In Search of the Perfect Investment

Let’s start with a chart of the last five days:

If Sell in May and Go Away were to work  this year, it started a little early. Here are three charts of stocks in sectors presently out of favor — mortgage REITs and biotechs. The first two are five days.

These are health care year to date (YTD).

Buffett talks about buying when blood is flowing in the streets. When oil dropped to the mid-$40s, blood was flowing. Since then, it’s rebounded.

And guess what happened to the oil companies> They bounced. Could they bounce more? Why not?

Berkshire Hathaway’s annual meeting fest is this weekend. Hence everyone and their uncle is writing about the stock. Since it’s my second largest holding (after Apple, and not counting my various index funds, detailed in the right hand column), I’m interested in the Berkshire articles. Here are the two best. First, the Wall Street Journal by the excellent Spencer Jakab:

Warren Buffett Has a Tough Act to Follow
Betting against Warren Buffett has been a loser’s game for decades but as Berkshire Hathaway prepares to celebrate 50 year of Mr. Buffett’s leadership, it may harder than ever to keep up the gains.

Google the words “Warren Buffett” and “lost his touch” and be prepared to read thousands of entries.

Not surprisingly, many date from market junctures such as 1999, 2002 or 2008. At those points, people looking back a mere few years at Berkshire Hathaway Inc. ‘s performance thought they had good reason to utter those words. In each case they were forced to eat them. A memorable instance dates from 2000 when the publisher of a technology magazine was quoted saying that Mr. Buffett should say, “I’m sorry.”

As Berkshire prepares to unveil quarterly results Friday and, more important, celebrate a half century under Mr. Buffett’s management in an extra-special “Woodstock for capitalists” this weekend, one might say it has become foolish to find fault with his results.

There are, after all, 18,261 good arguments his acolytes can cite: what $1 invested in Berkshire at its outset was worth in December 2014. But those counting on similar results in the next five decades should temper their expectations, and not only because Mr. Buffett won’t enjoy a biblical lifespan.

Splitting the past quarter century into five blocks of five years each, plus the first four months of 2015, Berkshire has had an uneven run. Mr. Buffett’s worst relative performance was between 1995 and 1999. He trailed the S&P 500 by a lot, but made up for it in the next five years.

Since 2010, Berkshire’s stock has outperformed the market by just 0.9% annually. Perhaps that means the next five will be correspondingly fantastic again.

Yet Berkshire’s size makes that tough. Mr. Buffett’s philosophy that he is buying companies, not stocks, has served him well. Now, though, he literally has to buy companies-large ones such as Kraft Foods Group Inc. -to deploy cash meaningfully. That requires paying a premium he never had to decades ago.

Another limitation is prudence given Berkshire’s size and insurance units. In the bear market of 1973 and 1974, Mr. Buffett giddily snapped up bargains. In 2008 and 2009, he also wrote big checks but could have profited far more. Berkshire’s 2009, 2010 and 2011 gains were just 2.7%, 21.4% and minus 4.7%, respectively, compared with 129.3% in 1975.

That doesn’t mean Mr. Buffett has lost his touch. But he does have very big hands these days.

A longer piece is by The Motley Fool’s Matt Koppenheffer, who owns shares in Berkshire:

15 Things to Expect from Warren Buffett’s Annual “Woodstock for Capitalists”

A look at what promises to be a memorable annual meeting.

Saturday is the day. That is, Saturday is the day.

That’s right, I’m talking about the Berkshire Hathaway annual meeting, which brings tens of thousands of investors to Omaha to hear what CEO Warren Buffett and his brilliant co-pilot Charlie Munger have to say about Berkshire, the economy, the stock market, and. well, just about anything else under the sun.

There are certain things that Buffett-watchers can expect every year from the meeting, but every year’s meeting is a bit different. And this year promises to be particularly memorable, as it marks the 50-year anniversary of Buffett and Munger at the helm of Berkshire.

So what exactly should we expect from this year’s edition of the Woodstock for Capitalists? Let’s see.

1. What do you think about the stock market?

I’m guessing the question won’t come in quite that form, but there will be some question during the hours-long Q&A session with Buffett and Munger that gets to their views on the current state of the stock market. We can expect the response to be a combination of their traditional wisdom that emphasizes how investors are buying a piece of a business (not a piece of paper), that long-term ownership is the way to go, and that low-cost index funds are the best bet for many investors.

But this ain’t the normal mealy mouth corporate-speak annual meeting, so don’t be surprised if Buffett and Munger offer direct views on the state of the market. After all, in Berkshire’s annual letter in 1999, Buffett was very clear about his view that valuations were inflated:

Our reservations about the prices of securities we own apply also to the general level of equity prices. We have never attempted to forecast what the stock market is going to do in the next month or the next year, and we are not trying to do that now. But, as I point out in the enclosed article, equity investors currently seem wildly optimistic in their expectations about future returns.

