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Gal^Stad
Investments Inc.

spacer July 2008
Commentary

At Contra, it's an unwritten policy of ours to avoid discussing religion, politics and sex. Of course, such policies have generally been ignored -- not worth the paper they're not printed on, if you will. Readers who would like us to adhere to the aforementioned guideline should therefore skip this commentary, which is all about the Contra Guys' embarking on The Haj.

No, we're not referring to the numero uno Haj in the world, the pilgrimage to Mecca -- the fifth pillar of Islam, one of the five duties each member of the faith is expected to perform, the trek which every Muslim with the physical and financial wherewithal is obliged to make at least once in their lifetime.

No, we're referring to the annual general meeting of Berkshire Hathaway. To put it in Dorothyesque terms, ours was a Haj of a different colour. It took us to Omaha, Nebraska, which may not be your idea of the Emerald City, but it is home to what is arguably the world's best investment team, Messrs. Warren Buffett and Charlie Munger. If ever two wizards there was...

Not only did our pilgrimage see us remain in the Western Hermisphere, but it was of a smaller nature, with a mere 31,000 people or so convening at this hallowed place. Still, when you consider that only 450 "crowded" into the 1986 gathering, it's a sure sign of the religious fervour that has sprung up around the Oracles.

To get the golden ticket -- hmm, a jump from The Wizard of Oz to Willy Wonka; a sign of what's on the Contra bookshelves these days? -- you have to own at least one share of BRK. Over the past 52 weeks, the Class A stock has traded as "low" as $108,600 USD, while spending some time north of $150,000.

Fortunately, a B share, which set us back a "mere" $4,601, was enough to get us on the guest list. We know, we know, this represents a blatant violation of the Contra dictum about buying stocks over $25, but when it comes to scripture we prefer to allow some room for interpretation.

Our Midwestern excursion was something of a return to our roots. The Brotherhood of the Travelling Benjamins goes back more than 30 years, to the days when we met as wet-behind-the-ears teenagers at university. After that, a common path took us in many directions, from sharing an abode to expeditions to places like New York, Las Vegas and France.

Of course, there was the mandatory road trip across Canada, which, though eventful in its way, was not exciting enough to provide fodder for the silver screen.

But the addition of kids to the mix has meant that, except for the odd Financial Forum in Calgary or Vancouver, our jaunts together have been limited of late, and they have invariably been driven by work, as we yakked with subscribers, potential subscribers and people who just wanted to chitchat. This voyage did have a business component, but was also somewhat of an escape, giving us five days to pursue many other avenues while indulging in the cultural opportunities offered by eastern Nebraska. Possibilities? Endless!

Turns out there is much to do in Omaha. After we settled into our (smoking, and smelling of smoke) room, which the hotel staff was kind enough to oxygenate, some initial meandering took us to the zoo, considered to be one of the pre-eminent examples in the US of A. We passed most of a day there, and it did enthrall us.

All the walking also helped us burn off the calories from our dinner the previous night at Warren's favourite restaurant, Gorat's Steak House. This locale was a must-do for us, our reservation made well in advance so as not to miss the opportunity.

What a spot it was, a veritable Smithsonian time capsule. As one online reviewer wrote: "...it was like a scene from a movie: white-haired couples on the edge of death dancing to an equally fragile lounge singer that may or may not have had an actual gig there, walpaper [sic] made to look like drapery, and the supper club standard of spagetti [sic] served with your steak... If you're looking for something kitschy, then this may actually be for you."

In terms of the ambiance of the place, the writer should also have mentioned the silver disco ball above the dance floor, which looked just as we remembered them from our Saturday Night Fever phase. And he could have mentioned that, as elevator music goes, what was on offer was definitely "hardcore." Or that, while the steak was tender, it is kind of sad when HP sauce is necessary to provide, rather than accentuate, the flavour.

Despite all the negatives, the experience was fun as a one-off. We went, we watched, we drank, we watched, we ate, we watched, we drank. And were happy to be there and see that the entire bill, after a very filling meal replete with real white bread and iceberg lettuce, a bottle of decent California wine, tax and appropriate gratuity, tipped the scale at a mere 70 bucks. Which goes to show you that, while Warren has a sharp eye for value wherever it can be found, his gastronomic range is more limited.

