Alec’s Diary – Up at 4am for my 7th Berkshire AGM
Here's my voice diary entry for the morning of Saturday, May 3rd – the day of Berkshire Hathaway AGM in Omaha. I'm privileged to be one of 40 000 pilgrims who have travelled to Warren Buffett's home town for the grand occasion. Also with us this year is Theo Vorster of Galileo Capital – he followed my 2013 tweets while watching his beloved Bulls at Loftus and decided he'd come with us. And here he is (pictured with me below). In this entry I've also summarised highlights of Friday's Value Investor Conference – Fracking, the probable results of QE and the sharing of insights from a money manager who worked closely with the legendary Sir John Templeton, Julian Robertson and Bill Sharpe. – AH
ALEC HOGG: So the big day has arrived. It's Saturday, the 3rd of May and the Berkshire Hathaway Annual General Meeting is going to be held this morning. I woke up (as I did last year) at around 4:00am. It's just too exciting. It sounds ridiculous that you come all this way, 30 hours of travelling, to listen to two guys (one is 83 and the other is 90), sit for five-and-a-half hours just answering questions, but they are so wise and there is so much to be gained that this is really one of the most exciting days of my life. I have to thank Laurie Dippenaar, the Chairman of First Rand, for the role he played in this.
Back in 2006, Laurie said to me that he thought it was a good idea that I attend the Berkshire Hathaway AGM. I wasn't too sure about it at the time. Of course, I'd heard a little bit of Warren Buffett, although he was much less 'high profile' then as he is now. He sent me a couple of books, particularly one by Roger Lowenstein – 'the Making of an American Capitalist', which talks about this incredible human being, as well as being a fantastic investor. I think he (Laurie) also had an ulterior motive because in the week before the Berkshire Hathaway AGM, he liked to come to America to play golf. I used to love my golf back then and in the three years we travelled together, we went to some fantastic golf courses, for which I will forever be in his debt, because Laurie's a member of a golf club that allows you to play pretty much anywhere in the world – that's their boast.
Anyway, he's been coming often. Jannie Mouton has been here as well. There've been many South Africans who've come and learned at the feet of Warren Buffett, but the one who's been waving the flag most aggressively is Kokkie Kooyman, so it's such a joy to spend a lot of time in his company. I'll be seeing him literally, in half an hour, as he gathers the troops at 5:45 – this year he has 54 guests – and does the walk from our hotel. It's probably about a 15-minute walk to the arena. I walk along with them and then I have the privilege of going around the back into the press section, so I don't have to stand outside for an hour queuing. I can have my lovely breakfast while these guys are all queuing. Anyway, that's one of the benefits of being in the media. The disadvantage of course, is that you actually have to work, whereas these guys can sit down and think about it.
It was very interesting yesterday. I met a chap named Peter from Denmark over our lunchtime at the Value Investors' Conference and he had attended something called 'the Genius of Warren Buffet'. Now, it's a three-day conference (at the same time that our Value Investor Conference is on), and 'the Genius of Warren Buffett' looks clearly at the man himself. Bob Miles, who put this together, also brings in some people that you would never have access to ordinarily. This year, amongst them was Susie Buffett.
We got to talking because a few years ago, there was a book on Warren Buffett's life called 'The Snowball' and in it, Warren Buffett said to the author Alice Schroeder who he knew very well and obviously trusted deeply, that when there were two instances of a story, she was to take the less flattering one and publish that. That was an indication of the way he wanted it to be as honest as possible. Well, Alice possibly overdid her mandate because up until the time when she wrote the book, she had any kind of access you'd like to the man who's the second richest in the United States. She had access to all the family members. She researched the book for six years, but when it came out the Buffett family wasn't terribly happy and indeed, Alice has been cut out of the inner circle very quickly.
