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                  WHATEVER HAPPENED TO THE “ENERGY CRISIS”? 

               DO WE THINK F-22s RUN ON WATER?

      November 2001

                       Last month, answering my headline. “What Next?” I said:

                      * this financial malaise will pass,

* our economy will rebound,

* American businesses will continue to grow and lead the world, and

* the US stock markets will reflect that fact.

           I still believe that to be true.  Short term, the markets may re-test the lows of September 21-28.  Unless you are a very nimble trader, ignore it.  For some of our wealth management clients, I will short some over-reaching companies or buy some “bear” mutual funds.  But then, I watch the market regularly enough to avoid the lightning strikes that will trip up the unwary or the inexperienced.  Long about late November - mid December, I think the market will begin -- in fits and starts -- its upward assault on the old highs and beyond.  In some cases, entire industries are the bottom having been reached on September 21 and the next stop Dow 20,000 and Nasdaq 10,000 are equally misinformed.

WILL THE LAST WHINY DOTCOMMER TO LEAVE THE

MARKET PLEASE TURN THE LIGHTS OUT?

 

May 2001

 

                                  Are you as bored as I am with the spate of articles about the plight of shrill Twenty-                      somethings who were great programmers with good ideas -- but dunce-cap businessmen?

           Did it occur to any in this Brave New World that business acumen comes as a result of something called “experience”?  Regular subscribers know that I accepted a position with one of the financial dotcoms and did my best to encourage a little business and common sense to the undertaking. I failed. I was told by the GenBeta 0.1 founder who invited me to come aboard that the world was different than in "my day" whenever I gave advice that differed from what they wanted to hear. "That may be how they did it "back in the days of Charles Schwab but the New Economy has changed all that," was the typical response. You know, the "ancient ways" of Charles Schwab, one of the most successful companies of the now-I-suppose-passe 1980s and 1990s!
      The investment world has not come to a grinding halt just because yet another crop of "the world owes me a billion dollars because I'm smart" entrepreneur wanna-be's went bust. And, while I personally believe there is way too much complacency for the bear market to have run its course, I never invest based upon what I, another advisor, Alan Greenspan, the Bull Channel, or Jo-Jo the Wonder Dog thinks "the market" is going to do.     

           If anything, by the time reporters and editors figure out the investment arena is more newsworthy than the latest super-model, whatever the trend was has probably already run its course.  What I do is invest for you in quality companies run by quality management with growing sales and earnings, and I do so with a long-term perspective bordering on forever.
           I don't care about investing fads like the computing craze of 1970 via (now-defunct) companies like CONTROL DATA and UNIVERSITY COMPUTING; the mini-computer revolution (remember WORDSTAR and WANG?) in 1980; and the PC revolution (how about ATARI, KAYPRO, and OSBORNE?) of 1990.  They all changed the way we live, just as the telegraph, telephone, automobiles, radio, and television did before them. All were, in their day, marvelous technological innovations. But that doesn't mean the founder of every me-too automaker (there were once 300) was a savvy enough businessman to turn technology into cash flow. (Now that's real alchemy!)     

           I am not alone in this approach. I just attended the BERKSHIRE HATHAWAY Annual Meeting, Social Happening, & Warren and Charlie Adoration Society Get-Together. (The company has two classes of shares. BRK.A sells for $66,400, while BRK.B, which BRK.A owners can convert into at the rate of 30 shares of Class B stock for every share of Class A stock held, sell for $2,200 a share. We'll use BRK.A as our proxy symbol.) Since I am in Omaha every couple months, I can attend the Annual Meeting easily. If you've never been to one, I recommend it highly for two reasons: (1) Warren Buffett and Charlie Munger are two of the most common-sensical advisors who will ever give you — for free — 6 hours of their time answering any question you want to ask about their company and their investing style, and (2) To get in, you have to buy the stock, so it will force you to make one of the smartest investments you will ever make!     

           Here's a vignette of your typical annual meeting: management warily and glumly agrees to face another year's crop of skeptical shareholders, often composed of people who are new to owning shares in that company and who attend merely because they have an axe to grind and they live nearby.  Management on stage consists of a gaggle of incredibly-overpaid hacks and flacks who skillfully divert any meaningful questions from pesky shareholders into the Great Maw of corporate doublespeak. A few trite panderings on the importance of stockholders is handed down and then management is off for a well-deserved R&R on the golf course before they go back home and tell their Boards of Directors they need a bigger salary. Attendance -- and this is for companies with hundreds of thousands of shareholders -- is typically a few hundred. 1500 would be big.

      Now contrast that with the BRK.A Annual Meeting... Warren Buffett and Charlie Munger have capped their salaries at $100,000 per year. They choose, instead, to align their future fortunes with those of their shareholders. (The last numbers I saw in print showed that about 90% of Charlie's net worth and 99% of Warren's net worth is in shares of BRK.A or its subsidiaries.)
      About 15,000 shareholders attend the Annual Meeting, ten times as many as typically attend a "well-attended" meeting of much larger companies. They  are true believers, many, many of whom have become millionaires by simply owning BRK.A, who are there to express their gratitude to Warren and Charlie, ask a few questions, and take notes on the answers.  ($1,000 invested in Buffett Partnership in 1956, then reinvested in BRK.A when the partnership was terminated in 1969 would -- after all taxes, expenses, and fees -- be worth about $27 million,  without ever worrying about what industry or stock to buy, and without contributing to the delinquency of Wall Street stockbrokers. Just buy it, hold it, and get rich.)     

