One would think those similarities would be enough for people to get along, but Islam is divided among itself, sometimes with snobbery that makes a British royal appear egalitarian. Most Iraqis are Arabs, but some are Kurds. Kurds consider themselves to be racially distinct from Arabs. Minority populations of nomadic Kurds also live in neighboring countries. Iraqis chiefly speak Arabic, but regional minority languages include Kurdish and Turkmen. Iranians, formerly known as Persians, consider themselves Aryans, but many Persians appear to look Arabic.
When I lived in Iran, an Iranian friend joked that 40 percent of Iranians may have Arabic blood, and 100 percent of them will deny it. Nose jobs are a brisk business among Iranians living in foreign countries. Yet, many Iranians claim they are descended from the prophet Mohammed, who was an Arab. My Iranian ex-husband, who earned his Ph.D. in chemical engineering, had no problem performing the required mental gymnastics to live with this contradiction. This is not that unusual, either. Having been born and raised a U.S. Catholic, I know a few who cannot accept that Jesus was Jewish. Many who do accept it believe he looked like the blond blue-eyed actor Jeffrey Hunter in the King of Kings.
Iran’s official language is Farsi (or Persian). It is an Indo-European language (most Westerners find Farsi much easier to master than Arabic), yet it uses Arabic script. All Iranian Moslems pray in Arabic, even if they do not understand the language. (Catholics recite Latin prayers without fully understanding them.) Iran has a small Arab minority and one of its neighbors is Arab-speaking Iraq. The United States has a much bigger language barrier in Iraq than Iran has. Given the large population of Shia Moslems in both Iraq and Iran, and given their common economic interest in oil, it is easy to see why Iran’s influence is rapidly growing in Iraq.What that would mean for Israel is unclear, but it is a concern.
Warren invested in ISCAR with his eyes wide open, and he is a long-term investor. One of my British friends complained that Warren’s investment in Israel is highly risky. I responded that financial risk is relative, and I saw people making much riskier bets in the mortgage market and in hedge funds for the promise of much less return.
Warren does not ignore risk, but he has a unique perspective.When we first met, Warren asked me what I thought the greatest global risks and surprises might be, and if I think of anything else later, to let him know. He asked what might happen if, for example, global computer communication were knocked out. How would we track trades? I responded that we might exhibit ingenuity. I recall that in Apollo 13, stranded astronauts and their Houston-based colleagues reached for pencils and slide rules. We sent men to the moon before computers were in every middle-class home. It is an unwelcome thought that we would go back to those days, but Warren tries to consider all angles.
While the 33-day Lebanese-Israeli war was still waging, on August 1, 2006, Bear Stearns Asset Management launched the Bear Stearns High Grade Structured Credit Strategies Enhanced Leverage fund. The fund invited investors with comforting words like “high grade” and “enhanced,” and the investors seemed to be persuaded that they were getting a relatively safe and rewarding investment. Yet a terrorist attack would have posed less risk to their investment. Within a year, Bear Stearns told the fund’s investors they would probably get nothing. Had the investors put their money in Berkshire Hathaway instead, they would have had more than $1.2 million for every $1 million they invested. Furthermore, the hapless investors in the hedge fund will have no peace.They hired lawyers.
Warren looks for companies that create value for consumers. ISCAR continues to thrive, and once he finds value, Warren’s favorite holding period is forever. As a result, Berkshire Hathaway still owns the major part of a company that creates economic opportunity for both Jews and Arabs in Israel. Perhaps one day, it will be part of a Middle East renaissance. I like to think that Warren’s investment has a chance to make the world a better place.
Chapter 14
Finding Value
[T]here was an absolutely open-ended, no-score-kept generosity of ideas, time, and spirit.
—Warren Buffett
on Benjamin Graham, 1976
After I met Warren for lunch, I began spending more time on my personal ideas of value. I bought energy and energy-related stocks, a potash manufacturer ripe for takeover, metals stocks, and some value stocks. I kept my Berkshire Hathaway holdings, of course.
