“If you have a 150 I.Q., sell 30 points to someone else. You need to be smart, but not a genius.”
So said Warren Buffett, the world’s most famous value investor, at Berkshire Hathaway’s annual meeting here on Saturday, a regular pilgrimage for some 35,000 shareholders that many call Woodstock for capitalists. This year there wasn’t as much free-flowing love, given what a difficult year it’s been for capitalists, Mr. Buffett included.
But shareholders still hung on every word from the 78-year-old investor’s lips. Between sips of Cherry Coke and bites of peanut brittle, he served up some wisdom that might have saved a lot of heartache (not to mention jobs and untold financial losses) had investors heeded it over the last decade: keep it simple.
During the boom, the country became too enamored with the idea that the best and brightest could predict the future; too dependent on complicated financial models developed by quant jocks; and too reactive to every uptick or slight drop in the market. It still may be today.
“If you need to use a computer or a calculator to make the calculation, you shouldn’t buy it,” he said. Given that the stress tests for the banking system — developed with complex spreadsheets and using sophisticated formulas predicting the next two years’ worth of earnings and write-downs — are being released this week, it was timely advice. (He still likes his investment in Wells Fargo, by the way, and suggests it has enough capital already. Though, it’s worth noting, he seemed less optimistic about the economy than officials in Washington.)
Charlie Munger, Mr. Buffett’s 85-year-old business partner, added his two cents: “Some of the worst business decisions I’ve ever seen are those with future projections and discounts back. It seems like the higher mathematics with more false precision should help you, but it doesn’t. They teach that in business schools because, well, they’ve got to do something.”
I had traveled to Omaha to sit on stage, along with two other journalists, to pepper Mr. Buffett and Mr. Munger with questions — some quite tough — for more than five hours. Shareholders had sent in thousands of them by e-mail before I left. Even while I was on stage, they kept arriving, stuffing my BlackBerry.
Some questions I received showed flashes of real anger. Mr. Buffett, who had earned the nickname “the Oracle of Omaha” for his long-term performance, had let some of these shareholders down, they said. This past year was his worst ever. Like everyone else, he missed the credit crisis and subprime debacle.
Not surprisingly, however, his fan club is still strong, dismissing his bad year as part of the “markets go up and markets go down” inevitability of value investing. Even so, Mr. Buffett himself acknowledged, “I didn’t cover myself in glory” in 2008.
Others, though, wanted to know why Mr. Buffett was still invested in Moody’s, whose credibility took a huge hit in the bust along with other credit rating agencies after it doled out Triple-A ratings the way McDonald’s sells hamburgers (a shareholder’s analogy, not mine). There were plenty of questions about Mr. Buffett’s succession plan (or lack thereof, to the dismay of many investors). And if it was not about Mr. Buffett’s successor, it was about his reinsurance guru, Ajit Jain, who runs Berkshire’s wildly profitable reinsurance business. “The Titanic-like ending of A.I.G., after Greenberg left, has me spooked,” wrote Ben Knoll, in reference to Maurice Greenberg, A.I.G.’s former chief. He wanted to know who was next in line to take over a job that requires assessing risk.
Mr. Buffett sometimes meandered, but he did not skirt the questions. It “would be impossible” to replace Mr. Jain, he said, saying that “we won’t find a substitute for him.” He suggested that if Mr. Jain were ever to leave, Berkshire didn’t have anyone it would allow to write the same size insurance policies. Most C.E.O.’s I know would have said they had a succession plan even if they didn’t.
To the question about Moody’s, he said the company “eagerly sought stupid assumptions that enabled them to do clever mathematics.” As to why he didn’t exert his influence, he said: “I don’t think I’ve ever made a call to Moody’s. We don’t tell Burlington Northern what safety procedures to put in or AmEx who they should lend to. When we own stock, we are not there to try and change people.”
When asked why the conglomerate structure seemed to work so well for him, he remarkably — and surprisingly, to me — explained the structure is efficient and comes in handy around April 15. “We’ve got this ability in terms of moving money around into various opportunities” without tax consequences, he said, describing how he can invest the profits from one business into another without being taxed.
Most of what Mr. Buffett said was basic and obvious — and was roundly ignored during the period leading up to this mess. “Leverage is what causes people real trouble in this world,” Mr. Buffett said. “You don’t want to be in a position where someone can pull the rug out from under you or, emotionally, where you pull it out from under yourself.”
Not that Mr. Buffett doesn’t have a rug or two of his own. For a man who preaches the virtues of simplicity in all things investing, he is wrapped up in a lot of complicated investments, namely the very same derivatives that he has called “weapons of mass destruction.” On Saturday, he acknowledged that he had futures and options contracts on stock indexes and foreign currencies, but added that, in and of themselves, “derivatives aren’t evil.”
Insurance, by the way, is not exactly simple, either. There is a crystal-ball aspect to the industry, papered over with spreadsheets of probability calculations.
On Sunday morning, the day after the meeting, I attended a private brunch for the company’s directors and managers. It was a star-studded affair (for financial types): Bill Gates, Don Graham of The Washington Post, Charlie Rose, Steve Wynn, Mr. Jain and even a movie star, Glenn Close.
It had been a long weekend. Everyone was heading to the airport. One C.E.O. told me, “If I can just hold on and try to think like Warren for a couple of days when I get home every year after this weekend, it’s a success.”
I shook Mr. Buffett’s hand goodbye and tried to remember his words from the day before: “There is so much that’s false and nutty in modern investing practice and modern investment banking,” he said. “If you just reduced the nonsense, that’s a goal you should reasonably hope for.”Related Links
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