Buy the Business, Not the Stock

Think more about Charlie's idea of buying a business rather than buying a stock. A reasonable valuation on a business can go to shit if the underlying business fails. Even if you find something with a huge margin of safety, the business can very easily collapse to competition or industry changes. It's a concept that you tend to think about for a second and say "yeah, that makes sense" but if you truly stop to dissect and invert the concept, more important than the price of any stock is the underlying value of the business you are buying. I know this sounds elementary but I just spent 5 minutes actually thinking about the statement and not just agreeing with it. 

To me, Facebook at any valuation is not as valuable in my portfolio as Wells Fargo at any price. Facebook is a 5 year old company in an industry that is subject to crazy breakthroughs and black swans. It's impossible to say where the internet will be in 5 years. I can much more confidently say that Wells Fargo will still have 10,000 branches and a trillion in AUM in 5 years. You say, "well what if you made this statement in 2006, you would have gotten whooped over the next 3 years". Which I did. But if you could have identified the worst offenders in the industry beforehand (Wachovia, Lehman, Bear) and bought WF through the downturn, your return would have trounced the market (WF up 300% off its 2009 low). And to that point, internet (tech) stocks have not faired so great over the last 5 years either. 

My point being: things people can not avoid using no matter what - banks, grocery stores, cars, fuel, coke, gum on the whole, should provide you with better businesses in the long run than things that can change - retail, internet, technology. I think they need to be bought at a reasonable price and if you can get them at a great price all the better but why should I clutter my portfolio with stocks that I hope will go up when I can load it with institutions that people must have no matter how living evolves over my lifetime? If I can load my portfolio with banks, X, FM, and KO their price may fluctuate but their underlying business is solid steel. And if they screw if up at some point (new coke, housing downturn, banking collapse, cars sucking), that should be an opportunity to pick up a great underlying business at a discount. 

This macbook air is absolutely amazing. Was I using it 5 years ago? No? Will I be using an apple product 5 years from now? Maybe. PNC is PNC. I was using them 5 years ago, I am using them today, and I will probably be using them 5 years from now. 

I noted on this in my previous post but I think in searching for a greater truth, most people have overlooked the message that Charlie and Warren are really trying to send. Quit over thinking investing. Models aren't needed. Calculus isn't needed. Beta isn't needed. Buy good companies at good prices and just go do something else. Its a tenant of Warren's to buy a company and not look at it for ten years. I think this should be a commandment. Revisit the company and industry once a year to make sure nothing material has changed. If not, ignore the stock price and carry on. Tdameritrade is the death of the value investor. Being able to check how much money one is making every 5 seconds allows emotion to enter an otherwise rational business decision. 

Having said, I am going to do something I never do and that is recommend to myself to review XLF in the future. The US banks are still coming off demolition in terms of earnings. They got nailed in the financial downturn. But the value of their AUM, brands, and earnings power in the future is remarkable. The whole XLF is trading less than book value. On the whole, owning American banks for the long run seems like a no-brainer to me. 

Poor Charlie's Almanack

Being only 250 pages into the book, it would be premature to call Poor Charlie's Almanack the best book I have ever read. But it is definitely up there. There will be many points to discuss but the one that is stuck with me right now is Warren's idea of "20 investments for a lifetime"

If you are only given the opportunity to invest 20 times over your whole life, you will make those investments very very wisely. This is generally counter to the way money is managed in the rest of the world. I would say the average person goes through 20 investments a year. Over a 30 year period thats 600 investments. How important then is each investment?

Charlie continually stresses how vital Berkshire's top ten investments were to the overall success of the business. For example, they bought a significant stake in the Washington Post in 1973. Their investment has returned 50 fold since. When you see a great opportunity, you need to have the liquidity and chutzpah to make it happen.

Another of Charlie's (and also Warren's tenants from past readings) tenants is a lazy approach to investing. Lazy is not the proper term. Patient is a more proper term. The most prevalent example of this is Charlie and Warren's rule to go home at 5pm while all other manager's work through the night. What could they (I) possibly be doing? Charlie and Warren are so comfortable in being patient waiting for one or two investments a year that they don't have to worry about a new investment every day. There is no rush to act. Which is also why Charlie and Warren are not in new york. They don't give a shit about what's happening on wall street. They don't want Goldman to call them to talk volume. They want to be renaissance men who can apply their omniscient knowledge to investments.

Berkshire Hathaway Annual Meeting 2012

What a day. This year, Mike, Pete and I decided that the stars have aligned and it was time for us to make the journey to Omaha to see The Oracle.

I arrived in Kansas City on Wednesday night where Pete picked me up from the airport and we drove toward Lincoln, NE. We ended up sleeping in Pete’s truck at a rest stop on the side of the highway. We picked Mike up Thursday morning in Lincoln and headed for Omaha. Thursday and Friday were relaxing days where we were able to catch up and just hang. 


Friday night I got my first taste of “Networking with Mike Morton”. We went to the YellowBRKers meeting for a cocktail hour. In retrospect, it was the best opportunity to network and get to meet people. We met some interesting people despite my absolute disdain for “networking”. We went to Borsheim’s for the shareholders cocktail hour. It was a complete zoo and we left immediately. It’s unfortunate that Berkshire has had to split thus allowing any clown to become a shareholder. We went to Gorat’s for dinner where we had a nice meal and met some good folks.

We arrived at the CenturyLink Center at 4:45am Saturday morning. We were nowhere near the front of the line. Mike was able to meet Mohnish Pabrai standing in line, which was awesome for him. It was a dead sprint once the doors opened to our seats in section 125.

What a day it was. Over the last 7 years, I have learned a lot from the teachings of Warren and Charlie. Saturday was just confirmation that I am on the right track. Listening to them speak, I found that their values are exactly the same as mine. Most importantly, we don’t act like Wall Street. I don’t have a Wharton MBA. I don’t network with other fund managers. I love being negative on an idea before being positive. The day reinspired me to be a fund manager.

We went to Whitney Tilson’s after party, which turned out to be a scam. He was there but so were 100 leaches that fall into the “networking” people mentioned above. Pete and I, tired of having the same conversation over and over, made a B-Line for the door. Going downstairs, we crossed paths with Ajit and got a picture that I can’t wait to hang on my wall.

Overall, it was one of the most inspiring days of my life. I am so glad I spent the money to go see Warren and Charlie before there is no more Warren and Charlie. I plan to send a letter to Charlie, in hopes of becoming his protégé. I will be able to tell constituents and descendants alike about the day I spent with Warren and Charlie.

For a better penned entry, see Pete McBride at:

http://harveysrun.com/2012/05/07/the-woodstock-of-capitalism/