Warren Buffett Weekend -- Part V
View From TheStreet.com
May 04, 1998
Commentary Features: Warren Buffett Weekend -- Part V
By Christopher S. Edmonds
Special to TheStreet.com
OMAHA, Neb. -- With the formalities of the promotional video and
election of directors out of the way, the "Oracle of Omaha" started
holding court before an overflow crowd in excess of 10,000 here at a
local horserace track.
Warren Buffett, the chairman of Berkshire Hathaway (NYSE:BRKa - news)
, and the second-wealthiest man in America, was joined by Berkshire
President Charlie Munger on the stage to take questions. About 7,000
folks were in the main hall, with another 3,000 sitting in overflow
rooms watching the action on closed-circuit televisions. There were 11
microphones for the eager investors to use, and the lines were long.
As the Q&A got started, people stood 10 deep waiting to query Buffett
and Munger.
Almost every shareholder begins their query with a word of thanks. And
then the fun begins. Already this morning, folks have asked about not
just market valuations, but also about Buffett's bridge game, Yahoo!
(Nasdaq:YHOO - news) and other matters. People from Australia to
Wisconsin stump to the mic, hoping to get a good word from Buffett.
Buffett admitted this morning that the growth in the size of the
annual meeting is becoming almost overwhelming, but he appears to
relish the attention. (No word on if he uses meeting attendance as a
contrarian indicator.) It is also clear that Munger enjoys his day
under lights to inject his dry, keen wit as well as impart his
understated shrewd knowledge of the company's holdings, the markets
and the economy.
We'll have more later tonight, but here's a sampling of the morning's
conversation.
Markets and Valuations
The only real goal of the 42 media organizations covering the
pilgrimage of the Buffett faithful to Omaha has been to determine the
chairman's opinion on current market valuations. While he has provided
hints, he still has not provided the sound bite CNBC and CNN came to
find. However, as tradition goes, he saves his best and most candid
comments for shareholders, and today is no exception.
When asked what the most important facet of his work was he responded,
"We have to allocate capital. At present, that is very tough."
While one might think, at first blush, that comment suggests Buffett
sees valuations at extremes, he doesn't appear ready to throw in the
towel. When asked specifically about the valuations of bank stocks, he
suggested that valuation remains in an acceptable range, albeit at the
high end. "This has been a better world than we foresaw. We've been
wrong before," admitted Buffett. "We would not necessarily want to buy
at these levels. However, if the outlook for corporate profits and
interest rates remains positive, these valuations are justified.
However, that's a big if."
However, if actions speak louder than words, Buffett may believe a top
is near. "You sell [marketable securities] if you need money for
something else," Buffett said. "You may also sell if you think
valuations between different markets are askew. We have done a little
of that this year."
Since he appears to remain positive on the companies he buys, whether
or not he continues to hold them, the sales appear to be the result of
a general valuation call.
"We will sell holdings, but that doesn't mean we are negative on the
company," Buffett proclaimed. "If the stock market were cheaper now,
we'd be buying more of what we own."
While not speaking as candidly about the broad market, he does feel
the banking sector carries unsustainable valuations. "Return on equity
on tangible assets in the banking sector are numbers that are
unprecedented," Buffett indicated. "If unprecedented, they are
unsustainable. We will not base our actions on an assumption that they
are sustainable. Twenty-percent-plus ROE growth with only 4% to 5% GDP
growth doesn't seem reasonable."
As for Munger, his position is typically clear. "Valuations in the
past 10 years have been unreasonably high," said Munger. "You won't
have 18 more years of 17% to 18% growth in the stock market. I can
almost guarantee that."
It's the Real Thing
While Buffett has often said the insurance business is the most
important to Berkshire, his favorite company may very well be
Coca-Cola (NYSE:KO - news) . He speaks highly of the business and its
strategy as well as the fact that the company continues to provide
substantial punch to Berkshire's bottom line.
He thinks so much of the company that -- even at these market levels
-- he supports Coke's stock repurchase plan. "It sounds like a high
price [with the current P/E of Coke around 40]," Buffett suggested.
