I just returned from the Annual Berkshire Hathaway shareholders meeting. This year witnessed a record attendance – approximately 35,000 people from around the globe flocked to Omaha, Nebraska to have the opportunity to hear some words of wisdom from the "Oracle of Omaha," Warren Buffett, and his partner and long-time sidekick Charlie Munger.
In case you are not familiar with Warren, Warren is the world’s wealthiest person. Depending on the quarter, he is neck-and-neck with Bill Gates and Mexican telecommunications giant, Carlos Slim Helu, but as of last year, I believe Warren was still in first place. How did he get there? Hard work making money, and then working hard to make his money work for him.
One of the best Buffett books that I have read, and I am by no means a Buffett expert, was the The Snowball: Warren Buffett and the Business of Life by Alice Schroeder, published last year. The Snowball explains how Buffett was an entrepreneur at an extremely young age, and as he accumulated assets, the book details how he gradually invested his money, and other people’s money, to propel him to the wealthiest human on the planet.
Warren is undoubtedly the most famous investor in the world, and plenty of people flocked to see him last weekend. At one point during the conference, I was within a few feet of multiple billionaires, including Bill Gates, Charlie Munger, and himself, Warren Buffet. At one point in time, I literally bumped into Warren. What do you say when you have about 1/10th of a second to have a conversation with the world’s wealthiest person? In a blink of an eye, I knew exactly what to say. "Hi, Warren!" I said gleefully as he passed by. "Hi, how are you doing?" he responded with a smile, and hurried through the crowd to take his seat.
Not much, I know, but it was the extent of my conversation with Warren, nonetheless. But soon the shareholders Q&A meeting would get started, and I would have the opportunity to hear some valuable insight from this brilliant investor.
This year, three journalists would ask questions that were chose from thousands of different shareholders, and some shareholders present were selected from a lottery system to ask the questions. Both Warren and Charlie are known for their words of wisdom. During the meeting, Warren would routinely take 5 minutes to answer a 1-minute question, and Charlie, who always batted second, would take 1 minute to answer a 10-minute question.
All sorts of questions were asked of the two, from the economy to any other question regarding Berkshire Hathaway’s holdings or operations. Buffett, who is a well known Democrat, and Munger, who is a Republican, both had the same view from the measures the government has taken recently to stimulate the economy: What they did wasn’t perfect, but it beat doing nothing.
When asked about Government Bonds, Buffett was clear that fixed income investors were going to lose purchasing power over time. Munger was a little more direct, saying that one "should become a brain surgeon and invest in Coca-Cola rather than government bonds."
On Inflation: "The best protection against inflation is your own earnings power," according to Buffet. In other words, excel in your chosen career path. Be the best you can be, and you will be able to earn more and more. The second best protection against inflation is the "earnings power of a wonderful business," especially ones that do not require heavy capital outlay.
Buffett and Munger mentioned several times that it is important to have emotional stability when being an investor, and slammed investors and analysts that try to "outsmart" the system. According to Buffett, "it is much better to have an IQ of 130, than to think you have an IQ of 160, when it is only 150." High IQ’s can get you into trouble. "Investing is simple, but it isn’t easy." You don’t have to be a brain surgeon to make money in the market.
Over the years, there have been thousands of words of wisdom from Buffett, 78, and Munger, 85. "You should invest in a business that even a fool can run, because someday a fool will," and two rules, "#1. Never lose money. #2. Never forget rule No. 1," both attributed to Buffett. Munger’s wisdom is equally revered: "Bull markets go to people’s heads. If you’re a duck on a pond, and it’s rising due to a downpour, you start going up in the world. But you think it’s you, not the pond, "and "People calculate too much and think too little."
Whether or not you like Warren Buffett and Charlie Munger or their politics, there is no doubt they will go down as two of the absolute best investors this world has ever known. Of course these are just my thoughts – Clark’s Thoughts.
Tuesday, May 5, 2009
Monday, May 4, 2009
My Two Greatest Fears
Contrary to popular belief, heights are not one of my two greatest fears, although I am not too fond of heights, either. I used to quip that I am so scared of heights that if I was any taller than 5’ 8", I would walk around scared all day. But as much as I dislike heights, there are two things that concern me even more – Taxation and Inflation.
Why are we concerned so much with taxation? In a nutshell – demographics. I don’t want this to be a political blog – not in the least. But obviously there are political forces out there that can influence in our economy. At the present moment, we have Oval Office intent on spending our way out of a recession. To date, we have lent, spent, or promised roughly $13 Trillion. Folks, this money must be paid back at some point in time. Whether or not some of the TARP funds get returned; whether or not some of the taxpayer dollars get paid back; this money has to be returned.
Noticed I mentioned the word demographics, and then criticized the current administration. But I honestly believe that no matter which political party that took office, taxes would have to eventually increase. When JFK was in office, the top marginal tax bracket was around 90%. As more and more Baby Boomers entered the work force, guess what? Taxes came down. The larger the workforce, the more tax revenue. The higher these Boomers moved up in seniority, the more taxes they paid. But unfortunately, the reverse is also true. The smaller the workforce or the lower the average salary, the lower the tax revenue. As Boomers retire, new employees replace them at the bottom of the pay scale. The current top marginal tax bracket is around 35%. And herein lies the problem. For the first time in our nation’s history, we are witnessing a smaller generation follow the current one. According to the H.S. Dent foundation, we have .95 "Echo Boomers" for every Baby Boomer. This is a huge problem.
