Interview: Investing With A Margin Of Safety

I was honored when the Editors of Seeking Alpha asked me if I would like to be interviewed for their PRO Weekly Digest. PRO is Seeking Alpha’s research platform for serious investors looking to get better ideas. The interview was far ranging and discussed such topics as: business valuation and the CBV, my investment approach, past mistakes, and a review of old and new stock ideas.

To read the interview at its original source, please click here.

It’s also up on the blog, here.

Below is a copy of the interview:

PRO Weekly Digest: Investing With A Margin Of Safety With Brian Langis

Summary

  • Being a Chartered Business Valuator, why having a high IQ is not enough and how to find underfollowed foreign companies are topics discussed, and he makes the bullish case for ECN Capital.

Welcome to the latest issue of the PRO Weekly Digest. Every Saturday for Seeking Alpha PRO subscribers and Sunday for all other Seeking Alpha users, we publish highlights from our PRO coverage as well as feature interviews and other notable goings-on with SA PRO. Comment below or email us at pro-editors@seekingalpha.com to let us know what you think. Find past editions here.

Feature interview

Brian Langis, a long-time Seeking Alpha contributor, manages a private investment company and is a Chartered Business Valuator (CBV). He employs a contrarian/value strategy with notable calls including Moleskine, NTELOS (NASDAQ:NTLS) and Dollarama (OTC:DLMAF). We emailed with Brian about the extra work (and reward) of international investing, the first place he looks when researching a company and how losing money can be the best education.

Seeking Alpha: Can you discuss your work as a Chartered Business Valuator (CBV), the designation itself and how this expertise applies to your personal investing?

Brian Langis: I was always interested in business and how the world functions. I like history, psychology, economics, science and so on. These interests led me to investing. And in investing, it’s all about figuring out the intrinsic value of an asset and its relation to price. So I had to learn how to value different businesses and assets. I like Warren Buffett’s style of valuation. That’s played into the idea of completing the CBV.

As you mentioned I’m a CBV and a lot of readers are probably unfamiliar with this three letter designation. The CBV designation is the premier credential for professional business valuators in Canada. There’s a national body (the CICBV), a code of ethics and professional standards to follow. It’s been around since the 1970s, when the capital gain tax was introduced in Canada. As a CBV, I have the knowledge to quantify the value of a business or assets. I’m trained to put a value not only on business tangibles, but also the intangibles such as intellectual property and key patents, which is taking more and more space on the balance sheet. With publicly traded equities, it’s much easier to determine the value of a company, but in the private-equity sector it’s more complicated. I worked in the investment business, but most CBVs find themselves working in corporate finance, taxation, valuation for financial reporting, or litigation. Also a CBV is very practical if you are involved in M&A.

Everybody can learn business valuation, but for me having credibility is important. It can take 3-4 years of studying on top of a four-year degree to get it done. The CBV is very specialized and very useful. The CBV is more about learning valuation procedures than finance theory. If you want to get very deep into equity valuation, the CBV is a good designation. If people are interested in completing the CBV, having some background in accounting would definitely make life easier. Some work experience would also help.

In Canada the CBV is well respected. However the CBV lacks recognition outside of Canada. Unlike the CFA, the CBV is not well known outside of Canada. The business valuation practice is fragmented by countries. The U.S., U.K., and Australia each have their own designation, governing body and practice standards vary widely. But there’s currently a process to harmonize and to implement universally accepted standards for the valuation of assets across the world.

SA: To follow up, which valuation methodologies do you find most/least useful or is the usefulness determined by the type of asset you are valuing?

BL: Unfortunately, there’s no “best” method of valuing a business. There’s no secret formula. There’s no one-size-fits-all investment strategy that I can give you. Trying to come up with a satisfactory formula that would identify undervalued shares in the stock market with a reasonable degree of safety and consistency will lead you down a series of blind alleys. Knowing what an asset is worth and what determines that value is more an art than science. It’s not supposed to be easy. If it was easy everybody would be rich doing it, right? I made and lost money buying companies trading at 6x P/E and 25x P/E. It turns out that stocks trading at 6x P/E can go down to 4x P/E. Continue reading “Interview: Investing With A Margin Of Safety”

Are Financial Advisors Professionals or Salesman?

Are financial advisors professionals like lawyers and doctors? Or is it a mere salesmanship gig like a used car dealer or insurance salesman? As a former investment advisor I do have some input.

