Graham Osborn

Buffett had/ has laggards like every one else operating at similar AUM - the difference was the upside of his winners. Although we don't have details on single-pick gains from the BPL days I think the best modern analogue is M Burry's early days at Scion. In the first year he was up 55% gross while the S&P was down 10% - and that was all because of a single value stock in his portfolio that was a 3-6 bagger depending on the cost basis. A number of his other picks (especially airlines in 2001) went nowhere. This is a power law world. You don't make 55% in a year by owning 10 equal-sized positions that each go up 55%. Buffett did 30% gross at BPL. His claim that he could consistently do 50% a year is bogus in my opinion unless he was managing <1M in inflation-adjusted dollars. He has really done the community a disservice by saying that IMO.

Just tell them how the government is screwing them. Doctors love to hear how the government is screwing them. See attached. The_wasting_dollar.pptx

This is a good example of taking a keyword out of context. What he actually says is: BECKY QUICK: The-- the Fed has been sounding a little more hawkish. Even Janet Yellen has been sounding a little more hawkish. Does that concern you? Or are people getting complacent thinking rates are going to be low for an extended period of time here? WARREN BUFFETT: Well, I think they expect 'em to increase. But the question is how much. I mean, if-- if three years from now interest rates are 100 basis points higher, then the stocks-- stocks will still look cheap at these prices. If they're 300 or 400 basis points, they won't look cheap. Note he says "look," not "are." Quoting from another interview: The most important thing is future interest rates,” Buffett said. “And people frequently plug in the current interest rate saying that’s the best they can do. After all, it does reflect the market’s judgment. And the 30-year bond should tell you what people are willing to put out money for 30 years and have no risk of dollar gain or dollar loss at the end of the 30-year period. But what better figure can you come up with? I’m not sure I can come up with a better figure. But that doesn’t mean I want to use the current figure, either. In order to properly discount the cash flows of a business between now and judgement day, you need to know interest rates every single year. Between 1956-2016, annualized inflation was 3.8%. Buffett has been around a long time, and I guarantee he's not banking on present rates to last forever. When you buy businesses to hold forever, you need a realistic long-term view. By assuming higher rates in the future, you build in a margin of safety.

That's the spirit! Here in Atlanta direct flights on Delta are not too bad. But given all the New Yorkers going to the meeting you might be able to rent a bus - and call it the "BerBus."

I'm a big advocate for not adjusting your strategy at all over time. Otherwise what happens is you relax your valuation standards over time. There's no question that growth (future increases in intrinsic value) vs value (the degree of discount to present intrinsic value) are both worth something, and you have to decide for yourself how much they are worth. If you demand more, you will generally take less risk, but if you demand too much you'll probably never do much investing. For me I want to get my money back on whatever I pay for the enterprise (vs the balance sheet) within 10 years. There are almost no assets currently that offer that, so I don't buy anything. It takes a lot of discipline to keep your standards invariant. You are also forced into a concentrated portfolio of 10-20 securities in all but the most depressed of times. People talk a lot about sector rotation. I guess this doesn't affect me much except to the extent that people who don't know how to value businesses overrotate out of a sector from time to time and expose some values. I picked up some nice tech values in 2016 before people rotated back into tech. But if they're still good businesses and not massively overvalued, why would I rotate out of them?

Thread for events around the meeting. Look forward to seeing folks there!

Does anyone have suggestions on getting information on dark companies? I emailed the CEO of one recently and he said you had to (in their case) submit a written request to the Delaware Division of Corporations and sign an NDA. This is obviously a fairly burdensome process when - in most cases - I don't have any more data on the company than the stock price and the process could turn out to be just a huge waste of time. Of course if it was a local business or I knew the ecosystem I might be able to come up with enough scuttlebutt to imply that looking at the financials would be worthwhile. Even then, the other thing I'm not sure of is whether a dark company would be expected to keep audited or unaudited financials for internal use - I guess that would depend on the shareholder base. Originally I thought if you bought a share and called the company they would just send you the financials but I'm no longer sure the process is that simple. Apparently the JOBS act has encouraged companies to get more cagey about what they share. Just looking for others' experience.

Hi everyone, I've been using IB about a year now and I've got about 20% of my portfolio with them. It's kind of a love-hate relationship. I like the international direct exchange access and low commissions. The customer service is below average. Their capitalization seems OK. But what gets me is their platform is just so unstable. About once a month I try to log in and get just random strings of code. And today I can't log in at all. I think a lot about market dislocations since I try to position myself to be a buyer when there are a lot of forced sellers. But it seems likely to me that whenever the next big dislocation rolls around, IB will be the first platform to crash. It also worries me that market makers who operate discount brokerages may have a conflict of interest to extend the downtime in these sorts of scenarios so they can get their own trades in before the retail investors. For you IB veterans out there, I would appreciate insight on your ability to trade during high-volatility markets on IB since 1994. If you had problems, what were they?

