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Taking Stock (so to speak)

Saturday, July 31, 2010 - 22:40

With reservations, I bring you the inevitable blog post about the famous WSJ story on Li Lu. Let me caveat this by saying that even good reporters like Susan Pulliam can't cover all the nuances in a short article, especially because the people involved probably aren't telling her everything. There may be important things left out. With that said, here's the unvarnished gist of it:

> Li Lu came from a disadvantaged background in China. He majored in Munger's second-favorite subject, physics, in college. He went to Columbia and attended a lecture by Warren Buffett. He became a hedge fund manager and started a VC fund investing in technology. He befriended Janie Olson, who in her own right is extremely influential in the Buffett inner circle, in addition to being married to Ron. He and Munger hit it off personally.

> Li Lu made one ten-bagger investment in BYD. Apart from BYD, Li Lu's investing batting average is unexceptional, as the article points out. However, because Li Lu concentrated his bet so heavily on BYD, it skewed the portfolio return very high.

>  So far, the ten-bagger has made Munger, Buffett, and Berkshire a lot of money, as ten-baggers tend to do. Sounding as though he has been doing venture capital all his life, Munger describes BYD's product, a lithium battery, as a "game-changer." It may indeed turn into a moonshot, like the Chinese version of Microsoft or Google. Or not. Regardless, Munger announced that, in his mind, it's a foregone conclusion that Li Lu will be managing Berkshire's money. Is it true? Who knows. Very possibly, if Charlie says so.

> Munger, Buffett, et al can afford to be sanguine no matter what happens. Within the overall context of Munger's wealth/Berkshire's balance sheet, they're not exactly betting the ranch here.  It's rather like writing cat reinsurance, or technology venture capital -- an educated bet on odds.  Munger and Buffett and Berkshire can afford to take a spin around certain blocks that would be too dangerous for us. True, this kind of investing is very out of pattern for them. But then consistency is the hobgoblin of little minds.

> The more important question is how to evaluate a manager who has concentrated a portfolio this way. Even aggressive 3F/angel/VC technology investors don't concentrate like this. How do you judge the results? Beats the heck out of me, although I would be reluctant to describe Li Lu as conservative or risk-averse.

> The whole thing is goofy. On the other hand, I believe when distinguished people reach a certain time in their careers, some kind of line should be drawn at which point their prior accomplishments are permanently put in a glass case for all to admire. Everything thereafter gets a free lifetime pass to be goofy without any reflection on the works of art already in the glass case.

> Nearly all of Buffett's and Munger's careers belong in the glass case, so if they do goofy things now, it should not undo what went before.

> I sincerely hope to be proved wrong, and that more evidence emerges that shows Li Lu is the second coming of Warren Buffett.

 

Morgan Stanley: Stock Is Too Cheap to Sell

Monday, July 26, 2010 - 07:53

In my latest Bloomberg column, I reflect, as a former managing director, on Morgan Stanley's strategy and competitive position.

(UPDATE: A PR person from Morgan Stanley called Bloomberg and questioned whether they had a policy that would prohibit me from commenting on a former employer. The answer, of course is no, and the relationship was disclosed. I also turned down a package from Morgan Stanley last year that included a considerable amount of money, health care benefits, and some other things, rather than sign a confidentiality agreement that would have prohibited me from ever writing anything about the firm -- anything -- without their permission and that would have allowed them to sue me if I said or wrote anything they considered criticism of the firm, by their definition, which definition was not spelled out in the agreement.

There are valid reasons why corporations want these agreements, and why people at times sign them. I really don't have any quarrel with Morgan Stanley wanting its ex-employees to sign NDAs. I respect people who refuse to sign them but don't condemn those who do. As  a journalist who might want to comment on Morgan Stanley in a meaningful way at some future date, I could not sign it myself.)

Am anticipating several perfectly reasonable questions/comments about this column:

> How can you own the stock of an investment bank? It's a black box.

> Even if it wasn't, how can you value an investment bank? It's too market dependent.

> Even if these things were not true, how can you invest in an investment bank? It's a terrible business, however defined (bad business model, or evil business).

And the answers are...Yes, the model is a black box. Who knows what the book value really is, and it shifts with the market all the time, so using book value as a basis for valuation is questionable. Buffett, notably, has limited his risk by owning a preferred (although, not surprisingly, he wants the upside in the form of the warrants). In short, he's betting Goldman Sachs will be a survivor, and can at least pay its tithe to him and redeem the principle someday. The rest is gravy. Why own the common?

