Here We Go…?

Color Commentary

1. Wish List Practice

What a week in the market, guys. The market is dropping due to the worries, which investors are starting realize are very real, that the global supply chain will slow or, in some cases, temporarily stop due to coronavirus…and I am waiting for what happens in the stock market because of it. From our long-term investor point of view, this potentially large drop so exciting.

If you or your loved one is affected by the virus, I am so sorry and I wish a speedy recovery. Unfortunately, crashes in the market come because of bad news for real people, and I try to always be conscious that real people are suffering – while, at the same time, as a long-term investor I eagerly await these drops so I can buy companies for lower prices. Frankly, it might be me suffering next.

Coronavirus is here in Zurich, and Germany and Italy have major outbreaks already. The Geneva car show was canceled yesterday, which is a huge economic blow to the region and to the auto industry. Switzerland banned gatherings of more than a thousand people until mid-March. Things are getting real around here. The death rate for younger people is quite low, so I’m less worried about getting sick and more worried about food shortages. I went to the grocery store yesterday and the shelves in the canned foods and baking goods sections had big patchy empty sections where the flour and canned vegetables were supposed to be. The fish counter guy told me it’s been crazy in there, with people buying non-perishable food to stock up in their cellars in case we can’t get supplies for a while. So, of course, I bought some non-perishables too. And toilet paper. I bought a lot of toilet paper.

(Totally non-investing-related side note to virus preparedness: my husband told me to buy more food and less toilet paper because “you can always just take a shower.” Which…yes…but toilet paper is prioritized differently for girls than it is for boys. I’m going to buy some more toilet paper AND some more food. SOLVED.)

Switzerland is its own island within Europe because it’s not in the EU. Our food costs about twice as much here because the products are either made by Swiss companies and farms with a small distribution apparatus and lower economies of scale, or are imported from the EU or other parts of the world. Perhaps that means Switzerland is in a stronger position, because it’s less dependent on outside sources, or perhaps that means Switzerland is in a weaker position, because it doesn’t have a vast network of sources from which to draw. It will be interesting, if this virus situation gets worse, to see how the Swiss supply chain plays out.

My guess was that the global market would keep dropping through yesterday’s market close and then some speculators would think the prices are low and buy stocks over the weekend, which would cause a slight rise Monday morning when the market opens. I was wrong. They beat Monday to the punch already – the market bumped up a bit at the end of the day yesterday (WSJ paywall) and the NASDAQ even ended the day flat, with no loss or gain. I’ll be interested to see where the market opens on Monday. Who knows, maybe it’ll trend upward.

Just like buying Practice Shares in a company to gauge how well I actually know that company and whether I’m ready to be an owner – and inevitably, I don’t know it well enough, and start to panic almost immediately because I need to answer a zillion questions about the company that pop up in my head – the market starting to drop is laying bare the holes in my Wish List preparation. It’s nerve-wracking in the best way. I think this feeling of “oh this is real, and I’m not ready” happens every time the market makes big moves. It’s inevitable. And it’s a good push to do more investing practice.

This weekend? I’m devoting as much time to investing practice as I possibly can to fill those holes and make sure I know exactly what my plan is should the stock prices keep getting lower.

Companies I’m reviewing (this is NOT my Wish List – no comment as to whether or how much I like or dislike any of these):

My gauge to know whether I understand a company well enough to own it is, when the stock price goes down, do I feel panic? Or do I understand why and how the price is going down, and whether and how company will recover? If the latter, then I know enough to own it.

With all of the market news in the last few days, the messages from our investing gurus, Warren Buffett and Charlie Munger, of the last two weeks have gotten a bit lost. I want to go back and focus on them.

2. Culture

I re-watched the video of Exor’s 2019 Investor Day at the beginning of this week, and was reminded that the first question was asked by investor Guy Spier. It was such a good question.

Guy asked John Elkann, Chairman and CEO of Exor, what he had learned and wanted to emulate from Berkshire Hathaway, and what he purposely was choosing to do differently from Berkshire.

Exor is, like Berkshire, a holding company that invests in both wholly-owned businesses and partially-owned businesses, some private and some public in both categories. Exor is far smaller than Berkshire Hathaway and owns far fewer businesses than Berkshire Hathaway. Exor is also relatively new as a company, since the Agnelli family consolidated their holdings under Exor only ten years ago. So, Exor is learning, and growing, and looking for a model of corporate excellence.