True - globalization and automation have some common effects.

Buffett has a good point though which ties into inflation as well - if a single person could do the work of 150M people, the cost of living would be rock bottom. In a nation where robots take all the jobs, people can enjoy a high standard of living practically for free - meaning it doesn't matter so much that they contribute a low percentage of overall production. And of course that has already happened to an extraordinary degree since the Industrial Revolution. I do think such a society generates some real social issues such as massive disparities of power, wealth, and freedom between individuals. A good example of this is a home and real estate ownership, which were once part of the standard of living for a great many Americans.

I will pay $25 to anyone who shows up at the next Berkshire meeting wearing a T shirt with that creed.

Thanks. I do like talking with people though!

Quiet board this year..

The usual bashing of "helpers" to a roomful of helpers who all seem to enjoy it. Never fails to amuse me.

I guess at 2B Ajit is rich enough he checks that box! The retained earnings option program seems like a good one, but I wish WEB would flesh out what the book value gain threshold would be that triggers the option.

This discussion of high margin/ ROC (monopolies) vs low margin/ ROC businesses (commodities) and the observation that the largest US companies are extremely asset-light is so fundamental. If Berkshire had gone that route it would already be the world's largest company. Instead Buffett drew a dotted line around anything that smelled "techy" and bought railroads and utilities then found creative ways to rationalize the purchases. Chris Sacca has a very similar thesis for early stage cloud companies - he says that traditional VC is broken because managers think you need to plow more money into the business to produce more growth - but that requirement is actually the mark of precisely the sort of business one does NOT want to be invested in. The right sort of business requires only a catalytic amount of capital at the early stages to get the ball rolling, but after that it should be self-generating. I liked Charlie's comments on Dow and the chemical co's as well. Fisher discusses these extensively. At that time in US industrial development the chemical companies where still high-margin (like pharmaceutical companies or unregulated cloud software companies) whereas now their profits have been regulated and commoditized away. Younger industries are less prone to both (sometimes).

Haha.

Warren's projection on prospective returns for Berkshire to prospective interest rates is interesting. I think he is talking about the ability to buy businesses at attractive prices to boost Berkshire's productivity in a meaningful way.

Yes! I've been saying it for at least 2 years and people just look at me. Where the hell was Berkshire (after being active in the media space in the 70s-90s) when Google was selling at 15x earnings? And why would Buffett buy IBM which was clearly getting commoditized into services? One only needed to look at the working capital trends over the past 10 years for these 2 businesses (or Apple for that matter) to see that Google is the printing press and the other 2 (speaking long term) are doomed to the commodization that always breaks down a hardware moat. I own some Google and I will be holding it 10 years from now unless something crazy happens. I think it's a much higher-margin and more durable business than Amazon or Walmart -the kind of business I dream about. I think if Warren were starting out now he would be tech-heavy. I've tried my best to emulate what he looked for in the 70s and I magically find myself over 50% tech. I'm not happy about that, but it's where one finds high-margin businesses that can grow like weeds through up and down cycles.

I'm a big fan of the AIG and Lloyds deals by the way. God help us if Ajit doesn't take over when Buffett dies - the thought of Todd or Ted running reinsurance feels about as good as the thought of Trump steering an aircraft carrier.

In the driverless car question - it's nice (or maybe not so nice) to think about a driverless and accidentless world where auto insurers aren't needed. But GEICO's premium volume relative to the reinsurance business is no longer as significant - and disasters there are not going away.

Does anyone have an opinion on Buffett's support for the current directors? Although the practices seems to have started at the lower levels, the complacency seems to have involved management. The questions director awareness. I'm not a Wells shareholder but my personal view is introducing fresh directors would be a benefit. It's not really Berkshire's problem directly but I would appreciate less waffling on this.

For those of you who have read the past annual letters, growth in average claims in the auto industry is a better long-term proxy for inflation than CPI. The advantage to GEICO's new policyholders (IMO) speaks to the growth in claims per policyholder. While there are many possible reasons for this, I have argued (and will continue to argue) that 5T+ in monetization is going to have an effect sometime. And like as not the auto industry will be a good proxy, as it was in the 70s and 80s.

The dramatic duo has just come out on stage!

A view from the rafters: