Markets & Finance

Under Warren Buffett's Big Top


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Warren Buffett could give the Rolling Stones a run for their money. The 75-year-old Oracle of Omaha packed the Qwest Center this year, hitting record attendance of 24,000 for his Berkshire Hathaway (BRK.A) annual meeting. But this "Woodstock for Capitalists" is more circus than rock concert. And Buffett is clearly the ringleader.

Berkshire shareholders and other Buffett devotees swarmed the arena when the doors opened at 7 a.m. on May 6, heading straight for the booths in the convention center to buy a plush gecko -- the mascot of Geico, the Berkshire-owned insurance company -- or a copy of one of Buffett's all-time favorite books, Personal History by Katharine Graham. But the main event was when Buffett and his right-hand man, Charlie Munger, once again took center stage for the traditional question-and-answer session, where individual investors and multibillion hedge fund managers alike seek the Sage's advice.

Much of the acquisition buzz surrounding the meeting had been silenced the night before, when Buffett announced Berkshire would spend $4 billion for an 80% stake in Iscar Metalworking, an Israeli company that makes metal-cutting equipment (see BW Online, 5/8/06, "Buffett Takes a Cut of Iscar"). He also alluded to a potential $15 billion deal during the meeting. But the ever-mysterious Buffett gave no other hint, other than to say it was of "low probability." The following day at a press conference he said the chance of a deal was "remote."

Although Buffett gave no solid clues or real specifics on how he plans to spend Berkshire Hathaway's $40 billion in cash, investors looking to glean some nuggets of wisdom about their portfolio would have been pleased. Here's a snapshot of some of this year's major lessons:

MANAGEMENT COUNTS. The Berkshire Hathaway video that signals the start of the meeting at 8:30 a.m. is a big draw. It features funny skits like this year's spoof of American Idol: Omaha Idol, hosted by a cartoon version of Oprah, and a mock scene from Desperate Housewives with the cast and a cameo by Munger. The show ended, as usual, with an homage to Berkshire managers, set to the tune of My Favorite Things.

To Buffett, management is everything. He simply won't buy a business or a stock if he doesn't have faith in the executive suite. Indeed, in terms of investment criteria, a strong management team carries a lot of weight. "At headquarters, we're not training managers, we're finding them," explains Munger, who adds that it's pretty easy to identify talent. "If you're standing on Everest, you don't have to be a genius to recognize it's a high mountain."

Of course, the biggest management question in the minds of Berkshire shareholders is who will replace Buffett. While Buffett didn't reveal his successor, he did say there are three "obvious candidates [at Berkshire] that would not miss a beat," and there is one at the top of the board's list. (For a look at the potential heirs to the Buffett throne, see BW Online, 3/7/06, "Buffett's Imposing Legacy".) "Do you really think [Buffett is] going to blow the job of passing the faith on?" asked Munger. "What could be more important in terms of his duties in life?"

PRICE MATTERS. Berkshire has made a number of major purchases in the past year: insurance company Applied Underwriters, clothing manufacturer Russell Corp., and most recently Iscar. Berkshire has also added a number of stocks to its portfolio, including biggies like Wal-Mart Stores (WMT) and Anheuser-Busch (BUD). Still, Buffett admits Berkshire is sitting on a pretty big pile of cash, around $40 billion. Buffett says $10 billion in cash would be more appropriate.

But even though he has a wad of cash burning a hole in his pocket, he won't buy just anything. One investor from Omaha asked him about buying Oriental Trading Co., a local outfit that sells novelty gifts. The private equity firm Brentwood Associates is putting the company up for sale, reportedly with a price tag of $1 billion.

Buffett admitted he didn't know the details of the deal. But he quickly added that if a private equity firm is selling, there's a pretty good chance the price is too high for him. "We get approached on this sort of thing all the time. They invariably auction the business, and they seek a strategic buyer," Buffett said. "I've never understood being a strategic buyer -- a strategic buyer is someone who pays too much."

INVEST FOR LIFE. Buffett's partner in crime, Munger is known for his wisdom conveyed through pithy axioms. He's a sort of Benjamin Franklin for the modern era. So he uttered far fewer words than Buffett during the course of the six-hour Q&A period. But whatever he says is worth taking to heart. The advice he offered to new graduates getting into the investment business: "Reduce your expectations."

As Munger and Buffett like to remind investors, they never expect to hit home runs. They don't invest for the returns they will see in a year or two. Ideally they buy a business or a stock forever.

Indeed, they have gotten a lot of criticism in the past when new investments don't work out right away. Berkshire Hathaway recently added Anheuser-Busch to its portfolio. But earnings at the brewer have been weak, and the stock has been under pressure of late. Such short-term drama doesn't bother the duo. In fact, it's exactly the sort of situation they like since it gives them a chance to buy a strong brand at a cheaper price.

GO OVERSEAS. Buffett has taken a lot of heat about his bet against the U.S. dollar. It's no wonder. Last year, his investment in foreign currency contracts cost Berkshire $955 million. But Buffett reiterated at the meeting that he's bearish on the U.S. dollar -- owing largely to the ballooning current account deficit.

The trade deficit, the biggest part of the current account, hit a record high last year. Of course, in typical Buffett fashion, the Wizard of Omaha admitted he doesn't have a crystal ball. So there's no timetable on this prediction. "I have no idea if it happens in the next six months or a year," Buffett said. "There's a very high probably that the U.S. currency weakens over time."

Buffett, however, has changed course a bit on his bet. He disclosed that he's moving away from trading foreign currency futures because it's a pricey strategy right now. Instead, he's looking to buy companies that derive a large portion of their earnings from overseas, through stocks and owning the companies outright. As an example, he cited the $4 billion investment in Israel's Iscar.

"There are better ways [than foreign currency derivatives] to mitigate the consequences of the dollar becoming a lot weaker. Develop earning power in other currencies around the world," Buffett said. "Iscar itself has a large portion of its earnings that are not in dollars."

Of course, he's hoping that going overseas will increase his piles of dollars here in the U.S.


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