Mr. Elkann replied to Guy that he had certainly learned from Berkshire’s reinsurance business, but otherwise he didn’t want to stress any differences. At the very end of talking for a bit about their business in the United States, he added that, at Exor, they believe that diversity is a strength, and it’s a strength that needs to be managed. “Cultures which are homogenous are easier. But we believe that cultures that can integrate differences are stronger.”

I’ve been thinking that statement over. I think he’s right. There’s so much talk out there about diversity being important, better, necessary, etc. At least for me, it’s an easy thing to agree with. But Mr. Elkann’s point that it’s a strength that needs to be managed acknowledges that diversity purposely creates a group of people who are different from one another, which is less easy than a homogenous group, and if the culture supports those differences and the group to benefit from them, rather than be broken apart by them, then and only then will the culture be stronger.

The Berkshire gurus, Warren Buffett and Charlie Munger, each communicated with us in the last two weeks primarily about their corporate culture and personal ethos. It’s almost like they think that once you’ve got your nuts-and-bolts investing strategy down, then what matters is HOW you do it.

Obviously, I couldn’t agree more.

3. Perspective

First, my dear Charlie (I should call him Mr. Munger, but I just feel so friendly towards him that in my mind, he’s Charlie) spoke for about two hours at his Daily Journal company’s annual meeting. There is video of the whole thing here.

Then, Mr. Buffett released his 2019 annual shareholder letter and annual report of Berkshire Hathaway. He also gave a long and wide-ranging interview to CNBC to accompany the release, which you can watch here.

I always give you the video of these things for a reason. Yes, they’re long. Yes, they take a lot of time to watch. Yes, your friends, significant other, and kids probably don’t think it’s their idea of a good time on a Sunday afternoon, which means you have to sneak away to watch. Still, watching, rather than merely reading a recap or even a transcript, is worth it. Watching really helps me understand the message Buffett and Munger want to send. It’s hearing the pauses, seeing the uncertainty or certainty in their faces, and how they each think it out as they talk that makes me think differently than when I read a book or article about the same sorts of themes.

The live feed of Charlie’s meeting started at 7pm in the evening my time and I had planned to watch it, so I kicked my husband out of the living room (I mean, I invited him to stay, but he kicked himself out once the feed started and he realized I really was going to watch it intensely and HE WAS NOT ALLOWED TO TALK), ate dinner in front of the TV and happily took notes.

Conversely, I discovered Buffett’s CNBC interview by browsing YouTube one morning during my investing practice time. I sometimes look for new CNBC videos or interviews with prominent investors, but I didn’t have to look hard for this interview with Mr. Buffett – it was the first suggested video on the YouTube homepage. YouTube knows me way too well, but that’s another topic for another day. So I watched this one while I cooked dinner. (I love getting extra credit for cooking a meal, when really I’m using the cooking as an excuse to watch something on my computer. I need to stop saying these things because my husband reads this newsletter.) With all the market craziness this week, I’ve been digesting Buffett’s letter and interview, and will have comments on it soon.

Learning by ingesting different media is a good thing. Using various methods of delivery embeds the knowledge more deeply. That’s also why I include my little mini-podcast in these newsletters – we all have different times and places and methodologies of learning, and it’s helpful to mix it up.

I’m focusing on Charlie’s comments below, because they came before the Berkshire letter chronologically and I don’t want to gloss over it just because there is market news. One of the most important adages I keep in my head is that I’m here for the long-term, not the day-to-day volatility. As this market goes down, or goes up, or goes sideways in the next two weeks, I will be re-reading, re-watching, and remembering these words from someone who has seen it all. Charlie has been through market crisis after market crisis. He hasn’t changed his methodology one bit.

4. Daily Journal Meeting

In addition to the video, here’s a transcript of Charlie’s talk at the Daily Journal meeting.

My five key takeaways from Charlie’s talk:

1. On index funds having shareholding power:
“Annual meetings are very peculiar in America. And of course, we now have the chief shareholder frankly of every big company in America as some index fund and it’s weird that the voting power of America goes so much to index fund operators. Nobody planned it. It just happened. And God knows what the consequences will be.”

I am extremely curious to see what happens with this market if people sell index funds. Will the prediction that the computers selling all at once will sink the market faster than we’ve ever seen come true? Charlie’s point here is not exactly that, though. His point is that owners of index funds are absentee owners of companies. When companies have absentee owners and CEOs start to feel like they can do whatever they want, bad things tend to happen. I haven’t heard anyone else make this point about the voting power of index funds, and it’s a really important one that clearly comes from experience.