One reason is that I don't get to make OTC deals like him. Another is that I inherited the Morgan Stanley.

It's definitely a questionable investment. Free cash flow has been an elusive concept at the banks. Even when they do well, the employees get paid and the shareholders get the leavings. Morgan Stanley has made a lot of dumb moves, such as selling what was arguably its best business (MSCI). So yes, I am going to dump the Morgan Stanley eventually; this just doesn't seem like a particularly auspicious time. It and Goldman have the playing field essentially to themselves, and I would like to see what they can do with it. In terms of downside, despite financial services reform, I still believe these two banks are too big to fail -- they would be sold instead. (Morgan Stanley employees have had a case of who-will-buy-us-itis for years.) Because of the deal it struck during the financial crisis, Morgan Stanley now has a big brother, Mitsubishi, so that answers the who-will-buy-us. The brand is worth something, and the retail network gives it a valuation floor of some amount -- which Bear and Lehman did not have.

Regarding Goldman, the stock is cheap for a host of reasons, many deserved. Pragmatically, the hysteria over the fraud charges was overdone, and this got reflected in the stock price. This quarter showed every sign of being a "kitchen sink," mea-culpa-to-the-proletariat situation. Goldman is the cockroach of investment banking; almost impossible to kill. Its employees aren't going down the elevator at night to jump to any other firm, and they never will. Goldman has an incredible culture, for better or worse.

The economy is in terrible shape, which worries me about the market. Along with that, our economy is rigged right now in a certain way. The financial services businesses get to scrape off an outsized portion of every dollar of GDP for no real good reason except that they are too powerful for anyone to stop it. You and I don't get to do that, unless we invest in the companies that are are doing it. Short of being a hedge fund manager and charging 2-and-20, Goldman might be the best way. It has enormous competitive advantages. You don't have to like them to invest in them. No matter what the market does, they're going to find some way to profit from it. I think that's been pretty well proven by now. With that said, I don't view the Goldman as a long-term holding either. If the valuation recovers there is no reason to hang around; there are better and safer ways to invest (asset managers anyone?).

Cirque du Berk 2012

Tuesday, July 20, 2010 - 09:29

Being a helpful sort, I put together the complete agenda for CIRQUE DU BERK 2012 – LAS VEGAS EDITION, which follows. Just some of the possibilities. Berkshire will have to spend a little money to do all this, but think of the payback.

Thursday

Armored trucks from Borsheims arrive at Sands Expo Center, located in between Wynn and Venetian.

R.C. Willey trucks in its furniture from the ‘burbs and sets up showroom next to 30,000 square foot Nebraska Furniture Mart exhibit, where technicians are running cables that will allow customers to order anything they want at the shareholder discount, even if not on display.

For the first time, Jordan’s will exhibit at the meeting and with a couple of bucks from Berkshire to help with the expenses, Jordan’s also will …. wait for it… bring along the Trapeze School and some Liquid Fireworks.

Shareholders begin arriving. Steve Wynn gives everyone who stays at Wynn and Encore a special rate plus a hundred bucks worth of house chips. No three day minimum  … everybody will stay the whole three days, no coercion needed. The Venetian also is offering a special rate. Anyone who doesn’t want to stay at higher-end hotels will find plenty of choices, including, right across the street, Hilton Grande Resorts, where rooms will be, essentially, free to anyone willing to listen to a timeshare presentation. 

Friday

9:00 a.m. – 6:00 p.m. CNBC coverage of the weekend begins as Sands Expo Center opens for a day of shopping. 2012 Cirque du Berk playing card meeting credential required. Optional, but the cannier exhibitors offer open bar. Dozens of Vegas showgirls in feathers and sequins will be wearing Borsheims merchandise throughout the weekend, demonstrating electronics at the furniture stores, touring customers through the Clayton model home, modeling cowboy boots, having their pictures taking with shareholders, and helping Fruit of the Loom customers choose their merchandise. (Steve Wynn arranged a cattle call audition for Buffett a month before the meeting, resulting in a photo op with hundreds of women.) 

12:00 p.m. Jimmy Buffett and the Coral Reefers perform at the Sands Expo Center.

