Good Reading -- November 2010
Facts and Figures
Former Countrywide CEO Angelo Mozillo knowingly misrepresented the financial condition of his company and the loans it was making, and prosecutors alleged that he added $141.7 million (before taxes) to his personal fortune through corporate misconduct. For this crime -- although he formally admits no wrongdoing -- Mozillo agreed to personally pay a $22.5 million fine...16% of the alleged ill-gotten gains. Read again: 16 per cent. In addition, Mozillo agreed to turn over another $45 million to former Countrywide shareholders, but that will be paid by Countrywide's insurers and by Bank of America (which bought Countrywide and saved it from certain bankruptcy in 2008). Oh, and all of his legal fees were paid by Bank of America, too. But the SEC's legal team said the settlement amounted to a "hard-won legal victory." I'm no lawyer...but huh? On what planet is any of this a victory? This was the trade of the century for Mozillo...
Just over two years ago, Warren Buffett cut a sweet deal with Goldman Sachs: Buffett got $5B in preferred equity yielding 10% and another $5B in warrants struck at $115 (the stock was then at or above that level, and today trades >$160). Today (Nov. 2010), Goldman is trying to redeem Buffett's investment and concurrently selling $250 million in50-year unsecured bonds at 6 1/8%...and the demand was so strong that Goldman increased the issue more than 5x to $1.3B.
Quoted
"The dumbest stock I ever bought was...Berkshire Hathaway." -- Warren Buffett (see below or here for complete transcript and video)
“Every single great idea that has marked the 21st century, the 20th century and the 19th century has required government vision and government incentive.” -- United States Vice President Joe Biden
Attached
"Night of the Living Fed" -- scathing and generally thoughtful criticism from Jeremy Grantham.
"The Current Cycle and the Long Term" -- presentation by Howard Marks.
"Legal Matters with Charles T. Munger" -- interview from March 2009. Great as ever.
"SimoleonSense Interviews Warren Buffett's Biographer, Alice Schroeder" -- thanks to Miguel Barbosa for fantastic work and permission to pass it along.
"The Number One Variable for Eurozone Sovereign Risk" -- my contribution for all the macro traders.
"Charles Brandes on Lessons Learned from Ben Graham"
"Steven Crist -- Legg Mason Thought Leader" -- a really interesting presentation and interview about the parallels between horse race handicapper and investing.
Charles Henry, born 11.9.10 at 6:09 p.m. Charlie was 22 inches long and weighed 10 lbs, 2 oz. Mom is a superhero.
Big brother was unsure at first, but he's starting to like his new role.
Links
"Common Sense Investing -- The Papers of Benjamin Graham" -- a great compilation from Emmanuel Franjul's excellent blog Value Huntr. "It took me a year to do this, but after many trips to the NYC research library I’ve finally compiled over 40 papers originally written by Benjamin Graham into an easy-to-read book format. These papers are not part of either Intelligent Investor nor Security Analysis. The papers range from 1930 to 1974, basically Ben Graham’s entire professional life."
Interview with Matt Taibi -- the Rolling Stone writer behind the famous Goldman Sachs "vampire squid" article of a few years ago sounds off on a variety of topics while promoting his new book, Griftopia. Not sure I will be reading that one, but on a variety of topics he certainly has an, um, interesting take...
"Baupost to Return Cash" -- a sign of the times that living legend Seth Klarman is returning capital to investors so soon after raising it to take advantage of market conditions just a short two-ish years ago.
Copied Below
"CNBC Transcript: Warren Buffett's $200B Berkshire Blunder" -- a longer version of the great story (which he's told before but never in quite this detail, as far as I know) about how he got into Berkshire Hathaway and what it ultimately "cost" him.
CNBC Transcript: Warren Buffett's $200B Berkshire Blunder and the Valuable Lesson He Learned
| 18 Oct 2010 | 02:54 PM ET
Warren Buffett tells CNBC that his 1964 decision to buy Berkshire Hathaway, then a fading Massachusetts textile company, was a $200 billion blunder.
He talked about that mistake, and the lesson he learned from it, in a taped interview with CNBC's Becky Quick for a series of TV segments this week on Squawk Box and Power Lunch in which some of the world's best-known investors discuss the worst trade they've made.
An excerpt of Becky's conversation with Buffett aired this morning on Squawk.
Here is the complete interview, in video and transcript form, including portions that did not appear on television.
