I came across this gem on Twitter. The image below is a snapshot of an interview Harvard Business Review conducted with Jerry Seinfeld in 2017. Two question in and the interviewer brings up the consulting firm McKinsey, well because it’s Harvard. Anyway I though the following exchange was very funny.
There’s a lesson here. The quality of the answers is positively correlated to the quality of the questions. Ask dumb question, get a dumb answer (or a funny in this case).
First, some comments on the pre-AGM webinar hosted by Professor Lawrence Cunningham, then I will comment on Berkshire Hathaway (BRK). Professor Cunningham occasionally does this kind of event and is generous with his time. Here’s the recording.
There were about a thousand of us on Zoom. Professor Cunningham did something similar two weeks ago when for the launch of his new book: Dear Shareholder: The best executive letters from Warren Buffett, Prem Watsa and other great CEOs (see post). Professor Cunningham is a Buffettphile. Lawrence is a professor of law at Georgetown. But he’s better know for his work Buffett and BRK. Lawrence has done a great job representing Buffett’s views. He had access to Warren for over twenty years. He has documented many angles of BRK/Buffett through the years. If you are an investor and you want to get better, then the book you should read The Essays of Warren Buffett: Lessons for Corporate America. A new edition comes out every five years to stay current with Buffett’s views. The book covers a lot of topics. Corporate governance, culture, management, values, investing etc…really it’s a gem. It’s not that big and packs a lot.
Anyway the pre-AGM meeting was good to get into some-kind of BRK groove. I don’t know if you have been to a BRK AGM, but an online AGM doesn’t quite catch the vibe. If you are a value investor, you have to attend at least once in your life. Hopefully we can defeat COVID-19 ASAP and move on to better things.
Berkshire Hathaway Notes
It goes without saying that BRK is a special company. There’s nothing else like it. There are clones, but they are not as successful. Maybe except for Markel Corp. (MKL) which is probably the best clone I can think off. MKL emulates BRK and Buffett in many ways. They have good insurance companies, good management, good businesses, a good culture and a great shareholder letter. Fairfax has solid insurance companies but is lagging behind on the investment side. I don’t know if there’s something equivalent of a BRK in Europe or Asia (there are a lot of giant conglomerates). The BRK recipe has been laid out. You can copy it. But the large majority can’t do it. BRK has such a unique culture which explains why it’s hard to replicate (autonomy, decentralization and trust). Also people don’t have the patience. Everybody wants to be rich but they don’t want to do it slowly.
That Cash Pile
BRK is sitting on $137 billion and he’s getting heat for it: “He’s not buying anything, he missed the dip, he didn’t do enough buybacks etc…” So who cares about sixty years of investing greatness. Really I don’t get the hate. I saw a video of a guy on Twitter burying a Buffett book. To the people that are giving Buffett crap for having all that cash, just take a quick look at the state the companies that don’t have any cash are in.
I don’t know about you but that pile of cash looks really good right now. We are a quarter into this Covid-19 mess. There’s a lot we still don’t know. We have no clue how this will play out. A second wave? Another shutdown? An Italian style public health crisis? We will get out of this mess eventually, but when and how much it will cost are unknown (astronomic!) A lot of people pretend to know, but nobody knows.
The current market rebound doesn’t reflect the reality I see right now. People are losing their businesses, their jobs, their savings, debt is pilling up…none of this is a quick fix. I understand that the market is forward looking and that most of the valuation is on the back end (terminal value). We will have a better idea of the real damage done in the summer and fall once bankruptcies starts to flood in. Governments are telling restaurants to open at 50% capacity. Do you know how hard it is to make money with a restaurant running a full capacity during good times? What about these stores in the mall? The current market rebound is based on the central banks doing everything there is to do to at any cost.
Buffett also said this about the $137 billion he had on hand: “Isn’t all that huge when you think about worst-case possibilities.” He’s certainly in a better position than anyone to make that judgement call.
The Fed
Back during the Financial Crisis of 2008-09, BRK made some of the sweetest deals. Buffett saved Goldman Sachs, General Electrics, Bank of America, Harley Davidson, Tiffany and I’m sure they are more. He had money, they needed it.
This time there were no deals. The main reason was the the Federal Reserve and government stepped in very aggressively. They learned from the last crisis. And you can’t compete with their terms.
As a consequence of their buying spree of epic proportion, the Federal Reserve’s balance sheet has exploded to over $6 trillion. Look at that spike at the end of the graph. That’s one swollen balance sheet.