The industry struggle with that question because it operates in an obvious conflict of interest. Advisors have a fiduciary duty to put their client first and to look after their best interest. This comes in conflict with how the advisor is getting paid and his duty to the firm/bank.  Remember that financial advisor doesn’t get paid for giving advices. Advices and retirement plan are free.  A financial advisor gets compensated by selling products that has fees. When markets are down, it is not a win for the client because they lose money.  When markets are down and the clients are losing money, the financial advisor and the financial institution still get paid.  Maybe they get paid less but they still get paid.

Financial advisors see themselves as professionals but have an image problem. It doesn’t help that the industry aggressively lobbied for the lower “suitability” standard, with less transparency and, of course, higher — often much higher — fees. It also doesn’t help that the bar to entry is very low. The exam is way too easy and banks are pushing anybody to take it so they can have more people on staff selling their products.  When I broke into the business they required everybody in the office (future financial advisors and support staff) to pass the exam because they didn’t want problem with regulators. Well I can’t remember anybody not passing. As a result the firm had a whole floor of people ready to sell mutual funds. The problem for the client is that it’s too hard to distinguish between a real professional financial advisor versus the guy that decided to pass the exam because he heard the money is good.  For example, in hockey you have the major, senior and amateur league. Your talent decides what league you are in. In the investment business everybody is in the same league, good and bad, wearing the same suit and credentials. My suggestion is that if the industry wants to be taken more seriously and respected they should have higher standards. I’m sure professional financial advisors would welcome that.

Should advisers do what a client wants, even when the adviser knows it is not in the client’s best interests? If you don’t, he might take his business elsewhere. After all you are paid by the client and he won’t hesitate remembering you that it’s his money. You have to say “no” to your client when he insists on a service that you know defies common sense and works against his or her long-term interest. If this means that you will lose an account, so be it. It’s better to lose some short-term business than having to face career ending problems later on. And that “later” might come pretty fast once Mr. Client sees his net worth meltdown because you didn’t protect him. You failed at being a professional. You failed at looking after your client’s best long-term interest. That money that was supposed to be there for retirement, a vacation, the children’s education or project xyz is now gone. You were supposed to protect him and you didn’t. A financial professional should not be an order-taker or clerk; they should be trained professionals working on behalf of a client’s best interest. Even if that means saying no to clients.

To prevent that from happening I used to tell my client to take 10% of this money and open self-brokerage account. I never had a problem with that suggestion. Everybody has a little bit of a gambling side inside them and that way the need for action is being feed. Go enjoy an expensive gamble but leave your retirement out of it. So take 10%, have fun and good luck. After a while, if there’s any money left, it comes back.

There seem to be a false perception that advisors will push their client into taking on more risk than is prudent, buying the hot new thing, using excess leverage, catching the latest IPOs, or following the advice of pundits or talking heads. This perception is false. There might have been a time when business was conducted that way but it’s hasn’t been the case for a very long time. I used to be an advisor and portfolios were very plain vanilla boring. A mix of equity and bond funds, that’s it. The reality was that it was the client that kept pursuing the latest investment flavor of the month. It was my job to say no to my client because pursuing the latest media fixation was not in his best interest. My job was to protect the client from himself. That’s the main role of the financial advisor.

Not every client is the right fit.  Usually if you have problems later on it’s because something didn’t click at the beginning of the relationship. Either you didn’t adequately explain your philosophy and approach or you signed the client just to get business.  Usually it will cost you more money and headaches in the long run and nobody will be happy out of it.

For Mr. Client reading this, no financial advisor, or anybody in the world, has any idea what world market is going to do best next. Nobody! If Mr. Advisor stars yapping away about where interest rates are going and market timing, it’s better that you take your money elsewhere. The reason why I managed other people’s money it’s because I didn’t know what is going to happen next.

The answer to the question, are financial advisor professionals or salesman, is really comes down to how the advisor sees himself.  This article may appear to be tough on financial advisors. There are some good financial advisors out there but unfortunately the bad ones really spoil the industry.

Seth Klarman 1991 Barron’s Interview

Below is a rare 1991 Barron’s interview (pdf) with Seth Klarman from the Baupost Group. He’s also the author of the out of print Margin of Safety, which a copy sells for over $1,000.

Credits to “The Odd Lot” from oddlotinvest.wordpress.com/. For some reason the website is no longer available.