This was something Peter and I got to talking about over lunch and I asked him if he had engaged with Warren's daughter Susie Buffett, on the subject. He said indeed, he did because it also concerned him that firstly, they would allow unlimited access and secondly, that after the book came out – and it's pretty scathing in many ways – that would be the end of Alice's relationship. He said that Susie was telling Warren that the family really didn't want Alice Schroeder to write the book. They would have preferred someone like Janet Lowe, who's written an excellent book on Charlie Munger. If you're interested in this stuff, go and read it. It's called 'Damn Right!' or perhaps even Carol Loomis, an old friend of his from Fortune Magazine.
He didn't. He made a decision that the family were baffled at, and it was one of those blind spots…one of those mistakes of his life. It's a wonderful book, but I think it edges perhaps as writers sometimes do in their attempt to be balanced, towards maybe excessively critical – a little bit like Walter Isaacson, particularly in the first half of his biography on Steve Jobs. Maybe that's the fashion nowadays.
Anyway, it was interesting to get those insights from Susie Buffett – those and others – and I think that next year I'm going to come early for that three-day course. The Value Investors' Course itself was actually a tour de force. Not every one of the presenters was excellent. I would say probably half of them though, would rather either nine or ten out of ten. The other half would be one out of ten, so it was that type of conference. You have to catch your breath in between the really good ones. What has happened though is if you put it all together, it's a lot of work I'm going to be doing on this, analysing what the guys said, because I do have a full day with Standard Bank clients. They're putting on a seminar at the end of the month where we'll talk about what was at this Value Investor's Conference and other things from Warren Buffett.
Anyway, what came to me, if you would put it into a nutshell is that value investing has evolved from the days of Benjamin Graham when it was about cigar butts. In other words, you went and got the really smashed-up companies where their prices were very low, priced for disaster, bought them, had a little run from them because they were just oversold, and then usually got out. Value investors today are being encouraged to buy good companies and Buffet himself, always said he would rather buy a wonderful company at a fair price than a fair company at a wonderful price. You'll hear many of these quips over the next day or so as I report back from these meetings.
This is quite different, but it also gives you the feeling that value investors are now saying 'well, it doesn't have to be a low PE necessarily, to be a good investment. It can be a highly rated stock, as long as it actually continues to perform or as long as you can see it will continue to perform into the future'. There's a lot. I will be talking about that in the days ahead, but just to look at a couple of highlights from yesterday that I can share with you quickly, there was an unbelievably good presentation on fracking by a guy called Ron Mulhenkamp. I have spoken to Kokkie Kooyman about this. I'm sorry about the background noise on that discussion, but we were right amongst a group of South Africans. Go and listen to that. It's on SoundCloud as well.
Ron Mulhenkamp effectively dispelled many of the myths for me about the problems with fracking and then gave an insight into the economic issues. He is a stockbroker or an investment money manager, so he's made it his business to get to know fracking well from an investor's perspective. He's not going in there (and that's why I love investors or these top investors from America). They're not going in there with any axes to grind. They're saying 'are there economic benefits to be had' and it's undoubted that with fracking, there is. He actually made the point that his own electricity bill last year went down ten percent – down ten percent. I think mine went up by 25 percent. He also makes the point that many of the coal-fired gas power stations that produce electricity, are now moving over to gas-fired. His view is that in the next ten years, you will see the reindustrialisation of the American economy and that you'll see electricity prices declining to the degree that many factories that would not be able to be built here, will happen in the future. He uses examples of the plastics factories, which are now being re-established. The first plastics factory will be going up soon, the first one in 30 years. Anyway, that's good. Google him – Mulhenkamp – and I think you'll be very, very well informed about fracking, when you've read that.
Another one of the highlights yesterday was a lady called Jane Siebel who worked – get this – for Sir John Templeton (from what is now Franklin Templeton), for Julian Robertson (one of the great hedge fund managers in the world), and for Bill Sharpe. Now, that is the kind of pedigree, which, I suppose, if you were a football player, you would have played under Alex Ferguson, Jose Marino, and not Sam Allardyce (but you get what I mean). Anyway, the way she shared the information with us was incredible, again reaffirming that management is really critical when you make an investment and that you have to know yourself as well and be highly disciplined. She's doing something interesting. She outsourced her research report to people around the world, so if you are in the game of research and you're interested in providing research, she pays fourteen thousand Dollars to those in America. She says she does pay a little bit less to people in other parts of the world, but she's looking for original stuff. Just Google her as well – Jane Siebels – and have a look at her company, Green Cay Investing based in Nassau in the Bahamas.
