That’s what I said about Tesla!

Color Commentary

i) In This Together

We held the First Ever Invested Practice Meetup! A bunch of us met up in Greenwich Village in New York City, and what a lovely, lively group we have in The Invested Practice. I was blown away that some people traveled from across the US and Canada to come to the meetup. The best part of the evening for me was how much fun everyone had talking to each other about their investing practices. It’s lovely to feel like we’re not doing this alone.

So let me tell you all: You’re not doing this alone. That is the point of me sharing my practice with you: I love showing what a real investing practice looks like, mistakes and all. I also personally love the opportunity to write about my work because it creates a discipline and forces me to think about what I do more carefully. Thank you for joining me on this practice.

ii) YouTube Investing Wandering

I was going to be a guest on Jacob Taylor’s podcast/video series Five Good Questions (and he’s going to be a guest on our InvestED Podcast on April 9), and we were laughing about how many technical difficulties we had on both of our podcasts. Guys, I have LOST ENTIRE EPISODES. Not a fun moment when you realize the sound wasn’t on or you didn’t press record, and you lost the GENIUS that had just been done and have to do it all over again.

In commiseration, Jake sent me a video of his class at UC Davis in which Pabrai and Guy Spier spoke to his students. He was struggling with the multi-person format of the video chat, and good lord, haven’t we all. So I started watching this video while Nuno was making me coffee in the morning, and frankly the technical difficulties are minor and the content is major. I especially love how, after Pabrai would answer a question, Guy emulated Charlie Munger’s oft-repeated comment at the Berkshire meeting with “I have nothing to add.” Perfect.

When I finished that video, Youtube automatically played next an interview with Pabrai and Steve Forbes in which he talked about many important things, but particularly checklists. Note that that interview is quite old, so take it all with a grain of salt.

Then, I noticed an acquaintance had texted me a video of a recent Steve Eisman interview, so I put it on. Nuno was wandering around packing for a work trip to Frankfurt and I watched the video and excitedly announced comments to him.

Eisman on Tesla (who has shorted Tesla, which means he’s betting the stock will go down in price): “You can’t wait a month to get your car fixed. [Elon Musk] doesn’t have the infrastructure to service the cars. That’s where I think the big risk of the company long-term is.”

Me, yelling to Nuno: “That’s what I said about Tesla!”

Eisman on General Motors: “With its bad balance sheet, its bad management, it sold at 5-6 times earnings. So fast forward to today, it actually has a good management team, maybe even better than good. It has a pristine balance sheet. And it sells at 5-6 times earnings. What’s interesting about it is that there are actually two leaders in autonomous driving today, and that is Google and GM.”

Me, yelling to Nuno: “GM! I’ve got to look into it. LJ Rittenhouse is a big fan of Mary Barra.”

Nuno, who walked into the room finally: “What are you yelling at me about cars?” He couldn’t hear the video, it turned out.

Suddenly I’m super into Steve Eisman’s thoughts about just about anything. He’s smart, well-read, intellectually honest, and realistic. Again, thanks to the YouTube algorithm that plays the next video automatically, I then watched this video of Eisman explaining the financial crisis at the Oxford Union (of which I was a member when I was at Oxford, yes indeedy). It’s a good explanation.

By then, I was into this rabbit hole deeply. I’ve never gotten all that excited about YouTube videos of investors, but suddenly, I am INTO it. There’s so much free information online that’s easily watchable, and the format makes it particularly easy to learn deeply watching one video after another on the same subject or same person.

So, obsessively, THEN I wanted to remember what Eisman did during the financial crisis, and realized there’s an entire book and movie about that: The Big Short, by Michael Lewis. I could have gotten the book off my shelf, but no, I was into my brand new YouTube investing info source, so I started watching clips of Steve Carell playing Steve Eisman (the name they used in the book and the movie is Mark Baum.

Wait a second. Why was I watching clips of The Big Short on Youtube? I could watch the whole movie AND call it investing practice. So I did.

Awesome day.

The Big Short is a good movie, and watching it again as an investor is a different experience than when I watched it the last time. The unbelievable stress those investors were under as they waited for the market to recognize the huge housing bubble was almost unbearable, even though THEY WERE RIGHT. They were right. But the waiting and concern over whether their rightness would pay off under the financial system, or if the financial system would cover its own ass and fraudulently find a way to avoid paying off.

Their ability to be antifragile in that environment was extraordinary. For Steve Eisman, it was partly because of his Mission. To stick it to the people who gambled with people’s livelihoods and lives.

