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The Pseudo-Death of Warren Buffett

June 26, 2006

Vooch

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STUNNED

As a Berkshire Hathaway shareholder, I was absolutely stunned when I heard the news over the weekend about Buffett giving almost all of his money to the Gates Foundation.

Buffett's announcement this weekend went against everything he said he would do.

In the past, his philosophy was he would be able to compound money at a faster pace than the overall market, and because he was such a great capital allocator, would be able to donate a much larger amount of money after his death.

This turn of events, leads me to believe he weighed the benefits of donating now versus the benefits of donating post-mortem and concluded he would be unable to compound his wealth at a significant pace. Age factors, and the death of his wife, played a major factor, imo.

BEST FRIENDS

I recalled a Charlie Rose DVD where Gates and Buffett were being interviewed together. In the interview, Gates called Buffett his 'best friend', which proved their closeness.

PSEUDO-DEATH

Today, was a pseudo-death for Warren Buffett.

I can reflect upon my March 10, 2006 post on GuruFocus.com: (here) where I entertained the idea of what might happen if Buffett died.

"Has anyone ever thought that Berkshire Hathaway's share price might actually go up the day (or day after) Buffett dies? I don't think so, but I believe it's quite possible after all the negative "mojo" that's been festering around the past several years. It seems everybody wants to buy the stock, but they won't buy it until after he dies."

In what could be called "the closest thing to death", Berkshire's stock tanked -2.86551% in mid-day trading before ending the day -0.0091175% (less than a 1 percent loss).

From my recollection, when Sam Walton died, WMT stock fell about 10% before resuming it's upward momentum. I knew the company was larger than the man, so I treated today's event as if it were Sam Walton dying.

STRUGGLING WITH THE EMOTIONS

As I watched the stock price drift downward and downward, I typed in the "Buy" order and I struggled with the emotion of impending doom. I felt the emotion today of the urge to sell. It's been awhile since I felt that way. I knew I should fight the emotion, so I placed a Buy order and got filled at $3,011.

CONFUSION

Right before I got into my car to listen to the lunchtime hour-long press conference, I placed another buy order.

After listening to the press conference, I was a bit confused.

The letter at: www.berkshirehathaway.com tells us the disbursement would occur at a rate of 5% per annum, which is about 500,000 B shares. However, during today's press interview, I thought I heard Buffett talk about giving The Bill & Melinda Gates Foundation one million shares per year.

After returning from lunch, I noticed I got filled the second time - this time at $3032.

CLEARING UP THE UNCERTAINTY

For me, I was always uncertain how quickly Buffett's shares would get unloaded onto the market after his death. Today's move, clears up that uncertainty (assuming my confusion regarding the 500k/yr vs. 1mil/yr distribution is answered) of the percentages and how fast his stock gets liquidated. Today, we learned it would take a long time for his stock to get liquidated. I believe it will take longer now, since he is still alive, than it would if he were dead. Any time you can remove negative uncertainty from a stock, it's likely to rise. Today was no exception.

Today, Buffett alleviated much sharesholder grief that could have taken place upon a sudden death probably. However, since we're in the eigth inning, I'm always in a state of confliction about the stock. Do I keep holding because it enforces me to learn more about Buffett? Or, do I sell because I'm holding onto a lackluster performing stock? Or, do i buy because everyone is selling, including Buffett, now? I haven't found an answer to my dilemma yet.

SPECTATOR

On another DVD interview, I recall Warren Buffett saying he'd trade in 5 years of his life in order to become a spectator for the next 40 years. He's genuinely interested in the markets. Perhaps, his statement was focused on being able to see the fruits of his donations. After today's action, he'll be able to see that fruit now.

In the end, I think Buffett made the right decision once again. I think it gives him peace of mind.

About the author:

Vooch
Visit my website at: www.ActiveValueTrader.com

Rating: 2.8/5 (5 votes)

Comments

dldavy
Dldavy premium member - 8 years ago
Gosh Vooch, I think you are paying a bit too much attention to short term events that have nothing to do with the intrinsic value of Berkshire Hathaway. You kind of "think out loud" as to Buffett's death, Buffett's gift, what it would do to the stock, etc. This is fine by way of musing, a kind of "spectator sport," but really has nothing to do with the intrinsic value of this or any other stock, and the probability estimate of the anticipated future growth of that value over time (which is part of the "current" intrinsic value, which is also a probability estimate). The death of Buffett will result, when it finally occurs, in a loss of intrinsic value of BRK, because of Buffett's extraordinary capital allocation ability. That's a real subtraction, and may at the same time cause the usual nutty gyrating to the short term stock price. But Buffett's talent has been on a relatively short tether for many yrs. in any case because of the dearth of opportunities at current prices (but that could abruptly change at any time; hence the huge "opportunity value" built into all that cash on the one hand, and the genius of the allocator of that cash on the other), and, more deeply, because of the massive equity base that BRK is now employing, and the difficulty of significantly increasing it over a short period of time. In Ben Graham's old metaphor, looking for cigarette butts is easier than looking for semi-trailer's filled with shipments of cigarettes (the whole trailer), because there are more of them.

