Category Archives: Charlie Munger

Commentary: Remember Charlie Munger’s Advice Before Loosening Banking Regulations

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“I don’t think you can trust bankers to control themselves. They’re like heroin addicts,” Charlie Munger famously said.

At age 94, Berkshire Hathaway’s vice chairman has seen enough business cycles to know that when things go bad, banks fail.

Yet, now that the Great Recession is far enough in the rearview mirror you get the inevitable push to loosen the proprietary trading regulations and bank debt to equity financial requirements that were put in place to prevent the very excesses that brought on the most devastating financial crisis since the Great Depression of the 1930s.

Among the changes, thanks to bank and financial institution lobbying, U.S. regulators are proposing changes to the “Volker Rule” introduced after the 2007-2009 financial crisis that bans banks from trading on their own account in order to make compliance easier for many firms.

The 2010 Dodd-Frank financial reform law banned banks that held U.S. taxpayer-insured deposits from engaging in proprietary trading.

Former Federal Reserve chairman Paul Volker, whom the rule is named after, supports simplification, as long as the new rules meet the intent of the the current regulations.

“What is critical is that simplification not undermine the core principle at stake — that taxpayer-supported banking groups, of any size, not participate in proprietary trading at odds with the basic public and customers’ interests,” Volcker notes.

The proposed changes are now undergoing a 60 day public comment period.

President Trump has already signed into law changes in regulations impacting small and medium-sized lenders. Among the changes, the bill raised to $250 billion from $50 billion the threshold under which banks are deemed too big to fail, and eliminated the requirement for stress tests for the banks below that threshold as well.

Loosening some regulations may in fact bring some needed relief and improved efficiency for banks, but the fact that a number of democrats have signed on to this effort in addition to republicans says as much about the power of the banking lobby as it does about bipartisanship.

Berkshire Hathaway shareholders have a direct interest in the solvency of some of the largest financial institutions because Berkshire owns sizeable stakes in Wells Fargo, American Express, and Bank of America, not to mention Goldman Sachs.

While loosening of financial regulations may boost share prices and increase dividends in the short term, the question is whether it increases the likelihood of catastrophic financial institution failures in the future.

The Great Depression and the Great Recession are certainly the two most memorable periods of mass bank failures, but investors should keep in mind that there have been many more, including the Panic of 1819, the Panic of 1837, the Panic of 1873, and the Panic of 1907.

And don’t forget the Savings and Loan Crisis of the 1980s and 1990s, which saw 1,043 failures, accounting for roughly one third of all Savings and Loan associations.

Over the years, Charlie Munger has astutely noted that free market objectives are different than letting the fox have unfettered access to the henhouse, and he hasn’t been afraid to say so.

“People really thought that giving a predatory class of people the ability to do whatever they wanted was free-market enterprise, Munger wryly observed at the WESCO annual meeting in 2009. “It wasn’t. It was legalized armed robbery. And it was incredibly stupid.”

As for the push for tight regulations, “Banks will not rein themselves in voluntarily. You need adult supervision,” Munger wisely pointed out.

© 2018 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Commentary: Warren Buffett is Right About Bitcoin

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“Bitcoin is like rat poison squared,” Warren Buffett said during the 2018 Berkshire Hathaway annual meeting. The comment got a positive response from the tens of thousands that packed the CenturyLink Center’s arena.

That Buffett, and Berkshire’s vice-chairman Charlie Munger, are down on cryptocurrencies is no surprise. As the world’s leading value investors, speculative assets are exactly the things they avoid.

While the “rat poison,” comment did not come with a detailed explanation, it easily ties in with a major point that Buffett hammered home at the beginning of the meeting.

After showing the audience the front page of a newspaper from 1942, Buffett talked about the first three shares of stock that he ever bought when he was age 12, which was a company called Cities Service. He showed how his impatience and quickness to denied the far greater amount he would have made if he had been patient and held the shares long term.

Buffett again returned to the 1942 date to make a completely different point.

Buffett detailed what would have happened to an investment of $10,000 in gold on that date, as compared to $10,000 in what would have been an index of the S&P 500, if it had existed at that date. While 300 ounces of gold would have grown to a worth of $400,000 today, the shares of the S&P 500 stocks would have grown to a vastly greater sum of $51 million.

