TB’s Quote of the Day: “As an economic measure, the light at the end of the tunnel had been turned off.” – Lawrence Block, writer in one of his short stories.
…last night CNBC hosted a town hall at the Columbia Business School featuring Warren Buffett and Bill Gates. Becky Quick did a good job as moderator and the students asked good questions and were very respectful. Glen Hubbard, Dean of the Business School was also present. TB would give a ‘B+’ to Gates and a ‘B’ to Buffett – and he had to work to get to that as he dodged any chance to point out how to correct the faults in capitalism that we just witnessed. But he got an ‘A’ for his advice to students that is right out of TB’s playbook.
The two were a good fit as Gates focused more on entrepreneurship while Buffett was more the conventional business model. Gates summarized his education (not mentioning that he dropped out of Harvard, perhaps to encourage them to stay after all he had a wealthy family to fund his adventures), while Buffett was old school, referring at least twenty times to his mentor, Benjamin Graham. Still, this was a lot better than paying a couple of million dollars on the EBay auction to have lunch with Buffett. He is a bit too folksy to TB which makes him seem a bit the buffoon but that is his attempt at humor. He is very self-deprecating and has to be admired by that. Still, it was apparent that these two men live in a different world from us…although both have committed to improving the lives of people around the world…through education and humanitarian efforts. Kudos!
The tone of the questions was interesting since the purpose was to be to discuss the economy and it was clear the students wanted to hear what went so desperately wrong. Buffett seemed to take the stand that this is capitalism which is definitely is not and that was his biggest failing…he saw nothing wrong…greed is normal and wasn’t excessive.
It was also clear that a high percentage of those asking the questions desired to be in the financial sector…mainly Wall Street. It is exciting but is it what we truly need of the best and brightest? No, we need engineers, leaders, people who want to help America be tops again in manufacturing and other industries thru innovation.
So here is what it all came down to…a question to Buffett near the end. What areas would be the best to achieve success? Here, the wise old man, excelled!
He gave three key pieces of advice that are so in line with TB’s thinking it’s scary:
1. His advice in letters to HIS CEO’s: run the company like it is your family’s and that you want it to thrive for a hundred years…do not look at the day, week, quarter or year but stay focused on the long run. This is the essence of capitalism and why it is a failure in it’s current state. People run companies as if they are their own…(TB adds with the exception of people like Rupert Murdoch and the egotistical Larry Ellison)…instead they are being run for the quarter and at the maximum the end of the CEO’s tenure.
2. Just because everyone else is doing it doesn’t mean you should be doing it. Again, in true capitalism this is more automatic…but when Wall Street went from partnerships to publicly held corporations and the partners took out THEIR money to be replaced by the shareholders (OPM). Now when someone goes heavy in derivatives the others all follow suit so as to not miss on any profits whether they understand the product or not. TB observed years ago that the best investment you can make is a ‘hot’ new product because the costs of implementing it are so high that the firm will not only support it but the others will start doing it until it’s value is completely neutralized and you had better be out by then.
3. Find something you are passionate about and hopefully someone to be a mentor who you are passionate about. Buffett was blessed – learning under the tutelage of Benjamin Graham, then working for him and then having friends he could tap to start his company. If you had invested $1,000 with him then you would have $5.6 million today. He has beaten the S&P 500 in 34 of the last 38 years…unfortunately two of those years were when TB owned Berkshire stock. Hmmm would TB like for a mentor…Dick Fuld (Lehman CEO)?, Lloyd Blankfein (Goldman CEO)? Steve Schwarzman (Blackstone CEO? Ken Lewis (BofA CEO)?…anyone at Citibank??? Stephen Friedman (GS Chairman while Chairman of the NY Fed was buying Goldman stock – 400,000 shares while the Fed was considering giving them bank status!). Throw me a mentor – please! Actually, TB had a mentor, his first boss, F. Alden Damon, who treated him like a son, and gave him the tools to succeed…a good and honest man! They are out there!
Buffett was also gave some insight in the Burlington takeover. It goes to #1 above. He doesn’t care what they make tomorrow, next year, or even five years…but they will be a company that does well over the next twenty years. He is also buying cashflow as it appears his gameplan is to do so his successor has more to play with and more to stake his reputation on…hence the preferred in Goldman Sachs, General Electric, and others. TB would have liked to ask him about preferreds in this environment…something TB championed…sell the common due to the dividend cuts and low prospects for capital gains…did that successfully with GE too.