BECKY: All right. Warren, thank you very much for joining us today.
BUFFETT: My pleasure.
BECKY: What we're trying to get to the bottom of is what was the worst trade you ever made and what'd you learn from it?
BUFFETT: The dumbest thing I ever did? (LAUGHTER)
BECKY: Yeah, the dumbest thing you ever did.
BUFFETT: The— the dumbest stock I ever bought— was— drum roll here— Berkshire Hathaway. And— that may require a bit of explanation. It was early in— 1962, and I was running a small partnership, about seven million. They’d call it a hedge fund now.
And here was this cheap stock, cheap by working capital standards or so. But it was a stock in a— in a textile company that had been going downhill for years. So it was a huge company originally, and they kept closing one mill after another. And every time they would close a mill, they would— take the proceeds and they would buy in their stock. And I figured they were gonna close, they only had a few mills left, but that they would close another one. I'd buy the stock. I'd tender it to them and make a small profit.
So I started buying the stock. And in 1964, we had quite a bit of stock. And I went back and visited the management, Mr. (Seabury) Stanton. And he looked at me and he said, ‘Mr. Buffett. We've just sold some mills. We got some excess money. We're gonna have a tender offer. And at what price will you tender your stock?’
And I said, ‘11.50.’ And he said, ‘Do you promise me that you'll tender at 11.50?’ And I said, ‘Mr. Stanton, you have my word that if you do it here in the near future, that I will sell my stock to— at 11.50.’ I went back to Omaha. And a few weeks later, I opened the mail—
BECKY: Oh, you have this?
BUFFETT: And here it is: a tender offer from Berkshire Hathaway— that's from 1964. And if you look carefully, you'll see the price is—
BECKY: 11 and—
BUFFETT: —11 and three-eighths. He chiseled me for an eighth. And if that letter had come through with 11 and a half, I would have tendered my stock. But this made me mad. So I went out and started buying the stock, and I bought control of the company, and fired Mr. Stanton. (LAUGHTER) And we went on from there.
Now, that sounds like a great little morality table— tale at this point. But the truth is I had now committed a major amount of money to a terrible business. And Berkshire Hathaway became the base for everything pretty much that I've done since. So in 1967, when a good insurance company came along, I bought it for Berkshire Hathaway. I really should— should have bought it for a new entity.
Because Berkshire Hathaway was carrying this anchor, all these textile assets. So initially, it was all textile assets that weren't any good. And then, gradually, we built more things on to it. But always, we were carrying this anchor. And for 20 years, I fought the textile business before I gave up. As instead of putting that money into the textile business originally, we just started out with the insurance company, Berkshire would be worth twice as much as it is now. So—
BECKY: Twice as much?
BUFFETT: Yeah. This is $200 billion. You can— you can figure that— comes about. Because the genius here thought he could run a textile business. (LAUGHTER)
BECKY: Why $200 billion?
BUFFETT: Well, because if you look at taking that same money that I put into the textile business and just putting it into the insurance business, and starting from there, we would have had a company that— because all of this money was a drag. I mean, we had to— a net worth of $20 million. And Berkshire Hathaway was earning nothing, year after year after year after year. And— so there you have it, the story of— a $200 billion— incidentally, if you come back in ten years, I may have one that's even worse. (LAUGHTER)
BECKY: If you— if you had to look at a moral for that story, though, is it don't cut off your nose to spite your face?
BUFFETT: I would say— I would say that no matter whether you cut off your nose to spite your face or whatever, if you get in a lousy business, get out of it. I mean, it— it was— it was a terrible mistake, just because I drifted into it, in a sense. And— and I've always said that if you want to be known as a good manager, buy a good business. (LAUGHTER) That's the way to do it. And everyone will think you're smart.
And when I'm in a good business like See’s Candies, people think, ‘Boy that guy's smart.’ And when I'm in a dumb business like textiles and don't know what I'm doing, you know, or shoes later on, or whatever it may be, you know, all that other — if you think you're a managerial genius, just try yourself in a bad business.
BECKY: Is that the lesson that you learned from it?
BUFFETT: Sure.
BECKY: But— and that is something that you've actually put into practice?
BUFFETT: I've actually put a line in my annual report many, many, many decades late— ago, after doing this. And I said, ‘When a manager with a reputation for bril— brillia— brilliance, meets up with a business with a reputation for bad economics, it's the reputation of the business that remains intact.’