I could write a long book on valuing Berkshire Hathaway. Instead I will offer you my completely unauthorized and lazy shortcut to understanding the value of Berkshire Hathaway. You can play around with balance sheets, discount rates, multiples, and the like; but basically Berkshire Hathaway invests in sound business that will stick around, and the businesses it owns have growing earnings.
A thorough analysis is hard, but understanding that there is a lot of value in the stock is easy. Getting the annual report brings a smile to my face and I dive in and get right to the action. Warren wrote in the 2007 shareholder letter that investments (about 40 percent financed by insurance float) are worth $90,600 per share. Now you add to that the value of $4,093 per share of a growing stream of earnings from the non-insurance operating businesses. As a long-term investor, you might use a 10-times multiple to earnings (as some long-term investors do) for a combined value—including investments—of $131,530. If you apply a 15 times earnings multiple (as other long-term investors do), you get a value of $151,995. No one knows what may happen in the super-cat insurance business managed by Ajit Jain who runs Berkshire Hathaway’s reinsurance business, and I did not factor that into the numbers. 2006 was a lucky year and the super-cat insurance business went from red to very black. 2007 was a good year, too. No one can predict what will happen, but the premiums are well invested, and this is only a part of the overall business.
Obviously, this is a gross oversimplification. My point is there is substance behind the numbers. First and second quarter 2008 earnings were down, but Berkshire Hathaway’s businesses continued and will continue to generate earnings. As noted before, there was an unrealized loss on derivatives, but shareholders know it is unlikely a payment will ever be due, Berkshire Hathaway has wisely invested the premium income, and Berkshire Hathaway is not leveraged and has lots of cash.This is why Warren Buffett and Charlie Munger are right to call this fluctuation meaningless. Meanwhile, the operating businesses generate earnings, and Warren is on the hunt for more good companies to grow operating revenues.
Intelligent investors revisit the stocks they own periodically, especially as market conditions change, but they do not overreact to a change in market prices. Although one’s favorite holding period may be forever, you do not have to hold stocks you no longer favor. If you are a value investor, you won’t have to check your portfolio every day, but you should periodically reevaluate your decisions.
Berkshire Hathaway may never match the stellar returns of its early years, but it is likely to remain a great steady performer returning 10 percent to 15 percent returns over a five-year period. Even if a prolonged recession hurts returns, I am still likely to be much better off than the rest of the market. Berkshire Hathaway’s companies make things people use, want, and need. While results may not be as exciting as they were in previous decades, they are likely to be satisfactory in the long run.You will not gasp with delight one day only to gasp for air the next. It is not my only holding, but it is one I do not worry about.
When we had lunch, Warren encouraged me to use what I know, so I fell back on my engineering background to look for opportunities. For example, in the late spring of 2006, it seemed to me oil pipe replacement orders were not keeping up with stress corrosion cracking and ordinary corrosion. A pipeline at Alaska’s North Slope proved the point by leaking oil through a corroded pipe shortly after I bought steel shares. The smaller steel companies were ripe for takeover and produced gains of more than 30 percent.
In December 2006. I wrote Warren that I had rejected a pitch by a California-based hedge fund manager that did not seem to offer anything new and demon
strated some inconsistencies. They strongly believed in the housing bubble, so they did not own their own homes. Yet this strength of conviction did not extend to their personal transportation. They strongly believed energy prices (and gasoline prices) would explode; yet they drove gas guzzling sports cars (except for the salesman, who seemed smug because he said he drives a hybrid). I was already long energy and oil-related stocks. I had bought shares in two steel companies, which produced gains of more than 30 percent when they were acquired by larger companies, and I profited when my shares in a small potash company was acquired by a large chemical company, and I do not charge myself high fees. Warren Buffett takes advantage of these kinds of market opportunities when he finds them. These are called merger and acquisition (M&A) opportunities, and they are sometimes loosely (and not technically correctly) called merger “arbitrage” opportunities. These are not meant to be long-term holdings, but are a way of taking advantage of a good opportunity when it seems to fall in your lap. Sometimes, however, you can be wrong (it is not a genuine arbitrage) and you fall off your chair. The other problem with merger and acquisition opportunities is that once the acquisition occurs and one pockets a gain (currently a short-term gain is taxed higher than a long-term gain and often these are short-term opportunities), one has to reinvest. What next? It can be exhausting, so I am trying to find more value stocks as long-term holdings.
