Tuesday, March 4, 2014

Buffett on CNBC with 3T's

Buffett spent three hours on CNBC yesterday (March 3, 2014).  Here are some notes, not necessarily comprehensive.  I flipped through some transcripts too to help me remember what he said.    Two most interesting things for me was Weschler's comment on DaVita, and Comb's comment that he reads 500 pages per week (which I think is wrong!).  See below for that.

Buffett has been buying stocks for 71 years and has never made a decision based on macro factors.  He bought his first stock in 1942 not long after Pearl Harbor and the outlook was not good.

Real Estate Better than Stocks?
The examples in the annual report were not to say that real estate is a better investment.  He used those examples because he doesn't know much about real estate or farms.  He feels the same way about stocks; even if you don't know much about stocks, you can do well.

Is the Stock Market Rigged?
The stock market is not rigged at all.  It's pretty hard to rig a $20+ trillion dollar market.  People should look at stocks as businesses, not as things that move up and down that you read about in the newspaper.  If you are optimistic about U.S. business over the next 50 years, then you should like stocks.  Think of it as a business, and not some thing that goes up and down every day for whatever reason.

If you think about owning the house next door to yours, you think about the rent you receive, the tax you pay.  You understand the neighborhood and it's future.  And you measure that against your purchase price.  The purchase price is important.  And the stock market has thousands of businesses.  You don't have to be an expert on all of them or even 10% of them.   And if you can find the group of companies that you have conviction will earn more five, ten or twenty years from now, that's all you need.  And it's not a difficult decision to come to.

By the way, Buffett would not agree that we need all of the financial information we now get for free online (too much information can be a big negative), but I've always wanted to use this picture and this seems like a great opportunity:

The average individual investor sitting in front of a PC today has much more and better information than this guy (no prize for guessing who that is).  I'm not talking about the information he is getting on the phone (which may be insider information!), but the information on those glowing green screens.  It's hard to imagine, but the stuff we get for free now on any old PC, laptop, iPhone or iPad is something Bud Fox could only dream about.  (But are individual investors investing better as a result?  Probably not. That's a whole other discussion.)

Buffett's Will
Buffett said that he advised his wife's trustee to put 90% into an S&P 500 index fund (Vanguard) and 10% in cash.  The 10% cash is for the bad times in the stock market so she won't have to sell stocks at bad prices as she will be withdrawing 3-4% per year.  He said she'll do fine with that and anybody will do fine with that.

Why not BRK instead of S&P 500 index fund?   BRK is fine, but he wouldn't want to be touting BRK, generally.  He has no problem touting low cost S&P 500 index fund.

The Economy
Steady growth, pretty much same as since 2009.  No acceleration or deceleration; it's a straight line.

3G Capital
Both 3G and BRK has appetite to do big deals.  It works; "they do the work, we finance it".

Heinz is doing well, they are doing zero-based budgeting. Profits will be "signficantly better this year than any year in history".  IPO possible down the line if other investors want to get out.  It happened with Burger King.  BRK wants to own for the long term (so won't sell out on an IPO; would buy more from partners wanting out if the price is right).

Revenue trends is less than expected, but not dramatically less than expected.  Financial results good (helped by taxes etc.).  There is a transition going on in the business (cloud).  He would like to see revenues go up.  CEO so far doing fine, but report card will come in five years.  Buffett knows less about IBM than KO, but feels good about it.  Thinks they are doing OK.  They bought more shares last year and even some this year.

Burlington Northern
Will BRK use BNI right of way to transport Mid-America energy and/or will it electrify railway?  No to both.  Buffett would like to hear ideas on utilizing their right of way.  But the above two aren't the way.

Keystone Pipeline
Pipeline would be good for America.  Not because it creates jobs (you can build anything to create jobs).  Not competition to BNI as pipeline will carry Canadian crude.

Is BRK a systemically important financial institution?  Buffett has heard nothing from regulators on the issue and thinks it's unlikely BRK will be considered a SIFI.

Minimum Wage
Raising minimum wage will have consequences.  It will have an effect on employment.  Earned income tax credit would work better with less negative effects.  There is a trade-off raising minimum wage.

Very, very few people work for minimum wage at BRK.

