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Last weekend I attended the Berkshire Hathaway Annual Meeting in Omaha, which has become a Mecca for investors, packed with 25,000 shareholders from all over the world. I had never seen anything like it, in all my years in finance.
Warren Buffett and his lifelong business partner, Charlie Munger, sat on stage for nearly six hours, dazzling the crowd with financial acumen, incredible energy, and absolute honesty into their world of money management. In a marathon five-hour question-and-answer session, they gave everyone a chance to be heard. This was the most impressive display of corporate transparency I'd ever seen. Everyone there, most of them scribbling notes, heard firsthand the thoughts of these two billionaires on an abundance of issues: Greece, the Euro, the International Monetary Fund, Goldman Sachs
(GS), Derivatives, High Yield Bonds, the Stock Market, Politics, Renewable Energy, Ethics, the US and Global Economy, the Emerging Markets, Finance Reform, Philosophy, History… they covered it all.
But the highlight of the trip was a 40-minute, one-on-one meeting I had with Charlie Munger, who had read A Colossal Failure of Common Sense
, and actually wanted to meet me… I almost couldn’t believe it. Munger is considered by many to be Buffett’s alter ego, the conservative skeptic who keeps The Oracle in check. Or just a loyal friend and business partner for over 40 years. It’s all true. It was an honor to meet Mr. Munger, not because he’s a billionaire, but because he represents the end product of a life built on a 24-carat-gold business character.
Imagine the tallest and widest of the great California redwood trees just south of the Oregon border. When you look at this magnificent 2,000-year-old Sequoia, over 375 feet high, it’s what you can’t see that’s most impressive; a root system over 250 feet wide that runs deeper than tree’s actual height. Now that's a foundation.
Munger and Buffett have run their business, Berkshire Hathaway
(BRK-A) with that type of foundation in mind. They operate in a completely opposite way from most public companies. They run their business, and let the stock price take care of itself. Most CEOs try and manage the stock price first and the company second. This was the problem at Lehman Brothers… ethics, treating your employees right, putting your customers and shareholders’ interests first, all came second to running the stock price. Whether it be accounting gimmicks or raising our dividend when we were almost bankrupt, it was all about trying to fool investors and shareholders into thinking we were just fine.
When it comes to ethics, character, and treating your employees and shareholders the right way, Berkshire does it like no other. It's a model for business ethics, and I could tell both men were torn over Goldman Sachs. Berkshire made a bold investment in Goldman during the depth of the financial crisis, plunking down $5 billion for a 10% convertible preferred stock which pays Berkshire $15 a second, every hour, of every day. One of Buffett’s first thoughts of every day was the $432,000 Berkshire Hathaway had made while he was sleeping. And sitting in that shareholder meeting a few days ago, I got the feeling Buffett and Munger were in a real dilemma. First, Goldman is probably their oldest of friend. Buffett pointed out to the audience back in 1967 he and Charlie were trying to borrow $5.5 million in a bond offering and there weren't enough takers. But it was Goldman and Kidder Peabody who came to their aid with an extra $400K to complete the deal.
To Buffett and Munger loyalty is everything. They’re torn, because they want to stand by an old friend, one who’s paying them very well. Buffett and Munger spoke at great length about their dark days around their large investment in Salomon Brothers. In the late '80s Berkshire ended up owning over 12% of Salomon but a few years later they all ended up in hot water after a scandal broke out in regards to Salomon’s business practices around trading treasury bonds. Back then, Buffett made a famous stand to Congress, the regulators, Berkshire shareholders, and Salomon employees. Buffett is not only a brilliant investor, he knows how to relate to people in very unique ways. Back then, he talked about ethics, and conducting business as if your actions were on display in your hometown newspaper for everyone to see. He replayed the grainy 1970s C-SPAN video with him in front of Congress last Saturday. It obviously still means a lot to him. He plays it every year.
The problem with Goldman Sachs is that more and more of its revenue, year after year, comes from proprietary trading and competing with clients -- other hedge funds and mutual funds. Would the actions of the Goldman Sachs mortgage-backed-securities team and their actions around the Abacus/ACA/Paulson transaction pass the Buffett local paper test? I don’t think so. Munger said on Saturday, “just because something is legal, doesn’t make it ethical.” There has to be a point where Goldman crossed the line. Twenty years ago, less than 30% of Goldman’s revenue was made by competing with the other funds. Today it’s greater than 65%. This troubles Buffett and Munger, especially since right now Goldman is doing it with the FDIC, insuring its customers’ banking deposits. And make no mistake about it; Goldman Sachs would have been out of business if it weren't for Hank Paulson and the TARP rescue plan.
Buffett and Munger put on a good cop/bad cop display on Saturday, like something off-Broadway, but I still get the feeling most of the shareholders are very uncomfortable about Goldman.
I was blown away with how much I agree with Charlie Munger’s ideas on finance reform. He feels like I do… that JPMorgan
(C), and Bank of America
(BAC) have no business sitting on top of $3 trillion of FDIC-insured deposits, and $15 trillion of derivatives. As Charlie said, “if I had it my way, I’d make Volker look like a sissy.” He was referring to the Volker Rule which would force the banks to abolish big risk-taking, investing in hedge funds, private equity, and derivatives from traditional banking.
Mr. Munger, like myself, would like to see more standardized accounting practices between the big four accounting firms and Wall Street. All firms should be treated the same way, no matter which accounting firm is signing off on the books. Abuses and innovative accounting moves like Repo 105s must be made a thing of the past if we want to reduce systemic risks among the big banks.
Both Buffett and Munger are bullish on the future, especially the United States, and all of the advantages our capitalist republic provides. But in the near term they seemed very cautious. Their main worries are centered around Greece, and the equity market pricing in higher taxes for the US. Munger said of Greece, “high drama is on the way,” and the Eurozone “experiment” will be stress-tested.Quotes
“Honey, if I lost everything, would you still love me?” “I’d love you, but I sure would miss you.” -- Munger
“If I had to bet my life on higher or lower inflation, I’d bet a lot higher.” -- Buffett
“Every one of my failures in investing brought me closer to that sweet smell of success. Just learn from each one. Humility builds character through hardship.” -- Munger
“I like owning a company where your customers tattoo the name of that company on their chest. That’s why I own Harley Davidson."-- Buffett
“If I could only invest in the USA, I’d be just fine with that.” -- Buffett
“Budget deficits of 10% of GDP are a lot of fun, but they can’t be sustained over long periods of time.” -- Buffett