That’s the difference been a nonproductive asset and a productive asset, Buffett explained. Even after all the decades went by, the gold would still be only 300 ounces. It wouldn’t have grown. But the productive assets of the S&P 500 stocks have the capacity to grow because they represent businesses that produce goods and provide services.

“For every dollar you could have made in American business, you’d have less than a penny of gain by buying into a store of value which people tell you to run to every time you get scared by the headlines,” Buffett explained.

It’s all about nonproductive assets versus productive assets.

“While the businesses were reinvesting in more plants and new inventions came along, you would look into your safety deposit box, and you’ve have your 300 ounces of gold,” Buffett mused, “And you would look at it, and you could fondle it, I mean, whatever you wanted to do with it. But it didn’t produce anything. It was never going to produce anything. And what would you have today? You would have 300 ounces of gold just like you had in March of 1942, and it would be worth approximately $400,000.”

In the end, gold versus stocks, over a great length of time, is not even close.

“In other words, for every dollar you could have made in American business, you’d have less than a penny of gain by buying into a store of value which people tell you to run to every time you get scared by the headlines,” Buffett said.

While Buffett’s nonproductive asset versus productive asset lecture was using gold as the example, it could have just as easily been about Bitcoin and other cryptocurrencies.

Here’s where you get my commentary

People that tout Bitcoin and other cryptocurrencies are really believers in the rise of a nonproductive asset that is no different than gold, silver, or the alligator infested swamp land offered during the Florida land speculation of the 1920s. Cryptocurrencies are an asset that is moving up or down daily based on what Benjamin Graham would have called speculation, and what can also be called gambling.

Naysayers will talk about the unique properties of blockchain, supposed anonymity of cryptocurrencies, and other virtues of virtual currencies that show its utility, but to do that is to ignore that these assets are not being bought and used as currency, which after all is a medium of exchange between two parties.

Let’s pretend that a significant number of people were converting their dollars or euros, or other currencies into Bitcoin and then going out and buying houses, or cars, or diamonds with it. The last thing a recipient of a Bitcoin transaction would want to do is sell their house today and find that the value of the medium of exchange had dropped 5%, 10%, or more the day after their real estate transaction.

Let’s look at another key aspect Bitcoin. It’s inflated in value at an astronomical rate. This is what has everyone so excited about it. You can become a cryptocurrency millionaire or billionaire overnight without doing anything.

This extreme bidding upward in the marketplace is not a feature of currencies. It is a feature of speculative fevers reminiscent of the Dutch Tulip Mania of the 1500s.

While historically currencies have periodically plunged in value due to hyper-inflation. We need just look at Weimar Republic Germany, 1980s Argentina, or Venezuela today to see that phenomenon, the same process does not happen in reverse.

There’s a simple explanation for that. Plunging values for currencies reflect a lack of faith in a currency as a method of exchange. The more extreme that pessimism, the more currency it takes to overcome it.

But, currencies of the more sound variety, which in essence have more faith placed in them by creditors, do not get bouts of extreme faith that shoot them up astronomically. They increase or decrease in a much narrower range.

Accepting Bitcoin as a currency is no different than asking to get paid in casino chips or lottery tickets. You are hoping for a second transaction to determine its value. At the casino it’s spinning the roulette wheel, and with Cryptocurrencies it’s betting in the marketplace someone will pay you more for your Bitcoins than the valuation you got them at.

All speculative bubbles are full of enablers. They are so-called experts that tell you why this time is different, hucksters telling the masses not to be left out, and true believers that have adopted the asset as a religion.

It’s best to remember that speculative fevers are not just a remnant of the distant past. In the late-1990s, a plush toy called a Beenie Baby became the focal point of a speculative fever. Suddenly, an asset that’s main utility was as an occupant of a child’s toy box, was being hoarded by everyone and their brother. Prices soared, certain $5 Beenie Babies were going for $5,000, and one obsessed man planned to pay his children’s college education based on the anticipated rise in value of his plush portfolio. The strategy did not work out well.

As for Bitcoin, while players such as Goldman Sachs are actively looking to make money off of people trading cryptocurrencies, Warren Buffet rightly expressed his skepticism that such a move represented any kind of endorsement of the soundness of the strategy.

“I would be very surprised if the top partners of Goldman are selling their Goldman stock and putting it into Bitcoin,” Buffett said on CNBC’s Squawk Box.

It’s a familiar tale that always has a sad ending for all but a few. Just ask the man who lost $100,000 hoarding Beenie Babies.