BECKY: (LAUGHTER) So that is a lesson you carried with you? And yet, it's one that is— you're reminded of every single day. It's Berkshire Hathaway.
BUFFETT: Yeah. And every now and then, I get tempted. Because I started out with Ben Graham in 1950 or so. And his whole idea was buying things that were cheap. You don't want to buy things that are cheap. You want to buy things that are good. It's much better to buy something that's good at a fair price, than something that is cheap at a bargain price. And I wasn't— I didn't start out that way. I— I was taught a different system. But— but if I didn't learn from Berkshire Hathaway, I'll never learn. (LAUGHTER)
BECKY: How long did it take you to figure out this lesson? You said it was—
BUFFETT: Well, it took me 20 years to give up on the textile business. I— I had a wonderful guy running it after— after Seabury Stanton— a fellow named Ken Chase ran it. And he was terrific. Honest and able, hardworking. And he couldn't make it go. But we just kept working at it, trying— we bought another textile company called Waumbec Mills in Manchester, New Hampshire. Another mistake. If— if— if you're gonna be brilliant with a lousy business, why not be brilliant with a good business?
BECKY: But really, how— it took 20 years for you to finally give up on it. When did you kind of figure, oh, this is not working? Was it— did it— was it really 20 years? Or did you kind of know—
BUFFETT: Well, it was— no. I figured it out fairly soon. But I just kept thinking I'm not gonna give up on this. And incidentally, we had a work force that was terrific. I mean, it— it was— we weren't done in by anything except competitive dynamics. And I— we'd buy new equipment, or we would move— we would add this mill in— in— in— in— Manchester, and we'd say, ‘Look at all those synergies,’ and all that. Nothing works.
I— In fact, I used to have a desk in my drawer. And they would keep sending me these things that if we buy this machine, we'll save 14 people. If we buy this machine, we'll save 12 people. I kept putting it in my drawer. With all those machines, we'd save more people than we had at the start of the— supposedly, we were operating with zero people. But it doesn't work that way.
BECKY: Is there any business that you didn't get into because you thought, wait a second, I've been down this road before? Where you were tempted and you kind of pulled back?
BUFFETT: I get calls on them every day. You know, I mean, I get calls— not every day. I mean, it's an exaggeration. But I get calls frequently on businesses that are just too tough. And— and people say, you know, why don't you tackle it? You know, got all these resources now and good managers.
But the interesting thing about business, it's not like the Olympics. In the Olympics, you know, if you do some dive off the— on a high board and have four or five twists— (LAUGHTER) on the way down, and you go in the water a little bad, there's a degree of difficulty factor. So you'll get more points than some guy that just does a little headfirst dive in perfectly.
So degree of difficulty counts in the Olympics. It doesn't count in business. Now, you don't get any extra points for the fact that something's very hard to do. So you might as well just step over one-foot bars instead of trying to jump over seven-foot bars.
BECKY: You know, people will say, well, wait a second. You're in some businesses that some people have written off for dead: the newspaper business. How is that different?
BUFFETT: You're right. (LAUGHTER) But— but we bought that in 1977. And— and we've done very well over the years. At— at first, we didn't do so well. But then we did very well. But I— the newspaper business of 2010 is not the newspaper business of 1977. I mean, it is diametrically different.
And it is true, and we put it in the annual report, that we run Berkshire in a way that they don't teach in business schools. Because in business schools, they say sell off your so-so businesses and keep buying new businesses. I call that gin rummy management.
And when I— if I had 50 kids, you know, and one of them isn't doing quite as well as the others, I'm not gonna put him up for adoption. Unless they are going to lose us money permanently, or if they have major labor difficulties, we keep the businesses that aren't as good as the others. So if I'm gonna follow that philosophy, I'd better be very careful about what I buy, right?
BECKY: Exactly. What about your business partner, Charlie Munger? What would he say your biggest mistake is?
BUFFETT: Well, he would probably repeat this. And I would say I've learned a lot about what I just got through talking about— I've learned a lot from Charlie. Charlie told me this from the first moment I met him in 1959. He said— he said exactly— I could have— I could have saved myself a lot of trouble if I'd just listened to him. But what did Charlie know? (LAUGHTER)
BECKY: Okay. Warren, thank you very much. We really appreciate your time.
BUFFETT: Thanks. Thanks for having me.