There was another point in that. She's based exactly where Sir John Templeton was, and he was asked on day 'don't you feel that you're out of the loop by being so far away from everything'. He said 'no, it's exactly as I want it. The Wall Street Journal arrives a day late', so it's to get away from all the noise. I think our friends in Cape Town know that only too well.
The other big presentation yesterday, which I remember so well, was Arnold van den Berg who is one of those old-style experienced value investors. He was talking about quantitative easing and this was just superb. It was the first time I'd heard anyone unpack what the likely outcome is going to be from quantitative easing. He says in essence, that there are three options for the U.S. Federal Reserve to pull out all of the money – which it's still, by the way putting into the system. The one he hopes for is if it does it with great finesse, pulls the money out carefully, quietly, and manages to somehow keep the U.S. economy – and be definition, the world economy – on a steady path upwards. He thinks that this might not be possible because it is just too difficult to get right.
The worst scenario would be if they repeated what happened in Japan, where they pulled the money out just too quickly – that happened in 1989 – or in the run-up to 1989, the Japanese did their own version of quantitative easing, got a terrible fright, sucked the money out of the system, and the stock market fell for 15 years. The economy went into deflation and it's only recently that they've now compounded that error (it seems) by pumping in money again following the United States. You had this brief uptick in Japan, but it's now gone even worse, so that's a concern there.
A third option is to do it too slowly and Arnold thinks this is probably going to happen for political reasons. As you start pulling money out of the system, the politicians will squeal because it's going to kill jobs, clearly. If you pull money out of the system, you push up interest rates. There is a tendency to get caught up in the moment if you like, or in the shouting that comes from the vox populi and Arnold reckons that because of the political issues, this is likely to happen. He says that if you leave it in too long, you get what happened in the late seventies/early eighties after Lyndon Johnson created money. It takes eight years, or it took eight years then for the inflation to actually kick into the system, but when it did, it was frightening. Inflation in America went from two percent to 12 percent in a period of 18 months. Once it takes off, it's very hard to stop and it happens very quickly. The impact of that was interest rates shot through the ceiling, the stock market plunged, ratings of shares went down, and the only winners really, were things like the gold price and commodities. You therefore have to look very hard to find a place to hide. The big losers around the world are the companies with poor balance sheets. In other words, those that have geared themselves or borrowed a lot, and countries that have the same situation.
Talking to Kokkie Kooyman a little while after this, he was of the same opinion that South Africa needs to be watching out because its balance sheet is not looking great at the moment. On the other hand, maybe a surge in the gold price is going to save if this all comes to pass – fascinating stuff. Again, there's somebody to go and read up about. His name is Arnold van den Berg and his company is Century Management. I think it's cenman.com – that's the website to go onto.
Okay, I've got to get shaved and see the guys downstairs in about 15 minutes, and then off to Berkshire Hathaway. I'll be tweeting through the day. I hope you can pick up on that, and then I'll be sending you….well, obviously doing another diary posting after the event, as well. Until later…cheers.
ALEC HOGG: Warren Ingram and Theo Vorster are here in Omaha. We're caught in a little – what would you call it – a storeroom, to try to get away from the crowds and all the noise. You guys have just been to your first Berkshire Hathaway AGM.
THEO VORSTER: That's correct, Alec. It is our first one and I certainly don't think it will be our last one. It is an experience, which is worth the time and the effort. The long flight is certainly worth it, just to listen to two of the world's most successful investors talk about the principles of investing and logic of life. It just simplifies everything. They have a way of cutting through all the noises and answering the questions in principle in an orderly and structured way.