And then, in the 2008 letter, he was equally clear about the bargains that he and Charlie were seeing:

Additionally, the market value of the bonds and stocks that we continue to hold suffered a significant decline along with the general market. This does not bother Charlie and me. Indeed, we enjoy such price declines if we have funds available to increase our positions. Long ago, Ben Graham taught me that “Price is what you pay; value is what you get.” Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.

2. What’s up with that new number?

Buffett and Munger’s benchmark of choice for many years has been the change in Berkshire’s per-share book value versus the one-year change in the S&P 500 index. This year, a new number appeared on the first page of Berkshire’s letter: the one-year price change in Berkshire’s stock.

On the one hand, this shouldn’t be all that surprising. For years now, both Buffett and Munger (more so Munger), have explained that the changing nature of Berkshire’s business – that is, away from an insurance-heavy operation to a more diversified conglomerate – make the per-share book value calculus less meaningful.

In this year’s letter, Buffett noted that:

Market prices, let me stress, have their limitations in the short term. Monthly or yearly movements of stocks are often erratic and not indicative of changes in intrinsic value. Over time, however, stock prices and intrinsic value almost invariably converge.

At the same time, going by the “classic” benchmark, Berkshire has underperformed in five of the past six years. I’d be surprised if somebody didn’t try to call out the duo on the apparent convenient timing of the new performance gauge.

3. You bought what at Berkshire?

One thing that Berkshire investors that attend the meeting can expect every year is a cornucopia of Berkshire-subsidiary products on offer, from Dairy Queen Dilly Bars to NetJets private-jet leases. Seriously, Berkshire investors get their shop on. Here’s what Buffett had to say about last year’s Berkshire rendition of Supermarket Sweep:

Last year you did your part as a shopper, and most of our businesses racked up record sales. In a nine-hour period on Saturday, we sold 1,385 pairs of Justin boots (that’s a pair every 23 seconds), 13,440 pounds of See’s candy, 7,276 pairs of Wells Lamont work gloves and 10,000 bottles of Heinz ketchup.

My personal goal is to buy something that will make my wife say.”You bought what at Berkshire?”

4. Kraft.

Buffett likes his “elephant hunting” and he did some for Berkshire in late March. Pairing up once again with Brazilian private equity firm 3G Capital, Berkshire agreed to buy Kraft Foods for around $50 billion. The Economist was none too impressed with the deal, writing.

Warren Buffett says he likes to buy companies that are easy to understand and are performing well. His latest deal, the $50 billion acquisition of Kraft Foods that was announced on March 25th, passes only one of those tests.

The article continues to clarify that while Kraft’s business is easy enough to comprehend, its recent performance hasn’t been terribly tasty.

My fellow Fool Alex Dumortier wasn’t as pessimistic, noting the incredible success that 3G has already had with the last team-up acquisition, H.J. Heinz. To be fair, The Economist did note that 3G “is the closest thing the consumer-goods industry has to a miracle-worker.”

The bottom line, though, is that the price tag for Kraft wasn’t especially cheap and the business isn’t thriving, so a “what’s up with that” question is bound to come.

5. “I have nothing to add.”

Charlie Munger is famous for curtly quipping “I have nothing to add” during the meeting when. well, when he has nothing further to add. On our live chat we will be sure to let you know every time Munger delivers his well-known line.

And for a fun Berkshire-inspired game that even the kids can enjoy: Eat a See’s Candy (or two) for every “I have nothing to add.”

6. .but then, there’s plenty to add.

Though Munger’s “I have nothing to add” is well known, it’s likewise known that when he does have an opinion on something he’s not afraid to share it. We can certainly expect that there will be plenty of this during the meeting as well.

Charlie on ethanol (2008): “The policy of turning American corn into motor fuel is one of the dumbest ideas in the history of the world.”

Charlie on gold (in a 2012 CNBC interview): “Gold is a great thing to sew into your garments if you’re a Jewish family in Vienna in 1939, but I think civilized people don’t buy gold, they invest in productive businesses.”

7. So, um, what up with Clayton Homes?

When you’re as large as Berkshire, you’re bound to find yourself in the crosshairs of controversy. That’s doubly so when you’re run by a CEO who says things like “we can afford to lose money – even a lot of money. But we can’t afford to lose reputation – even a shred of reputation.”

In the past, Berkshire has come under fire in the annual meetings for the disruption of salmon spawning by a dam owned by Berkshire subsidiary Mid-American Energy, as well as its ownership of PetroChina stock, which a shareholder proposal described as “the dominant international player in Sudan’s oil sector.”

