Shapiro on Warren’s annual shareholder letter: Buffett’s all-in bet on the US economy
These days, everyone's a US pessimist. US markets are overvalued, America is losing to the Chinese or the Indians or the Brazilians, the US government is too dysfunctional to save the country from a debt meltdown – you hear this stuff all the time. And, to be frank, there's a lot of truth to a lot of it. However, that doesn't mean that America is going to stop doing what it has done better than any other country in history, and that's creating shareholder wealth. As Sasfin's David Shapiro points out in this interview, the world's most successful investor, Warren Buffett, is a big believer in America's ability to generate wealth. In fact, Buffett's entire portfolio is essentially one gigantic, one-way bet on the US economy. With a few small exceptions, Buffett owns American companies in not-very-exciting industries, companies with stable earnings, solid market share, and good future prospects, assuming America continues to grow. It's an interesting way of thinking about Buffett, and an interesting lesson for the rest of the world, much of which is betting against America and by extension, against Buffett. – FD
ALEC HOGG: Berkshire Hathaway, the fifth most valuable company on the New York Stock Exchange and is headed by Warren Buffet, made nearly twenty billion Dollars in profit last year – a record for the company – but it's the distribution of the shareholder letter with the Annual Report over the weekend, that gets many Buffett followers excited. David Shapiro from Sasfin is a regular visitor to Omaha for the Annual General Meeting, which happens on the first weekend in May. He joins us now. Are you going this year, Dave?
DAVID SHAPIRO: In fact, I've made my arrangements, as well. When is it…I think on the 3rd of May or the 2nd of May? Yes, it will be on Saturday the 3rd of May, so this will be my eighth trip in a row.
ALEC HOGG: Okay, and what about this letter? There are hundreds of thousands of people all over the world who wait for this day in March – it's usually the first weekend in March that it is distributed and sent out with the Annual Report. What was in there that caught your attention?
DAVID SHAPIRO: Firstly, I think the few pages in the front were all about his business, but I think what impresses you about Buffet, is that he's exceptionally bullish from the United States, and the ability of the United States to create prosperity. He always says that his business is really built on an all-in wager, on the economic future of the United States and I think that's what always impresses him. I think the only time he's gone out…I know that he reduced his interest in Tesco, but that's very small. He however, has ISCOR, which is a machine cutting tool company. It's not huge in his line, but I think that's the only real big investment he's made outside of the U.S. Otherwise, everything is in the U.S. You go through that and you realise how positive he is about Americans' ability to actually create wealth. If you don't like numbers, you don't like putting things together, and you don't understand the definitions of intrinsic value, just read the back pages. That's where he discusses his philosophy and his whole approach to investment. He's easy to read and I think that's what makes him so appealing. It's as though your uncle is talking to you and telling you war stories, so it's wonderful, always looked forward to, and he never lets you down.
ALEC HOGG: Well neither do you David, and I think that's something that Buffett has taught us as well. If you really know your subject, you can make it understandable to people who might be from a completely different field. That's Buffett's genius, isn't it?
DAVID SHAPIRO: Do you know what he said? You've heard this many times. He writes his letter for his sister, who is a shareholder with him. In other words, he writes it as though he's explaining it to someone who is financially illiterate but still a partner of his. The only companies that come close to following in him in South Africa – and I think it's one of the big followers – is PSG or Capitec. Jannie Mouton had copied him, he's a great Buffett follower, and he writes his letters in a very similar and easy to understand way. For example, 'this is how we make our money'. Do you know what I mean? 'We lend you money. You pay us interest' – that kind of thing, and it's very appealing, but I think anybody can pick up Buffett. It's a company, which is worth hundreds of billions. He is one of the wealthiest men in the world and he actually writes the letter as though it's a primer for children.
ALEC HOGG: Jannie Mouton is one of our great entrepreneurs here. When David, he left – or rather, he was fired by SMK, the stockbroking firm – he told me that he read a lot and he read all about Buffett. He of course, went to the Berkshire Hathaway AGM and hence, picked up a lot of what Warren Buffet is. It surprises me that other South African executives still farm out their letters to shareholders, given that Buffett's one is written from the heart and is so well appreciated.
DAVID SHAPIRO: I know, and that's what makes him as focused as he is and I think it's a lesson we should all learn. Write as though you're writing to a shareholder, with sincerity. The problem is that its edited by a lot of investor relations people and at the end of the day, you don't even understand. You can't understand what they say. I challenge people. I have no issues with Old Mutual at all. I think Julian Roberts is doing a wonderful job there – cleaning up the company, but when you pick up their shareholders' letter as we saw on Friday, it's very difficult to try and grasp how they make their money. That's the difference with Buffett. You know exactly how he makes his money and that's why I say I wish so many other companies here in South Africa, would actually learn. Read this letter. Read it. Twenty-three pages are very easy to get through – that's the front part – and try copying him. I don't think he'll worry about that. I don't think he'll care about it. I think that's what he wants executives to do.
ALEC HOGG: Indeed, he does. There is also this year for the first time – and I'm also a long-time Buffett follower – 2500 words from Warren on the way he invests. It is absolutely superb where he refers to his own investments that he made as a younger person, and then how one book, 'The Intelligent Investor' from Benjamin Graham changed his life.
DAVID SHAPIRO: I reread The Intelligent Investor. It's been updated since it was first published in the late 1940's I think, and I reread it on Mr Market…I think it was chapter eight. He always says 'go to chapter eight'. In fact, I wrote an article about it – going into it in detail, because we tend to kind of just fall back on it – but I reread it and it still makes incredible sense. He talks about Mr Market and how one day he comes and knocks on your door, wants to buy your shares, and the next day he wants to sell you back those shares, and how you have to learn to look through the market and look through the kind of volatility that we have. Those are the guidelines. The principles that he applied then still apply to him today.
ALEC HOGG: It's no longer rocket science.
DAVID SHAPIRO: No, look at the companies he owns – they're good companies with sustainable returns. I think he's had to adapt his whole approach, because I think it's very difficult as we saw with Benjamin Graham, in an age where information was very difficult, to find companies that were below their intrinsic value. Today, you've had to adjust those policies slightly and he's done it with the help of Charlie Munger – his lifetime business partner. I think you still buy good companies. I think you still buy good companies at decent prices, which give you sustainable and ongoing returns from one time to the other. As he said when he buys his companies, they'll still be around in…like Heinz, which is ketchup or tomato sauce – they'll still be around in 300 years' time.
ALEC HOGG: You must not get David Shapiro talking about Warren Buffett, because you can't get him to stop.
DAVID SHAPIRO: I'm sorry.
ALEC HOGG: Dave as always…I thank you for your contribution today.