When I sent Warren my old copy of The Intelligent Investor to sign, he returned it with an inscription: “To Janet - With personal & professional admiration.”1 He may write that inscription for everyone but I glowed the entire day anyway. In August 2007, during one of several minor market upsets, I wrote Warren: “I’ve been recommending The Intelligent Investor for those swimming for the lifeboats.”2
Warren could have invented the maxim “ponder, and then act.” His investment style allows him to remain unflappable despite Mr. Market’s manic depressive fluctuations. While the asset bubble expanded and exploded,Warren made time for old and new friends.
Warren wrote me at the end of May 2006: “I am swamped at present. You will see why in a little while....”3 Even though he was terribly busy, he made time for me. I called Warren in June 2006 to ask his thoughts on my nephew selling his business. It is a business too small for Warren (but very substantial), and my nephew is a young man. While Warren’s advice was the same as mine, Warren agreed my nephew would more readily accept advice from “the voice of authority.” 4 The prospect of getting a large upfront payment was very enticing to my nephew, but he loved running his business. Would he rather spend his money beating back tropical vegetation from a Caribbean estate, or would he rather invest his cash in a growing business that he finds rewarding to manage? Warren said he envied him having a business he loved (but only because my nephew was in his early 30s). I wrote Warren on June 20, 2006:
Tony was very surprised that you would spend even a picosecond considering his dilemma and was curious about my impressions about how you spend your money, meaning whether or not it was spent in a way that impresses people. I responded that most of your wealth growth occurred after age 65, and you spent your wealth reinvesting in good businesses. It struck me that you lived how and where you wanted and didn’t waste a moment’s thought on how others might assume you should live. Yet, you are still the kind of man who would spend time considering someone else’s problems, even when there was nothing immediately in it for you. I was deeply impressed. What could be more impressive?5
On June 22, 2006, Warren wrote back and mentioned Tony: “Tell him I wish him the best.”6 Not only did I tell Tony, I gave him a copy of Warren’s letter. Tony did not sell his business. My nephew probably would have come to this decision himself, but it helps to have a sounding board. My nephew was floored that he called to ask me about this and I was able to have a conversation with Warren and get back to him with Warren’s opinion in the same afternoon. Warren must have known the effect this would have. At the time of our conversation, I had no idea Warren was in the middle of finalizing his arrangements to leave the major part of his wealth to the Gates Foundation. On June 26, 2006,Warren made the announcement with Bill and Melinda Gates in New York.
I responded: “In my June 20 letter I asked: ‘What could be more impressive?’ Your answer is magnificent.”7
Value isn’t just about money, but value investing may give you more time for the other things you value in your life.
When I think back to my unanswered invitation, I cannot explain what took me so long to answer. It seemed to me Warren did not just invite me to lunch. He invited me to come around (even more) to his way of thinking. Benjamin Graham wrote about the pretensions of stock market pundits: “The farther one gets away from Wall Street, the more skepticism one will find.”8 Graham might have said the same things about the social pretensions of the Maserati drivers of Wall Street. Warren had written me that he thought Tony was “better off for having the experience of thinking through what he truly wants to do in his life.”9101112 At the time Warren had already given a lot of thought about his legacy, and it seemed to me that everyone benefits from the experience of thinking through what is really valuable to us in life.There is something to be said for moving 1,269 miles away from Wall Street in one’s mind. One gets a clearer view.
Warren Buffett may be my benchmark for sanity in the global financial markets (and how to conduct one’s life), but he is not perfect and is not above using statistics to his advantage. At his annual meeting he joked that he (at 77) and Charlie Munger (at 84) have an average age of 80. They are aging by 1.25 percent per year, whereas 50-year-old executives are aging around 2 percent per year. According to these statistics, I am aging around 60 percent faster than Warren.
I really must write him about that.
Notes
Preface
1 Josh Hamilton and Dan Reichl, “Buffett Has $2.1 Million Lunch Date with Hedge-Fund Manager,” Bloomberg News, 28 June 2008.