This year, the heat will likely come from concerns over Berkshire’s manufactured-housing company, Clayton Homes. In early April, The Seattle Times published an article titled “The mobile-home trap: How a Warren Buffett empire preys on the poor.” The article alleges that while Buffett rails against shady mortgage practices, the company that he owns – and praised in this year’s shareholder letter – is “trapping many buyers in loans they can’t afford and in homes that are almost impossible to sell or refinance.”

8. The Berkshire movie

Every year, the meeting begins with a movie. That’s right, a movie. Well, it’s really sort of half-movie and half-advertisement for Berkshire brands and holdings (Coca-Cola KO 0.17% and Geico always seems to have prominent placement). What the movie lacks in plot and clear structure, it makes up for in cheap laughs and cameos.

Who will pop up in this year’s iteration? I’ve got my fingers crossed for Left Shark.

9. Tell us more about this car thing

Could it be that Jay Leno now has an Omaha billionaire that he can talk cars with?

In early March, Berkshire closed on the acquisition of Van Tuyl Group – one of the U.S.’s largest auto dealerships – and promptly renamed the group Berkshire Hathaway Automotive. Prior to the acquisition, Van Tuyl reportedly had $9 billion in annual sales, but Buffett wants to see the new subsidiary grow further. In late March he went on CNBC and said:

We’ve heard from a lot of dealers and we’ll hear from more, I’m sure. I’d be very surprised if five years from now, we’re not a whole lot bigger.

Berkshire also purchased $560 million in Axalta stock from Carlyle Group. While Axalta is a diversified coatings business – which fits in with Berkshire’s vast industrial holdings – its primary market is transportation. Axalta holds the No .1 worldwide position in supplying coatings for auto-repair shops and is No.2 when it comes to manufacturers of cars and light trucks.

And lest we forget, it was just in 2011 that Berkshire coughed up $9 billion to buy Lubrizol.

What’s next for Buffett’s burgeoning auto-empire? I’d certainly be interested to hear what the Oracle sees ahead for the industry.

10. Zombies in Omaha

The crowd at the CenturyLink Center in Omaha is expected to top 40,000 this year for the 50thAnniversary meeting. Any shareholder can attend the meeting, but none can purchase preferred seating. What does that mean? The same as every year: Investors will line up bright (technically, it will still be dark) and early to try to secure the best seats and the best views of Buffett and Munger.

This means that if you happen to be in Omaha on the weekend of May 2, but aren’t part of the Berkshire hoopla, don’t fret, those aren’t actually zombies wandering around Farnam Street and Dodge, they’re just exhausted Berkshire investors.

11. Entschuldigung Herr Buffett, aber was ist nächste für Sie in Deutschland?

As the Geschäftsführer for The Fool’s German-language website (Fool.de), I have a special interest in this one.

On February 20 of this year, Berkshire announced that it was acquiring German motorcycle-gear business Detlev Louis Motorrad. Buffett called the deal a “door opener” and crowed that “I like the fact that we have cracked the code in Germany.” Wie cool.

Buffett followed up with an interview with Handelsblatt, Germany’s answer to The Wall Street Journal. In the interview, Buffett said:

We are definitely interested in buying more German companies. Germany is a great market: lots of people, lots of purchasing power and Germans are productive. We also like the regulatory and legal framework.

I wholeheartedly agree and would be very interested to hear: Also dann, was jetzt Herr Buffett?(So then, what now Mr. Buffett?)

12. Just give us a hint

Every calendar quarter, large investors like Berkshire are required to deliver a so-called 13F filing to the Securities and Exchange Commission that shows their stock holdings. Berkshire last filed in mid-February, and we’ll likely see the next filing in mid-May – conveniently after the annual meeting.

In the last 13F filing, we found out that Berkshire had shed all of its holdings in ExxonMobil XOM -0.56% – Buffett later explained to CNBC, “We thought we might have other uses for the money.”

Will there be any big moves this quarter? I doubt we’ll find out at the annual meeting, but that doesn’t mean that the question won’t be asked.

13. Run like the wind

If you’re a runner, you may be familiar with the Brooks running-shoe brand. If you’re a Berkshire shareholder you may know that Berkshire owns Brooks. But did you know that for the past couple of years Berkshire and Brooks have put on a 5k race the day after the Berkshire meeting?

The runners that come out for the “Invest in Yourself 5k” are no joke – last year’s male winner finished in a blazing 15:52. For the rest of us, it’s a matter of just trying to shake off a sleep deficit and an over-indulgence in See’s Candy. But, then again, what better way to burn of a few of those candy calories than by running a few miles?

Better still: Runners get a Berkshire-ized Brooks t-shirt and a finisher’s medal with Buffett’s smiling mug on it.