2. On the Fourth Estate disappearing:
“Of course what’s happened is that technological change is destroying the daily newspapers in America including the little one’s like ours. The revenue goes away and the expenses remain and they’re all dying. Berkshire Hathaway owns – what – about a hundred of them, and truth of the matter is they’re all going to die and there’s nothing that can be done with good management to save them. It’s a sad thing because those newspapers was an accidental part of the government. They called them the fourth estate and each one had come into being sort of by accident of capitalism without any planning by the founding fathers. The people who ran them became very powerful people due to two great American institutions; one is nepotism and the other is monopoly. And all those nepotistic monopolists, many of whom drank too much, actually morphed into a function where they were more useful than our legislators. And of course we’re losing them all. What we get is these opinion services on TV that everybody watches where everybody believes some ridiculous version of things that’s led as much as anybody good. It’s not a good thing in America that we lose Newsweek-type magazines and all our daily newspapers and get back Rush Limbaugh and his ilk on the other side. That’s what’s happened and it’s a sad thing. Nobody planned that we would have a Fourth Estate that really is a branch of the government that worked really well for us and that took pride in being accurate and so on. And nobody planned it would go away. It just happened.”

I have nothing to add. Except: support your quality news sources if you can.

3. On EBITDA:

“I don’t like when investment bankers talk about EBITDA, which I would translate as bullshit earnings.”

Sorry for the cuss word, but it’s a quote! It’s Charlie! It’s not me. I LOVE this comment. Way to call out, in one line, all the executives who try to make their financial results sound better than they actually are. EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. All of which are real costs that must be paid. So when executives reference EBITDA – which is very common – they’re pretending those upcoming bills don’t matter. But THEY DO.

4. On ethical business:
“I do think there’s something to be said that you have the option for selling stuff that’s good for people instead of stuff that tricks them. That’s our approach and I would choose that approach even if I made less money. In fact, I think you make more. It reminds me of Warren Buffett’s favorite saying: “You should always take the high road because it’s less crowded.” That’s the system.”

I’ve been searching for a nice definition of Mission in my investing, and maybe I just found it: “selling stuff that’s good for people.” I’m not sure I have anything better to add to that. If I can own a company that’s selling stuff that’s good for people and takes the high road, that’s good enough for me.

5. On us nerds coming together:
“You people come from all over the world to this thing out of some hunger. I regard you as nerds because I was once one of you, and I know a nerd when I see one. You come here because some fellow nerd managed to succeed in spite of defects and you need a similar result. And you know something that’s really odd? It’s that you’re right. If you can learn some of our tricks, you can get more success out of life than you deserve. That’s what has happened to me. How did it happen? I tell you how it happened. It’s obvious that I got better life outcomes than I deserved based on energy or intellect. Of course, it’s an interesting process that everybody would like more of. Who doesn’t like to get a lot more than one deserves? I stumbled into a few mental tricks early in life and I just used them over and over again. I take the high road because it’s less crowded. Of course, that’s a smart thing to do. Then I was raised by people who thought it was a moral duty to be as rational as you could possibly make yourself. That notion which was just inherited, basically, from my upbringings and my surroundings has served me enormously well. It’s like Kipling’s: If you can keep your head when all round you are losing theirs, it’s a big advantage.”

Charlie is far too modest here. He succeeded because he’s one of the smartest and most sensible people to ever live, and I’d say he deserves his success. Many of us also feel like we don’t deserve success, and yet, here we are, plugging away bravely to try to achieve a better life for ourselves and our families. So, I don’t think there’s much better that I can do to succeed than emulate Charlie’s “mental tricks.” Take the high road. Be as rational as I can possibly make myself. Keep my head when all around me are losing theirs.

In the next few weeks, let’s all keep our heads when all around us are losing theirs. It’s our HUGE nerd advantage.

LET’S GET PRACTICAL

Buffett’s recent CNBC interview is here.

Berkshire Hathaway’s shareholder letter for 2019 is here, its entire (including the letter) 2019 annual report is here, and all its resources and back letters and filings are here.

Charlie Munger’s Daily Journal meeting livestream is here.

If you’re a Wall Street Journal subscriber, there are two excellent Intelligent Investor columns by Jason Zweig recently that speak directly to US – small individual investors – and how much better situated we are than the big guys. Yay!

What the E*Trade Deal Tells You About the New Investing Game (paywall)

The Pros Have to Sell Stocks Now. You Don’t. (paywall)

Disney’s CEO, Bob Iger, announced out of nowhere this week that he’s stepping down. His replacement is not the person who was expected to succeed him. Curious.

If you haven’t already read this from 2016, this is a great New Yorker article on index funds and passive investing.

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