Federal Reserve Balance Sheet as of April 29, 2020
Bearish
Six months before the bottom in March
Buffett is known for his eternal optimist. People turn to Buffett for some-kind of hope. Back in 2009 he wrote an op-ed in The New York Times saying he is buying American stocks! Then the market went down for another six months. But his message and action remained iconic. Having the right temperament and attitude can help you navigate hard times.
Last Saturday listeners where waiting for this kind of up-beat mood lifter and let’s just say they got buzz killer. He came across as quite bearish (more realistic IMO) during the virtual meeting and that’s scary. Investors turn to Buffett for guidance during hard time. Stocks are apparently low (kind of not really) and he’s not buying. It’s probably not the message investors wanted to hear. But sometime you need to hear the truth. And right now the truth is not going to be pretty for a while. Remember he’s an Oracle…
You have to understand that through BRK, Buffett has a direct pulse on the business world, from small to big businesses from many different industries. He knows what is going on.
Also when Bill Gates is your best friend, and Bill seems to knows everything there is to know about pandemics and Covid, you are probably getting better facts than the White House briefings.
“I Don’t Know”
Buffett said “I don’t know” a lot during the meeting. Smart people says I don’t know a lot.
I think we don’t say it enough. Buffett understands his circle of competence. If it’s out of his league, than you get a “I don’t know”. It’s important to be intellectually honest. That way we can grow and make less mistakes. We should say “I don’t know” more often. It will prevent less b.s. floating around.
Successor
Nice to see Greg Abel up there. We got an extensive look at a man who could succeed Warren Buffett. He looked good. He demonstrated very broad knowledge across the company. Abel is a vice chairman for non-insurance operations. Abel gave investors a sense of how those operations were adjusting to the coronavirus pandemic and economic landscape. The other candidate for succession, Ajit Jain, is the vice chairman overseeing the insurers.
Buffett Exits Airlines
How to you become a millionaire? You start off as a billionaire then buy an airline.
Buffett sold all his airlines. Good riddance. “When we change our mind, we don’t take half measures”. To Buffett’s credit, he didn’t nor seek to assign blame elsewhere. He just said he made a mistake.
There’s probably other motives too. Buffett is the 2nd or 3rd richest man in the world and ex biggest investor in the airlines. Just think of the headline: “Billionaire Buffett’s Airlines receive bailout money” or “$137 billion cash pile and Buffett needs government help”. Buffett is careful of his image and he doesn’t need that political/public backlash that would have follow. Billionaires don’t need a bailout. He made a mistake, recognized it, and move on.
Quiet Buffett
As the coronavirus crisis unfolds, many are asking: Where is Warren Buffett? They want to hear and see more from the famed investor, noted for both calm and prowess in times of distress. Well he did an one interview back in February (CNBC) and another one in March(Yahoo! Finance). His AGM was coming up so most likely save the spot for all the questions. Buffett has already given the world so much. He’s 90 years old. He’s been doing this for sixty plus years. He doesn’t owe us anything more than he’s already said and done.
It’s possible there are other forces at work here. We are in a pandemic and recession. I’m not sure it’s smart to have Buffett hopping around of happiness like a little kid because “the supermarket is on sale” while people are dying or losing their jobs, money, or business.
Just as in investing and climate change, accurate models are difficult. It requires a lot of assumptions and judgment. Even if you are off a degree here and there, it can have a massive impact on the results. You need to understand its limitations. That’s why a margin of safety (error) is important.
If you follow Warren Buffett then Lawrence A. Cunningham (@CunninghamProf) doesn’t need an introduction. Lawrence is a lawyer, a professor at GW, a corporate director, and a Buffettphile. Mr. Cunningham is better known for documenting Warren Buffett and Berkshire Hathaway for decades. He’s the author of many books. His most famous work is the The Essays of Warren Buffett: Lessons for Corporate America. Investors that want to learn more about Buffett and BRK has turned to Professor Cunningham’s work.
I’m looking forward to reading the book. Investors, entrepreneurs, and business leaders could learn from some of the best shareholder letters written. The book is separated in 16 chapters. Each chapter represents a company. Most letters have one author, but companies like Leucadia-Jefferies and Markel Corporations have two. This is truly some of the best people in business, separated in three categories: 1) Classic (Buffett, Goizuieta +), 2) Vintage (90s), and 3) Contemporary (SEACOR, Google, Constellation Software +). The only ones I never heard of on the list were Charles Fabrikant from SEACOR, Brett Roberts from Credit Acceptance Corp, and Robert Keane from Cimpress N.V. I will have to look them up.
