... and once again, from "The Economist" and another reason why I will probably take the large amount of money expiring from my 90 day T-bills in April and invest that in Berkshire Hathaway long-term.
Face value
The oracle strikes back, Mar 15th 2001, From The Economist print edition
As storm clouds continue to gather over technology companies, one investor at least can be forgiven for feeling
pleased with himself: Warren Buffett.
THE Dairy Queen ice cream will taste particularly sweet at next month’s “Woodstock for Capitalists”, as the annual meeting of Berkshire Hathaway is affectionately known. Only a year ago, Warren Buffett, who runs the investment firm (which owns Dairy Queen, among others), was being written off everywhere as the once-great investor who simply didn’t get the “new economy”. How could the legendary Oracle of Omaha admit to not understanding technology companies, when everybody else was successfully betting their shirts on JDS Uniphase, Qualcomm and the like, firms that were going to do something very important and new? (What was it, again?)
It is Mr Buffett who is laughing now. The day the Nasdaq peaked at 5,100 last March marked the point at which Berkshire’s share price touched a low from which it has since risen steadily (see chart). Mr Buffett’s latest annual letter to shareholders, always a treat to read, mixed his hallmark folksy, gently self-deprecating style with a loud shout of “I told you so”. “We have embraced the 21st century by entering such cutting-edge industries as brick, carpet, insulation and paint. Try to control your excitement,” he urged. Berkshire, he explained, is now one of very few authentic “clicks and bricks” businesses, thanks to the Internet activities of GEICO, an insurance business, and the purchase of Acme, a brick firm—a deal that “you can bet...is making them sweat in Silicon Valley.”
To Mr Buffett—who now dares disagree?—last year’s Nasdaq surge was a bubble destined eventually to meet with a deadly pin. This bubble caused a massive transfer of wealth from the public to the promoters of companies, “designed more with an eye to making money off investors rather than for them”. But investors large and small must share the blame, he writes: like Cinderella, they knew that midnight would bring on pumpkins and mice but, hating to miss a second of a great party, they stayed too long. They have now learnt, or should have, some old lessons. First, Wall Street will sell investors anything. Second, speculation is most dangerous when it looks easiest.
Mr Buffett does not dismiss the new economy entirely—he accepts that much real value has been created in the past decade by new or young businesses. He is saying merely that he is not “smart enough” to pick the “few winners that will emerge from an ocean of unproven enterprises”.
Mr Buffett’s comeback is in many ways a triumph for the view that, ultimately, share prices reflect a company’s
fundamentals rationally. This was an argument made by Benjamin Graham, author of “Security Analysis”, perhaps the greatest book on investing ever written. Mr Buffett joined Mr Graham’s famous class at Columbia University exactly 50 years ago.
Yet there is more to Mr Buffett’s success than solid analysis of companies’ fundamentals. For one thing, he is not always the amiable, uncomplicated 70-year-old suggested by his carefully cultivated public persona. He can be as tough as the cowboy boots that one of his companies sells. He made plenty of enemies while saving Salomon Brothers, an investment bank, from bankruptcy in the early 1990s. More recently, he intervened at the last minute to stop Coca-Cola, one of his biggest and earliest investments, pursuing its planned takeover of Quaker Oats, which he considered too pricey. That left Coke’s boss, Douglas Daft, looking embarrassed. Even Mr Buffett’s recent opposition to the abolition of estate taxes may not have been the selfless gesture it appeared: a big loser from the taxes’ demise would be the insurance industry, in which Berkshire is a leading firm.
The way Mr Buffett invests has also been crucial to his survival in bad times. Unlike many other “value” investors, last year Berkshire did not engage in the expensive and risky activity of shorting shares that looked overvalued. Nor did it have to win mandates from, say, pension-fund trustees who felt that Nasdaq was the only show in town. Nor, for that matter, did it have to meet cash demands from investors by selling poorly performing stakes in companies such as Coca-Cola, Gillette and Disney, just at the point when they were worth least.
Cash cushion. Mr Buffett has been cushioned from short-term pressures by his insurance businesses, which account for roughly half of Berkshire’s profits. The insurance industry may be largely populated by dull, unimaginative sorts, but for a financial wizard such as Mr Buffett its tax advantages and cash generation offer huge opportunities. The cash allows him to invest when rival investors are unable to raise money, enabling him to buy at low prices. Last year, for instance, the drying-up of the junk-bond market meant Berkshire faced little competition when making a series of acquisitions.
Berkshire’s liquidity may be the key to Mr Buffett’s success, reckons Myron Scholes, a Nobel prize-winning economist, and a former partner in Long-Term Capital Management, a failed hedge fund that Mr Buffett tried unsuccessfully to buy in 1998. But can Berkshire continue to spew cash? Its performance in insurance underwriting has been disappointing of late. If this continues, it could hamper Mr Buffett. Moreover, even at today’s lower prices, he does not think that shares are an exciting prospect. Private purchases of firms are more attractive, he says, but even they are unlikely to offer “really juicy” results until capital markets get very tight.
If things go on as they are, that day may not be far off—in which case, Mr Buffett’s prospects will be better than ever. More ice cream, sir?
Copyright © 1995-2001 The Economist Newspaper Group Ltd. All rights reserved. |