     Warren Buffett built the company by buying some percentage, from a couple percent to 100%, of quality firms. Of those 100% owned and operated, BRK.A ensures they are quality businesses run by quality people making quality products that they sell the hell out of. Own the best companies with a dominant industry position that make things people want to buy -- and people will buy.
      At the Annual Meeting, shareholders can buy, from 100%-owned subsidiaries, DQ ice cream,  Tony Lama, Justin and other boots, fractional jet ownership, furniture, bedding and electronics from Nebraska Furniture Mart or from Star Furniture, Jordan's, and R.C. Willey, insurance from GEICO and Berkshire Hathaway, or candy from See's. Don't need any of those? Then how about carpeting from Shaw Industries, insulation and building products from Johns-Manville, bricks from Acme Building, or paint from Benjamin Moore?  Still haven't bought anything? May we tempt you with some Dexter shoes or some jewelry from Borsheim's, Helzberg, or Ben Bridge?

           How about renting some furniture from CORT or buying a generator from Campbell Hausfeld, a vacuum cleaner from Kirby or an investment in your kids' future from World Book?
      All these are majority owned subsidiaries of BRK.A, along with Flight Safety Intl, General Re and the Buffalo News. Then there are the meaningful equity ownership positions in AMERICAN EXPRESS, GILLETTE, WASHINGTON POST, WELLS FARGO, and COCA-COLA.    
          The Wonder of Warren is not that he has a secret investment tool he's unwilling to share. The wonder is that he's been telling investors for 45 years exactly what to do to turn $1,000 into $27 million: buy as much as you can afford to buy, preferably 100%, of quality businesses run by quality people, then sell the dickens out of their products. Thanks for the example, Warren -- and for sharing the "secret" so freely!  < >

           Which way is this market going to jump now?  I don’t know and neither does anyone else,  including the talking heads they dredge up on CNBC — but I can give you an informed guess.  It will continue under pressure for another 4 or 5 weeks, then begin its move to the upside.  I can’t guarantee the next sustained up-move will begin this soon, but it sure looks likely.  It is the screamers that get the TV time, so those who say the market is ready to plummet, with the Dow bottoming somewhere around 4,000 and the Nasdaq at 500, get lots of air time.  By the same token, those who say the worst is over and this is a screaming buying opportunity with Some in this business are convinced that we are now in the long-awaited secular bear market — one that condemns us to at least two more years of continuous downward movement.  This view has become a religion to some folks, in the same way that Jerry Falwell says September 11 was God’s way of punishing America — bunk! — or Osama bin Laden and his ilk believe they must destroy the world in order to make it work.  Full-time bears who missed the Greatest Bull Market of the Century now need to feel vindicated by trumpeting that they were right all along.  The only thing is — it isn’t whether you’re right that counts in the market; it’s what you do about it.  Staying out of the market was such a dreadful mistake that shorting it now may be the only way to get psychic, if not financial, vindication.

           How about the optimists?  They abound — usually at commission-oriented brokerage firms.  These people are quick to tell you that the market must go up because it got hit so hard.  My problem with this line of thinking?  Nothing has to go up (or down) because of where it is today.  We increased our equity positions to about 80% recently because in some industries we saw companies that will continue to generate excellent cash flow that were taken down along with firms that deserved to be taken down.  Ours wasn’t a “market” call, it was a we-like-to-buy-cheap-and-sell-dear call.  My guess is that the current fear will reach a crescendo long about December and January -- which is why I want to be 80% invested right about now and more like 100% invested around January 15 or so.

           What to invest in?  Well, you remember the energy crisis circa 2001, don’t you?  Gasoline prices skyrocketed, the state of California sued everyone who had a Texas return address, and fast-moving energy stocks were front-page headlines every day for a couple months.   Now, however, oil and natural gas prices are in retreat.  Smells like a buying opportunity to me.  Why?

           (1)  We don’t have an alternative to fossil fuels yet.  When we can all make do with fuel cells and solar, I’ll be the first to join the stampede.

           (2)  The world is using more oil.  People on bicycles today want to move up to motorbikes and people on motorbikes want a small pickup truck.  International commerce is a constant, and will grow year after year.  Ships need fuel to run on.  Petroleum is the basis for roads and runways and plastics and a whole host of other necessities that bring the world closer together.

           (3)  So commercial airlines aren’t flying as much.  Military jets are.  And they don’t have an EPA fleet rating they have to maintain.  In addition to military jets, there are military ships, military tanks, military helicopters, and military trucks that will be on the move.  None are noted for their fuel efficiency.  Where should these facts lead you?  To buy oil when it is cheap.  In addition to our favorites already in the portfolio, take a look at these two rising superstars, as well…  < >

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2001