A Few Unorthodox Observations and Thoughts From Omaha

Last week I made my annual pilgrimage to Omaha and had a ton of fun. The activity I enjoy the most is to talk to like-minded investors from all over the world and learn from them. I do have a bias toward talking to international investors as I’m really interested in what’s going on outside of the U.S. and how different cultural, geological and even language backgrounds influence the way value investing is practiced or the extent to which value investing is accepted.

I did learn quite a bit from Warren Buffett (Trades, Portfolio) and Charlie Munger (Trades, Portfolio) during the annual meeting, but people have already posted their notes and thoughts and I don’t have much to add. Instead I’d like to share a few unorthodox observations from the Omaha trip that I hope you might find amusing.

• MCD 30-Year Financial Data
• The intrinsic value of MCD
• Peter Lynch Chart of MCD

Omaha and time management as Buffett’s huge competitive advantage

Unlike previous years where I spent most of my time in meetings and social events in Omaha, this year I took two whole days to “live” Omaha. I walked and jogged in downtown and midtown Omaha, visited a few local businesses and chatted with a few local people. It was a wonderful experience. It is very convenient in Omaha – everything is within five to 15 minutes' range; people are friendly and helpful; and there are a lot of great businesses in Omaha.

There are two details from the recent HBO movie “Becoming Warren Buffett” that I found interesting, which I validated in Omaha.

First, Buffett talked about how his office is only a few minutes away from home and for many people a one-way commute can be 30 to 35 minutes. That’s almost one hour difference for a round trip per day. One hour per day for five days a week and 50 weeks a year (assuming you take two weeks off) for 30 years adds up to 312.5 days or almost a year of life. Think about how much more time we can spend on compounding knowledge and experience by cutting down commute times or by working from home or a nearby coffee shop.

Second, in the movie, I noticed how Buffett always had exact change when he ordered breakfast from the McDonald's (NYSE:MCD) instead of using a credit card. Again, a very small habit that probably saves him one to two minutes each time, but these time-saving habits accumulate. I used my credit card three times during the day (including once in the restaurant) and I counted the time it took to swipe or insert and sign – it was about 10 minutes total (granted waiting for the check at the restaurant is a major chunk of it, but I could have gone to a fast-serve restaurant and paid it up front).

I jogged from downtown to Berkshire’s (NYSE:BRK.A)(NYSE:BRK.B) headquarters; as I got closer to Kiewit Plaza, I couldn’t help but notice that there are a lot of insurance companies nearby. There are Mutual of Omaha Insurance, Pacific Life Insurance and Physicians Mutual to name a few. And the Markel (NYSE:MKL) building is not that far down the road. I don’t know whether it is accidental or intentional that Berkshire is surrounded by so many insurance companies, but the end result is beneficial.

Indians, Chinese, health care, Google, Amazon and the competitive advantages of nations

One of the trends that even an idiot can spot is the rising number of Indian and Chinese nationals who attend the Berkshire meeting and the rising number of questions from shareholders that were asked from Chinese shareholders (most of them are from Shanghai). Granted most of the questions were very basic, but one thing that’s obvious is that they showed the courage and eagerness to learn.

Tom Russo (Trades, Portfolio) cited an interesting story in a talk he gave prior to the meeting. For many years, he has been visiting a tobacco manufacturer in Japan and for all these years, he had to use an interpreter because the Japanese counterparty doesn’t speak English and showed no interest in learning English. Then Russo started visiting a Chinese tobacco manufacturer who didn’t speak English in the beginning, but in just a few years they were able to communicate in fluent English without any issues. I don’t mean to degrade the Japanese. Quite honestly I admire many aspects of the Japanese culture. But I also see a difference in the eagerness and drive between the Japanese and the Chinese.

I am really impressed by the Indian people I met at the Berkshire meeting. I see the passion, intelligence and the determination. Better yet, English is the first language to the Indian people so the messages and wisdom Buffett and Munger convey don’t get lost in translation. They have something in common – Google, Microsoft (NASDAQ:MSFT) and PepsiCo (NASDAQ:PEP) all have Indian CEOs.

It may seem absurd that I’m writing about the Indians and the Chinese on a forum that mainly discusses value investing. A natural question may arise – how in the world is any of this related to investing?

We all learn about competitive advantages of companies, the moats. But rarely talked about is the moat of a nation. If a nation outperforms, businesses in that nation, and especially businesses in the industries in which the nation possesses a competitive advantage, will flourish. Just look at the U.S. medical device companies, the U.S. pharmaceutical companies and the Swiss chocolate companies. This is not a new idea; Michael Porter has written a whole book about it.

The U.S. still has a strong competitive moat but the moat is narrowing relative to China and India. Said differently, China and India’s moats are widening relative to the U.S. Buffett and Munger pointed out one important factor – health care cost is at more than 17% of U.S. GDP and shows no signs of abating. While this is unfortunate from a national competitive advantage point of view, if health care cost indeed grows faster than the U.S. GDP, it means that the U.S. pharmaceutical and medical device industries will continue to perform well – at the cost of some other sectors in the economy perhaps.

But there is one other subtle factor that may have tilted the advantage toward China and India quite a bit – technological advancement. While Amazon (NASDAQ:AMZN), Google, Facebook (NASDAQ:FB) and Netflix (NASDAQ:NFLX) have disrupted many U.S. businesses and a lot of business owners have to think about how to deal with the disruptions, very often they have no choice but to watch the business slowly die. In China and India’s case, because the infrastructure was not ready and traditional businesses weren’t as entrenched, the Googles and Amazons have caused less disruption and actually helped many small and medium-sized businesses flourish. This leapfrogging effect has helped and will continue to help China and India tremendously. We have seen that in payment, in e-commerce, in Internet of Things and many other areas.

There are many other drivers of national competitive advantages, and I won’t go into the details. The U.S. does still have the best system in the world. But it is inevitable that China and India will catch up and become much more powerful competitors.

From an investing point of view, China and India are widening their moats while at the same time, their capital markets are much less efficient. Combining higher growth with a market where you can shoot fish in a barrel, the implication is clear.

An interesting explanation from Buffett on why he’s not buying Google today

BECKY QUICK: So when you say you missed it (Google), that suggests that it's now at a valuation – you understand the company, but it's now at a valuation that doesn't make sense to you? Why don't you just buy it now?

WARREN BUFFETT: Well, if I was forced to buy it or short it, I'd buy it. Same way as Amazon. But it's a little hard when you look at something at X, and it sells at 10X. To buy it, it shouldn't be, but I can just tell you psychologically it's harder. If you looked in the first place and passed – at X to then buy it at 10X. That's cost people a lot of money at Berkshire. I mean they saw it at a lower price and they just said, "If it ever gets back there, I'll buy it." But that's a terrible way to think.

BECKY QUICK: How come you don't feel that way about shares of Apple (NASDAQ:AAPL)? How come you feel like that's a different story?

WARREN BUFFETT: Well the shares, when we bought 'em, at least, were much more reasonable in relation to current earnings. Apple didn't have to do a lot better in the future than they were doing at the current time. When you get into Google and Amazon you're paying for the future more. But they may well have a better future. I mean that may be more than justified. I wouldn't say it is easier for me to understand than Google now, perhaps, or Amazon now, but certainly would have been five years ago. It's amazing where Apple's ended up with consumers.

I can very easily determine the competitive position of Apple now and who's trying to chase 'em, and how easy it is to chase 'em. We happen to be well situated in terms of having these massive home furnishing stores, and I can learn very easily how consumers react to different things there. Probably easier than I can trying to pick out what's really happening at Amazon at any given time.

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