Mike Lipper’s Monday Morning Musings
Lessons
From Warren Buffett
Editors:
Frank Harrison 1997-2018, Hylton Phillips-Page 2018
As Often the Case, Media and Other Pundits Missed the Opportunity to
Learn
The August 29th New York Times headline stated, “Berkshire
Hathaway Hits $1Trillion in Market Value”. However, the headline was essentially
a current events piece, which missed an opportunity to plum Mr. Buffett’s
actions. In so doing, they learned no lessons from his current and
historic activities derived from an extremely successful professional
investment career.
Caution: Bias at Work
Berkshire Hathaway is the largest position in my personal
accounts. Perhaps more significantly, I share a responsibility with Mr. Buffett,
I manage money for personal accounts. We are not managing money for our own
benefit, but for our heirs. In my case, it begins with starting to care about the
fourth generation.
This orientation leads to largely investing strategically,
which means positions are permanent unless conditions change materially. This
desire separates Mr. Buffett and me from most professional/individual investors
who are more focused on tactical approaches. Most investors react to sell
signals, while we focus on disappointments as a need to re-underwrite. We hope to
add to our holdings at cheaper prices while extending our holding period.
Strategic Diversification
Changes occur at different times for different opportunities,
making it wise to take advantage of changes with different tools. While Buffet
is always looking for lasting value, he has found a way to take advantage of
these situations with different tools.
Berkshire was initially mostly a buyer of cheap stocks
selling below book value, which worked reasonably well coming out of the
depression. The focus changed to buying good companies at fair prices when
Charley Munger came on the scene. As fairly priced securities became scarce and
Berkshire’s assets grew, cheap assets were to be found in the private assets of
whole companies. After a few mistakes they learned how to pick winners.
For many years the wholly owned companies were larger than
the publicly owned and publicly traded companies. Within this collection of companies
there were a few insurance companies, including GEICO and other casualty insurance
companies. The primary attractiveness of these companies was “the float”, allowing
for the use of client cash before it was needed to meet claims. The insurance
assets grew, and they hired very talented people to underwrite very large risks.
Most casualty insurers were risk adverse, but Berkshire looked at insurance
risks as opportunities at very high rates. On balance the rates were larger
than the risks, which allowed for large, long-term “floats”. The final, or
perhaps the first type of asset was cash.
Cash, the Intermediate Asset
Most investors treat cash as the ultimate reserve asset, but
not Warren Buffett. After segregating Berkshire’s $100 billion in US Treasuries,
he devoted the remaining cash pile to acquisitions. Buffet recently sold 50%
of his Apple stock and enough of his Bank of America stock to drive it below 5%
of its outstanding stock value. He did not buy any of his own stock with the proceeds.
(I suspect he has converted more of his assets to cash.)
I have stated that these moves are the most “bullish”
indicators I have seen. I don’t know whether this cash will be used for the
acquisition of a private company or a publicly traded stock. I have been told
he has made some offers, but he has been outbid. When the market breaks, his
cash will become more valuable.
Some other Buffet lessons are useful in building a picture
of how his mind works:
- Losing is part of winning
- Cash is not king
- It is okay to change
- Buy businesses, not CEOs
- Don’t buy art as an investment, buy it for pleasure
- There is no such thing as growth or value stocks as Wall Street generally portrays as contrasting asset classes. Growth stock is part of the value equation.
Question: Are you utilizing any of Buffett’s lessons? Which
do you disagree with?
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