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Musings From Omaha

Thoughts and observations from the 2018 Berkshire meeting

May 10, 2018 | About:

Last weekend I made my seventh annual pilgrimage to Omaha for the Berkshire Hathaway annual shareholder meeting. It was the first time I attended the meeting as an international shareholder (I flew from Shanghai to Omaha this year). As always, I had a ton of fun catching up with old friends and meeting new friends. The only complaint I have is that the weekend went by too fast. But as they say: Time flies when you are having fun.

Warren and Charlie, as always, dispensed worldly wisdom for six hours. It’s amazing that at the advanced ages of 88 and 94, both are still so sharp and show no sign of slowing down at all. Although most of what they said is not new to us, it’s always good to be reminded of the timeless principles and lessons by the greatest investors of all time every year.

Most of you have either watched the livestream or read the detailed notes of the meeting. Therefore, I won’t bother to repeat what has been widely distributed. Today I’ll share some less-discussed thoughts and observations from the meeting, the after-meeting CNBC interview and my interactions with fellow value investors.

The greats are extraordinary in all aspects

My biggest realization this year from the Berkshire weekend is that the truly extraordinary people such as Buffett, Munger, Ted Weschler, Tom Russo (Trades, Portfolio), Li Lu and Peter Kaufman, are extraordinary in so many ways. They don’t just excel in investing, they are the champions in life.

The extraordinary traits are manifested in details. For instance, they all have great manners and etiquettes. In this year’s short film, a video clip made us laugh hard. It was about how Charlie Munger (Trades, Portfolio) had a hard time opening up the See’s Candy box at last year’s Daily Journal meeting. What the clip didn’t show, was that after finally opening up that damn box and taking only a few bites, Charlie generously passed it around to all of us because he realized that his groupies didn’t have lunch either.

The other thing they all exceled at is their human skills. Obviously a lot of us wanted to talk to Li Lu, Ajit Jain, Tom Russo (Trades, Portfolio), Peter Kaufman and Ted Weschler. They are of course very busy. But they managed to make everyone feel at ease instantly with warm smiles and a little patting on your shoulders. They were also extremely calm and elegant in those conversations. You may also be surprised by how much they know about practically everything. And this doesn’t just apply to extraordinary investors. If you go to the exhibition hall and talk to Berkshire managers or the authors at the Bookworm such as Bob Cialdini and Andrew Kilpatrick, you’ll probably get the same feeling. These are truly extraordinary people. They are warm, humorous, intelligent, well-versed and well-mannered. They possess the qualities we admire.

It also dawned on me that the gap between the extraordinary and the ordinary such as myself widens over time. We hear Buffett say, “The chain of habits is too light to be felt until it’s too heavy to be broken.” Well, habits not only accumulate, they compound. I think for all of us, we have to spend some time every day to reflect upon what bad habits we have and more importantly, what we need to do about them.

It’s also a good idea to think about what great habits Bill Gates (Trades, Portfolio) has and what can we do to make them our own habits. One habit I can think of is no matter how busy Gates is, he would always carve out an hour to read before sleep. You and I can only imagine how hectic his schedule can become yet Gates reads over 50 books a year. And he even writes notes about them.

What is investing all about?

We’ve all heard the opening remarks by Buffett this year on how if one had invested $10,000 in an index fund in the U.S. and held it until now, one would have had $51 million. All you need to figure out is that America will get better over time and American businesses will do better over time.

Buffett may have made it sound so simple and easy, but such is the most important thing about investing. When we buy stocks, we are buying partial ownerships in companies in a certain nation. If a nation does well over time, its businesses will do well over time. Simple enough. If so, shouldn’t we figure out which nations are likely to do well over the next few decades before we decide which markets we should focus on? The opportunity cost of investing in the U.S. would be, say, not investing in India. Would you rather own a basket of U.S. companies in the next 50 years or a basket of Indian companies in the next 50 years?

It’s a question very few investors have thought about. And of course if you don’t have the expertise to invest in India and China, maybe you should find somebody who does have the expertise, like what Munger did with Li Lu. Each country has its moat, just like each company does. Perhaps investing is as much as about assessing the moats of a nation as it is with assessing the moats of a business in a nation.

Fish where the fishes are

It’s also amazing that although Buffett and Munger have preached for so long that we have to find inefficient areas in the markets and our edge, very few of us do so. I, for one, have listened to Munger for years say that there is a lot of low-hanging fruit in China compared to the U.S. The market is less efficient in China. There are many Chinese companies that are entrenched there. And the Chinese like to gamble, so valuation extremes are more frequent than in the U.S. Yet I’ve spent most of my investment career trying to find bargains in the U.S. market. I wrote about Kweichow Maotai back in 2014 but back then it was too obvious. I only started seriously researching Chinese companies in 2016 and it wasn’t until the end of last year that I’ve finally made the move back to China to focus most of my time and energy on the Chinese market. Boy, how I wish I’d made that move much earlier.

Or take Buffett’s advice of investing small sums in micro-cap stocks. Again, I’ve heard Buffett’s advice for many years, yet I’m still not following it as quickly and as thoroughly as I should have. I’ve compounded my mistake of not investing in China early enough by spending most of my time on large and mid-cap U.S. stocks while I was in the U.S. Last year, when one of my very good friends suggested a micro-cap name to me, I didn't buy it. And it didn’t take me very long to realize that it was obviously very cheap.