10:00 a.m. – 4:00 p.m. GEICO gecko accompanies shareholders on gondola rides at the Venetian. 2012 Cirque du Berk playing card meeting credential required. At 2:00 p.m. Buffett rides with Gecko, followed by cameras.

3:30 p.m. Cast of Jersey Boys performs at the Sands Expo Center.

7:00 p.m. Buffett makes brief guest appearance as part of Blue Man Group ensemble in the Venetian Theater. Plays drums, sprays orange glop at shareholders.

9:00 p.m. MidAmerican Energy light show at Bellagio.

Saturday

No need to get up at 4 a.m. after a night in the casinos … for the first time the meeting is being held outdoors at the LAS VEGAS MOTOR SPEEDWAY. Shuttle buses run for $5 each way for those who didn’t rent cars.

9:00 a.m. Buffett and Munger walk onto the stage. In lieu of the movie, which is running in special theaters back at the Sands Expo Center as well as on Wynn, Encore and other hotel channels in hotel rooms throughout the weekend, casino chips rain down on shareholders from hot air balloon that swoops over the crowd. The crowd goes wild. Buffett announces that these chips are good only at the Wynn-sponsored slots in the Sands Expo Center next to the Borsheims booth beginning at 3:30 p.m. and running through Sunday evening. Munger observes from microphone that Berkshire wasted $50,000 to do this. Buffett responds that Borsheims’ sales had better go up by at least that much.

This year, the meeting is again limited to “serious” questions only. Buffett has sold all the Moody’s, Goldman Sachs redeemed its preferred, the fate of NetJets is at least well-understood, and nothing else awful has happened. The meeting is both interesting and tranquil.

12:30 p.m.  lunch break. Jamie Lee Curtis and Susan Lucci dressed in showgirl outfits parachute into Speedway a la Nick Cage in “Honeymoon in Vegas,” or like the flying angels at Aureole, wired and lowered from balloons. Or something like this, involving famous women, lightly dressed.  (A necessary replacement for their appearances in the movie.)

1:15 p.m. Buffett and Munger return to the stage. Buffett announces that $1 Cirque du Berk casino chips are being auctioned on eBay for five bucks, and to cut it out.

3:30 p.m. The world’s fastest shareholder meeting takes place, setting a record. The proxy contained no proposals this year, but did include a coupon worth $50 worth of chips at Venetian or Wynn.

3:35 p.m. White limo carries Buffett, in Elvis costume, to New York, New York, where, followed by cameras, he plays ukulele strolling through the faux city streets, winding up in the food court for a Cherry Coke-fest (brought in for the occasion).

6:30 p.m. Buffett makes special appearance at one of the many Vegas magic shows (David Copperfield? Lance Burton? Penn & Teller? whoever). Wearing a top hat and tails, he saws Becky Quick in half.

7:30 p.m. Buffett hosts poker tournament at Wynn casino. At his table: Bill Gates and four shareholders who have paid $1 million each for the privilege in Glide charity auction. Other tables are sponsored by Berkshire managers.

10:00 p.m. Buffett makes brief appearance at Leno show. Leno forces Buffett to apologize for not recruiting his parents as partners.

Sunday

2:00 a.m. Poker tournament at Wynn winds up for evening.

9:00 a.m. Sands Expo Center opens again.  Buffett hosts “world’s biggest brunch.”  Bridge players, chess players, etc. appear at the Expo Center. At noon, Buffett plays bridge, then more poker. Susan Lucci models world’s largest diamond ring. Extra showgirls are brought in, wearing less than the previous day except larger feather headdresses.

 3:00 p.m. Buffett and Munger hold their press conference in public for the first time. Only journalists can ask questions, but anyone can watch. Buffett and Munger, flanked by showgirls, answer questions for the usual two hours. Shareholders learn to their surprise that the main thing journalists are interested in is which stocks Buffett and Munger like in Malaysia, Australia, Germany, Taiwan, Croatia, etc. and what they think of the economies of these countries. The international press corps numbers 150 this year, instead of the usual fifty or so. Furthermore, publications like the FT, the Economist, Atlantic Monthly, are in attendance for the first time. To cap it off, Ken Auletta is present because he has been given the “insider’s” tour of the meeting so that he can write one of his signature New Yorker pieces.