Arriving among the laggards at the Qwest Center for the AGM, we were shuffled off to one of the rooms where the meeting could only be watched on a big screen, the more punctual (and probably less hung over) faithful having already filled up the entire 18,000-seat arena. After lunch, however, many of the less devoted would depart, enabling us to filter down to where we could be a part of the action.

For those of you who don't know the format, audience members ask questions. Warren always answers first, then Charlie often chimes in with a rather pithy response, before Warren adds a summation. Quite frankly, while our knowledge of Warren and his manner was more extensive, Charlie had remained a background figure for us; now, due to his concise, well-thought-out contributions, our appreciation for the man grew.

There was a wonderful, revivalist feeling about the proceedings. The answers rolled out of Warren's mouth in a relaxed, often humorous way. It felt like the straight goods were being sent our way, and many of the items on the list of things we detest -- greed, derivatives, excessive speculation, disproportionate profiteering, lack of foresight, hopping on bubbles -- were commented on in detail.

It felt in so many ways like this is the way the world should be, far away from the Conrad Blacks and Bernard Ebberses and Dennis Kozlowskis and Michael Koppers and David Myers and Sam Waksals.

We were inspired to review past shareholder letters from the annual reports dating back to 1977, to gain a historical context for these two gentlemen. In addition, we searched far and wide for some of their other brilliance to give us, and readers, food for thought.

In 1983 it was written, "Of Wall Street maxims the most foolish may be 'You can't go broke taking a profit." This is something we maintain, and though "buy and hold" is not a mantra for us, the distance of our Initial Sell Targets from the purchase prices means that short-term profits are not the object of our practice. When a profit is taken prematurely, the gain is not as great as it could have been -- tantamount to a loss in our book.

The same year, Mr. Buffett wrote, "And an iron law of business is that growth eventually dampens exceptional economics." This is one of the reasons why purchasing huge companies that have done well for a very long time often does not work. In fact, this very quotation applies directly to Berkshire, as Warren currently bemoans the fact that with so much money, it is harder to achieve excellent returns.

It is also germane to mutual funds that have had tremendous success -- they are consequently inundated with cash that the managers must find a way of investing. Size often breeds diseconomies of scale. This directly relates to another bit of wisdom: "The investor of today does not profit from yesterday's growth."

A parable of sorts from 1985 helps explain some of the booms and busts that have happened since, and before. "An oil prospector, moving to his heavenly reward, was met by St. Peter with bad news. 'You're qualified for residence,' said St. Peter, 'but, as you can see, the compound reserved for oil men is packed. There's no way to squeeze you in.'

"After thinking a moment, the prospector asked if he might say just four words to the present occupants. That seemed harmless to St. Peter, so the prospector cupped his hands and yelled, 'Oil discovered in hell.' Immediately, the gate to the compound opened and all of the oil men marched out to head for the nether regions.

"Impressed, St. Peter invited the prospector to move in and make himself comfortable. The prospector paused. 'No,' he said, 'I think I'll go along with the rest of the boys. There might be some truth to that rumour after all.'"

Here is another, from a few years later, with which we can definitely empathize. "It is encouraging, moreover, to realize that our record was achieved despite many mistakes. The list is too painful and lengthy to detail here. But it clearly shows that a reasonably competitive corporate batting average can be achieved in spite of a lot of managerial strikeouts."

This is admirable modesty. Despite these acknowledged errors, Berkshire arguably has the best record the investing world has ever seen. The stock was trading at $15 when Buffett took control in 1965 and set it on a new path as a holding company. Currently, it trades in the vicinity of $120,000. How's that for the miracle of compounding!

From 1987: "Oftentimes, in his shareholder letter, a CEO will go on for pages detailing corporate performance that is woefully inadequate. He will nonetheless end with a warm paragraph describing his managerial comrades as 'our most precious asset.' Such comments sometimes make you wonder what the other assets can possibly be."