Buffett is the dean of shareholder letters. They all learned the art from Buffett. They all tried to emulate him. But they have their own style, own personality, and all try to bring something different to the table. These guys (and two ladies) are great writers. There is something special about this group of authors. They focus on discipline, capital allocation, conservatism, being rational and the long-term. What makes a great shareholder letter? They treat shareholders as partners. They provide a comprehensive clear report.
This book is great business writing pulled together into a book. I’m waiting for my copy and will be great references on the book shelve.
Thank you Professor Cunningham for your work and being generous with your time.
Are you in quarantine with two young children like me? We are all doing our best and trying to navigate the current crisis. Below are three different fun activity packs to keep your young children busy. They were free and fun. It worked for me. My kids are five and two. I’m supposed to be working and educating my kids at the same time. It’s sort of impossible. Formal home schooling is not working because the two year old like to crash the party. Plus, even without a toddler, it only works for so long. So you kind have to improvise as you go. My approach is learning while having fun. Basically they are having fun and they don’t know that they are learning. That’s the best kind.
Social isolation is playing defense. It’s a tool and it’s very effective. It’s the equivalent of taking a sledge hammer to a fight. It buys off time. The curve is starting to flatten in Italy and other parts of the world that have adopted social distancing measures. You can’t get infected if the virus doesn’t know where you are. But there is a problem. Social isolation is half of the battle. A battle has to be fought on multiple fronts. If you don’t know who has the virus, you can’t see where it is and where it isn’t. If you can’t see where it is, you don’t know how to fight it, except by shutting everything down and telling people to stay away from each other. In addition to a sledge hammer we now you need a scalpel. We need to get surgical. Testing in an outbreak gives you data. The data provides two functions. One is to diagnose those who are sick. The other is surveillance: to see where the virus may be lurking, especially in cases where symptoms are mild or don’t manifest at all.
Before we have a vaccine and a victory parade, we need massive testing. The key forward in this battle is testing, testing, and testing. We need to be aggressive on that front. That’s how we will know how wide spread the virus is. Test positive: Hide for fourteen days. Test negative: Go to work. The countries that have tested the most people are also the countries with a better handle on the virus. Why? Because they have data. South Korea and Singapore have been exemplar in their response. Italy is the “what not to do” example and the U.S. is providing serious competition for the title. In Italy the pandemic has turned into a disaster. Italy has only twice as many cases as Germany but almost 50 times the deaths. The Germans have tested huge numbers of people and the Italians have tested only people with serious symptoms. That is, some vast numbers of Italians has had the virus but were never tested, either because their symptoms never sent them running to the hospital or they never even knew they had it. In a matter of weeks (from February 21 to March 30), Italy went from the discovery of the first official Covid-19 case to 11,591 deaths. Within this very short time period, the country has been hit by nothing short of a tsunami of unprecedented force, punctuated by an incessant stream of deaths. This is the world’s biggest crisis since World War II.
We need mass testing for both the affected and the asymptomatic. Social distancing slows the disease to manageable level. That way we ensure hospitals have the equipment and resources they need. We’re going to need other kinds of testing, too, like serology — testing of people’s blood. That way, we can figure out who has already had the disease and is now immune and can safely return to be in contact with others in society. When that happens, we can move to a more sustainable mitigation strategy. Any sustainable strategy against Covid-19 has to balance public health and economics. It will need to be done in phases. You can’t just turn on the economic faucet to full and nuke the health care system. Low risk and younger people will be able return to work. Gradually allow “nonessential” businesses to reopen (prioritize reopening in industries compatible with physical distancing first).
With aggressive wide spread testing we can start to go back to our normal lives, or a new normal, while savings lives. It’s not the case that everything could go back to normal. A new normal includes some level of social distancing measure in place with tracking and isolating cases. No more handshakes and kisses. That’s over for a while.
Over the next couple days, I will publish a few posts on the current Covid-19 crisis. The first post is where I highlight some positive developments that deserve to see the light of day to keeps things in perspective.