For others, it was about the money. That’s fine too. But I don’t think thoughts of the money is going to sustain me through that kind of stress.

Michael Burry, one of the investors in the movie, says his insides felt like they’re eating themselves. So, after he finished the housing investment, he closed down his fund.

One of the greatest investment minds, wanted to quit, because of the stress. THAT is a cautionary tale.

iii) Berkshire Letter: Book Value

Time for a shift from wandering around in investing practice to the annual words from the master himself, Warren Buffett. Very soon after the Daily Journal shareholder meeting, Buffett published his 2018 letter to Berkshire Hathaway shareholders.

He began with his traditional comparison list of Berkshire’s Book Value and Market Value to the S&P 500. Berkshire is up 18.7% compounded annual gain in Book Value since 1965, while the S&P is up 9.7%. Point Buffett and Munger. (Editorial Note: I am capitalizing accounting terms like Book Value because it’s much easier for me, if they are capitalized, to be aware that they are accounting terms of art rather than regular words. I tried and failed to convince my publisher to let me capitalize all the terms in Invested, but this newsletter is all mine, and I can do WHATEVER I WANTTTT it’s the best.)

This comparison begins every Berkshire shareholder letter, but is notable this year because usually the first paragraph points out Berkshire’s Book Value per share. Not this one. Buffett has decided that that metric, which he has said to use as the touchstone of how to evaluate Berkshire for many years, no longer has the relevance it once had. For me, accounting isn’t the easiest, but I struggle to understand the ins and outs and nuance because it’s hugely informative about the health of companies, so I read this section with interest.

He gives three reasons not to use Book Value anymore:

  1. Berkshire’s value has gone from mostly public stocks to private operating businesses.
  2. New accounting rules require their operating businesses to be included in Book Value at an amount “far below” what Buffett thinks is their current value.
  3. Berkshire is going to repurchase its own shares at above Book Value, but below what Buffett thinks is its intrinsic value, and the repurchase will make Book Value go down but intrinsic value go up.

Instead of Book Value, what does he want us to use? Operating Earnings, he advises, is the best metric to watch, along with the long-term trend of Berkshire’s stock price.

OK. This is a bit odd, because Buffett has said for YEARS that Book Value is the correct way to value Berkshire Hathaway, and looking at the stock price is a waste of time because markets are inefficient and price does not equal value. So why the change?

His second reason – new accounting rules – is the one that should be in bold. Last year, Buffett railed on the new accounting rules requiring the company to mark-to-market their stock investments because it will show gains that don’t exist and losses that don’t exist. Which means Book Value no longer reflects reality. How, then, could he stick with using it to value his company? This change in how to value Berkshire is the natural outgrowth of those accounting rules making Book Value no longer reflect what Buffett has actually done.

What this tells me is that accounting is not a fixed science. It is an art that changes. Which is so bloody FRUSTRATING to me, I cannot tell you. How can I practice something I don’t completely understand that is ever-shifting and ever-changing? As an accounting neophyte and avoider, I have to accept the reality that accounting is slippery. I have to not only take every number I read with a mountain of salt, but, before I make conclusions, search online for the formulas and find out what that Book Value, or Earnings, or whatever metric it is, actually represents. It makes me want to avoid financial statements altogether, quite frankly. I think I know just enough to be dangerous.

I have no solution to this accounting slipperiness. Even Buffett sounds a bit tired to me, in this letter. It’s a vibe of “Why are you making this harder, GAAP people? I’m old and don’t need these silly complications.” He’s just too nice to truly excoriate them.

iv) Berkshire Letter: Investing in People

The question that comes up more and more often about Berkshire Hathaway is what will happen to the company when Warren Buffett is no longer with us. Charlie Munger, the vice-chairman and Buffett’s investing partner, is 95, and Buffett is 88 – he noted, “I’m the young one” (his emphasis, and I love him for it) – so they’re getting up there. Yet it’s been only the two of them representing Berkshire every year on stage at the shareholder meeting, and when someone asks them directly about succession, they dodge the question.

My own opinion is that, for some years, they haven’t particularly cared what would happen after they go. It was probably a combination of figuring they’d be around to do it themselves, and if some unexpected calamity happened, then so be it. Berkshire would figure it out. But why pay attention to such things when there’s interesting investing to be done?