ALEC HOGG: What I want to know is who is the Warren and who is the Charlie of you two guys.
WARREN INGRAM: I'm the Charlie, I think
ALEC HOGG: Well, you have the glasses.
THEO VORSTER: I think it depends on which portion of the business it is, but certainly, what is nice about them is also the way there's almost an entertainment element. These two guys know how the other's mind works.
ALEC HOGG: Do you tap dance to work? You can see Warren Buffet tap dances to work.
THEO VORSTER: I think that's why we enjoy what we're doing. If work is fun, you'll actually never work a day in your life. Work becomes work if it's not fun. Every day, there are things you do, which isn't fun, but if 90 percent of the stuff is fun – yes.
WARREN INGRAM: This is a funny story for us because we started the company nearly ten years ago and we said to each other, when the company is stable, growing, and on its way, we'll come here as a reward. I think that probably should have happened a few years ago. I said to Theo at the beginning of this year, 'look, Charlie's hitting 90 and Warren's hitting 83/84, and if we don't go now we might not get the chance'. We've built a lot of our business around the principles around what we should do here, so it's fascinating to see these guys that are almost role models for us in terms of the way we run our company in action…in real life.
ALEC HOGG: But it's interesting. You made this a reward and now you've rewarded yourselves.
THEO VORSTER: Yes, we did.
ALEC HOGG: Did you fly Business Class? You didn't reward yourselves that much.
THEO VORSTER: No, we're not there yet. Unfortunately, we turn right in the aircraft. We're not there yet.
WARREN INGRAM: No, we're not at the freight of the plane yet.
ALEC HOGG: Did you do other business, or did you come straight in and straight back?
THEO VORSTER: Basically, straight in and straight back. In total, it was about seven days. We flew in, spent a few days in New York, came here, we're going to spend another day in New York, and then fly back.
ALEC HOGG: So what are you taking back, Warren, from your namesake?
WARREN INGRAM: I think Theo's right. One of the things we get wrapped up in is… As our company grows, we have this burden in the way of extra staff and extra mouths to feed, which is something we feel – we employ much more than 50 people now. It becomes quite frightening when you know that you're at the bottom of this inverted pyramid, and if you make a mistake, you could cost many people their livelihood. What you realise with Buffett and Munger is you can't take yourself that seriously. You can't take this entire thing as a matter of life or death because if you do, every decision you make will be slow and I think you end up making bad decisions. Having an element of objectivity and rationality about every decision becomes easier when you see these guys doing it with companies that are probably bigger than the entire South African economy.
ALEC HOGG: Well, it's extraordinary. Their share portfolio alone has now gone through $100bn for the first time. That's about one-fifth. That's 20 cents in every Rand spent in South Africa in a year – just in a share portfolio – let alone, their business.
THEO VORSTER: Yes, and for me the principle is they've moved to a position where their businesses now form the majority of their portfolio. I think the principle that comes out of that is you have to take long-term views. You have to get compounding to work in your favour. That's part of the success; the fact that they've been doing this for so long that that compounding effect works in your favour. When you listen to them, short-term market noise is not relevant. If a market is high or low, it's not relevant. If it might not be the ideal timing, it's not relevant. What is relevant is that you get the right businesses that add earnings to your business, that add cash flow to your business, and that add compounding to your business. For me, the key today was the fact that if you take a long-term view, if everything you do will add income and earnings to the business, then you're doing the right things. If you do anything that's about short-term, movement, or market timing, it's the wrong thing. Does it add long-term earnings capability to the business? That's what they do.
ALEC HOGG: Compounding machine.
THEO VORSTER: That's the key.
WARREN INGRAM: It's comforting to realise that those kinds of geniuses make many mistakes, and sometimes, some of those mistakes become their biggest successes. For us, it's quite nice to know that.
ALEC HOGG: They spoke about that, hey.
WARREN INGRAM: They're almost proud of it in a way, saying 'look at these mistakes we made, look how quickly we recovered, and look at how these failures became the reason why we built what we built'.