Barron’s 1991 interview with Seth Klarman

A Better Cup Of Coffee Right Now

Smiley Coffee

Yesterday I wrote a post about quitting coffee. Today I’m sharing with you advice on how to have a better cup of coffee. You don’t have to have a sophisticated palate or a barista to notice the difference. You can tell because of the magnitude.

We love our coffee. Coffee is a huge part of our daily life ritual and culture (think about how much prime real estate is taken over by Starbucks and Tim Hortons). At the same time, you would think that the average coffee drinker would be a connoisseur about something that they put in their body so much but the reality is that we know so little about our coffee.

Coffee, on its surface, is an incredibly simple beverage: just add hot water to ground up roasted beans. Why complicate it? To have an excellent cup of coffee. You can immediately have a better cup of coffee with these few simple easy tips. First a few comments on coffee machines. A good machine definitely helps. A good machine doesn’t mean it has to be expensive. You can have one of the best cup of coffee in the world with the AreoPress (US$38 on Amazon). Also, very importantly, a good machine won’t turn crappy coffee into a great cup. Garbage in, garbage out. There’s nothing you can do to make it taste good. Now with that out of the way, here’s how you can improve your coffee regardless of the machine.

1- Buy organic whole beans. You might have to fork over a couple extra dollar more but the taste is significantly better. It’s not just a “health” thing or a socially conscious decision. Organic coffee beans taste much better. If you want to take it a notch higher, go with Arabica coffee, its the better coffee plant. The coffee you drink everyday is most likely coming from Robusta coffee plants. If you want to take it another notch higher, aim for beans that within a month of roast date. By the way coffee beans do go bad.

2- Grind your own beans before making each cup. It requires a little extra work but again it’s all about enhancing your coffee. This ensures that the oils and flavors end up in your drink and not in the air. Don’t buy the cheapest grinder

3- Use fresh cold water. Coffee is mostly water but we seem to neglect it. The better the water, the better the cup. The ideal water for coffee is soft water which contains less minerals, rather than mineral rich hard water. This last sentence is now being debated. Generally speaking, soft water is better for coffee. However, if you want to go crazy, some hard water has been known to produce a better cup of coffee. It comes down to knowing which minerals makes it hard. Magnesium helps make the coffee taste better. Bicarbonates does not. It comes down to knowing your water.

4- The ratio of coffee to water. The key is to start with the golden ratio of 17.42 units of water to 1 unit of coffee. It’s a starting point then adjust to taste. A unit could be grams, ounces, whatever you want. Basically 15 grams of coffee requires 261 gram of water. You can be more precise by using weight—instead of volume—to measure your coffee and water. Most of the time people don’t put enough coffee.

Enjoy your next cup of coffee!

Coffee Divorce

*Updated Friday January 29, 2015 with more info.

That’s it. It’s over between me and coffee. Me and coffee have officially been broken up for almost a full month. I’ve been faithful by not messing around with any other source of caffeine (and no decaf, it’s weird and still considered cheating in my book). I have been juggling with the idea of quitting coffee for a couple months and that now my baby is finally doing her nights, it definitely help make the hard decision. So I was “using” coffee to get through.

Why do such a cruel thing to myself? I did it for me. I wanted more energy. I also don’t like the idea of being “addicted” to anything. The motivation also came from a friend of mine, a more intense coffee drinker than me I just should note, who has quit coffee and as a result claims he has way more energy than when he was on coffee. I heard that from other folks as well. I had to test it myself.

I should give you a little background on my coffee habit. I’ve been a daily drinker for 9 years (same amount of time that I’ve been with my spouse). I average two cups a day, occasionally three. One or two in the morning and one after lunch. I’m also not one of these grumpy people in the morning because they didn’t have their cup of coffee.  I love my coffee. I like waking up the morning and making it. It’s almost like a little ritual and there’s pleasure in doing it. Those who visit my blog probably read a couple posts on coffee. They have been among my most popular posts. I think people visit the blog more for the coffee posts and than the investment stuff. I’m one of those coffee “amateur”. I have a few coffee/espresso machines, grind my own beans, shop for organic beans etc… I’m that coffee guy. As many coffee lovers know, the idea of quitting coffee can be torturing.

