Tuesday, 27 October 2009

The Sage of Omaha

I dare say I was one of millions who watched Evan Davis' program on Warren Buffett last night.

I was probably not the only one who sat there, glued to the TV, pen poised above a notepad ready to scribble down the learning points from the 'Sage of Omaha' that would lead to my transformation into a multi-millionaire investor - make that multi-billion. Pithy remarks, wise anecdotes, shrewd insight, clever techniques and unique methods were the sorts of things I wanted to hear about. Instead, we found a homely old fellah living in a nice house, with a cheap car, a tiny office and none of the trappings of a man motivated by money. Indeed he had not only pledged to give it all away but his children seemed perplexed by the idea of it being passed down the family lineage.

I sat there at the end of the program and thought to myself, 'If he didn't seem to like money, why did he actually go out an make it?'.

Also, many of his investments seemed to be haphazard and almost suicidally hopeful as to believe that he could easily be hoodwinked or conned or, worse still, have no idea what he was doing. The phrase 'due diligence' was never used and seemed to be not in his vocabulary and there were at least two company purchases that he did in his career where he did not look over any financials or check any contracts beforehand. In fact, they interviewed the owner of a mobile home house builder who stated with surprise that he never met anyone from Buffett's company beforehand and the whole deal was done over the phone with the remark, 'Just send me any financials you produce each quarter'. For that, the former owner was hailed one of Berkshire Hathaway's greatest stars.

I am sure there is more rigour and greater acumen involved, but Buffett just came across as a strumming, would-be folk singer who just 'tap danced' his way to his small office each day as he loved his work so much. Indeed, when asked why he did not have much more than his 85 year old partner, Charlie Munger, on his staff, he replied, 'Why would I employ someone to just read the paper after me?'.

There is no doubt that during his career he worked a 'Lord Hanson' on some underperforming companies but it was clear that interacting with people about tough decisions was not his style - Rottweiler managements did not suit him. When he came up against bad ethics and mismanagement at one of his buys, Salomon Bros Bank, he personally pledged to the Fed that he would sort it all out and his word was taken as an invaluable bond to save the bank. Probably no other businessman in the world would have been taken so seriously.

Buffett likes to invest long term and he likes to invest big. He doesn't have any modern technology to monitor his investments, no office computer and he even rarely answers his mobile phone as Bob Diamond at Barclays famously found out. He doesn't visit his portfolio of companies and when he was led around the Microsoft's campus for half a day he joked to Bill Gates that he had seen more of Microsoft that any business he had owned. He doesn't monitor stocks and shares - he views companies as farms, watching how much they produce from the land rather than what the price of the farm would be.

He eats poorly, dining most nights at the same low grade restaurant, hates vegetables, and drinks lots of sugary drinks - indeed his daughter claimed she had never seen him drink a glass of water in his life. In the same vain as his friend Gates, he seems to thrive on just about anything a doctor says is bad for us. On top of all this, he lives in a leafy street in Omaha where his house of 50 years, bought for $31,000, is not even the best on the street and is his only property in the world. His car was bought by his daughter as she always did, at a discount because it was hail damaged.

So what picture are we building of this incredibly simple and likable man? To him investing seems very simple. The formula he and his partner use is obvious, repeatable and not rocket science. He may have started by punts on obscure, undervalued companies but he now tends to focus on household names like Coca Cola and Goldman Sachs. His engine is the cash business of insurance and his mantra is never to get into debt. But as much as he expounds a common credo you find he breaks his own rules all along.

The one thing I have always taken from Buffett is that debt is bad for business. He claims more smart people went out of business through 'leverage' or debt than unsmart people who succeeded and did not use debt. I like that mantra and I think it is something that most businesspeople should take seriously. Today, there is a huge focus on debt as being good - Buffett is one of the many cash businesses that has taken advantage of the depressed markets so dependent on debt to make $billions in tough times.

The other thing I took from the program cheesed me off. Buffett, despite the fact he will give all his money away and tells us to invest not speculate, has invested in the derivative products which he rightly labelled the 'financial weapons of mass destruction' that would tear down the financial world and did so. He now owns such products because he believes the fundamentals are right. That really did not square with the man's supposed philosophy and he visibly squirmed in the chair when Davis mentioned it. He was embarrassed. It was pure speculation and it had nothing to do with investing as clearly such instruments are not for long term investors. What he does believe, like most banks today, is that the whole market for such products has been 'written down' so much by taxpayer money that they are now all cheap again. The 'equity' that had been consumed by mad price spirals has been returned at much cost to everyday folk and he is ready to capitalise on it as any greedy bank would.

The one thing I asked myself at the end of the program was why? If he was indeed unmotivated enough by money as to give it all away so people less fortunate than him can benefit and to not live the life of a rich person, why would you capitalise on the misfortune of others so blatantly? And why, knowing who has paid for the market reset, would you play the market so cynically?

The answer is that if you want to make serious money in life, there is no other way, you have to profit on the misfortune of others. In fact, over on the other channel on 'Have I Got News For You' a capitalist credo was shown which I barely can recall but went something along the lines of, 'Inequality is a good thing as it makes sure that enough wealth can be generated to help everyone.'

That's the kind of circular logic that clever rich people use and believe in. It's the one thing worth writing down on your notepad. It's why bank bonuses are a good thing, allegedly.

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