14. Want another question that won’t be answered?

Buffett’s successor: Who will it be? We won’t find out at the meeting, but it’s another “not to be answered” question that I expect to hear.

15. Oh right, the Berkshire business meeting

Believe it or not, sandwiched into all of the Buffett and Munger-y goodness of the Berkshire meeting and weekend is an actual business meeting. According to Berkshire’s annual meeting info, the business meeting will be held from 3:45 to 4:15 on the day of the meeting. In the years that I’ve attended the meeting, I can’t recall the business meeting lasting more than 10 minutes.

Then again, my perception of time by that point in the day has usually been compromised by the peanut brittle.

In past days, Buffett told CNBC that it would be very hard for the Fed to raise interest rates any time soon — given what was happening in Europe. If he’s right, that should mean the market will do OK for the upcoming summer. I’m staying in — but I’m intrigued by both oil stocks (see charts above) and a couple of good European (but especially German) ETFs, which I’ll research more this weekend. For why, keep reading:

Contrasting labor reform in France and Germany. From the Economist:

The King and I at Lincoln Center. See it — even if you’ve seen it a thousand times. Kelli O’Hara is brilliant as the schoolteacher who travels to Siam (now Thailand) to teach the King’s many children.

For tickets, click here.

A different war

When the Vietnam War ended 40 years ago, 100,000 refugees were brought to America and set up in tent cities. One such city was at Camp Pendleton. The Los Angeles Times reconnects with some of those refugees, who were just small children when they were brought to a new country for an uncertain future. Click here for the L.A. Times lookback story.

Weekend Tips:

+ Filing an FBAR? If you have a bank account abroad (no matter how small), you’ll need to file a “FBAR — Report of Foreign Bank and Financial Accounts.” It’s a long,boring, government form which you file online. But you MUST use Adobe Reader — the free version. If you don’t, it won’t work and you’ll waste even more time. Here’s an IRS explanation of FBAR: Click here.

+ My laptop’s fan stopped. That meant my ThinkPad X230 wouldn’t work. So, a backup hard drive wouldn’t work. But I had an identical ThinkPad X230 laptop which was working. I swapped hard drive and, bingo, I was live again.  You can pick up “backup” laptops on eBay or Craigs List for much cheaper than you can buy them new. Had I not had the backup laptop, I would be facing a three-to five day wait for the part. And I’d be very annoyed.

+ Check. Check. Check. Too many bills — especially those I have on “auto-pay” are coming in wrong — always in the company’s favor. Some months are fine. Others are outrageous. I have no idea what’s going on. But it’s a real waste of time calling the companies and their idiotic answering machines: “We’re recording this for training purposes.”

Favorite Baltimore “comment”

Peeing on my flowers. Weekend fare.

A little old lady was walking down the street dragging two large plastic garbage bags behind her. One of the bags was ripped and every once in awhile a $20 bill fell out onto the sidewalk.

Noticing this, a policeman stopped her, and said, “Ma’am, there are $20 bills falling out of that bag.”

“Oh, really? Darn it!” said the little old lady. “I’d better go back and see if I can find them. Thanks for telling me, Officer.”

“Well, now, not so fast,” said the cop.

“Where did you get all that money? You didn’t steal it, did you?”

“Oh, no, no”, said the old lady.

“You see, my back yard is right next to a golf course. A lot of golfers come and pee through a knot hole in my fence, right into my flower garden. It used to really tick me off. Kills the flowers, you know. Then I thought, ‘why not make the best of it?’ So, now, I stand behind the fence by the knot hole, real quiet, with my hedge clippers. Every time some guy sticks his thing through my fence, I surprise him, grab hold of it and say, ‘O.K., buddy! Give me $20 or off it comes!’

“Well, that seems only fair,” said the cop, laughing. “OK. Good luck! Oh, by the way, what’s in the other bag?”

“Well, not everybody pays.”

Harry Newton who wishes he were at the Berkshire annual meeting this weekend. But he has a bar mitzvah of the son of a dear friend, whose bar mitzvah he also attended. Shows how fast time flies. Hug your kids and grandkids this weekend. Read the grandkids some books. It’s huge fun whether they can understand what you’re reading about or not.

Elon Musk’s vision of a world of solar panels on housing roofs and batteries inside the houses makes huge sense. From CNBC:

“The obvious problem with solar power is that the sun doesn’t shine at night,” the company founder and CEO Elon Musk said in a press conference in California. “We need to store the energy to use at night.”

But he added “the issue with existing batteries is they suck.”

Musk launched the Powerwall home battery, a rechargeable 7-10 kwh lithium-ion battery, priced at $3,000-$3,500 for installers, with deliveries slated in three to four months. It’s available in a selection of colors.