The verdict: It has been 28 days and I feel awesome. The first benefit I noticed is the quality of my sleep. Now I have these very long colorful dreams. it feels like the dream never stops.  It’s definitely sign that I’m sleeping more deeply. The first week is the roughest but it gradually gets better. The first three days I didn’t notice anything different. Then I think on the fourth day that’s when my  body realized that the good stuff wasn’t coming in anymore. I got hit by random fatigue attack. My thinking was at times blurry and I suffered from the lack of concentration. So my start to 2016 wasn’t the most productive. If you Google a list of symptoms, I had about half of them. And fortunately I didn’t get any headaches, and that’s a big one and a deal breaker for a lot people. Four weeks in I can testify that I have more energy than before and it’s going to get marginally better. We know that non-coffee drinker don’t need coffee to have energy. We drink coffee to get that “natural” energy level, whatever that might be, and not to be above.

After a couple weeks the benefits outweigh the cost. Quitting coffee is an experiment that’s working well  The break up was fine for the most part. There were a few instances where I really wanted a cup, like the time I had breakfast at a restaurant. It feels really weird not have a coffee when reading your newspaper. I could have ordered decaf so I could have the complete experience but I didn’t. Coffee and a newspaper. They go together so well. I’m not a smoker but when a smoker says they need a cigarette with their drink, I can sort of relate to that now. They call themselves social smokers. I haven’t banned coffee from my life. I plan on drinking the occasional cup sometime the future but I don’t plan on reintroducing coffee in my daily diet. I will treat coffee like alcohol, I will have it occasionally for pleasure purposes. Maybe on weekends or when I read the newspaper. I guess you can call me a “social” coffee drinker.

 

2015 – The Year Nothing Worked, Especially Hedge Funds

2015 was the year where nothing really worked. Stocks, bonds, commodities, foreign investments are all down. Cash went no where. There wasn’t any place to hide. The only way you could have made money is by holding U.S. dollars and shorting the market. If you held the “FANGs” (Facebook, Apple, Netflix, Google) you made some money. However it’s not exactly what I call a sound investment strategy. With two trading days in 2016 in the books, the FANGS are slumping with everything else. Yet, don’t divest your portfolio to buy these four stocks. They are not the holy grail.

Do you remember your favorite financial advisor mentioning you need a diversified portfolio? Something about asset allocation? When one market is slumping it’s alliright because you have another asset class that’s thriving to balance things out.  Well that didn’t work out too well in 2015.

Below is a table of the performance of some of the main indexes. The crazy thing is that the market was hitting new highs just in May 2015.

2015 asset returns
Source: Barron’s, Bloomberg

Right now hedge fund performance are retaining my attention. Hedge funds used to be the sexy thing. Hedge funds was the go to place for new graduates. After many disappointing years and the financial sector getting clobbered in the media, working at a hedge fund has loss its cachet. Now it’s fashionable to work at tech companies and start-ups. Several well-known funds closed their doors in 2015 as big bets on oil went bust and returns sank. Three Tiger cubs seed funds, JAT Capital Management, and the macro fund of Fortress Investment Group  were among some of the funds that closed shop.

Remember that hedge funds were promoted as investment vehicles that suppose to make money in any markets, bear or bull. Hedge funds also aim to make money even in volatile conditions. Because of that they were able to justify  their high fees. They have historically charged 2% of assets under management and 20% of any profits. Of course their are cheaper and more expensive funds.

The most well-known names in the hedge fund business, considered investment geniuses, such as Bill Ackman of Pershing Square Capital Management and David Einhorn of Greenlight Capital have been crushed, both down around 20%. The depth of their losses is stunning. Bill Last year Bill Ackman was prompted as the next Warren Buffett and now he has a lot of explaining to do to his shareholders. While on the subject of Buffett, his Berkshire Hathaway (BRK) investment machine also did worst than the market.

If the crème de la crème can’t beat the market, who can? Below is a table the hedge fund performance since the financial crisis. To their credits, they performed much better than the market in the 2008 crisis but hasn’t been able to repeat that performance.

Hedge funds performance

To defend themselves, some managers claim that hedge funds never had the objective of beating stock or bond indices. Rather, the role of hedge funds is to provide diversification (uncorrelated returns) when added to portfolios of stocks and bonds and other assets. Also it’s unfair to compare their performance to the equity market because some hedge funds invest in other assets.

In 2016, hedge funds will have a lot of work to do to gain back investor confidence.