Fed's Low Interest Rate
Sam Zell apparently said that the Fed's low rate policy makes people not invest as it's like playing basketball without a shot clock.  Buffett disagrees and says it's in fact the opposite.  With rates so low, he doesn't want cash sitting around earning nothing so is incentivized to invest quickly.  If rates were 15%, then it would be harder to get him to invest in capital projects.

Extreme Weather Events
Extreme Weather not affecting insurance.  Public perception is of climate change, more extreme weather, but not much has changed in the insurance world.  Very few hurricanes in the U.S. in the past few years, for example.

Buying Stocks
Stocks were down Monday morning (on Ukraine news) when Buffett was on TV; he said he was buying a British stock on Friday, and on Monday it's lower so he's happy.  He will buy more.

What if this (Ukraine) is World War III?
He would still buy stocks.  You're going to be investing in something over time.  And if there is a major war, one thing that you can be certain of is that the value of money would go down.  This has happened in every major war he is aware of.  You might want to own a farm, apartment house or securities (but not cash).  During World War II, the stock market went up.   (Benjamin Graham said something about this too which I mention in this post:  World War III and the Stock Market)

American businesses are going to be worth more money.  You're better off owning productive assets over the next fifty years than owning pieces of paper (or bitcoins, Buffett said).

Bitcoin is not a Currency
Buffett says bitcoin is not a currency because people who accept bitcoins keep changing the price (in bitcoins) as it's price fluctuates against the dollar; so people who accept bitcoins are actually still pricing in dollars.  This is not the definition of a currency.  He wouldn't be surprised if it didn't exist in ten or twenty years.  It's a "Buck Rogers-type thing" where people buy and sell hoping it would go up or down like people did with tulips.

Pension Trouble
Public pension is not the problem, private pensions are.  The government has the power to tax and can print money.  U.S. is not in a dangerous fiscal position.

Debt is OK if it goes up along with nominal GDP.  2% growth and 2% inflation means we can carry 4% more debt every year.  But it is a problem if debt keeps growing more than GDP.  This can't continue.  But we are not in critical situation at this point.

There was some discussion about Detroit, and Buffett said that there will be plenty of trouble in municipal finance to come. (even though he said public pensions aren't the problem).

On Ted, Todd and Tracy
It wasn't just about their performance, but how it was achieved (Ted and Todd).  Also, not just performance but character.  They really want to be at BRK.  They think about stocks as businesses like Buffett does. They are business analysts that translate that into investment decisions.

There is a fundamental soundness to them both.  A combination of soundness and brilliance.  Both are important. They think about things that haven't happened yet (problems).

Tracy does work on things at BRK that Buffett doesn't want to do, working with smaller businesses that need work.

Ted and Todd's Non-Portfolio Contributions
Ted did Media General and small newspaper acquisitions.  The RESCAP bankruptcy was also Ted.   The Phillips 66 swap was Todd.

They both managed $5 billion last year.  If they ran a 2 and 20 hedge fund, they would have earned $100 million just sticking the money under a mattress. If they bought an index fund, they would have earned $300 million.  You can retire comfortably on $300 million.   They would have also gotten favorable tax treatment on that.

Hedge funds delivered high fees, not high returns.

Ted and Todd get a salary and 10% of the outperformance versus the S&P 500 index (over a three year period), the same deal Lou Simpson had for 30 years.

Ted, Todd and Tracy
Todd said that he met Munger multiple times over a period of several months and one day Munger told him Buffett wants to meet him.  He spent a day with Buffett and that was it.

Ted told his story about bidding for a lunch with Buffett and doing it two years in a row; the second time with Buffett inviting Ted to join BRK.

Tracy said that she met Buffett on a group visit once and later wrote a letter asking to spend some time with him.  She was invited to do a project, which was to work on the Lehman bankruptcy.

Investment Process
Both of them seem to focus (like Buffett) on reading.  Weschler doesn't like to visit CEO's as they tend to be charismatic, salesman-types and it's easy to get to like them too much and make mistakes that way. Weschler said read a lot and be ready.  Most of the time, things won't be at the right price, so you have to wait for the right price.

500 Pages per Week
So here's an interesting comment.  Todd Combs said that he reads 500 pages per week because that's what Buffett said he does when he spoke to a class at Columbia a while back.  I saw this live on TV and he said this twice or more, and Buffett and Weschler were sitting right there and didn't correct him.  He clearly said 500 pages per week.

