserved their reputations from the perspective of a Dexter shareholder.
Seemed like Munger didn’t say a peep during any of this Dexter discussion and Buffett didn’t really turn to him and say “anything to add?”
WEB The Raider
First, he was already fielding multiple questions about retirement and his successors. Wow he must be tired of addressing that, but I guess that’s part of the gig.
He talked about judging management for how they treat shareholders at some length and I think (I might be mixing up with one of the highlight reels) he was a little more frank about managements wanting to “empire build.” Seems like he has definitely modified some of his statements about managements probably because he has so much capital now he needs to buy whole, large businesses, so keeping the management discussions PC is profitable. I find these earlier, more frank in my opinion, views on the subject of conflicts with management interests.
WEB was like a more charming Carl Icahn. hah! I do probably need to be really firm about requiring alignment of financial interests in my checklist, in the future. It’s not like I’m running 300 billion, requiring a compromise on that score.
GuinNess and Cap Cities
He discussed the BRK investment in Guinness (forerunner to Diageo) and noted that Guinness was suffering from week demand for scotch. I gather that Scotch wasn’t too fashionable at this time. I suppose 90’s go-go, nuveau-riche, vodka parties may have been in ascendancy. He said it was popular in Asia. WEB also commented that Guinness (the beer) was very small in America. I think Guinness became trendy in the states a few years later. It is just sort of interesting that they were facing headwinds even back then. They seem to have come through just fine. I wonder if craft distilling is going to impact spirits like craft brewing has impacted beer.
It was interesting that they got some questions about selling Cap Cities stock. Apparently, they participated in a tender and some other shareholders didn’t participate like they thought would happen. I feel like I read something about this in a book or something, maybe the Snowball. Do any of you remember something about Tom Murphy kind of wanting to work down BRKs control of Cap Cities so he was a little more independent or am I misremembering?
Reinsurance and Supposed Berk-a-likes
Finally, I thought it was interesting that they discussed the reinsurance business a few times and indicated that it is the type of business where people can do dumb things for a long time, based on recent experience as opposed to expected exposures. They noted that Berkshire’s advantage in that business is that they don’t have to write it if rates aren’t adequate as they can allocate the capital elsewhere. Competitors, however, are not likely to want to return capital to shareholders and are more likely to write business because it is expected of them.
This idea/comment triggers some thoughts about purported Berkshire emulators/insurers Markel, GreenLight RE, Lancashire Holdings, and Boston Omaha.
I know Lancashire has been returning capital at a high rate during this soft market over the last several years, so that is unusual, and perhaps lends credibility. It is certainly an unorthodox move by management and make you take notice.
I will have to look more closely, but I think Markel has been writing (and acquiring) reinsurance exposure right through what Berkshire (and everyone else, including Lancashire) has said is a bad pricing market. Their earnings were also hit a few quarters back by a higher than usual combined ratio. Could be some BS there, or it could be that the capital allocators aren’t running the ship with the same degree of control as at BRK.
GLRE seems to be focused on recurring RE business with sort of smaller exposure with shorter tails. I think Burton may be changing this to be more opportunistic (pretty sure he used that term a lot on his first couple of calls and he’s from Lancashire), but you know that may speak to some deficiencies in the guy who designed the original business model.
Boston Omaha is premature, but it will be something to watch, if they dial down exposure in soft markets. You also might have to give them some marks for not plowing into reinsurance, P&C, or workers comp (as some have done).
Perhaps you will remind me if I don’t post more on this at some point in the next few months [Also feel free to flag any other supposed Berk-a-likes to track]. Basically, I am wondering how this comment might color my view of these entities. It is probably good bullsh*t meter test for some.
Lord Keynes
I keep updating this post with new information. 1994 was a treasure trove. Near the end of the meeting, basically the last question, WEB gets a question about Lord Keynes’ investment style.
I recall on another occasion he got a question about how Keynes impacted his investment style and he gave a rather clipped “no impact” sort of answer, which I thought was odd, knowing he often quoted Keynes. Of course, Keynes is probably about as quotable as they come.
This question was basically, “You quote from Keynes rather frequently, what are some lessons one can take from his writings about investing?” WEB gives a nice fulsome answer to this question. He says that Keynes got to the same sort of philosophy as Graham eventually, after coming from a (mistaken and failed) macro style.
He says to read Chapter 8 of Keynes’ General Theory (he’s a little uncertain about the chapter, but I am pretty sure that’s the right one….it’s the only chapter about investing). He also recommends reading Lowe’s biography of Graham, saying there is some interesting correspondence between Keynes and Graham in the book. I actually haven’t read this one yet and it is going on my list.
Finally, he says to read Keynes’ letters to his co-trustees of the funds he managed. These have been assembled online in a pdf you can find or you could go ahead and get one of the Keynes’ investing books. These are the options:
I have read both and prefer the “Keynes and the Market” one by Justyn Walsh, but I think they both have the letters and other source material. Honestly, neither one has enough material to weave into a book, in my opinion, but the one by Walsh is solid for maybe one half and then just kind of spins thing gruel. The other book has a bunch of cut outs and quotes from Jack Bogle and random filler type stuff, in my opinion. So I wouldn’t pay up for either.
Anyways, that is probably the last point from this meeting, if there is any interest I will try and post some more notes as I work through the other annual meetings. I think the late 90’s ones will be really interesting.