Interesting Reads

-1x-1Here are a couple links of material I’ve been reading lately.

Lessons from attending a Berkshire Hathaway shareholder meeting by Mark Bidwell

Jim Murray, author of the annual Whisky Bible, nominated the Crown Royal Northern Harvest Rye 2016 whisky of the year!

NFL Owner Stan Kroenke Wants to Take Over L.A.

Most of What You Learned in Econ 101 Is Wrong

Letter to My Younger Self by Bryan Trottier

Dark Matter and the Dinosaurs by Lisa Randall

iTunes Terms and Conditions In Graphics!

Itunes 1Apple has a reputation for putting a lot of thoughts in their products to make it the best and as consumer friendly as possible. Everything from the original iMac that came out in 1998. That was the cute transparent computer with a colored handle that took the industry and consumers by storm. This probably doesn’t mean a lot today to the readers, but it was a big deal by then. It just needed one wire to operate (just plug it in) as opposed to the PC that required tons of wires to run. One for the mouse, one for the keyboard, speakers, power etc…Then Apple came out the iPod, iTunes, iPhone, iPad and other innovative products. All Apple products are very well regarded by their users.

However, there’s one thing that Apple does that really annoys their consumers and it’s that frustrating iTunes terms and conditions update that you need to agree to every other week. Once in a while Apple randomly hits you with a nice 40 something pages legal document for you to “read” and agree to (you have the option to have it emailed to you…) I’m not sure what happens if you disagree/decline their terms. I never did because I’m afraid I wouldn’t be able to use my iPad. It’s written by an army of lawyers and it’s really unreadable. Actually that’s a lie because I never read it, so maybe it’s not boring. Am I suppose to send this to my lawyer for him to read? The whole thing is so ridiculous that South Park even made an episode out of it.

Anyway, looks like I’m not alone with that feeling and some people took matters in their own hands. Cartoonist R. Sikoryak published a page by page graphic novel of the terms and conditions featuring Steve Jobs. Definitely not a small task. It seems that each page is dedicated to a real comic artist, which some of them you will recognize from your youth. I really recommend that you go check it out at this tumblr page, iTunes Terms and Conditions: The Graphic Novel.

I added some of their art pieces. All credits to them. Here are the samples:

Page 1
Page 1
Page 20
Page 20
itune 4
Page 43

Business Valuator Drink Menu

cocktailsThe International Institute of Business Valuers (IIBV) came out with an interesting drink menu for the a panel discussion in Paris.

Here are some of the specialty drinks you can order at the bar:

A Cap Rate
“Not to be confused with a night cap, The Cap Rate combines creative juices with a sparkle to enhance the value of a business.” The drink is a cocktail of Ratafia of Champagne, Pineapple juice, Coco juice and Lemon juice.

You can also order a Discount for Lack of Control, which is described as
“The balance of liquors and Bacardi reduces the pain of any loss of value due to lack of control.” Bacardi, Saint germain Liquor, Cranberries juice, Mango juice

There are other interesting drinks as well. Here’s the full list:Business Valuation Drink Menu

Omaha Pilgrimage

150501205433-berkshire-hathaway-rubber-ducks-780x439

IMG 20150501 131227I finally did it, just like forty five thousands others, I made the pilgrimage to Omaha Nebraska to attend the Berkshire Hathaway’s (BRK) Annual General Meeting (AGM) headlined by the world’s richest person, Warren Buffett and his sidekick Charlie Munger (Bill Gates was there too in case of dispute). A rock fan goes to Woodstock, Muslims go to Mecca, and I guess investors have to go to Omaha at least once in their lifetime. By coincidence it happened to be the 50th anniversary of Buffett running BRK, so the meeting looks promising. Plus, the schedule is jam-packed with meetings, investment panels and conferences, events and even a 5k run. To sum it up, it’s a weekend mixed with business, education, networking, and entertainment.

Attending the BRK AGM has been on my mind in the last couple IMG 20150501 123310years and circumstances such as Buffett and Munger’s age, 84 and 91 years old, made 2015 the year. How many more years can you squeeze out of them? For those readers who are not too familiar with the meeting, the main event of the AGM is Buffett and Munger taking questions from shareholders for about six hours. The two of them together is really entertaining. It’s an enigma to me on how you can pepper two guys over 80 years old with questions for hours without having anyone verifying if they are still breathing. Is it the diet? Buffett is known for drinking five Coca-Colas a day, about the same amount of I consumed in the last ten years.