Uncle Sam Wants You Home
At the time of this writing I’ve been ordered to shelter inside my home with my family because I’m fighting an invisible enemy called Covid-19. You too have been drafted in this war to stay home. Except for essential workers (which should be renamed brave workers), the most heroic thing I can do is stay home and watch TV. That’s how we are saving lives. Despite being in isolation for the last seventeen days, we are in this fight together, but not physically together, to prevent from killing each other. In theory, if everybody respected the rules for thirty days, the virus would be dead and we could declare victory. But that would be too easy. Yogi Berra said that “In theory there is no difference between theory and practice. In practice there is”. So practically speaking, the reason we are home is to slow down the spread of the novel coronavirus to avoid a public health care crisis.
Behavior has changed. You can tell just on walking down the street. A new etiquette manual is being rewritten as we go. People are keeping their physical distance. People are also making more of an effort with each other than I’d ever seen. Strangers are saying hello to each other. We now all have something in common. We all are in quarantine! And we talk about being stuck at home. I see people helping each other, especially the most vulnerable. I have a lot older neighbors that can’t go out in public and can’t believe the response they get from their neighbors willing to offer help. It’s fascinating how hard times bring people together.
The purpose of this post is to highlight some positive developments, current events, and a way forward.
I believe we will get out of this crisis sooner than later. I believe we will get out of this stronger. We are planting the seeds to combat the next epidemic. The world and the U.S. will never let this happen again. The world will adjust their response for the next crisis. They will treat this like a war. They need to be able to mobilize thousands of people and resources next time a threat is detected. We will be ready for Covid-20.
The Good News
We are flooded everyday with negatives news. It’s raining gold for the media industry. We can’t turn it off and the media is not turning off the tap. Covid-19 is a very sticky business for the media. Covid-19 is not only a lung killer, it goes after our brains. It activates a part of our brain call fear. Fear is more contagious than the virus itself. Fear is a powerful emotion that makes us act irrational. It makes human hoard toilet paper.
I want to shine some light on certain developments that might not see the light of day:
People are united in friendship and solidarity. People are coming together. We are in this together.
Not exactly grounded in hard science at the moment, but based on what we have seen warm weather might slow down the virus. It seems the droplet don’t travel as well in humidity. It will help us catch a break to get ready for the 2nd wave in the fall.
I’m optimistic that we will find a medical solution sooner than expected. The global medical research community might prove surprisingly resourceful. Everybody is focusing on this. From the medical community, companies from every sector, governments, and freelancers are pouring resources and time into solving this.
We were reminded of the importance of washing our hands. The soap goes after the fat shell around the virus and kills it. It’s very effective.
Because of the lack of testing, it was possible that a huge number of people have it now, or have had it, without really knowing it. There’s hidden community spread. The positive is that we are building some herd immunity. The means the virus will eventually slow it spreads because of the lack of targets. A screening at a Dutch hospital reveals surprising prevalence among hospital staff. Some 1,353 hospital staff were tested for the coronavirus. Of those, 86, or 6.4%, were positive. Barely half had a fever, and the majority reported working while they were mildly ill.
An F1 team, Mercedes, with the University of London, is building a new breathing aid. If trials go well for, it may be available in a week’s time.
Abbott has developed a 5-minute coronavirus test. It’s FDA approved under the Emergency Use Authorization. Abbott said in a statement that it plans to begin distributing the test next week and will ramp up manufacturing to 50,000 tests per day.
Bosch developed a test that gives you result in 2.5 hrs. What’s more, it allows a single sample to be tested not just for COVID-19 but also for nine other respiratory diseases, including influenza A and B, simultaneously.
A consortium of manufacturing companies is working to build ventilators.
The U.K. is sending coronavirus antibody tests to homes.
Oil prices are at a 17-year low. But it doesn’t matter because nobody is buying it.
I read their are about 35 companies and institutions racing to create a vaccine.
The first clinical trial for coronavirus vaccine began last week in the U.S. on 45 people.
People do recover. Around the world, many are recovering from the infection. Often this is thanks to the hard work of medical staff and the people who support them.
The environment is taking a break.
Even though we might not feel like it, we are heading in the right direction. Social distancing works. Better testing tools are coming. Everyday we are making progress. It will take time but we will win and come out of this stronger and better.
I made these two videos over the weekend that I shared over social media. Basically the message is if we stay inside for the next little while, we can defeat this virus, or at least slow it down. We can still have a handle on the situation. Staying inside is the best weapon we have right now. If it free up our ICUs, our resources, staff and equipment for the people that needs it the most. We have to get the best chances on our side.