5:00 p.m. Poker tournament at Wynn resumes.

9:00 p.m. Grand prize for poker tournament announced: 25 free hours on NetJets. Most of shareholders are still around, waiting to see who wins this prize. (Berkshire employees, board members and journalists who cover Berkshire and/or ask questions at the meeting can play for fun, but are not eligible for prizes. Only regular shareholders get prizes.) Various lesser prizes donated by luxury merchants (Cadillac) and gift bags for everyone of Fruit of the Loom underwear.

Monday

Board of directors’ meeting held at the Wynn. Shareholders either stay and play, or depart. CNBC coverage of the weekend wraps up with Becky Quick commenting from the airport, standing in front of departing NetJets flights.

For Aspiring Authors

Friday, July 16, 2010 - 08:30

People often ask about the writer's life. Writing is an absorbing, draining, exhilarating, maddening, fulfilling way to spend your time. It's like  trying to paint the Mona Lisa with somebody holding a stopwatch beside your easel. It's like doing a jigsaw puzzle by first finding a million pieces that are hidden all over the world. Writing a book is like running a marathon while wearing a straightjacket. This, on the other hand, is what its like to be "an author."

Solution: Move Meeting to Paris, Hawaii, Bali or Better Yet, Vegas

Thursday, July 8, 2010 - 07:56

In my last post, I wrote about price-gouging by the hotels in Omaha. To get some perspective on what this means in the real world, let’s look at the total cost of the trip for two people to share a room at this year’s Berkshire meeting including nonrefundable coach air tickets.

 A stay at the Holiday Inn Downtown will run either $874 and $914 if you fly from Los Angeles and New York City. This excludes transportation to and from the airport, parking, checked baggage, a rental car in Omaha, meals, and other miscellaneous fees at the hotel, and souvenirs. Bottom line, unless your friends drop you at the airport, you carry on luggage, bring a lot of Odwalla bars to avoid buying meals, skip the Internet service at the hotel, and drink nothing but tap water for three days, it’s going to be hard to avoid spending $2,200 or more for two people to attend the Berkshire meeting. (That’s as of today. The airlines haven’t started price-gouging yet, but if you wait to book your airline tickets, you’ll be sorry, if last year is any guide.)

 As I noted earlier, for a lot of people, it's well worth it. These numbers are so high, though, that I started to think about what else you could do with the money the weekend of the Berkshire meeting, at a hotel somewhere else, that was charging a non-ripoff rate.

How about a weekend in San Francisco? The Holiday Inn San Francisco is charging $218 per night the weekend of the Berkshire meeting. The Holiday Inn Fisherman’s Wharf will cost you $249.

If the Paris of America is affordable, then how much would the real Paris cost? The Holiday Inn Paris—Notre Dame is $225 a night. Granted, the dollar is strong right now, but still, we are talking about April in Paris vs. April anywhere else.  Similarly, a Holiday Inn in London, the King’s Cross/Bloomsbury, costs $274 a night. I found it even more surprising that the Holiday Inn Omaha is pricier next April than the 5-star Eden Hotel in Rome, currently available at $282 per night.

After doing this research it struck me that, surely, you will get killed on airfares to these destinations. It must not be a fair comparison. So I started researching packages. You can get a package for a three-night stay at the Holiday Inn Kensington Forum in London for $903 per person. The Crowne Plaza Hotel is only going to cost you $984 including airfare in Paris. True, it's $70 more than Omaha, but these deals were good enough that I kept looking for more.

Did you know that if you act fast, there are a few rooms at the Sheraton Kauai Resort for a three-night stay in Hawaii including airfare from LA for $846 per person? And the Marriott Frenchman’s Reef in St. Thomas U.S.V.I. will cost you $975 for the same airline deal from New York, only $61 more than the trip to Omaha.

At this point I was getting really intrigued. Just how far could you travel if not being price-gouged by the Omaha hotels' extra freight?  Do you want to go to….

 > Istanbul?  Cost is $982 to stay at the Crowne Plaza.

> Thailand? You’ll pay $1,092 to stay at the Holiday Inn Silom Bangkok.

> Beijing? It will run you $1,010 to stay at the Holiday Inn Temple of Heaven Beijing.

> Tokyo? Japan is expensive. But if you really want to splurge, you can stay at the Intercontinental Tokyo Bay for three nights including airfare for $1,225 per person.