Secondly, I don't believe it is true that Buffett made the gift now, because he thought "he would be unable to compound his wealth at a significant pace." There are subjective factors involved here (even Buffett can be subjective!) such as the death of his wife, his wife's wishes that he "do more now," and simply being friends with Gates, knowing more and more what Gates is doing, and simply being influenced by that whole Gestalt of the Gates connection. Today, Buffett mostly waits for the phone to ring, plus keep his eye on the stock market and prices. The ringing of the phone (with offers to sell whole companies) is irregular and could increase dramatically at any time (particularly now that he has signalled his desire to buy outside the U.S.), and a new terror event, or something equally dramatic, could cause the stock market to swoon big time, and opportunities fly in the window like so many golden pigeons (sorry for the mixed metaphor). Sooner or later something outsize will happen. And they are ready. Meanwhile, free cash flow continues to pour in, and, if we are smart, we should never forget that the most important thing (and the second most important thing) is WHAT IS YOUR DOWNSIDE? HOW MUCH CAN YOU LOSE, REALLY? And Berkshire Hathaway is as much a Fort Knox as any public company that exists. It is my top holding.

vooch
Vooch - 8 years ago
You've made numerous great points. Thanks for your comments!

You are very correct on my "thinking out loud" approach. I do that to help you and myself. I get to think through my thoughts, and you get to read what other people are thinking. I hope everyone here finds my comments interesting; otherwise, I should stop.

Berkshire is my top holding overall also. In my value portfolio, which is just one account, HD is my top holding.

Downside risk is probably -10%, but that's about it and maybe -15% if he died.

- Vooch

dldavy
Dldavy premium member - 8 years ago
Sure, I enjoy reading your posts. But by downside risk (10%, 15%, etc.), what exactly do you mean?

Thanks...
vooch
Vooch - 8 years ago
> But by downside risk (10%, 15%, etc.), what exactly do you mean?

My guess is.... those are worst-case scenarios attributable to either market risk, or the risk of Buffett passing away. There isn't much of a Buffett-premium built into the stock right now, and I doubt there ever will be one now.

I think there's a -25% drop before you collide into book value, so the risk seems very minimal compared to many other stocks.

The Fear and Greed metrics should really tug away at this stock for awhile, and I expect volatily on this stock to rise over time. Depending on who you talk to, some want to sell the stock when Buffett dies and others want to buy the stock after he dies. I haven't decided which one I'd prefer.

The low turnover in BRK shares is because Buffett is the captain of that ship. A lot of shareholders hold that stock because he's still alive. Once he's dead, the stock is surely to change hands from Buffett-fans to general investors. It might take awhile to flush through the emotional attachments, but after that's gone, the stock will be riding on it's own.

I imagine there will also be a management fallout of some respect, but I don't know how that will play out. Buffett's death could swing either way: (1) an exit means, or; (2) a way to build upon greatness - all the key investors are already there.

This might be a good time to unload some shares. I think there will be a charity transfer of stock next month, which I think, will be converted to cash. Might as well sell before the selling pressure kicks, in my opinion. Or... at least... watch and see what happens in July.

- Vooch

dldavy
Dldavy premium member - 8 years ago
There is much that you say about BRK that doesn't make sense from a value perspective. However, you say you have a 'value portfolio,' but also others, and that BRK is your top holding 'overall.' Do I then understand correctly that BRK is not a component of your value portfolio?

Also, given the fact that you have more than one portfolio of stocks, and that only one of them is a 'value portfolio,' would it then be accurate to say that you do not identify yourself as a value investor?

Thanks......
vooch
Vooch - 8 years ago
> Do I then understand correctly that BRK is not a component of your value portfolio?

Correct. BRKb was not in my value portfolio. However, I did add some to it on June 26th.

> Also, given the fact that you have more than one portfolio of

> stocks, and that only one of them is a 'value portfolio,' would it

> then be accurate to say that you do not identify yourself as a

> value investor?

I'm moving towards the direction of a value investor, but I've also traded speculative OTC stocks. It would be difficult to call myself a "value investor" since my average holding period for a purchase is about 4-6 months over the past 14 months. However, I do follow some of the rules that "value investors" use when picking stocks.

I'm still in learning mode - trying to fine tune a value-based trading/investing system. I'm really happy with the results so far. After I get this system working the way I want, I may go back to researching my automated daytrading system.

