Sequoia fund had their recent Investor Presentation day, where the fund managers field questions about the Fund's investments. All of the fund managers are spectacular, but I wanted to focus on Greg Alexander. Greg Alexander keeps a very low profile, but Warren Buffett stated that Greg is one of the three best investors today. The other two that Buffett mentioned were, Seth Klarman and Li Lu. Sequoia has a huge stake in Berkshire Hathaway. I included a section where some of the managers talk about the succession plans at Berkshire (note: this conversation took place far before the announcement of Ted Weschler as an investment manager).
Question:
I was wondering if you could talk about the two competing companies that you own, O'Reilly Automotive (ORLY) and Advance Auto Parts (AAPL).
Greg Alexander:
I'll make a general observation, which is it's amazing how many of the companies that people have asked questions about so far today are buying back really gargantuan amounts of stock every year. In the case of Google, which is not, I can't see what else it's going to spend $10 billion a year on. Driverless cars? But it's fascinating to me that at a time when if we put money in the bank, we're lucky if we get 1%, so many of our companies are — I'm just guessing wildly at this — buying back maybe up to half a percent of their shares a month or something like that. I kind of like the idea that in two months we get one year's worth of interest on all these companies.
Below are some excerpts from Greg, followed by the full presentation in Scribd:
Question:
What is your view on Berkshire and Munich Re's reinsurance businesses in the aftermath of the Japanese earthquake and tsunami?
Greg Alexander:
Insurance and banking are two of those businesses where the industry has a certain amount of equity that it's going to end up with and if it has more than that they ï¬nd a way to make it go away. I mean, if they are smart, they buy back stock. But if they don't do that, they ï¬nd other ways to make it go away. If they have less than that certain amount of equity, they tend to have a few good years. So really when you have an earthquake, on the one hand they make less money that year, but it increases the odds of a little better pricing the following year. It's kind of a zero sum game.
Question:
Can you say something about the methodology or models you use in locating energy companies?
Greg Alexander:
The oil business, as they say, is a very difficult business. It requires technological skill. I'm not saying anything you probably don't know, since you asked the question, but it requires technological skill a lot of it these days. It also requires ï¬nancial skill. There's a lot of capital to allocate. In a normal business you're just allocating the proï¬ts at the end of the year; in the oil business you're also getting back all the money that you spent to drill the well. You have to reallocate that capital, too. You might be reallocating a quarter and in some cases up to a half of the market cap of the company, reallocating that capital every year. So your capital allocation skills are perhaps more important than in any other industry.
There are also strategic considerations — all these new ï¬elds and global politics in the case of some of the big companies. To run an oil and gas company these days is really a very challenging, complicated job. And good CEOs are really good. As Bob said, it's very CEO intensive.
Question:
I have a question about Buffett's succession. A number of times I've seen on the news outlets when Charlie and Warren appear, Bill Gates is there. Is Gates a possible successor?
Bob Goldfarb:
I would think if Bill Gates wanted to be a CEO, he would have remained at Microsoft. But he's clearly decided to devote much of his life to philanthropy. Given the size of the Gates/Buffett foundation and the dedication that he and Melinda have to it, I don't see that happening.
Question: He just seems so comparatively capable. Bob Goldfarb: His primary interest is in philanthropy.
Question: Could you quickly comment on the challenge that the next CEO of Berkshire will face in terms of capital allocation? With all the cash being generated by those businesses and when I look at the billions of dollars of deals that Warren's done, I have a hard time seeing someone else in that seat being able to get those deals done.
Bob Goldfarb:
It's an enormous challenge when you're working with that sum of money and you're generating that much cash every year. That person is going to have his hands full. And to follow a CEO as great as Warren, wow, those are big shoes.
Question: The issue of the next CEO having big shoes to ï¬ll, are you entirely comfortable with how it will play out over decades?
Bob Goldfarb: Not entirely.
Jon Brandt: I'm not fully disagreeing with Bob. But I think Berkshire will start deploying cash as dividends, share repurchases, or some combination of the two after Warren is no longer CEO. So that will reduce the size of the job for the successor in some respects.