Aside to listening to 175 years of combined wisdom and experience, there’s a lot more to the trip in Omaha than meetings. It was also an occasion for me to reconnect with some friends from the industry, make new friends, get investing ideas, and more importantly acquire knowledge to become a better investor. It’s a hobby of mine to pick the brain of smarter people than me (I’ve met two and they’re pretty old).

IMG 20150501 124851
Bombardier Challenger private jet model at the NetJet booth

The AGM has been growing exponentially in the last couple years. An estimated record 45,000 people attended the AGM, that’s five thousand more than in 2014. The 50th anniversary festivities might have played a role in the spike. Off the top of my head, I don’t think it’s the largest AGM in the world, I believe that award goes to Wal-Mart with its 75,000 attendees. The BRK AGM attracts a diversified crowd. You didn’t have to be a serious investor to attend the meeting. There are people attending from every walk of life and corners of the world. A lot of folks attending the meeting weren’t serious investors. There were a lot of students, foreigners, non-investors, and just folks that wanted to learn more about business. I met a guy/scientist who was researching a cure for cancer and was simply in Omaha to see what the whole thing was about.

When you have that many people descending on a mid-size town like Omaha, airlines and hotels don’t mind jacking up the fares, as explained in the classic supply and demand theory from economics 101. A room downtown near the convention center can set you back $400 a night and $50 rooms become $150 for a couple of nights. The Hilton Hotel by the convention center is already fully booked for the 2016 AGM. I got around the jacked up airfare by flying out from Montreal. I’ve written in detail about it in an earlier post about my discovery when shopping for airfares. The price of my plane ticket was reasonable because apparently Montreal-Omaha is not a popular flying destination. On any other weekend of the year, it would have been cheaper to fly out of Plattsburgh or Burlington but for those few days it cost a lot more to fly out off. I wish I had taken a picture of the second leg of my flight, Minneapolis to Omaha, since most people on the flight were either reading the 2014 BRK annual letter or a Buffett book. It felt like people were learning the lyrics before attending a concert.

IMG 20150501 124951
Inside the Challenger

To get around the over-charged hotel rooms, Buffett suggested Airbnb for a cheaper solution and he’s right, there are hundreds of listings with rooms under $100. If you are not located downtown Omaha, I suggest you rent a car to get around since cabbing everywhere can add up on your stay. Plus, depending on the time of the day taxis can be scarce. On the day of the AGM, if you don’t have your cab booked in advanced you are in for some trouble. The estimated wait time at 4am was between 10 min and 45 min. I wouldn’t want to know what it would have been like trying to book a cab at 6am. The Omaha airport has arrangements with the cab companies for a fixed-price to the hotel so tourists don’t get scammed getting off the plane. The fixed-price system actually comes out the same as the meter fare, I tested it. I guess it just prevents cab drivers from taking the new comer on the “long way”.

I was quickly reminded of how nice and courteous Americans are (after you get through TSA). Getting into my first cab ride at the Omaha airport, a cop opened the back door of the cab for me, I had to double check that I wasn’t getting into a police cruiser. The whole time, Americans were going the extra mile to help you.

Berkshire Hathaway (BRK-A, BRK-B) is more than 50 years old, but Warren Buffett’s partnership, an earlier form of hedge funds, Berkshire Hathaway textileformally took control of Berkshire Hathaway Inc. At the time the company was a textile manufacturer in steep decline. Warren Buffett actually said that buying Berkshire Hathaway was the biggest investment mistake he had ever made. Buffett says if he had bought Berkshire’s insurance business through his hedge fund, he and his investors would have captured all of the gains. He claims it cost him and his investors $100 billion. Buffett only bought BRK to make a quick buck and get out but it didn’t play out that way. The story on how he ended with the whole company is an interesting one and you should look it up. BRK might not be in the textile business anymore but it is now one of the largest businesses in the world. Its Class A shares, which have never split, trade for about ~$215,000 each, compared to $19 in 1965. The company’s market value is about $356 billion.