- Vooch

dldavy
Dldavy premium member - 8 years ago
Well, good luck.. Creating a system, and 'getting it working properly,' would seem to be the holy grail of the daily frenzy that goes on in the stock market. Over one billion shares traded every day on the New York stock exchange--it would seem that none of these people can make up their minds about what they want to own! In fact, almost all of it is pure noise, with everyone trying to anticipate what everyone else is going to do. It is the market on the level of the market; dogs chasing their own tails, after devising systems on how to catch them.

Under the noise, however, there is logic: sometimes in the short run, frequently in the middle run, and always in the long run, prices revert to some reasonable approximation of the value of the underlying business as a business. In my view, the only logical system therefore, is to ignore the noise and tune in the music: value the business as a business, and look to buy at a significant discount to the underlying value of the business.

Indeed, here is Ben Graham himself, the very womb as it were, out of which the mind of Warren Buffett was born (In The Intelligent Investor, revised ed., 2006):

"Since common stocks...are subject to recurrent and wide fluctuations in their prices, the intelligent investor should be interested in the possibilities of profiting from these pendulum swings. There are two possible ways by which he may try to do this: the way of timing and the way of pricing [Graham emphasis]. By timing we mean the endeavor to anticipate the action of the stock market--to buy or hold when the future course is deemed to be upward, to sell or refrain from buying when the course is downward. By pricing we mean the endeavor to buy stocks when they are quoted below their fair value and to sell them when they rise above such value." (p. 189)

Graham calls any and all timing methods speculation, and forecasts their fate:

"Probably most speculators believe they have the odds in their favor when they take their chances....Each one has the feeling that the time is propitious for his purchase, or that his skill is superior to the crowd's, or that his adviser or system is trustworthy. But such claims are unconvincing....If you want to speculate, do so with your eyes open, knowing that you will probably lose money in the end." (pp. 519, 188)

In my view a speculator, a man with a 'system,' is rather like the kid with a "fast gun" who saunters into the old Western town looking to challenge the famous gunfighter known to be in residence. Call him out on main street, blast away, and become the new famous gunfighter! The kid is indeed on an exciting journey: his trip to boot hill is imminent.
vooch
Vooch - 8 years ago
I appreciate your Graham quotes.

My 'fourth revised edition' of Intelligent Investor only goes up to page 340. When you reference page 519, are you referring to Security Analysis or Intelligent Investor?

Could you reference the chapter numbers please? Our page numbers don't match up. Your second paragraph ("Probably most speculators believe they have the odds in their favor when they take their chances....Each one has the feeling that the time is propitious for his purchase, or that his skill is superior to the crowd's, or that his adviser or system is trustworthy. But such claims are unconvincing") is on page 283 in my book.

Also, regarding your 2006 version, has anything been added to the book in the past 20 years?

Thanks,

Vooch

dldavy
Dldavy premium member - 8 years ago
Good questions. The edition I am referring to is the newer text with commentary and notes by Jason Zweig. Graham's text of course remains as per his final revised edition at the time of his death. Zweig's commentary seems to me quite intelligent and on the mark. The quoted material I used in my previous post is taken from the chapters on market fluctuations (Chapter 8?), and the margin of safety concept, which I believe is the last chapter in the book (My copy of the book is at home; I am currently in my office, and cannot remember the exact chapter #'s).

Reading Graham again, and Buffett again and frequently, seems to me a bracing exercise, lest one begin to have one's value bolts, as it were, psychologically loosened by constant exposure to the giddy rhetoric issuing from CNBC and other financial “Info & Education” sources.
vooch
Vooch - 8 years ago
> Reading Graham again, and Buffett again and frequently, seems to me a bracing

> exercise, lest one begin to have one's value bolts, as it were, psychologically loosened

> by constant exposure to the giddy rhetoric issuing from CNBC and other financial “Info

> & Education” sources.

I was watching the "Woodstock for Capitalists" video and one guy on there said the same thing. He said he goes to Omaha each year to get his mind realigned.


humpty dumpty
Humpty dumpty - 7 years ago
great read.
kfh227
Kfh227 premium member - 7 years ago
Jsut wantd to mention that I saw an interview with Buffet several months ago.

The orignal idea was that Buffett's wife was to give the money away when he passed. He figured she'd out live him due to life expectancies. Her death truely seems to have changed his life. And he is doing what she would have done in his passing.

The intent goes something like this:

Every year give away 5% of the wealth he has.

His worth should grow at say 7% annually.

I forget exactly how it works out, but over hte long term, he will actually be donating more and more each year even after he passes. Each year hte donations should be increased in a mnner as to outpace inflation.

My words:

In theory (BIG THEORY HERE). And something that I think Buffett also thinks ..... is that in say 500 years, his donations will ultimately save everyone. Its hard to comprehend, but it has hte potential to truely be amazing.

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