Bob Goldfarb: That ends the Q&A and we thank you all for attending. We look forward to seeing you next year.
2011.5.20 Ruane, Cunniff & Goldfarb Transcript
Question:
I was wondering if you could talk about the two competing companies that you own, O'Reilly Automotive (ORLY) and Advance Auto Parts (AAPL).
Greg Alexander:
I'll make a general observation, which is it's amazing how many of the companies that people have asked questions about so far today are buying back really gargantuan amounts of stock every year. In the case of Google, which is not, I can't see what else it's going to spend $10 billion a year on. Driverless cars? But it's fascinating to me that at a time when if we put money in the bank, we're lucky if we get 1%, so many of our companies are — I'm just guessing wildly at this — buying back maybe up to half a percent of their shares a month or something like that. I kind of like the idea that in two months we get one year's worth of interest on all these companies.
Below are some excerpts from Greg, followed by the full presentation in Scribd:
Question:
What is your view on Berkshire and Munich Re's reinsurance businesses in the aftermath of the Japanese earthquake and tsunami?
Greg Alexander:
Insurance and banking are two of those businesses where the industry has a certain amount of equity that it's going to end up with and if it has more than that they ï¬nd a way to make it go away. I mean, if they are smart, they buy back stock. But if they don't do that, they ï¬nd other ways to make it go away. If they have less than that certain amount of equity, they tend to have a few good years. So really when you have an earthquake, on the one hand they make less money that year, but it increases the odds of a little better pricing the following year. It's kind of a zero sum game.
Question:
Can you say something about the methodology or models you use in locating energy companies?
Greg Alexander:
The oil business, as they say, is a very difficult business. It requires technological skill. I'm not saying anything you probably don't know, since you asked the question, but it requires technological skill a lot of it these days. It also requires ï¬nancial skill. There's a lot of capital to allocate. In a normal business you're just allocating the proï¬ts at the end of the year; in the oil business you're also getting back all the money that you spent to drill the well. You have to reallocate that capital, too. You might be reallocating a quarter and in some cases up to a half of the market cap of the company, reallocating that capital every year. So your capital allocation skills are perhaps more important than in any other industry.
There are also strategic considerations — all these new ï¬elds and global politics in the case of some of the big companies. To run an oil and gas company these days is really a very challenging, complicated job. And good CEOs are really good. As Bob said, it's very CEO intensive.
Question:
I have a question about Buffett's succession. A number of times I've seen on the news outlets when Charlie and Warren appear, Bill Gates is there. Is Gates a possible successor?
Bob Goldfarb:
I would think if Bill Gates wanted to be a CEO, he would have remained at Microsoft. But he's clearly decided to devote much of his life to philanthropy. Given the size of the Gates/Buffett foundation and the dedication that he and Melinda have to it, I don't see that happening.
Question: He just seems so comparatively capable. Bob Goldfarb: His primary interest is in philanthropy.
Question: Could you quickly comment on the challenge that the next CEO of Berkshire will face in terms of capital allocation? With all the cash being generated by those businesses and when I look at the billions of dollars of deals that Warren's done, I have a hard time seeing someone else in that seat being able to get those deals done.
Bob Goldfarb:
It's an enormous challenge when you're working with that sum of money and you're generating that much cash every year. That person is going to have his hands full. And to follow a CEO as great as Warren, wow, those are big shoes.
Question: The issue of the next CEO having big shoes to ï¬ll, are you entirely comfortable with how it will play out over decades?
Bob Goldfarb: Not entirely.
Jon Brandt: I'm not fully disagreeing with Bob. But I think Berkshire will start deploying cash as dividends, share repurchases, or some combination of the two after Warren is no longer CEO. So that will reduce the size of the job for the successor in some respects.
Bob Goldfarb: That ends the Q&A and we thank you all for attending. We look forward to seeing you next year.
2011.5.20 Ruane, Cunniff & Goldfarb Transcript
