Why did you buy stock in Tesco and J&J?
Ordinarily we don’t go into reasons for buying things. Obviously, we think they’re very respectable enterprises. One is the dominant grocery retailer in England and J&J has one of the great long-term records in its field.
These are just portfolio securities. We expect to moderately outperform the market with these securities.
Wesco’s surety insurance subsidiary
Wesco’s surety insurance subsidiary [Kansas Bankers Surety] insures small banks. That is a wonderful business because it knows what it knows and knows what it doesn’t know.
By specializing in a particular area, it does well. It’s like a specialist in an ecosystem: it occupies a tiny niche and does it well. You just have to look at the numbers – underwriting profits year after year – to know it’s a very good business. We’re capable of making those decisions.
Lesson 14. Increase in value investing practitioners means more competition.
ADVICE ON INVESTING
Is value investing becoming more widespread?
I think our way of looking at things will become more popular. In fact, it already is a lot more popular than it was decades ago. I used to look out at this group and it was 20 people. The increased popularity of the investment style will not make it easier for all of you to make a lot of money. All these smart people competing will make it harder, but that’s not all a bad thing: maybe some of you will have to make money less the way we did and more the way some engineer does.
Lesson 15. Take Efficient Market Hypothesis With A Pinch Of Salt
If markets were efficient, this tent wouldn’t be so full. Some business schools are teaching properly, but the world grew up amidst a different fashion, encouraged by academics of the era. What we believe is simple, and many avoid it because of that simplicity. They want to be experts. And how can you be an expert if it’s simple?
Also, execution is difficult – and people don’t like to fail.
The whole institutional reward system encourages different behavior and thought. If you went to work at a big firm, you’d grind your way up. It’s a hierarchy. Nobody cares about how to do it better. And by the time you’d been there 10-15 years, you’d be thinking their way. This didn’t happen to Warren.
[Wesco board member] Peter Kaufman came into a business [Glenair] and became the CEO in his early 30s, so he’s been the CEO a long time. The whole place is twenty or more times bigger. That’s a Berkshire experience, but that’s not normal. Normal bureaucracy doesn’t reward an attitude like ours.
Lesson 16. Where Can You Find Market Inefficiencies? (i) Small Markets (ii) Crazy Markets
Where are there market inefficiencies?
Two markets are inefficient: very small ones (which are not much use to Berkshire, with its $120 billion), and ones where crazy people are doing crazy things, especially if they’re selling. From time to time, the big markets have some crazily mispriced securities in them. But there’s no question that in small markets there’s a lot of opportunity to find mispricings.
Is the Chinese stock market a bubble?
The Chinese market is divided into two parts: Shanghai and Hong Kong. The Shanghai market shows some signs of gross excess and I have no interest in what’s traded there given prices at present. But there are other parts of the Chinese market that are at least interesting. We don’t comment on individual securities for obvious reasons.
Lesson 17. How Some People Become Rich Just Based On One Decision? Bought Bershire Stocks.
Comments on Andy Kilpatrick
I don’t think he’s the greatest Warren Buffett fan, but he’s the most resolute. Andy met Warren through the Washington Post connection and Andy had the same experience that St. Paul had on the road to Damascus. Andy was decisive, he bought all the Berkshire stock he could on margin, it went up, he bought more, it went down and he sold just enough. In due course, became quite rich. He did this by making one decision.
Not only Peter Kaufman [Poor Charlie’s Almanack], but Andy self-published his book [Of Permanent Value: The Story of Warren Buffett]. A lot of other people met Warren and said, “Who in the hell is this bumpkin?” Now they’ve had to pretend they bought Berkshire.
Lesson 18. Immense concentration of wealth in people who don’t make or invent anything is not good for our system.
COMMENTS ON BUSINESS AND ECONOMIC MATTERS
Tax rate for hedge funds and the concentration of wealth
If you’re running a hedge fund, you’re paying the lowest taxes, lower than a college professor or a taxi driver. This is madness of a sort. It would not surprise me if this changed in the near future.
There’s an enormous concentration of wealth in people who don’t make or invent anything. It can’t be good for our system to create this new kind of hero if our graduating brilliant young give up engineering to go into trading derivatives. This is rewarded by a peculiarity in the tax code, but it’ll probably change.
If you have a Jasper Johns painting, this is the world for you. These hedge fund guys seem to like Jasper Johns paintings and what’s $120 million if you made $1.7 billion last year? That’s the world that we live in and you gotta admit it’s very interesting.
Notes from 2007 Wesco Financial Annual Meeting – By Whitney Tilson