Traditions. As you get older your life slowly starts turning into a series of traditions. (I write this word and I think of Tevye the milkman in Fiddler on the Roof singing it.) And over the years, the beginning of May has turned into a wonderful tradition: a trip to Omaha to Buffett’s Berkshire Hathaway annual meeting.
Indeed, early May in Omaha, Nebraska, is almost like a spring-break destination for value investors (with fewer Señor Frog or Girls Gone Wild moments). But for a value investor, May is also the most intellectually stimulating time of the year.
As well as dinner in the evening with old and new friends — mostly at steakhouses, so I am sure my cholesterol, just like the stock market, was hitting all-time highs — I get to participate in several investment panels.
This year, for the fourth time, I was on the Value Investing Panel at Creighton University. For an hour and a half, I had the immense pleasure of answering questions from students. I also participated in an investment panel hosted by YPO, where I joined some great value investors, including Markel Corp’s smart, funny and articulate CIO Thomas Gayner, and Thomas Russo, a well-known value investor who has held some stocks for longer than the life expectancy of a Twinkie.
I convened my annual Cheap Talk and Water gathering a few hours before the Creighton investment panel. A dozen of us, some of whom have showed up for five years, debated stocks and the economy. (And of course, the conversation would not have been complete without discussing Apple.)
During the Berkshire meeting, instead of selfishly taking notes for myself, I committed a selfless act: I tweeted.
Here are those tweets and some additional thoughts:
@ vitaliyk : Buffett doesn't think US high corporate profit margins are sustainable. #BRK2013 — Vitaliy Katsenelson (@vitaliyk) May 4, 2013 I was glad someone actually asked the question about profit margins. Today they are hitting modern-day highs, and this is probably the biggest risk to U.S. stocks: margin compression.
Buffett and Munger have no idea how Fed can get out of QE. "It is often a lot easier to buy than to sell. #BRK2013 — Vitaliy Katsenelson (@vitaliyk) May 4, 2013 This was probably my most important takeaway from the annual meeting. In fact, I am working on an article on the subject. Bernanke tries to convince everyone that getting off QE will be easy and painless. But QE is like a drug that we’ve been mainlining for four years, and as drug addicts know, going cold turkey is painful. Buffett, as always, was trying to be a statesman, not wanting to offend Bernanke.
Buffett "interest rates to economy is what gravity is to apple" (not sure if he is referring to Apple stock) #BRK2013 — Vitaliy Katsenelson (@vitaliyk) May 4, 2013 Buffett "watching economy today (he is referring to QE) is like watching a good movie - you don't know the ending" #BRK2013 — Vitaliy Katsenelson (@vitaliyk) May 4, 2013 Buffett and Munger have no idea how Fed can get out of QE. "It is often a lot easier to buy than to sell. #BRK2013 — Vitaliy Katsenelson (@vitaliyk) May 4, 2013 Buffett "Fed wants inflation.Debt is measured against nominal GDP". — Vitaliy Katsenelson (@vitaliyk) May 4, 2013 Munger was, as always, direct and to the point:
Munger "economists should worry about consequences of printing a lot of money" #BRK2013 — Vitaliy Katsenelson (@vitaliyk) May 4, 2013 And here comes my favorite line from the meeting:
Munger about current economic problems "if you are not confused you don't understand it very well."#BRK2013 — Vitaliy Katsenelson (@vitaliyk) May 4, 2013 This is exactly how I feel about the current state of the global economy: Chinese property bubble; Japanese debt bubble; the dysfunctionality of the EU; U.S. addiction to QE. All of these things are very complex in isolation, but the complexity of analysis increases exponentially once you start thinking about how problems in one region impact each other. For instance, the monster QE in Japan will make Bernanke look like an amateur (it is six times larger than his) and will drive the yen down — a lot. This will make Japanese goods cheaper and more competitive against Chinese and Korean goods, for example. Will this be the final straw that will break the back of the Chinese economy? I don’t know. Will it lead to currency wars? I don’t know. But it could.
Munger also expressed his love for politicians, globally:
Munger: "Europe will make terrible mistakes, they have politicians too." #BRK2013 — Vitaliy Katsenelson (@vitaliyk) May 4, 2013 Doug Kass had an (almost) impossible task: asking Buffett questions that would expose Berkshire’s frailties. He had to walk a fine line; after all, you don’t want to go too hard on the Jesus of Omaha. He asked Buffett about using short sellers to manage some of Berkshire’s billions. (Well actually, Doug asked if Buffett would let him manage $100 million. Doug now probably regrets asking that question.) To which Munger replied:
Munger on short selling "trading agony for money" #BRK2013 — Vitaliy Katsenelson (@vitaliyk) May 4, 2013 I agree with Munger’s attitude towards short selling. Half of the success in making money on the long side (buying stocks) is probably attributable to analysis, with the other half down to behavioral intelligence. On the short side, if you succeed, the upside is capped at 100 percent but the downside is unlimited; therefore, behavioral intelligence becomes exponentially more important. Most people are simply not wired to be short sellers. It requires nerves of steel and an enormous ability to stick to your conviction when the stock you’re shorting goes against it. I have a friend who is a short seller. He shorted one stock, whereupon it tripled in price before finally collapsing 50 percent below his entry price. I would have lost all my remaining hair when the stock tripled. He did not flinch.
Buffett "the best competitive advantage is when you have no competitors" #BRK2013 — Vitaliy Katsenelson (@vitaliyk) May 4, 2013 A few hours later at the YPO event, I was asked about Amazon and its valuation. I called Amazon’s valuation “priceless.” I quoted the Buffett line above. Amazon is “investing” in its business by destroying its competition, which is how it is building its moat. I am not trying to take away from Amazon its incredible distribution system, great customer service and simply insane selection of merchandise. But Amazon is also building a competitive advantage by basically obliterating competition. Once the competition is gone, Amazon will start charging higher prices and its margins will go up, but at that point it will be hard for new competitors to emerge. Of course, the company may discover another area where the competition is yet to be destroyed, so you may have to wait awhile.
The point of all this is that it may make you feel good that you spend 60 hours a week staring at your spreadsheets, listening to conference calls and reading annual reports. And though this is a big part of investing, if that is all you do, you limit your scope for learning. Debating stocks and global macro hurricanes, interacting, listening to others present their ideas, eating steak and drinking beer are also very important parts of the process of learning and thinking about investing. (The last two are optional.) It is very easy to develop tunnel vision if you only expose yourself to yourself — you have to force yourself to get out. You may learn something new.