ALEC HOGG: What about the whole part of adding these layers of knowledge or wisdom to your understanding of things? You guys are in a very complex area in investments, too.
THEO VORSTER: The point is that (and they also alluded to that) as long as you don't make decisions that can put the entire business at risk… Therefore, you have to take a slow progress as you move outside your comfort zone, but make sure that those decisions will not sink the business in the end.
ALEC HOGG: Well, stay in your circle of competence. Isn't that what he said?
THEO VORSTER: Stay, and then broaden slightly.
ALEC HOGG: He said he doesn't know too much, but what he knows he knows well.
THEO VORSTER: In any business, you need to be a specialist at something. Realise what you're a specialist in, focus on that and don't try to do everything, but make sure you are a specialist in something and focus on that element where you are a specialist. The other point they feel very strongly about is that when people work for you…when people manage businesses you have to allow them the space to run that. Don't be a disciplinarian. That's not the way to get the person running the business. Yes, you will get mistakes. They'll make mistakes, but the price of disciplining and running the business in too structured a manner, is a lot bigger than those few mistakes you are going to make. Rather get the right people and give them space.
ALEC HOGG: You worked with Jannie Mouton. He was here a few years ago and he quotes Warren Buffett often. He says a lot about him as well. Do you think there are any similarities?
THEO VORSTER: Yes, certainly, there is. I think the one similarity from having worked within the PSG Group is the fact that he believes in what he terms 'ultimate empowerment'. You must give people…you must delegate decision-making power to people so that they can make mistakes. They can actually run under the spotlights and not behind the pavilion. That ultimate empowerment where you empower somebody to run his own business the way he wants to fun the business: when Warren and Charlie talk about the fact that you mustn't be a disciplinarian on how you manage these guys – that is the principle Jannie uses. I think the principle of compounding and allocating capital to businesses where you believe you can get superior growth over periods of time. I think the idea also takes from this.
ALEC HOGG: Money makes money. What are you going back with, Warren? You sat there for five hours listening to these two old fellows talking, making jokes, eating peanut brittle, swilling coke, being cheered, and having some of the pom-pom girls. That was a first.
WARREN INGRAM: That was magic. Watching the enormous humility they operate with, was interesting. In South Africa, we're a small pond and looking at some of the big fish, some of them operate with… Really big fish have enormous humility, but quite a few of them don't. That lack of humility is often the reason why those operators will fail. For us, that's interesting because as we grow in our businesses and in our careers be humble enough to learn and be humble enough to know that you don't know everything. Try to find out more constantly, learn from your colleagues, bring in smart people, and trust in the managers you have around you because those are the people that will grow your business.
ALEC HOGG: There was a lovely quip that Warren had. He said 'many chiefs executives had no clue where their circles of competence were' – humility, as well. Moreover, from your side, Theo?
THEO VORSTER: Yes, I think what Warren said is true.
ALEC HOGG: From which Warren, this Warren or that Warren?
THEO VORSTER: Both Warrens. I think the principle of compounding as I noted earlier, but if you're going to give people the authority to make decisions and to run businesses, spend more time in making sure you have the right people and then trust them. If you have the right people, put trust in those people to grow the business the way they want it. Getting the right people would be of paramount importance.
ALEC HOGG: It's all about trust.
THEO VORSTER: It then comes down to trust, and that means you have the right people, and then give them the ability to let the business grow.
ALEC HOGG: Are you coming back next year?
THEO VORSTER: I'm coming back next year.
ALEC HOGG: Even if Charlie's not around.
THEO VORSTER: Well, next year… If Charlie were not around, it wouldn't make a difference. It's their 50th, so yes; I do think…it will take a lot away from the interaction if Charlie isn't around. Who knows? Perhaps Bill Gates will sit up there.
ALEC HOGG: Warren Ingram, thank you. Theo Vorster, it was such a pleasure talking to you.
THEO VORSTER: Our pleasure, Alec.