But that doesn't make any sense.  If Buffett and Combs only reads 500 pages per week, we should all sell BRK right now!  Why?

First of all, look at the BRK annual report.  That's 136 pages.  So 500 pages is like reading the BRK annual report 3.7 times.  That means that if you read the BRK annual report (or similar amount) once a day for four days, you're done!  You can read one annual report the length of BRK's in the morning and then go and play golf for the rest of the day.  That just doesn't sound right to me at all.

Buffett said a while ago in an offhand comment on CNBC that he spent the previous night reading the AIG form 10-k.  I think he said it took him three or four hours.  I don't remember which.  But the AIG 10-k runs around 370 pages. So if you get up and go to the office on Monday morning and read the AIG 10-k (you should finish by lunch), then you are more than half way through your work week?!

That makes no sense at all.  500 pages per week is way too little!

So despite Combs saying "per week" very clearly more than once on TV without being corrected by Buffett / Weschler, I still bet that he misspoke and meant 500 pages per day.

Being on live television for the first time can be very distracting, so I can understand things like that.  And the others may not have been as attentive either with the distractions of being on live TV.

Reading is Cumulative
Buffett said that he has been reading the annual report of Bank of America every year for fifty years.  I remember he said that about BUD; he has read the annual every year for fifty years before he ever bought a single share (well, he may have owned 100 shares just to get the annual).   Knowledge is cumulative.  The same thing happens many times.  What you learn about company A will help you in thinking about company B.

Money Managers Ted and Todd Recommends
Combs likes Tom Bancroft (Makaira Partners?) who worked for Lou Simpson for 13 years.
He also mentioned Meryl Witmer.

Weschler likes David Tepper who has as good a 20-year record as anyone out there; he has done well in good and bad markets, and "I always respected that".

Do They Own BRK?
Both Ted and Todd own BRK.  Todd owned it in his fund, but Ted didn't as he likes to be the largest shareholder and that's not possible with BRK.  Both said BRK doesn't have to be broken up.

Interestingly, Combs said that BRK doesn't have that much of a conglomerate discount (how do you reconcile this with Buffett's comment that BRK is worth substantially more? Well, he does say it's worth substantially more than book value, not necessarily from the current price).

Weschler likes DVA because it passes the three filters he looks at for healthcare companies:

  1. Does the company deliver better quality care than can be had anywhere else? 
  2. Does it deliver a net saving to the health care system?  Is the total healthcare cost in the U.S. lower because of the efficiency that the company delivers?  
  3. Do you get a high return on capital and predictable growth with shareholder friendly management? 
DVA checks on all of these and is run by an "incredibly talented" management team.  He has no idea what the stock will do in a year or two years, but very comfortable that it will be a more valuable franchise five years from now. 

They both owned it before joining BRK and bought it as soon as they joined BRK.  Unfortunately, there was no discussion (like DVA) on what they liked about it.

Activist Investors
He says activists are in it to make quick profits.  There is nothing wrong with quick profits. But BRK runs the business for people who want to stay in, not for those on the way out.  At any given time, you can make more money selling a company than running it.   Most stocks, most of the time,  sell at a discount for what it can be sold for that day, so activists may just want to sell a company.    This would be a big mistake.  If a stock is trading at a discount, the answer is to just keep running the company.  They can buy back shares.

At BRK, Buffett can do stuff too to boost the stock price for the short term, like spinning out a hot division.  But if it's hot, they might as well just keep it.  Buffett wants to run BRK for the people who stay, not the ones who want to get out.

If Buffett owned all of PEP, he wouldn't split it up. Frito-Lay is a better business than the soft drink business, so just keep it.

KO is under a lot more pressure than ten or fifteen years ago, especially in the U.S.    But last year their sales went up, like it does every year even in terms of cases of carbonated sodas.   KO has a 3% share of all liquids consumed by seven billion people, and this will go up a little over time.   It's under more attack, but still a very, very good business.

Creating shareholder value doesn't mean doing something to get the stock price up tommorow.   He believes in creating value over five or ten years, and Apple is working hard on that.   You want to build sustainable earnings power over time.