Buffett’s rat poison comment is true. However, rat poison kills rats. Speculative fevers kill the hopes, dreams, and lives of investors.

© 2018 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Commentary: Buffett Unlikely to Abandon BYD

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With Chinese new energy company BYD seeing a major slump in its share price, its important to remember that Warren Buffett’s belief in the company’s founder and CEO Wang Chuanfu makes it more likely that Buffett will buy more shares, or at least maintain Berkshire’s current position than abandon the investment.

BYD’s share price peaked at 83.70HKD in October 2017 and as of May 2 has slumped to 54.00HKD.

Berkshire’s still way ahead, as its cost basis per share was 8.00 HKD. Berkshire took its position in 2008 when it purchased 225 million shares at roughly 8.00KHD.

Whose idea was it to purchase a stake in the company? It wasn’t Buffett’s, but he has since become a big fan.

“Charlie (Munger) called me one day and says, ‘We’ve got to buy BYD. This guy that runs it is better than Thomas Edison,’ Warren Buffett explained while appearing on CNBC’s Squawk Box on Feb 26, 2018. “And I said, ‘That isn’t good enough.’ And then he called a little later and said, ‘He’s a combination of Edison and Bill Gates.’ And I said, ‘Well, you’re warming up but it still isn’t good enough.’ Anyway, Charlie wanted to do it. Now, it’s worked out so well that I’m actually starting to remember that it was my idea. As it’s coming back to me. I think I persuaded Charlie. But unfortunately I’m on the record that it’s his deal. But BYD, Charlie’s in love with the company, and it’s done very well. And the fellow that runs it, you know who’s autos and batteries, but he’s got big, big ideas and he’s very good at executing. So, but I leave it to Charlie.”

Stock prices go up and down, but Buffett has always been the most patient of investors.

With BYD having sold 13,000 of its plug-in electric cars in March alone, and aiming to sell between 15,000 and 20,000 cars per month when its new model year debuts, it continues to be the leader in EV cars.

The sales marked an increase of 116% year-over-year and were 31% of the total BYD car sales for the month.

BYD was number one worldwide in plug-in electric vehicle sales in 2017, its third consecutive year.

Additionally, its dominance in the Pure electric bus market continues to grow. The company sold over 14,000 pure electric buses globally in 2017.

It’s unlikely that Buffett’s or Munger’s respect for the company will change due to short-term price fluctuations and investors should be reminded that BYD’s stock price had a similar plunge in 2014 that saw no selling by Berkshire.

I’m not calling this one of Buffett’s forever stocks, but it would seem to fit one of his classic buy-and-hold investments, and it is unlikely to leave Berkshire’s portfolio anytime soon.

For More on BYD, read the Special Report: BYD, Berkshire’s Tesla.

© 2018 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Warren Buffett on a stock buy so good, “that I’m actually starting to remember that it was my idea.”

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Berkshire Hathaway’s investment in Chinese new energy company BYD has worked out so well that it’s now among the company’s top fifteen stock holdings.

In 2008, Berkshire Hathaway bet on BYD’s potential, purchasing 225 million shares. It’s an investment that has grown almost ten-fold in just a decade.

Berkshire’s original investment of $230 million is now worth roughly $1.96 billion.

Whose idea was it to purchase a stake in the company?

“Charlie (Munger) called me one day and says, ‘We’ve got to buy BYD. This guy that runs it is better than Thomas Edison,’ Warren Buffett explained while appearing on CNBC’s Squawk Box. “And I said, ‘That isn’t good enough.’ And then he called a little later and said, ‘He’s a combination of Edison and Bill Gates.’ And I said, ‘Well, you’re warming up but it still isn’t good enough.’ Anyway, Charlie wanted to do it. Now, it’s worked out so well that I’m actually starting to remember that it was my idea. As it’s coming back to me. I think I persuaded Charlie. But unfortunately I’m on the record that it’s his deal. But BYD, Charlie’s in love with the company, and it’s done very well. And the fellow that runs it, you know who’s autos and batteries, but he’s got big, big ideas and he’s very good at executing. So, but I leave it to Charlie.”

For More on BYD, read the Special Report: BYD, Berkshire’s Tesla.