Berkshire doesn’t broadcast their meeting over the Internet like Microsoft or Coca-Cola. Recording the BRK AGM is “strictly prohibited” according to the visitor’s guide. “Offenders are subject to equipment confiscation, meeting credential revocation, and dismissal from the meeting.” The ban also applies to journalist who would typically use hand-held digital recorders to verify quotes at such a large and important event. There is no legal obligation to make a transcript available or an audio recording of the event. But public companies are required by their corporate charters and state laws to hold meetings with shareholders once a year. If you have ever been to a traditional AGM, you would know that they are incredibly boring. Most meetings usually consist of electing directors and an overview of the financial results but it’s an opportunity for executives to communicate directly with shareholders. Usually the analyst conference call will give you more substance about the company than most AGMs.

For that weekend, Omaha become the capital of value investing. There are the official activities associated with Berkshire Hathaway and there’s a bunch of non-BRK related organized events that target value investors. There’s plenty going on Friday, Saturday and Sunday. Here’s a list of some of the events: There’s the value investing panel at Creighton University, the Yellow BRKers gathering, the value investor conference at the University of Nebraska, the CFA Society of Nebraska Value Investing event, the Columbia School of Business had a dinner, the Omaha Asian Investor Dinner, the Young Presidents Organization panel on Saturday after the BRK AGM, the Omaha Quick Draw (stock pitch presentations starting at 9pm with a pause to broadcast the Mayweather-Pacquiao fight live), and Sunday morning there’s was the Markel breakfast right after the BRK 5k race. There are probably a couple events that I forgot to mention.

IMG 20150501 141041

The perfect pair
$2 on site, $15 on Ebay for Ketchup and Mustard.

The Exhibitions
Another point of interest is the massive exhibition featuring some of the companies under the BRK umbrella. This year the exhibition was opened for two days for the first time ever, Friday and Saturday, which is an excellent idea because you don’t have to split your time in two. BRK has over200 wholly owned subsidiaries(Dairy Queen, Geico, Heinz, Brooks, Fruit of the Loom, See’s Candies) plus a portfolio of publicly traded companies (Coca-Cola, American Express, Wells-Fargo, IBM, BK-Tim Hortons etc…). Shareholders could test their wits against IBM’s supercomputer Watson, shop, eat or talk to CEOs. Burger King-Tim Hortons nor Kraft had a booth at the exhibition. It’s probably too early since the BK-Tim Horton deal closed in December and the Kraft deal was just recently announced. The only 3G deal company on display was Heinz which was selling a special edition of ketchup and mustard featuring Buffett and Munger for $2.s I just saw the same package sold out on Ebay for $15. Dairy Queen made their presence felt with $1 Dilly Bars and $2 Blizzards and a giant ice cream cake celebrating BRK 50th anniversary. All the money collected was for charity and just about everyone was walking around with one. Fruit of the Loom and Brooks probably had the busiest booth with super special shareholder discount on their products. I was surprised to learn that Garanimals is part of the BRK family, since my daughter has a bunch of their products.

IMG 20150502 075652
That’s called an Encyclopedia. That’s the precursor to Wikepedia. Yes they apparently still sell them. They aren’t responsible for the great Q1 numbers.

The bookstore was another popular attraction with a new updated recommended reading list by BRK. You also got the chance to talk to some of the authors. You also get the opportunity to talk to some of the CEOs and managers running any type of company imaginable. So you get to learn a lot about a lot different industry all in one place. If business is not your thing, the shopping is pretty good with discounted shareholder prices.

IMG 20150501 144314

BRK AGM
I got in line at 4:30 am and there were hundreds of people in front of me but the odds that I get a decent seat looked well in 18,000 seats CenturyLink center. By 6am the chances that you get a seat were slim. But to accommodate everyone there were TV screens all over the building and the Hilton Hotel next door has a giant Ballroom where you can view the meeting. I could have sold my spot in line for hundreds of dollar. I know that for a fact because there were people in front me getting paid $200 to wait in line. If you wait a bit you will eventually get a seat on the floor because there’s a lot of movement during the Q&A (people leave to go shopping or something).

The doors opened at 7am and no matter how civilized you would think BRK shareholders are, when the gates open at 7am the law of the jungle takes over. For a couple minutes its pandemonium and people are sprinting for the best seat. You really need to hustle your way to get a seat. You know it’s a unique AGM when people are sprinting for seats. There’s plenty of videos to entertain yourself on Youtube of the herd running. People seem that have forgotten that the actual race was the next day. BRK has warned that they wouldn’t tolerate excessive seat saving the morning of the meeting after receiving a lot of complaints in the past but I didn’t see security enforcing it.