Final Thoughts on Economy
Economy is growing steadily as it has in the past five years and is continuing; not as fast as some would like.   We are growing 2%/year.  If you have 1% population growth and 2% output, output per capita grows 20% in a generation; that's not bad.

Ukraine and the Stock Market
Ukraine doesn't change anything.   If you have a wonderful business in Peoria, Illinois, why would you sell it now because of what's going on in Ukraine?   If you have a productive farm or an occupied apartment, why would you sell because of what's going on in Ukraine?   The same applies in the stock market.  People react too much to short term things in the stock market whereas they act more rationally in other businesses.

Washington Post
OK, this was not mentioned.  I was sort of surprised that noone asked about it.  I did find quotes of both Graham and Buffett saying that BRK would never sell WPO.  So who initiated the deal?  Maybe that will be an annual meeting question.


  1. A key point about the information that we have today vs the past is that at any time, everyone else has the same advantage. We don't get to compete with Bud Fox and his green screens, in which case I think we would slay him based the size of the information advantage we would have.

    But that information gap has to be pretty sizeable to take profit from it, and I'd categorize that as trading, not investing. Today's information gaps (apart from insider information) are not actionable for the individual investor. In that case, more information is not always better, and does not necessarily lead to better investment decisions.

    Seth Klarman puts it eloquently (as taken from this summary, #27) http://www.safalniveshak.com/wp-content/uploads/2013/05/30-Ideas-from-Margin-of-Safety.pdf


    "But information generally follows the well-known 80/20 rule: the first 80 percent of the available information is gathered in the first 20 percent of the time spent. The value of in-depth fundamental analysis is subject to
    diminishing marginal returns.

    Most investors strive fruitlessly for certainty and precision, avoiding situations in which information is difficult to obtain. Yet high uncertainty is frequently accompanied by low prices. By the time the uncertainty is resolved, prices are likely to have risen."

    Also, you are right on about the 500 pages, as noted in this profile in the Omaha World Herald: http://www.omaha.com/apps/pbcs.dll/article?AID=/20130428/MONEY/704289987

    1. Yes, that's right. I agree. A lot of what is available (level I, II, III live quotes, market depth) is useless. But think about the positives too. Yahoo Finance, for example, is way better than what was available on any Quotron, Telerate or Reuters screen. Yahoo Finance is the poor man's Bloomberg terminal, lol... But it has a lot of useful stuff that is not trading oriented at all.

      SEC.gov, is amazing for investors, of course. So are all the investor sections of company websites which include historical annuals, filings, presentations not to mention publicly accessible earnings conference calls (which were previously restricted to Wall Street analysts).

      And check out all the great websites that track and analyze the great investors, not to mention access to trade magazines, data etc...

      Yes, the internet has given us enough rope to hang ourselves, but if you know what is useful information and what should be ignored, the value of what's out there is priceless!

      Thanks for reading. (I guess this blog post counts only as one page...)

  2. “Read 500 pages like this every day” WEB

  3. Hi Brooklyn Investor,

    Nice blog. Do you happen to have youtube links for this video?

    BTW - It is for sure 500 pages per day. I had read it long back that this advice was given by Warren Buffett at Columbia when he had come as guest lecturer. Todd Combs was one of the student at that time.



    1. Hi, you can go to CNBC.com and search in the video section. I couldn't find a simple link; they are a bunch of separate videos.

    2. It's a very user friendly site ;-)

      Go CNBC.com, hover on "shows" in the top menu and click "CNBC U.S." Then click "Squawk Box". Videos are in chronological order, so hit "next" (bottom of page) until you get to the first video, Monday March 3 6:09 AM. The Buffett segments are interspersed with non-Buffett segments.

  4. kk,

    Thanks as always for great posts. I went through all the CNBC videos and couldn't find any discussion of "Money Managers Ted and Todd Recommends". Was this in the interviews? Or another source? If you happen to have a link, I would greatly appreciate it.

    Thanks again,
    Tom L

    1. Hi, here's a link to the transcript from CNBC. It's full of mistakes, but most are obvious (they are quoted as saying the exact opposite etc...).


    2. Thank you so much!

      -Tom L

  5. kk,

    I also wanted to mention that I signed up for email notifications, but don't seem to receive anything (I checked my SPAM folder also). I'm not sure if this is effecting other eager readers....

