Is This the Last Hurrah? - Weekly Blog # 945

 

 

 

Mike Lipper’s Monday Morning Musings

 

Is This the Last Hurrah?

 

Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018

 

          

 

 Preface

Hurrah is both a shout of victory and a political world about aging politicians, warning that the following election won’t be a happy one. (BTW it is pronounced Oorah in the Marines and Hoorah by the Army.)

 

I don’t know whether the reception for the largest IPO of all time is a sign we will not see larger market enthusiasm in the future. I am talking about both the size of the SpaceX offering and the further gains generated after underwriting.  What I do know that it was a record fundraise at a time when many non “AI” stocks are dealing with mediocre sales. Consumer sentiment is at its lowest on record going back to the early 1950s

 

More importantly, I am trying to find investments for the next “bull” market. My assumption is that we will experience a substantial rise after a major correction to the present market level.

 

The Process

The first thing I don’t do is look for clues to a different future by crunching GAAP numbers found in today’s annual reports or other regulatory accounting statements. To the extent present sales data may be useful, they need to be adjusted to match reality. For example, today it looks like semiconductor companies are doing very well in Taiwan and South Korea. Truth is, only some of their product sales are produced in their home country, with increasingly more in other countries. More importantly, I am guessing their ultimate sales are to US customers. Thus, investors are concerned that many of these so-labeled international companies are extremely sensitive to what is happening in the US.

 

Forward Looking Analysis (Guessing)

The example that I discuss should not be treated as a buy recommendation and should only be rendered knowing the economic condition, resources, and personality of the buyer. The case I will discuss shortly is a long-standing large position with a large unrealized potential tax liability, although the analytical thinking may also be appropriate for the reader.

 

The stock is Berkshire Hathaway. The news item is the $8.5 billion purchase of Taylor-Morrison Homes for cash, including the assumption of some debt. The initial size is about 1/3rd of Berkshire’s annual net free cash flow, excluding their large cash reserves.

 

The decision made by the new CEO of Berkshire was completed in matter of weeks and was applauded by Warren Buffet. The announced plan is to create a housing group combining Taylor-Morrison with already owned Clayton Homes, which manufactures homes at a lower price point. Taylor-Morrison builds communities of new middle-class houses as well as rental housing. There is a national need for more housing.

 

I believe this purchase is very similar to Berkshire buying See’s Candy, which was initially misunderstood by some as Berkshire going into the Candy business. They were instead going into the franchising business, which has been an excellent business for McDonalds. In this case they would be going into the home mortgage business in a major way, with a controlled sample.  Furthermore, this is a sign that Greg Able the new CEO of Berkshire, has different talents and proclivities than Mr. Buffet without the guidance of the late Charlie Munger.

 

This is an example of how to investigate the future. 

 

Let us know what you think about our views?

                                         

 

 

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ANSWERS FROM WARREN AND CHARLIE Omaha Highlights

There are legions of books written about Warren Buffett, Charlie Munger and their performance at the Berkshire Hathaway* (NYSE:BRK-A) annual meeting. While I have been following them since the early 1980s, and had the distinct honor to introduce Mr. Buffett to the New York Society of Security Analysts, this was my first visit to the annual meeting. (I plan to return again.) There was not much written in the Sunday paper about the meeting except their support for the Goldman Sachs CEO, but I suspect that coverage will be extensive beginning with Monday. As an exercise for myself as well as the members of this blog community, the following 38 briefs come from my five pages of notes, which I hope share some of the wisdom of these two remarkable men.

INVESTMENT OVERVIEW

One of the first steps in the Buffett/Munger intuitive capital allocation process is to develop their thinking on the potential and likely return on invested capital generated by the businesses being examined.

At this point for Berkshire, capital-intensive investing is a bigger drive than intrinsic (value) investing.


THEIR VIEW OF GOLDMAN SACHS & AFTERMATH

In terms of the ABACUS-2007 deal, based on the SEC complaint, Goldman Sachs* (NYSE: GS) did nothing wrong. The motivation of the other side is not relevant when trading. Berkshire may even benefit from the complaint, as it will probably delay the calling of Berkshire’s preferred stock, currently earning 10% annually.

A new version of Glass Steagall is likely. If Berkshire was forced to put up collateral for its derivative position, it would probably put up its stock holding of Coke (NYSE: KO). At the same time it would demand some additional payments from its counterparties, as they paid for uncollateralized derivatives.

NOTES FROM THE EXTENSIVE Q & A SESSION

In terms of currency exposure, they have exposure on both their assets and liabilities sides. They are bearish on all currencies, particularly those who have to borrow using other currencies.

Each July, Warren Buffett will give 1.5% of the stock to five foundations. The current turnover in the stock on the NYSE is over 100%.

Over the next 50 years there is a high risk of a nuclear, chemical, or biological attack on the US. The risk is low in any given year. (This statement which is not new, it may be a plea for some sort of federal guaranty.)

The list of four candidates to replace Buffett on the investment side changes periodically. The directors are familiar with the candidates, They did well in 2009 without leverage.

It is easier to build a new culture than to change an old one. They failed in an attempt to change the culture at Salomon Brothers.

They think that despite the worldwide size of McDonald’s (NYSE: MCD), the company does a better job of educating its employees than universities do their students.

Munger was the one that discovered Chinese auto parts maker BYD and drove the acquisition of its position.

The various CEOs are paid on the basis of the economics of their business. There is not a Berkshire standard and there is no compensation consultant. Managers are paid to widen their “moats.” Headquarter fees for the 21 employees are not charged to the various operations, but there are capital charges.

The major railroads have been rebuilt over the last 30 or 40 years. The big 4 railroads are allowed to earn 10.5% on their invested capital.

In terms of insurance risks, the company will accept volatile returns while others want to have their earnings smoothed.

Read chapter 12 of John Maynard Keynes’s The General Theory of Employment, Interest and Money, written in 1935.

In 1982 Buffett submitted to John Dingell the only letter in opposition to permitting futures on the S&P 500.

Employees should think and act like owners.

Generally they hope a dollar of increase in equity to be equal to more than a dollar increase in market value.

Warren Buffett, Charlie Munger and some of the board members are visiting China in September.

Thomson (NYSE:TRI) always seems to want a 40% return on capital, a habit held over from its newspaper days.

Munger is converting his IRAs to a Roth IRA.

The federal government will have difficulty in not bailing out the failing states. Due to too-low rates, they are no longer writing new municipal bond insurance policies.

For the next 10-20 years one should want to own equity and not bonds and cash.

Moody’s* (NYSE: MCO) is a wonderful business, but they made a bad mistake on residential housing, They, like others (particularly graduates of business schools), relied too much on models.

Berkshire does not have an annual budget for a fear that various managers would “game” the system.

“We can get along without oil if we must.”

“If scared when others are fearful, you won’t make money in securities.”

In practice they are much more comfortable averaging down than up.

Advice to a new investor: “Get your feet wet with a little failure.”

“Solar panels will get cheaper.”

There will be a truly national electrical grid system.

Their portfolio is often undervalued, they do not own any major future winners.

“There is no better way to get happy than to lower expectations.”

They are blessed by not having an investor relations department.

“One should know the perimeter of one’s circle of competence.”

“One should always keep learning as the competitors are surely doing."

“Very few people fail totally.”

“Follow one’s passions.”

Many of these notes might be cryptic. I would be happy to discuss them to the extent of my understanding of what was said and what was meant.

*indicates securities owned by me or by my financial services hedge fund.
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