© 2018 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Major Changes Coming With Abel’s and Jain’s New Roles as Vice Chairmen

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With Gregory Abel elevated to Berkshire Hathaway’s Vice Chairman – Non-Insurance Business Operations, and Ajit Jain appointed Vice Chairman – Insurance Operations, Warren Buffett has made clear that major changes are in store in the command structure of Berkshire’s operations.

While Buffett has no interest in stepping down as chairman, he is shifting the responsibility for both the bolt-on acquisitions and the setting of salaries and compensation for Berkshire’s managers to his new vice chairmen.

“They’ll decide the compensation of the people underneath,” Buffett explained in a January 10 interview on CNBC. “I mean, certain people we have compensation arrangements with that we will have in force for their lifetime because we made up at the time of acquisition, but aside from the ones that are fixed, those decisions will be theirs. And smaller bolt on acquisitions will probably be theirs if there’s a large bolt on acquisition, then Charlie and I will get involved.”

Berkshire shareholders apparently should have no fear that Buffett’s famed “elephant gun,” the term he uses for hunting for giant-sized acquisitions, will be silenced any time soon.

2018 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Only One CEO in Berkshire’s Future Says Warren Buffett

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With both Greg Abel and Ajit Jain recently promoted to the positions of vice chairman, the obvious question is will they one day be co-CEOs of Berkshire.

“No” say’s Warren Buffett, who in a January 10 interview on CNBC made it clear that there will only be one CEO.

“When I’m not CEO, there will be another CEO, Buffett explained. “There will be a CEO. And how that CEO will organize things will be up to him in this case. And he will figure out the best way to do it. And it won’t change very much. It will change a little, but it won’t change very much.”

So, will the CEO be Abel or Jain? From Buffett’s remarks it seems clear it will be Abel.

“There’s no horse race at all in these two fellows,” Buffett noted in answer to a question of whether the two are jockeying for position. “They know each other well. They like each other well. They both have their areas of specialty. I mean, Greg would not want to be running insurance and Ajit would not be running the other operations.They are extremely good at what they do. Those are two pretty different businesses. And they’re roughly equal businesses. There are more people on one side, but the insurance business generates over $100 billion of float in addition to having well over $100 billion invested in it in terms of net worth. So, there’s more or less parity of earning power and importance.”

Since according to Buffett “Ajit would not be running the other operations,” and Buffett has expanded Abel’s purview to all of Berkshire’s non-insurance businesses (a new CEO has been appointed to head Berkshire Hathaway Energy), everything points to Abel, 55, being the heir apparent for CEO.

As for other potential CEOs, Mathew Rose, executive chairman of BNSF Railway, no longer seems to be a candidate to take over the helm of Berkshire. Nor does Mark Donegan, CEO of Precision Castparts. The two executives lead two of Berkshire’s largest companies.

Buffett also revealed that Charlie Munger, who already had the title of vice chairman, would not be getting a new title, and was completely on board with sharing the title.

“It was his idea, actually, in terms of the title,” Buffett said. “I got about halfway through the first sentence, which is more than i usually get through with Charlie before he comes up with a better idea, and he just says, let’s just have three vice chairmen.”

2018 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Greg Abel and Ajit Jain Join Berkshire Board

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In a move that clearly foreshadows the next generation of Berkshire Hathaway leadership, Berkshire’s Board of Directors voted to increase the number of directors comprising the entire Board of Directors from twelve to fourteen. After making that move, Gregory E. Abel and Ajit Jain were then elected to serve as Directors to fill the resulting vacancies on the Board of Directors.

In connection with their election to the Board of Directors, Warren Buffett, Berkshire Hathaway’s Chairman and CEO, appointed Mr. Abel to be Berkshire Hathaway’s Vice Chairman – Non-Insurance Business Operations and Mr. Jain to be its Vice Chairman – Insurance Operations.

Mr. Abel joined Berkshire Hathaway Energy Company in 1992 and currently serves as its Chairman and CEO. Mr. Jain joined the Berkshire Hathaway Insurance Group in 1986 and currently serves as Executive Vice President of National Indemnity Company with overall responsibility for leading Berkshire’s reinsurance operations.

In March 2016, Buffett appointed Abel to the Board of Kraft Heinz, a move that showed his confidence in the 55-year-old manager.

For the time being, Buffett and Munger will continue in their existing positions, including being responsible for significant capital allocation decisions and investment activities.