Just think about it. For every high school that we once had, we only need .95 of them. For every car, we only need .95 of them. And to really bring it home, for every house, we only need .95 of them. That means that for every 1,000 houses owned by Baby Boomers, roughly 50 of them will not be needed. But it also means that for every person on Social Security, we have fewer active workers. For every person on Medicare, we have fewer people paying into the system. And right now, we have a huge problem with Medicare. According to CNBC, Medicare will be bankrupt in 10 years. Now that is a problem!
It doesn’t matter who won the election – taxes can only go one in direction. Want to solve the Medicare crisis? Want to solve the Social Security problem? I can think of only three possibilities, and none of them are good. 1) Raise Taxes. Obviously, current workers would not be in favor of this. 2) Lower Benefits. Obviously, current retirees will not be in favor of this. 3). Do a combination of numbers 1 and 2. Obviously, no one will like this, but it may be the most rational answer.
Now for the second fear: inflation. We are printing tons of cash right now. All things being equal, from an economic standpoint, this should cause inflation. But we are also witnessing a switch to a wants-based economy, as shared in a previous post. As we move to a wants-based economy, we are starting to see demand for some goods decrease, which can have the impression of deflation. But we can also clearly see demand for other goods and services which have the clear impression of inflation. Think about our current environment: many have seen their retirement accounts go down in value, their homes go down in value, and their vehicles go down in value. But take a trip to the grocery store, buy groceries and diapers, or take a trip to the doctor and tell me there is no inflation….
As more and more money gets printed, as more and more money gets promised, there is little doubt that inflation will be heading our direction. The question is: when? Every economist knows that as the Fed lowers interest rates, the value of the dollar should decline. If the value of the dollar declines, the amount of goods that we can purchase also should decline, thus we would experience inflation. But if the entire world cuts rates, then the dollar would not decline as rapidly as one would expect. At some point in time, however, the chickens will come home to roost, the Fed will have to raise rates to help fend off inflation, and many people hiding in fixed income investments will eventually lose purchasing power.
Taxation and Inflation will be heading our way….the big question is how soon?
Of course these are just my thoughts, Clark’s Thoughts.
Why are we concerned so much with taxation? In a nutshell – demographics. I don’t want this to be a political blog – not in the least. But obviously there are political forces out there that can influence in our economy. At the present moment, we have Oval Office intent on spending our way out of a recession. To date, we have lent, spent, or promised roughly $13 Trillion. Folks, this money must be paid back at some point in time. Whether or not some of the TARP funds get returned; whether or not some of the taxpayer dollars get paid back; this money has to be returned.
Noticed I mentioned the word demographics, and then criticized the current administration. But I honestly believe that no matter which political party that took office, taxes would have to eventually increase. When JFK was in office, the top marginal tax bracket was around 90%. As more and more Baby Boomers entered the work force, guess what? Taxes came down. The larger the workforce, the more tax revenue. The higher these Boomers moved up in seniority, the more taxes they paid. But unfortunately, the reverse is also true. The smaller the workforce or the lower the average salary, the lower the tax revenue. As Boomers retire, new employees replace them at the bottom of the pay scale. The current top marginal tax bracket is around 35%. And herein lies the problem. For the first time in our nation’s history, we are witnessing a smaller generation follow the current one. According to the H.S. Dent foundation, we have .95 "Echo Boomers" for every Baby Boomer. This is a huge problem.
Just think about it. For every high school that we once had, we only need .95 of them. For every car, we only need .95 of them. And to really bring it home, for every house, we only need .95 of them. That means that for every 1,000 houses owned by Baby Boomers, roughly 50 of them will not be needed. But it also means that for every person on Social Security, we have fewer active workers. For every person on Medicare, we have fewer people paying into the system. And right now, we have a huge problem with Medicare. According to CNBC, Medicare will be bankrupt in 10 years. Now that is a problem!
It doesn’t matter who won the election – taxes can only go one in direction. Want to solve the Medicare crisis? Want to solve the Social Security problem? I can think of only three possibilities, and none of them are good. 1) Raise Taxes. Obviously, current workers would not be in favor of this. 2) Lower Benefits. Obviously, current retirees will not be in favor of this. 3). Do a combination of numbers 1 and 2. Obviously, no one will like this, but it may be the most rational answer.
Now for the second fear: inflation. We are printing tons of cash right now. All things being equal, from an economic standpoint, this should cause inflation. But we are also witnessing a switch to a wants-based economy, as shared in a previous post. As we move to a wants-based economy, we are starting to see demand for some goods decrease, which can have the impression of deflation. But we can also clearly see demand for other goods and services which have the clear impression of inflation. Think about our current environment: many have seen their retirement accounts go down in value, their homes go down in value, and their vehicles go down in value. But take a trip to the grocery store, buy groceries and diapers, or take a trip to the doctor and tell me there is no inflation….
As more and more money gets printed, as more and more money gets promised, there is little doubt that inflation will be heading our direction. The question is: when? Every economist knows that as the Fed lowers interest rates, the value of the dollar should decline. If the value of the dollar declines, the amount of goods that we can purchase also should decline, thus we would experience inflation. But if the entire world cuts rates, then the dollar would not decline as rapidly as one would expect. At some point in time, however, the chickens will come home to roost, the Fed will have to raise rates to help fend off inflation, and many people hiding in fixed income investments will eventually lose purchasing power.
Taxation and Inflation will be heading our way….the big question is how soon?
Of course these are just my thoughts, Clark’s Thoughts.
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