In 1990, Warren wrote about his mentor, Benjamin Graham. "Confronted with a challenge to distill the secret of sound investment into three words, we venture the motto, Margin of Safety." This is also a primary focus for us, and is particularly noted in our attention to debt levels. Regrettably, it does not eliminate all blowouts, as our record sadly attests.

The kissing cousin quotation is, "Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks." This one gives us additional food for thought, especially when we get caught on a sinking ship.

"A public-opinion poll is no substitute for thought." How true that is. When one regards where the public is investing, it is often in the hottest sectors. The result, over and over again, is that the public are burned.

"It's better to hang out with people better than you. Pick out associates whose behavior is better than yours and you'll drift in that direction."

The next one is a classic: "Only when the tide goes out do you discover who's been swimming naked." Sub-prime mortgage fiasco, anyone?

"Price is what you pay. Value is what you get." This is critical. Always try to pay less than the value of the purchase.

Watching the Warren and Charlie show, we found the manner in which these guys work together -- and seemingly have forever -- to be an absolute delight. They're not the Smothers Brothers, but if they had wanted to be, it might have been possible. After Warren had answered one question in a particularly glum fashion, Charlie said, "Warren gave a very optimistic prognosis. Some people seem to think there's no trouble just because it hasn't happened yet. If you jump out the window at the 42nd floor and you're still doing fine as you pass the 27th floor, that doesn't mean you don't have a serious problem."

In terms of their analysis, Charlie has stated, "We both insist on a lot of time being available almost every day to just sit and think. That is very uncommon in American business. We read and think. So Warren and I do more reading and thinking and less doing than most people in business."

Sometimes this examination leads to a deal being done, and as Warren pointed out, once they seal an agreement with a handshake, the party on the other side knows that the transaction is complete. The bankers involved in the BCE deal might want to take note. Oh, maybe they should be excused, being bankers and all, who are probably being advised by a pack of lawyers.

A few other highlights of the trip included the time we allotted ourselves to visit Nebraska Furniture Mart, one of Berkshire's holdings and advertised as the largest furniture store in America. We believe it; the store's mammoth dimensions are enough to make Ikea look like a corner store. Next up: the Berkshire taco event. For a mere five bucks, we dined on a couple tacos, soft drinks and cookies. And quite frankly, it was yummy.

While travelling, one often does things that are normally pushed to the back burner back home. We managed to take in the Joslyn Art Museum, spending a delightful afternoon.

In the evening, we returned to the concert hall to see Leo Kottke and Leon Redbone, two old musical hands who, odds are, never would have been on our agenda if they were on the bill at Massey Hall. They were amazing, not only for their musical virtuosity, but the accompanying reams of stories. Their yarns were of another verse than the taxi drivers who kept us entertained from latitude to longitude, rendering fascinating major accounts of life experiences in 15 minutes or so.

Without meaning to sound egotistical, a few people we had never met recognized us and stopped to say hello. One pair of stylish young fellows were pros with one of the big investment outfits in Ottawa. This was an annual excursion for them, and they knew that during and after the AGM, it was possible to head into one huge hall within the Qwest Center where various Berkshire companies were hawking their wares.

We caught up to one of the Ottawa lads in the Fruit of the Loom area, where we found him stockpiling undies at prices unbeknownst to us in years. "Yeah," he said quietly, "I only come down with two pairs and fill up the sack."

In essence, this chap embodies the moral of the story: buying quality at a low price. If we return, our suitcases will also be lighter on the way down.

We should add that our pilgrimage almost did not come off. Ben had a list of pressing priorities that pushed this adventure way down on the chart. Benj finally said something like, "Great if you can join me, but if not, I'm going to go anyhow. Warren and Charlie aren't getting any younger, so there might not be too many more chances for this."

Ben acquiesced and, when asked why, he responded, "We're not getting any younger, either."

After a long hiatus, the Contra Guys travelled together, largely for pleasure, and it was wonderful. As life passes, with all its vagaries, who knows whether the opportunity will arrive again? A dream was fulfilled, and now it can be replayed in the realm of reminiscence.


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