Prof. George Athanassakos Interviews Warren Buffett (2008)

Thanks to the generous support of Fairfax Financial Holdings Limited, the Richard Ivey School of Business has established the Ben Graham Centre for Value Investing (henceforth, the Centre) - one of only two in the world. Ivey's Centre is led by the holder of the Ben Graham Chair in Value Investing, Professor George Athanassakos.


The Centre, which was formally established in 2006, focuses on researching and educating future business leaders and investors in the investment style made popular by Benjamin Graham in the early 1930's, referred to as Value Investing. The Centre serves a critical role in coordinating applied research at the University and in linking the activities of faculty and students with practitioners, primarily in the financial services sector, but also in other industries and in undertaking activities which are mutually beneficial to the University, the Industry and investors in general. Finally, the Centre preserves the thoughts, ideas and investing philosophies of Value Investors, especially those of investment icons such as Benjamin Graham, Warren Buffett, Irving Kahn, Walter Schloss, Mario Gabelli, Glenn Greenberg, Robert Heilbrum, Seth Klarman, Michael Price, Paul Sonkin, Charles Brandes, and others.

Question: With the abundance of stocks and companies out there I was wondering if you could discuss the process you use to narrow it down in search of a value investment.


Buffett:


With the situation we are in now companies don’t change that fast. I try to think about those companies. I hope their prices change a lot because then their price to value may change significantly. One source I use is Value Line. Every 13 weeks they value thousands of companies, so I go through their weekly stuff (it takes 15 or 20 minutes) and hope that it jogs my memory. When you get into currency or bonds and things like that, it’s essentially reading or seeing unusual things happening. Let me give you an example. If you believe in efficient markets I will destroy that belief. About 7 or 8 weeks ago you may have read about how in auction rate securities the weekly auctions were fake. In other words, these were instruments backing up money market funds ($330 billion of tax exempt funds). People had their money in what they believed were demand deposits and the way they could get out was that every week there was an auction of underlying securities where anyone could get out and somebody else get in. They had limits on the interest rates they would pay. Nobody ever thought they would hit those limits. They were past those limits. If the limit was 4% then the issuer would pay 4% and nobody was willing to buy at 4%. So the people were stuck in it. The underlying credits, in 99% of the cases, there were no problems with the issuer. The problem was the whole financial system was under strain and nobody wanted to come in. Incidentally, many of you are from Canada and this is similar to the commercial paper that was frozen. People thought they had something that they could get out of tomorrow morning and couldn’t. Here in the US we had hundreds of billions of dollars that people were locked into these auction rate securities. So what happened? 6 or 7 weeks ago we started bidding on these things.


That caused me to start thinking about it. This doesn’t add up to lots of money, but we started buying these issues and today we have something like 4 billion in things that 7 weeks ago were paying 2% and now are paying 8%. This is when short term treasury bills are 1%. So this is crazy, but the really crazy part is that every day we get these bid lists from Citi, Merrill Lynch, JP Morgan of all these different options. Sometimes we see that on different pages there will be the same issuer, let’s say the New York Port Authority, because, in fact, they are different issues. Sometimes we put in bids at an 8% basis and someone else, just because they are on another page, gets them on a 5% basis; now that is huge. That can’t happen if markets are efficient. This is not some little market anomaly, this is a $300 billion market, with a 300 basis point spread on the same security. 8 weeks ago I would not have dreamt that this would happen - and then it happened. And it is lasting longer than I thought it would.