"However, Coke's been around for 112 years. There are very few times
during those years that it would not have been great to buy back its
shares. It is the best large business in the world."
The bottom line: He loves the current repurchase plan. "I think it is
a very good use of capital." Of course, he admits, "All share buybacks
are good for Berkshire shareholders."
As for the president's opinions on Coke and its future growth, Munger
panned: "In the long term, I predict that Coke will grow versus Pepsi
(NYSE:PEP - news) ." To which Buffett replied: "It's that kind of
insight that allows us to keep Charlie around."
Fannie and Freddie
Ironically, while Buffett believes that higher interest rates could
spell doom for the markets, he considers the threat of significantly
lower interest rates to be a bigger threat to his holdings in Fannie
Mae (NYSE:FNM - news) and Freddie Mac (NYSE:FRE - news) . "They [FNMA
and FHLMC] are not as interest-rate sensitive as people think they
are," suggested Buffett. "If interest rates dropped to very low levels
and then increased dramatically, that would be tough. However, in a
sense, very low rates are more of a long-term threat," Buffett said.
"That would hurt [the mortgage lenders] regardless of what you did."
The Land of the Rising Sun
Buffett was asked about his opinion of the Japanese economy and the
possibility that the country would sell its holdings in U.S.
government securities, causing a market decline at home. He didn't
seem too concerned, as he doesn't think Japan -- regardless of its
actions -- can get assets out of U.S. investments. "Let's assume Japan
sells. If they sell to U.S. companies, they get U.S. dollars. They
can't get out of the system," Buffett suggested. "As long as the U.S.
runs a deficit -- especially a trade deficit -- when they send us
goods they may get a bond. They have to be net investors in the U.S.
as long as we are net consumers of their goods."
Munger was more blunt. "If I owned Japan, I would want to own U.S.
securities. I'd be very surprised if they dumped their holdings."
Berkshire Technophobia
Buffett continues his love-hate relationship with technology. While he
admits to being an avid Internet bridge player, he simply will not
touch companies that supply the tools for his game.
"Technology didn't make it through our filters," said Buffett. "The
filters are the consequences of our ignorance."
In response to a shareholder who asked him why none of the companies
that recommends stocks via Yahoo chooses Berkshire, the chairman shot
back: "We're not recommending Yahoo either, incidentally."
In response to a question about how Buffett would teach stock
valuation in business school he said, "I'd take any Internet company
and ask what it was worth. Anyone who gave me an answer would flunk."
It is clear the morning questions surrounding technology gave Buffett
the most trouble. As he says, "It's just not something I understand."
(More on the technology piece in tonight's wrapup.)
The Munger-meister
While the knowledge imparted to shareholders is the focus of the
meeting, the humor of Charlie Munger -- and Buffett -- should not be
overlooked. As one shareholder told me on Saturday, "Warren is the
straight man. Charlie has all the fun." Indeed, in the morning
session, Munger was up to his old tricks.
In response to a questions about the Y2K problem, Munger said: "I find
it interesting it is such a problem. It was predictable that the year
2000 would come." Added Buffet, "Yes, we predicted that in 1985."
When asked who would be the next Warren Buffett, the chairman humbly
replied: "Let's find the next Charlie Munger first." Munger replied:
"There's not much demand."
Buffett had a few lines of his own. When asked about competitors, he
said: "The secret to life is a weak opponent. Someone asked me how you
beat Bobby Fischer. I replied, 'You play him in something besides
chess.'"
Finally, Buffett was asked about an Omaha telecommunications startup
that has $5 billion in the bank. Without passing judgment on the
company, he could only state the obvious. "A startup company with five
billion in the bank is better than most startup companies. Like
Jennifer Gates -- the newborn."
What a party!
Christopher S. Edmonds is the president of Resource Dynamics, a
private financial consulting firm based in Topeka, Kan. At the time of
publication, he has no positions in the stocks mentioned. Under no
circumstances does the information in this column represent a
recommendation to buy or sell stocks. While he cannot provide
investment advice or recommendations, he welcomes your feedback at
invest@cjnetworks.com.
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