Could the Holiday Inn Downtown Omaha be, literally, the most expensive “midpriced” hotel on earth during the last weekend of April 2011?  After some research I discovered that the answer is “no.” You will find worse deals in places like Johannesburg, Sydney, and Marrakesh.

While the lower prices abroad were intriguing, they only deal with one side of the supply question (abundance). To illustrate the effect of price-gouging, it helps to find the other side -- scarcity. I looked for other places with significant limits on supply. The Maldives seemed like a good comparison. Like the Berkshire shareholder meeting, the Maldives will not be here forever. Sure enough, three nights in the Maldives at the Holiday Inn Male will set you back $2,321. Tahiti, another place where the supply of hotel rooms is limited, costs a fortune. Bora Bora is astronomical, over $5,000 to stay anywhere. (I would love to see comparisons of the Bora Bora prices before and after the movie Couples Retreat.)

On the other hand, it is possible to go to Bali for little more than Omaha. The Holiday Inn Resort Baruna, Bali is $1,252 for three nights. So if you are willing to risk the once-every-few-years terrorist bomb to avoid the crowds around the Qwest Center during the final weekend of April, try Bali.

There you have it: the free market in action around the world. Warren  at various times has considered moving the meeting to Kansas City, which has more hotel rooms, so that people could shop at the new NFM. There are a lot of travel bargains right now. Kansas City is lovely, but how about a meeting in Paris? Or Hawaii?  Or Beijing? Or Bali?

Or, let's take the most obvious choice of all - Las Vegas. I would bet you anything the Berkshire meeting would attract WAY more than 40,000 people if held in Vegas. And Warren loves Vegas. It would be Omaha's loss. Somebody's got to lose here, the shareholders or the city. Warren, are you listening?

Tab for 2011 Berkshire Meeting

Wednesday, July 7, 2010 - 19:14

Markets are a meeting of supply and demand. I recently got a jolt to learn that the only rooms left in Omaha for this year’s Berkshire meeting are at the Holiday Inn Downtown Omaha. This hotel has a bar and a swimming pool, but no restaurant, room service, or fitness facility. That would be okay at the Holiday Inn’s “normal” rate, which at $176 including taxes and fees is reasonable for a one-night stay in a mid-priced hotel without many amenities.

But the Holiday Inn is charging more than double that for Berkshire weekend.

The hotel is requiring a minimum three-night stay with onerous cancellation terms, and the price is stratospheric -- $349 per night or $412.18 including taxes and fees. This means a three-day stay during the meeting will set you back $1,236. Any other time of year your hotel bill would run $528 -- a difference of $708, more than enough to pay for airfare for two from either New York or Los Angeles. And that's being generous. Most people do not need three nights and would arrive on Friday, leave on Sunday, and pay only $352 total.

The extra $884 ($1,236 minus $352) may be worth it for a considerable number of people. You are paying for the authentic experience. Seeing Buffett live is not the same as seeing him on television. Rubbing shoulders with a crowd of like-minded people, participating in the energy of the event, dropping into the barbecue, the cocktails at Borsheim's,  shopping -- it's a unique experience.

The Berkshire meeting, while unique in character, is not unique in size. The popularity of Buffett and Munger attracts 40,000 people. Yet there are plenty of other huge events that don’t create a bottleneck. For example, the Consumer Electronics Show in Las Vegas attracts 113,000 people. The World of Concrete trade show had 70,000 attendees last year.

The problem with the Berkshire meeting is supply, not demand, and the result is price-gouging.

Price-gouging occurs when somebody collects "excess" profits because of a temporary shortage in supply of something – especially food, clothing, or shelter. Usually, price-gouging occurs in an emergency. The hotels of Omaha have a whole year to plan their price-gouging in advance.

The Holiday Inn Downtown is the only hotel left with rooms, but it’s far from the only culprit. Fortune editor Carol Loomis was seen at the front desk of the Marriott Regency this year, her voice raised in outrage, protesting the new policies for 2011 and saying that she would complain to Buffett.

I don’t know that he would have any influence, especially in this rotten economy. These hotel chains are not locally owned. The citizens of Omaha are not the ones who are doing the price gouging. In fact, they are victims like everyone else, because if their friends and relatives attend the meeting, they’re going to get gouged too.