    Tom L

    1. Yes, I just noticed that too yesterday. I like to get emails too so I can keep a file (backup) in my mailbox, and I haven't received anything since November. I did a quick google yesterday on this issue and didn't find anything.

      I will look into it.

  6. Thanks for the post. I hope this 500-pages rule includes newspapers and magazines as well.:)

  7. 500 pages per week seems reasonable. There's other commitments throughout the week.

    1. Well, maybe reasonable for normal people, but not for Buffett/Combs. That's like reading 3/4 of the BRK annual report every weekday. That's not much at all for someone who spends a LOT of time reading.

    2. much of a typical 10-K is worthless and if you are reading a company's report annually, you can skip with some of the boiler plate sections. 500 pages of MD&A and risk sections would be more than ~4 10-K per week. Not mention if you utilize functions like black-line on cap IQ, you can just look over specific changes and save yourself a great deal of time. I get your point but I think if you look at it over the course of a year, 500 pages makes sense. Over 52 weeks, that's 26,000 pages. Let's say they read 100 annual reports and there is only 100 relevant pages, on average in each report. That's 10,000 pages, 16,000 pages would remain for articles, analyst reports, white papers, etc. that for argument's sake say average 10 pages each. That would be 1,600 additional items to read. That plus 100 annual reports would be a good year in the office for most people.

    3. much of the typical 10-K is worthless unless if it's your job to find the tiny insights that matter. for folks like Buffett and Combs, it's getting an edge by doing the work.

      and it's neither so special or strange because that's part of their investment strategy/style. Weschler doesn't say anything about the 500 pages, because that's not his method, and he's good enough to hire. it's one method.

  8. Both Buffett's and Zell's perspectives on low interest rates can be correct because Buffett primarily buys with cash and Zell primarily buys with debt.

    1. Good point! Zell's shot clock is the interest expense he is incurring on the debt; he's on the opposite side of the balance sheet as Buffett... Didn't think of that.

  9. I met a guy from HBS who had worked for Buffett in Omaha, he ended up quitting after 6 months because Buffett would spend all day in his office, every day, reading annual reports, and he could never have a long conversation with him. It was too frustrating.

    1. Thanks for the story. It's nice to hear that that is in fact what Buffett does all day, not that we doubt what he says. Maybe if the HBS guy had something interesting to say the conversation might have lasted longer. But oh well... Too bad, but at least he got to see Buffett in action up close every day for six months, even if that "action" was not so exciting...

  10. He mentioned he was buying stock in an English company. Anyone want to speculate? I'd guess Rolls-Royce.

    1. This comment has been removed by the author.

  11. I think Combs meant 500 pages of reading per day. He references it in this article from the Omaha World

    1. Yes, I remember that. But he just so clearly and deliberately said "per week" on TV so it made me think for a second that that must be more accurate than what I read (heard it directly instead of through a reporter).

      But yes, I think it has to be 500 pages per day. 500 pages per week is too easy and not worthy of even mentioning.

    2. I think it's definitely PER WEEK. I don't think anyone can really process 500 pages of detailed material - 10ks, regulatory filings, conference call transcripts - per day. I think if you can consistently read 50 pages/hour of MD&A, financial statements, conf call transcripts, you are a machine. Then, you'd have to do that nonstop from 8am-6pm every day. 70 technical pages probably takes 4 solid hours to read. That's probably close to the limit of what humans can do with total focus.

    3. It might be. Who really knows what they mean. But then again, the JPM 10-k is 362 pages long, and I can't really imagine that people who spend all their time reading would be done with a whole week of work if they read less than two 10-K's of JPM's length. That is way too little and even I can manage a JPM 10-K and then maybe a couple of other shorter ones if I sat their and focused on it (instead of checking email every five minutes, looking at the financial news ticker etc...).

      But it may be per week if they really counted pages strictly; excluding pages full of tables, boiler plate risk factors etc... But I would imagine it to be time consuming for anyone to actually count pages like that; "does this count as a full page or a half a page?". If I counted pages read, I would just count all the pages, period, whether I read every word or if I read what I needed, I think.

      But we don't know how that works.

      Maybe this will be an annual meeting question/discussion.