At 830 am the AGM kicked off with a very hilarious company movie that included a news clip on Berkshire’s meeting from 25 years ago. In the clip, the newscaster said anyone can be an investor in Buffett’s company Berkshire, but it would cost you as much as $7,000, which got a laugh. The stock now trades at $215,000. The one hour movie is a mix of ads for Berkshire businesses and comedic sketches featuring some A-list Hollywood stars such as Dustin Hoffman, Arnold Schwarzenegger, and Jamie Lee Curtis. The movie closer was Warren Buffett getting ready to fight Floyd Mayweather. I would watch it again but there doesn’t seem to be a copy on Internet. Yep, I can’t that something like that isn’t on Youtube or somewhere, and more impressively there doesn’t seem to be any leaked or cam version of it (or any prior years as of matter of fact).

The Q&A with Buffett and Munger was the primary reason why investors make the trek to Omaha. The questions are not scripted. Buffett and Munger don’t know what the questions will be but there’s a general idea of what to expect. Journalists and shareholders were allowed to ask questions. If a shareholder wanted to ask a question at the podium, they had to sign up before 8am and their name would be picked out of a hat. Or you could submit by email your questions to the journalists.

The opening question, from Carol Loomis, was a tough one about the lending controversy surround Clayton Homes and 3G Capital. You can read about the Clayton controversy on the Seattle Times here. Even though the question wasn’t staged it was obviously expected and Buffett and Munger were prepared with tables and numbers to defend themselves. I’m not going to repeat everything that was said at the meeting, there’s plenty of copy of the notes available online. I have more own notes if you are interested to discuss it. Some of the best highlights are the chemistry and the back and forth between Munger and Buffett. In general, a lot of questions were on the principles, values, and the unique culture at Berkshire Hathaway. A lot of the answers Buffett and Munger responded too are what you would hear on a TV interview. Except the major difference is that you get a long thoughtful detailed answer instead of the 1 minute clip seeking a buzz quote. There’s nothing you can ask that wasn’t asked. A lot of the answers are what Munger and Buffett have been preaching for a very long time. You shouldn’t expect any surprises. Their line of thinking and philosophy didn’t change overnight. They are consistent and disciplined in their approach which resonates throughout the company and in its results.

buffett03e
I didn’t take that pic.

On Sunday, following the 5k race, I attended the Markel Corp (MKL) breakfast. Even though they held their official AGM the week after, they still distributed annual reports and had the feel of  a real AGM. It’s a good way for MKL to talk to their shareholder base since they have a similar profile than BRK. Markel is often dubbed as mini Berkshire because of its similar structure, financial holdings, and management’s long-term approach. The meeting was much smaller in size it was probably what the BRK meeting looked like a long time ago. The MKL lunch was a more traditional meeting than the BRK one. At the BRK one, even though Buffett and Munger took questions for 6 hours, they are not accessible for obviously reasons (security, giant crowd etc…). At the Markel meeting, there was a nice back and forth between management and the crowd and they stayed after the meeting to discuss with the shareholders.

IMG 20150504 071608

Post-Meeting
I’m glad that I finally made the trip. It was definitely worth it. I accomplished what I wanted to do and I ended up with good memories. I don’t rule out going back in the future. The BRK AGM has a fervor approaching the evangelical. I believe that there’s a Buffett cult inside the shareholder base. Some folks are just fanatical about everything Buffett. I admire Warren and I see him as a teacher. But I don’t agree with everything he says or does. He happens to be very contradictory on many things he said. There’s an incredible wide gap between Warren as perceived and the Warren who exists. Warren Buffet is painted as this warm and fuzzy grandfather who pinches babies’ cheeks. If you follow his actions and investments; he’s not exactly that holy figure.

By the way, Warren Buffett has two neighbors selling their houses if anyone is interested. One seller is asking 10 Class A shares ($2.15 million) and the 2nd seller is fine with cash. The market value of the house is $900,000, but you are paying a premium to be Warren’s neighbor.

Enjoy,

Brian Langis

Buffett's house
Buffett’s house, I apparently missed him by 5 minute. He just drove out in his Cadillac to go to work.

 

 

IMG 20150501 083815
That guy will take cash.

 

IMG 20150501 084101
Asking price: 10 BRK Class A shares. ~$2.15 million. Market Value: ~$900k