One last piece of advice TB wished Buffett had given: stick with your strategy if it is working…do not go into areas you don’t understand. He lost on an ‘emotional’ anti-dollar bet to the tune of $15 billion; also his insurance companies took huge hits on credit default swaps and other derivatives…which are now being written back up – partially – which resulted in trebling his earnings.
Gates also had an interesting take on which sectors will do in the future…alternative energy, utilities – you would be hard-pressed to find any strategist that is overweight utilities….most have them at or near zero. But his caveat is that is a long-run view. Many ideas will be tested and only a few will profit….like the VHS/Betamax battle that Sony lost…even though theirs was on the market first. They made the same mistake that Apple made so that others ganged up on them. Companies that were not ‘in’ the club formed their own group and combined took market share. Brilliant as he is though, Jobs made his restriction of source codes except to select programmers a success when they had such a low risk of hackers. Sony was not so lucky.
Have you noticed that Gold is spiking…hit a new high of $1,123.40 yesterday. While Meanwhile, as a class commodities are not going any where …in fact they are weak and now BOTH the CRB and Goldman Sachs indices are sitting on their 40 day moving averages. Even gold, which surged to $82.00 on October 21 is back down almost to its 40 day moving average and could break through today. While Gold is bucking the trend it is in a pattern we have seen lately (since it trades so heavily on technicals), since mid-July it has been hugging the 40 day…surged three times and on the prior two times came back to the 40 day (currently $1049). But the danger here is it has risen so fast that the moving averages are climbing rapidly…both the 40 and 50 day are rising more than $2 a day! Break the 40 and you go to the 50 day ($1040), and if that fails…$1,000-1,025…is next. That could be a good entry point. Keep in mind that several countries are considering increasing their gold reserves…what great investors they…remember when they were selling them off…now buying them back at inflated prices. Only India has acted thus far.
Russia, Brazil, and others…the U.S. is not among them for obvious reasons.
So with the high correlation of asset classes (0.7) if commodities crack, and bonds crack, can stocks be far behind? Note there are sizable net long positions in commodities, stocks, and even bonds…but the dollar has a huge net short position…contrarians heed.
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It’s Friday the 13th…and that could be ominous…or not.
TB’s friend, Graef Crystal (www.graefcrystal.com) has some good new reports out. One is on Billionaire CEO’s…an excellent piece…in general he says they are great value with the exception of Larry Ellison, Rupert Murdoch, and John Hess (Steve Jobs is number one, followed closely by Buffet, and Google’s Eric Schmidt…then Ballmer, and Bezos). Of course the worst ever was probably Citicorp’s Sandy Weill…years ago Crystal wrote unflatteringly of his greed. He ranks them by total pay…Ellison’s $60.9 million which is 233% above market using a regression formula, to Jobs $1.00, 100% below. The others listed above ran from 89% to 99% below market…kudos to them!
How about Abercrombie’s CEO (not a billionaire but perhaps a villionaire?), Michael Jeffries…and once again, CHAIRMAN AND CEO!!! who has a pay package of $79 billion. They just reported today with EPS of 30 cents beating lowered bar estimates of 20 cents, sales in line – but down 22%, and same-store sales down 22%. They are maintaining the 17.5 cent quarterly dividend.
Crystal has another article on Goldman: executives first, charity second (?), shareholders third. It might also amuse you…or sicken you that as TB said above, they no longer a partnership and totally playing with OPM. As a group, the 10 largest insider shareholders collectively own just 2.06% of outstanding shares (all employees own just 6.05%)…Buffett owns 8.46%. This sure doesn’t mesh with his investment ideals!
Don’t walk under any ladders…let black cats cross your path…and have a great weekend!
TB
Trader Bill thinks it is clear to anyone reading these missives that they are merely commentaries…as he sees it…and do not necessarily reflect the views of anyone other than his own. Information is gathered from sources he has found reliable, but no guarantees of accuracy are implied. These are merely observations of events in the marketplace offering in an attempt to offer a non-mainstream viewpoint. Hope you find it useful. Copyright TBD Capital LLC, © November 13, 2009.