  12. 500 pages per week might be on the low side, but 500 pages per day is extremely ambitious for mere mortal investors. Assuming each page requires just one minute to fully comprehend, one would have to spend nearly 8 1/2 hours constantly reading in order to make it through 500 pages per day. Granted, 8 1/2 hours isn't a full workday for the very ambitious but throw in the inevitable phone calls and (dreaded) meetings and it would be pretty hard to set aside that time. In addition, many 10K pages take considerably more than a minute per page to digest, at least for me, and I suspect for most investors. This could be partially offset by "boilerplate" pages that require less attention, but would skimming such pages "count" as a page?

    I think that we should be mindful of not confusing quantity with quality. It is not necessary to plow through 2,500 pages of materials per week to achieve above average results if one sticks to a circle of competence and only acts rarely when the risk/reward scenario is very clear. Also, it is useful to divide time between studying things within one's current circle of competence and trying to expand the circle of competence. The latter is the far more difficult task intellectually and often requires slow and dedicated comprehension not best measured in number of pages read per day.

    Bottom line is that Buffett, Combs, and Weschler and truly unusual characters and most of us can do quite well on a fraction of 2,500 pages per week. I tend to think that 1,000 pages/week of SEC filing type work is a very solid goal for a full time investor, supplemented by broader reading to expand the circle of competence or just to expand horizons with no immediate reward expected from an investment standpoint.

    1. Good point. But Buffett/Combs etc. are not 'mere mortal investors' and I think that's sort of the point. And yes, you can do well without reading 500 pages per day.

      Some pages in a 10-k will take more time than others, but as you say, others will take way less time. For example, if you are familiar with the company or industry, the financial statements may not take too long. The risk factors don't change much. Neither do the notes.

      So if you are like Buffett and are reading tons of annual reports every day, you are probably reading something in industries you already know, and many reports are of companies he is already familiar with (remember that he has been reading BUD and BAC annual reports for 50 years; this is probably true for many companies).

      But anyway, yes, it sounds like a lot. But you know, I've come across many 'extraordinary' people (in real life and indirectly) and when you open the hood and look inside, you will often find these mind-boggling, incredible feats that go a long way in explaining their tremendous success... Most people seem to focus on 'talent' etc... but when you get right down to it, a lot of it is due to the extraordinary effort they put into their work, above and beyond what most other people would do in a similiar line of work.

      Having said that, I'm not gonna count how many pages I read per day, and if I do, I'm not telling anybody (unless it's more than 500 pages per day!), lol...

  13. "Buffett said a while ago in an offhand comment on CNBC that he spent the previous night reading the AIG form 10-k. I think he said it took him three or four hours. I don't remember which. But the AIG 10-k runs around 370 pages."

    I found this when I googled Buffett reading AIG 10-K.

    If I remember it correctly, this was the night before an interview during annual meeting week. Someone ask him what he did 'last night' and he said .. read the AIG 10-K

    At the time, I had an investment in AIG based on a thesis that did not require understanding most of the company. But I know enough to know it is like a telephone book. For those that remember when we looked up phone numbers in a book. And, it isn't unreasonable to simply take reported numbers at face value. Or big chunks of it. It is like buying a used car. You can buy a 'clean' 'late model' used car without having a mechanic check everything and likely do fine. Or check everything. Dealers buy used cars just by looking at them at auctions every day.

    Anyway .... 10-K's have a lot of boilerplate. I have to think that Buffett can get through a 10-K reading 5 or 10% of the report with any degree of concentration and skimming/skipping over the rest.

    A guess would be that he starts with the Financial statements. Then the notes. As an example, there is always a note on debt. And one on pensions. The debt is broken out by year due, etc. Text on what changed during the year, &c. The pension note is more or less the same structure for all US defined benefit plans. The discount rate is critical, and the annual change. The point being that it can take a few days or a week to get an understanding of how benefit plans are reported. And the important numbers. After 10 of them, they start to look the same. 100? 1000? I don't know, but he can read them like an ordinary person reads People Magazine.

    Companies like AIG are incredibly complex. So ... 3 to 4 hours sounds about right for Buffett. My guess is that he was primarily looking for businesses he would like to buy within the company.

    But the main thing .... Buffett seems to feel like it is entertainment. This is the difference between guys like this and normal people. It isn't work. They love it.