In this letter, Buffett addresses succession, at least more than he ever has before. It’s another point in which he seems a bit tired, a bit aware that he’s gotten so many questions about succession, he’d better respond to them. Still, he doesn’t do so directly, that would be too easy. In a little tiny paragraph on page four, he said that in 2018, they made some management changes. They put Ajit Jain in charge of all insurance activities and Greg Abel in charge of everything else, and they are sharing oversight of management together with Buffett.

It’s few words, but big news. Ajit Jain and Greg Abel have been with Berkshire for many years, have been asked to answer a few questions at the shareholder meeting from their seats in the front row of the audience, and have been long considered to be the successors. For Buffett to put them in charge, though, is another step altogether. He clearly wants us to trust them, because he notes that they have rare talents, and, “Berkshire blood flows through their veins.” That’s code for “Berkshire will be in trustworthy, long-term hands.”

Buffett came around to them again at the end of the letter, and in addition to closing as he usually does, with an assurance that he and Charlie are doing great and love what they do, he added that the new management structure of Ajit and Greg running operations, their lives are even more enjoyable.

I expect a lot of questions about this at the shareholder meeting in May.

Indeed, it’s not only Buffett and Munger who are getting older. As I read, I was struck by how often Buffett commented on how important certain people are to success. In his section entitled “GEICO and Tony Nicely,” he glowingly thanked Mr. Nicely, who recently retired, for his stewardship of GEICO which increased Berkshire’s intrinsic value by more than $50 billion. FIFTY BILLION DOLLARS. And – I love Buffett – Nicely’s personal qualities of developing his employees outstretch even his capital management. The connection is not lost on me, nor on Buffett. I hope he thinks Ajit and Greg will engender the same confidence for the organization as a whole.

This letter contains all the investing principles I’ve been learning but said slightly differently, which is a very good thing to read. A lot of his annual letters are dense. This one is much shorter and lighter, and for us beginners, it’s worth reading as a refresher.

Over and over, Buffett reiterated in this letter that he and Charlie Munger hold their publicly traded companies not as “stocks” but as companies they partly own, and are earning well with minimal debt. They’re not ticker symbols to be “downgraded” or forecasted. Retaining earnings is the key.

And thusly, I will also look for investments. Companies with minimal debt. That manage money conservatively. That save their earnings. That are run by engaged managers with integrity and talent.

One further thought about the rhythm of investing practice life: I’ve been doing this a few years now, but I hadn’t been paying attention closely enough to notice the steady progression of value investing community touchpoints in the first half of each year. This year, I’m really noticing the rhythm. It goes (1) Daily Journal meeting in February, (2) Berkshire letter sometime in February or March, and (3) Berkshire meeting on the first Saturday of May. I’m jealous of the people who have been following that rhythm for 30 or 40 years. At least I’m here now, catching the tail end of the Buffett/Munger era, and who knows, it could be even better under Jain/Abel. For now, though, let’s abandon all such thoughts, and be utterly grateful that we have the greatest investors ever living, right now, and speaking directly to us.

v) Financial TV

I’ve been in the US this week and watched, for the first time EVER, probably, CNBC’s morning show, Squawk Box. CNBC is a financial news network in the US. I used to hate these shows! Talking heads going on about minute changes in stock prices and speaking in a language I did not remotely understand. Which is all still true – except that now, I understand the language.

While watching, I had a moment of wow, I understand this and I have opinions about it. It’s pretty cool to have that amount of fluency in the language. I love these moments of noticing my own growth. It’s so important to take a second of time out and really internally congratulate myself for reaching a new level, because it’s a big deal! I used to find CNBC frustratingly incomprehensible. Now, it’s comprehensible. It’s comprehensible! I actually enjoyed watching it! What a lovely moment in my investing practice.

Google and Amazon’s mission statements coming soon. This is just like my podcast – so many interesting things come up in the process, and I have to keep pushing other interesting things! Do you find the same in your practice? We’ll get to it.

LET’S GET PRACTICAL

Review Buffett’s 2018 shareholder letter. It’s short, it’s digestible, and it’s a fantastic review of most of the value investing principles.

Watch The Big Short! Easiest investing practice ever. If your partner isn’t (yet) into practicing investing with you, this is a good movie to grab them and get them to watch with you. It’s on Amazon and probably other places

I couldn’t believe how fun it was to wander around YouTube. I highly recommend starting with Steve Eisman’s recent interview, which is 23 minutes long and goes quickly, and see where you wander from there.

Ownership Disclosure: Danielle Town owns shares in Berkshire Hathaway (BRK).

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