2 Steven F. Hayward, Churchill on Leadership (Rocklin, CA: Forum, 1997), 3.
Chapter 1: An Unanswered Invitation
1 Warren Buffett to Janet Tavakoli, letter, 6 June 2005.
2 Ann C. Logue, “The Cassandra of Credit Derivatives,” Business Week Chicago, 28 January 2008.
3 Warren Buffett,“Shareholder Letter,” Berkshire Hathaway 2002 Annual Report, 14.
4 Ibid., 11.
5 Ibid., 13.
6 Ibid., 14.
7 Ibid., 15.
Chapter 2: Lunch with Warren
1 Katherine Graham, Personal History (New York: Random House, 1997), 534.
2 Ibid., 531.
3 Taesu Bynun, “IMDb Mini Biography for Dustin Hoffman,” Mndb.com, 2008.
4 Carol J. Loomis, “The Jones Nobody Keeps Up With,” Fortune, April 1966.
5 Benjamin Graham, The Intelligent Investor (New York : Harper & Row, 1973), 108.
6 Benoit Mandelbrot and Richard L. Hudson, The (Mis)Behavior of Markets (New York : Basic Books, 2004), 261.
7 Based on the Yale Endowment Updates 1993-2007 and Berkshire Hathaway historical daily share price data from Yahoo! Finance.
8 Benjamin Graham, The Intelligent Investor (New York: Harper & Row, 1973), 277.
9 Ibid., 103.
10 Cifuentes Arturo, “CDOs and Their Ratings: Chronicle of a Foretold Disaster,” Total Securitization, 4 June 2007.
11 Brooke Masters, “Former Reagan Aide Charged with Fraud,” Financial Times, 26 March 2007.
12 Warren Buffett to Janet Tavakoli, e-mail correspondence, 27 August 2007.
Chapter 3: The Prairie Princes versus the Princes of Darkness
1 Berkshire Hathaway 2007 Annual Report, 15.
2 Julie Rannazzisi, “Coca-Cola to Expense Stock Options,” CBS Marketwatch .com, 14 July 2002.
3 Tom McGinty, “Fewer Investors Back Plans to Weigh in Executive Compensation,” Wall Street Journal, 22 May 2008.
4 Janet Tavakoli, “FASB in Error on Options Valuation,” Financial Times, 5 April 2004.
5 Warren Buffett, “Fuzzy Math and Stock Options,” Washington Post, 6 July 2004.
6 Mark Maremont, “Authorities Probe Improper Backdating of Options—Practice Allows Executives to Bolster Their Stock Gains; A Highly Beneficial Pattern, Wall Street Journal, 11 November 2005.
7 Charles Forelle and James Bandler, “The Perfect Payday—Some CEOs Reap Millions by Landing Stock Options When They Are Most Valuable; Luck—or Something Else?” Wall Street Journal, 18 March 2006.
8 “Perfect Payday: Options Scorecard,” Wall Street Journal, 4 September 2007.
9 Kip Hagopian, “Point of View: Expensing Employee Stock Options is Improper Accounting,” California Management Review 48 no. 4 (Summer 2006): 136-156.
10 Holman W. Jenkins, Jr., “Stock Option Fiends Revealed,” Wall Street Journal, 30 August 2006.
11 Janet Tavakoli, “The Golden Fleece Award for Optional Integrity,” Tavakoli Structured Finance, Inc. (client note), September 6, 2006.
12 Janet Tavakoli, “The Golden Fleece Award for Optional Integrity,” Lipper HedgeWorld, October 2, 2006 (printed with permission of Tavakoli Structured Finance, Inc., which retains the copyright).
13 Warren Buffett to Janet Tavakoli, e-mail correspondence, 2 October 2006.
14 Kevin Allisonin, “HP’s Dunn Charged With Conspiracy,” Financial Times, 5 October 2006.
15 Warren Buffett, memo of September 27 was published in the Financial Times on October 9, 2008. It was sent to me six days after Buffett sent it to his managers.
16 Ibid.
Dear Mr. Buffett: What an Investor Learns 1,269 Miles From Wall Street Page 26