 * (Please note I have updated to include the actual taxes and fees from the Holiday Inn, as billed. These were *higher* than my estimate -- 16% -- it's useful to keep in mind that these "shrouded" costs turn a $349 quoted rate into $412.)

NetJets Consolidated Links

Wednesday, June 30, 2010 - 18:31

There are various NetJets conversations taking place scattered throughout this site. They represent the accumulation of months' worth of comments, many of which appear to be from employees, ex-employees and flight crew, about events leading up to and (especially) since Warren Buffett ousted Richard Santulli in 2009. Although I am not endorsing particular comments, the NetJets content is of interest to a wide variety of readers because it offers a glimpse into the opinions of people who are unhappy about recent changes (and some who are happy). To make this material more accessible to all, here are the links. NOTE: I have included some key links about Sokol's resignation, but not all of them, because they do not directly pertain to NetJets.

These who want to comment, please do so on one of the relevant pages. COMMENTS MADE ON THIS LINKING PAGE WILL BE REMOVED.

Also, please note that comments containing Wikipedia links will be vetted and will NOT be approved for posting if the page in question appears to violate Wikipedia's editing guidelines. Please see Wikipedia if you need guidance; the Foundation provides complete instructions about how to comply with its editorial criteria.

AGAIN, TO REPEAT, PLEASE DO  NOT MAKE COMMENTS ON THIS LINKING PAGE -- MAKE YOUR COMMENTS ON A TOPIC PAGE. Thanks for your cooperation.

***********************************************************************************

Is Sokol Still Running Things at Berkshire? Note -- this was not addressed at Berkshire's annual meeting, as far as I can tell.

Sokol Resignation. 

Milestone -- Richard Santulli's new company.

NetJets Europe. Some statistics from Eric Connor.

New Info on NetJets from Buffett. Year-end 2010.

View from Inside Aviation Industry.

Breaking News about NetJets buying Marquis.

Business Jet Demand -- More News.

Latest Fractional Sales/Inventory "Stalled."

Business Jet Market Conditions "Discouraging" information from UBS market survey.

Why NetJets Matters. It's important.

NetJets -- What Do We Actually Know? Based on Berkshire's disclosures and statements about NetJets in recent years do we really know anything meaningful about how NetJets is doing? The short answer is no.

Betty Liu Interview with David Sokol and commentary.

NetJets Europe new thread requested by blog reader.

Sokol Threatens to Shut Down NetJets.

Fortune Story on David Sokol and feedback from a lot of people.

Sympathy for Sokol long  thread with many recent posts.

Russian Spy at NetJets claims she worked closely with Buffett.

NetJets - Still Here the original linking post, which now contains some content.

Huge Mistakes Were Made at Netjets is commentary that begin after the Berkshire shareholder meeting.

Why Fly? Private Jet Aviation thread began in February.

NetJets 1Q10 Earnings begins post-first quarter earnings.

Recent Events at NetJets, part 2 of post that kicked off this discussion. Lot of content.

Recent Events at NetJets, part 1 of post that kicked off this discussion.

 

"Russian Spy" at NetJets

Wednesday, June 30, 2010 - 16:58

Here's the link. Claims to have worked closely with Buffett. Despite the photo, I don't think so.

NetJets -- Still Here

Tuesday, June 29, 2010 - 15:23

I got a question today, "did you take NetJets off your blog?" No, it has just rolled down to the next page because of other blog posts.

Audiobookstore

Tuesday, June 29, 2010 - 09:41

The Audiobookstore  contacted me and asked me to link to their site. Their site is comprehensive, and this gives me a chance to tell you about the differences between various versions of the audiobook.

They offer all three versions of the audiobook (original audio, paperback audio and full-length audio). The script abridgement for the hardcover was done by someone else, whereas I did the condensation of The Snowball paperback myself. The result is that the paperback audio is essentially the same length as the hardcover, but has higher feedback ratings.

I also have gotten astonishly good feedback (in person and on this site) from those who took the trouble to listen to the entire library-length version. It features a female narrator, which had been my first choice for the audiobook.  The Snowball is written in the voice of a female narrator (me) who alternates with commentary from Warren Buffett. This version of the audiobook is a different way to experience The Snowball that is the closest you will get to hearing the book as I wrote it in hardcover.