© 2018 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Buffett Reveals Terms of Failed Unilever Bid

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Berkshire Hathaway and 3G Capital Partners’ recent unsolicited offer for Unilever may have flopped, but it hasn’t soured Warren Buffett on working with 3G on more acquisitions.

The two entities have worked together on the takeover of Kraft to form Kraft Heinz, and Berkshire provided financing for 3G’s merger of Burger King and Tim Hortons that became Restaurant Brands International. The merger made Berkshire a minority owner of the combined company.

At the annual shareholder’s meeting, Buffett detailed that both Berkshire and 3G were prepared to each put $15 billion into the Unilever transaction.

Some in the press have questioned whether 3G’s extreme cost-cutting made the deal unpalatable for Unilever.

While a shareholder questioned whether 3G’s emphasis on layoffs as part of its cost-cutting strategy was in line with Berkshire’s corporate culture, both Buffett and Charlie Munger noted that improvements in productivity have often lead to layoffs.

Munger noted that he doesn’t long for the days of elevator operators, and “We don’t want to go back to the days of subsistence farming.”

While Munger didn’t see a particular “moral fault” in 3G’s strategy, Buffett was clearly sensitive to the impact on displaced workers.

“If you look at any industry, they are trying to get more productive,” Buffett said. Still he noted that society’s improved living standard as a whole can be of little comfort to an individual that has lost their job, and he wishes there could be another way.

Buffett did term 3G’s severance packages at Kraft Heinz “more than fair.”

© 2017 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Buffett Warm, Munger Cool on Initiating a Stock Buyback

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At the 2016 Berkshire Hathaway Annual Meeting in April, Warren Buffett expressed enthusiasm for a potential stock buyback of Berkshire stock if the share price fell below 120% of book value. He noted that the company would repurchase “a lot” of stock, especially if the amount of cash the company generates “burns a hole in your pocket” and grows to levels over $100-$120 million with no good candidates for acquisition.

In the past, Buffett has been skeptical of shareholder demands for stock buybacks, noting that it’s foolish if the price is too high. All the way back in 2000, Buffett addressed the logic of stock buybacks, noting:

“There is only one combination of facts that makes it advisable for a company to repurchase its shares: First, the company has available funds — cash plus sensible borrowing capacity — beyond the near-term needs of the business and, second, finds its stock selling in the market below its intrinsic value, conservatively calculated.”

However, also at the 2016 Annual Meeting, vice chairman of Berkshire Hathaway Charlie Munger still seemed less than convinced.

“These buyback plans got a life of their own, Munger noted. “It’s gotten quite common to buy back stock at very high prices that really don’t do the shareholders any good at all. I don’t know why people exactly are doing it and I think it gets to be fashionable.

We’re always behaving a lot like what some might call the Episcopal Prayer. We prayerfully thank the Lord that we’re not like these other religions who are inferior and I’m afraid there’s probably too much of that in Berkshire but we can’t help it.”

© 2016 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Berkshire Gives Mixed Signals on AmEx Stake

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Warren Buffett has long regarded Berkshire Hathaway’s stake in American Express like he views his stake in Coca Cola. It’s one of his “forever stocks.”

With American Express having struggled in recent years, including losing its co-branded relationship with Costco, the question is whether forever is really forever, or just a long time.

Costco’s jump to Visa is expected to take a big bite out of AmEx revenues, as it represented a whopping 8% of total billed credit card charges.

“I personally feel OK about American Express, and I’m happy to own it,” Buffett, said while taking questions at the meeting Berkshire Hathaway annual meeting. He did note AmEx’s problems, stating that it “has been under attack for decades — more intensively lately — and it will continue to be under attack. It’s too big a business, and too interesting a business.”

Buffett acknowledges that banking and finance draw a lot of attention and competitors, and there is always someone trying to knock you off your pedestal.

In that regard, Charlie Munger was less sanguine about AmEx.

“Anybody in payments who’s an established long-time player with an old method has more danger than used to exist,” he said.

Buffett is loath to sell Berkshire’s stake in AmEx and Coca Cola, because the cost basis is very low, and the profits from the sales would incur billions in taxes. The positions are both so large that they would also be hard to unload without affecting share prices.

Buffett also noted that Berkshire’s fund managers Ted Weschler and Todd Combs may not be as wedded to holdings in those companies as he has been when the day comes that they take over the entire $100+ billion portfolio. Each currently manages a $9 billion portfolio.

© 2016 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.