Friday, May 9, 2014
The Waren Buffett Way
Warren Buffett is often mistaken for his more famous brother, Jimmy.
I am a "Class B" shareholder in Warren Buffet's Berkshire Hathaway company. The stock (like most in the last five years) has done well. It initially sort of languished, but recently has nearly doubled in value.
A lot of people on the far right hate Warren Buffet, which is odd, as he is a Billionaire, and Republicans generally like Billionaires. But someone forgot to tell Mr. Buffett to stick to Fox News Talking Points, and in their mind, he is a loose cannon and a traitor to the cause.
How did Mr. Buffett get rich? Well, that's the first problem the far-Right has with Mr. Buffett. He doesn't subscribe to the "Invest in The Next Big Thing!" mindset, which is touted in the financial media, and by stockbrokers and bankers who want to fleece small-town America from their last cent of savings.
Buffett eschews tech stocks, Facebook, Gold, or any other trendy investment. You won't see him quoted in Motley Fool, as he has nothing exciting to say or any unconventional advice on how to "get in on the ground floor!" on some "next big thing!" like Alibaba IPOs or whatever.
And he isn't looking for fantastic rates of return, either. No get-rich-quick schemes for him, I'm afraid.
Rather, he seeks out opportunities in companies that are undervalued by the marketplace. And the marketplace routinely undervalues companies as people are drawn more toward "sexy" investments like Facebook, than they are to some old line manufacturing company.
The marketplace thought that the ZipCar IPO was hot shit, and people threw money at it, driving the price up to over $24 after the IPO. Old-line "traditional" car rental companies were viewed as drab and boring. I managed to buy AVIS stock at 74 cents a share in February 2009, as the market thought it was going out of business. Today, I am showing a Capital gain of over 7000% on that stock (you read that right, 7000%). What happened to ZipCar? The stock tanked, the "revolutionary" business model never went anywhere and Avis bought it for half the IPO price. The boring investment won. The "Next Big Thing!" separated a lot of small investors from their money.
Similarly, Buffett does odd things like loan millions to Harley-Davidson at 15%. Once you have as much money as he does, you can really act on opportunities like that. If you don't know the history of Harley-Davidson, this might seem like an odd loan. The company was nearly driven into bankruptcy by AMF, who built shoddy bikes in the late 1970's. The company was bought by the managers in a leveraged buyout, and with the product redesigned and improved, flourished. The baby-boomers fueled sales of the bikes and business took off. But in 2009, when the market crashed, again, the market undervalued the company - as people stopped buying Motorcycles. But Buffett realized that the company (which exports more than half its production) could bounce back - and did. Harley paid off the loan, stayed in business, and Mr. Buffett (and me) reaped the benefits of a 15% loan.
That is, of course, not a sexy deal you read about in the headlines or hear about on the financial pages. It doesn't show dramatic swings in stock prices, or huge cash payouts all at once. And these deals often involve slogging through mountains of paperwork to understand how a company is running, and how to turn it around. And often, when Mr. Buffett gets done turning around a company - and sells it at a profit - the new management ends up dragging it right back down again.
Buffett also has earned the ire of Conservatives by being a supporter of President Obama, and also calling for more rational tax rates for the very wealthy. As he points out, he pays the same tax rate (15% Capital Gains, the "Mitt Romney Rate") as his secretary does (15% bracket, ordinary income). It makes no sense. When you are a Billionaire, you can structure your income so you end up paying less taxes than people making less money than you.
Why would he want to be taxed more? Well, at first this seems contrary to his own interests. But higher tax rates on the wealthy might result in a more robust and stable economy. And maybe the very wealthy would become more proactive about cutting government spending (including defense spending, a big favorite of the far-Right) rather than just cutting taxes. What is good for the individual is often bad for society. And if things get bad enough for society, then it is not good for the individual. Payday loan operators may argue they run a "legitimate business" but I for one would shed nary a tear if their pissed-off customers rose up in arms and wiped them out. You can only screw a society for so long, before it starts to fall apart from within.
His support of Obama also includes fiscal policy. As a guy who believes in making money the old-fashioned way - investing in a company, improving its operations and products, making a reasonable profit, and selling, he likes to see an economy that grows organically and at a rational rate. The sudden excesses of the 2000's and the resulting plunge in 2009 are bad for business - unless of course, you are one of the lucky few who profits wildly from the misery of the masses.
Stock bubbles, hysteria, manias, and the like, do not produce real wealth, but merely the transitory appearance of it. The boom in housing in the 2000's did not make many people very wealthy. For the few who "made out" (like me) there are maybe five or six who lost money. And we all lost money when financial institutions went down and were bailed out with our tax dollars.
This is not a rational way to do business, unless you are one of the lucky few who scrapes a few percentage points off the top, even as your company or customers are losing money. So that a few people on Wall Street can get huge bonuses, the rest of us suffer. It is not a sustainable business model.
And folks on the far-Right hate that about him - being rational and all, and sticking to "old school" investment principles. The far-Right wants you to believe in "The Next Big Thing!" whether it is Glenn Beck's gold, or a new mini-mansion or the latest "tech" IPO which is little more than a website. They want you to gamble - often literally (the largest sponsor of the GOP is a casino magnate) as gamblers always lose and the house always wins.
Is Buffett a genius? Is he always right? Hell, no. Buying Low and Selling High doesn't take any special insight, just a lot of legwork, rational thinking, and measured risk-taking. He never will outperform some hot-shot stock picker on Wall Street, whose record is based more on the laws of probability than anything else.
And when you try to value companies rationally, there is still a risk that you may miss something and overvalue a company - or that the market may turn in an unexpected direction. So even Warren Buffet makes some bad calls once in a while. But since his "winning streak" is not based on the laws of probability, this is to be expected. Never confuse brilliance with luck.
Do I have a lot invested with Mr. Buffett? Hell, no. I don't put all my eggs in one basket, no matter how nice the basket appears to be. He once famously (or supposedly) said "put all your eggs in one basket - and then watch that basket carefully." For the small investor, however, who cannot afford to lose their life savings, this is ridiculous advice - and I doubt he was aiming that comment at the small investor.
Investing rationally - by diversifying your investments and hedging risk - is the "old school" way of investing. You may not get rich quickly, but you will become prosperous, over time. The shouting guy on the financial network hates that sort of talk, of course, as do the people trying to sell you "The Next Big Thing!"
Those folks, of course, don't have your best interests at heart.