It’s a good idea to have a partner who can push you to do the right things when human nature is likely to lead to procrastination

When asked about Wells Fargo’s recent troubles, Buffett said this about Munger, which I thought was very inspirational:

"Once you have not done it, you're in the soup. John Gutfreund in April of 1991 got word that Paul Mozer, a trader in government bonds, was doing something that was very wrong. And he absolutely – John was not profiting by it. He didn't know about it. But the next minute he had to pick up that phone and call Gerry Corrigan of the Federal Reserve of New York. And everybody thought he was going to do it in the room. But it was unpleasant or he got distracted. And then on May 15th Mozer did it all over again and now the position you're in is you caught him and you knew this pyromaniac was out there who would set fires and you let him light another match. And then you're in big trouble. Anyway, you have to act. Charlie's been very good with me on things like that. If I tell him about anything is a problem, I mean, he doesn't let me procrastinate. And I might procrastinate a little. It's a very human trait."

Getting defensive can be a sign of speculation

When asked about bitcoin, Buffett said the following, which is actually profound:

“You don't get defensive if you're buying something that produces. You don't buy a farm and get real defensive if somebody comes and says, "You shouldn't buy a farm." If somebody says, "I watch the crops go and I can see what I'm selling my crop for at the end. And I'm making 4% or 8% on my investment." You're getting defensive when you look at this thing and it doesn't do anything. You're just hoping somebody comes along to pay you more tomorrow and the next day. And you're dependent on more people-- the mob growing, you know, basically. So those people do get angry. But the person that bought a house with it, I would say they did the very right thing. They sold it.”

This is true with bitcoin. It’s also true with any sort of speculation. If you buy a stock and you are hoping the next guy will pay more than you did, you will likely to get very defensive. But if you buy a stock because it’s cheap, you are less likely to get angry when there’s a difference of opinion.

That’s all from this year’s meeting. I hope you are still awake.

About the author:

A global value investor constantly seeking to acquire worldly wisdom. My investment philosophy has been inspired by Warren Buffett, Charlie Munger, Howard Marks, Chuck Akre, Li Lu, Zhang Lei and Peter Lynch.

Rating: 4.7/5 (11 votes)



The Science of Hitting
The Science of Hitting - 2 years ago    Report SPAM

Those are some great thoughts - thanks for sharing Grahamites!

Stephenbaker - 2 years ago    Report SPAM

Grahamites, do you discount the following risks when investing in Chinese companies:

1. Trust of management; 2. Laws and regulation of securities markets; 3. Proper auditing and disclosure of financial results? The companies that Buffett invests in today, and for the most part his entire investing career, do not carry such risks. IOW, what you see is what you get. How do you ensure that Chinese public markets and stocks are legitimate?

Grahamites - 2 years ago    Report SPAM

Science - You are welcome! Thanks for the nice words:)

Grahamites - 2 years ago    Report SPAM

Stevenbaker: Thanks for your comments and questions. In general, I use similar filters whether investing in the U.S or internationally. And I understand the risks that you've raised are common among U.S investors. Li Lu has given a great speech at Peking University which addesses some of the issues you've raised. He's done a great job in China obviously.

Specifically to your question:

1. Trust of management: I don't think it's any different than evaluating management teams in the U.S. It doesn't matter which country it is, I would apply similar filters evaluating management teams (honesty, competency etc). It's case by case, just like it is here in the U.S. I understand language and culture may be a barrier for non-Chinese investors to assess the quality of management team.

2. Laws and regulations of securities market: The U.S securities laws and regulations are absolutely more mature than those of China. China has been catching up and the government has made great efforts making the securities market more open, fair and transparent. There's still work to do but I don't see this as an issue investing in China.

3. Financial reporting: I also think it doesnt matter which country it is in, if people want to cheat, they'll cheat, doesnt matter whether it's U.S GAAP or IFRS, or China GAAP. The way accounting standards is set gives management a lot of discretions in many important areas, this is the same across the globe. What matters is whether the reported financial statements make economic sense and whether management is being aggressive or conservative in applying the accounting standards. I actually think to some extent the U.S is doing worse in China in this regard as the use of Non-GAAP numbers and metrics such as EBITDA are becoming more prevalent. This is not the case in China except some of the U.S listed Chinese companies.

Hope this helps. Just my two cents.

Stephenbaker - 2 years ago    Report SPAM

Grahamites, thanks for the substantive reply. I suppose my primary concern is what recourse is available to investors in Chinese companies if they discover irregularities? Here in the U.S. we have laws, regulations and procedures which are well established (and published) to protect investors. Not having the same degree of knowledge and comfort with China markets gives me pause - particularly when a lot of money is at stake.

Grahamites - 2 years ago    Report SPAM

Stephenbaker - I perfectly understand your concern. In China, the laws, regulations and procedures are currently not as well established as they are in the U.S. There's great progress being made in the right direction though. For instance, in May 2017, for the first time, investors in a company with irregularities (stock code 600696) were able to recover part of losses through civil legal actions. Judge ruled that the CEO and CFO of the company were personally liable for the losses incurred by investors due to misleading financials. Furthermore, the Chinese government and the SEC are taking investors protection very seriously. China's financial markets will be more open to foreign investors and for China to attract more foreign capital, a more established and well-enforced investor-protection mechanims is one of the absolute top priorities. I think we'll see much better laws, regulations and procedures in place to protect not only domestic investors' rights but also foreign investors' rights. The recent financial reform (more opening-up of asset management, insurance etc. to foreign investors) will accelerate the process.

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