The big news last night: Warren Buffett's holding company, Berkshire Hathaway, announced it hired Todd Combs as an investment manager. The 39-year-old Combs has been managing Castle Point Capital (a long/short equity hedge fund) for the past five years. Combs specializes in the financial services sector. We looked at his fund's latest 13-F (a quarterly filing of a firm's holdings), and it's almost exclusively financials. He owns Annaly, Western Union, Goldman Sachs, MasterCard, and two big Buffett banking picks, Wells Fargo and U.S. Bank.
The financial services focus overlaps perfectly with Buffett's investments, which include investments in Wells Fargo, U.S. Bank, and Bank of America. Berkshire also owns 100% of Geico. Buffett made a fortune buying financials during panics (most recently in 2008). It makes sense he'd bring in someone with a focus on financials who can take advantage of future busts... and be hyper-alert to new sources of risk in the financial system. Buffett hammered home that point a couple times. He's always said whomever he picked must have the ability to consider risks that aren't on the radar. We have to assume Combs has this ability in spades, at least in Buffett's estimation.
Berkshire had previously considered Li Lu, a Chinese-born, Asian-focused investor, to manage some of Berkshire's assets. Li Lu declined the invitation. He already manages part of Charlie Munger's fortune. And he introduced Berkshire to Chinese battery maker BYD, which returned multiples.
Buffett's choice of Combs and Lu seems to indicate he likes financials and China. Financials, especially insurance, have contributed greatly to Berkshire's growth. And of course, he made eight times his money on Petro China, the big Chinese oil company. He's made money in BYD, and expects to make a lot more.
And I promise you, Buffett knows how the system works. That's why he's always such a booster for America and generally supportive of big government. He doesn't want anything to change too much. It's treated him just fine the way it is. Buffett knows the financial services industry is the most highly regulated – and therefore protected – in the world.
Buffett knows when the U.S. financial system blows up and looks like it's sending the world to hell in a hand basket, he and his friends on Wall Street will be treated like manna from heaven... even though the Wall Street crowd, at least, is more like mammon than manna.
Mammon is wealth, personified and worshipped as a deity. Buffett and his ilk love the worship of power, as long it's your worship of their power and wealth. So often, the super rich figure they're better than everybody else and uniquely qualified to run your life much better than you ever could.
But when it comes to anything outside their core competences, the super rich are like anybody else... They've got dumb views on a whole host of issues. Buffett's views on the estate tax are a great example of his cheerleading for the financial status quo. He thinks your children will be better people if the government can steal enough of your estate when you die. He says that'll prevent the world from being run by dynasties of wealthy heirs... because that would be so much worse than being run by the political class.
And regarding the financial crisis, Buffett said this recently:
[We] needed a really big stimulus in the fall of 2008 – a really, really big stimulus. We didn't get it. It was a miracle that Bank of America bought Merrill [Lynch] for $29 when it was probably worth 29 cents if left on its own for a few days. If that hadn't happened, everything would have collapsed. The whole commercial-paper market would have stopped. Every domino would have fallen. Berkshire would have been the last, but it would have fallen too. Ken Lewis saved the whole system for a while, until TARP could rescue it. But now we're just going to get a very slow recovery because people are still scared.
Did you get that? Gold is pushing $1,400 an ounce, and Buffett says the government didn't print enough money. What a genius. He's a typical Keynesian... though, arguably, the one who has benefited from the system more than any other. Buffett loves inflation. Sitting atop an insurance behemoth, he takes in today's dollars and pays out liabilities in tomorrow's less valuable currency. Meantime, he can twist Goldman's and GE's arms for 10% a year when the opportunity arises.
Buffett's partner, Charlie Munger, isn't much better. A couple years ago at the annual Wesco meeting in Pasadena, California, Munger said we should carpet the country with solar panels to help the environment. Besides, he said, we could sure use the stimulus.
I kid you not. I was in the room. Nobody laughed at him. The faithful only looked in reverence. I couldn't contain myself and said, "What a moron. He wants to help the environment by carpeting the country with toxic waste. Is anyone hearing this?" I looked around me. You'd think I had belched in front of the Queen of England.
Then, there's Buffett's genius buddy, Bill Gates. Gates thought he'd help the U.S. education system by throwing a bunch of money at it and shrinking the size of schools. Gates knows it isn't working... yet he keeps shoving money at shrinking schools. What a genius.
It's like our friend Doug Casey said many years ago... These billionaires are idiot savants. Casey named, as I recall, Buffett, Soros, Ted Turner, and Ross Perot as some of the most prominent offenders. They know investment and business... and little else. It's a good thing we don't need Buffett to know anything else in order to be Berkshire Hathaway shareholders. If he needed competence at anything but investing and playing bridge, we'd have to sell Berkshire, and maybe even sell it short.
I'll tell you something truly valuable Buffett has taught us... If you invest in the stock market, buying individual stocks, you must focus on finding the best businesses and then refuse to buy them unless the price is right. Otherwise, you're going to lose.
It's like my old friend Mike. Mike sells guitars and guitar music. I went to his shop one day several years ago to find him limping, his arm in a cast, the side of his face banged up badly. I asked what happened.
Mike rides horses. Loves them. He said with a wry look, "You hang around horses long enough, and sooner or later, you're going to get hurt." Same with stocks. Unless you are hypercareful... more careful than anyone's ever been... you can't avoid the mistakes. All you can do is avoid risk, buy great businesses, and admit your mistakes.
Buffett's mentor said it a little differently. Ben Graham said you should never put money into a low-grade enterprise on any terms. Hear, hear.
And maybe there's hope for the billionaires. Carlos Slim, the Mexican billionaire, surprised us recently. Slim told attendees at a conference in Sydney, Australia, "The only way to fight poverty is with employment. Trillions of dollars have been given to charity in the last 50 years, and they don't solve anything."
The market is starting to worry about inflation... The Treasury held a Treasury-inflation protected securities (TIPS) auction yesterday. And for the first time since it created the securities, the TIPS auctioned at a negative yield. The Treasury sold $10 billion of five-year TIPS with a yield of negative 0.55%. TIPS are designed to protect investors from inflation. Their value rises along with the cost of goods. This auction means large institutional investors and central banks will pay to lend the government money if inflation doesn't occur. The five-year maturity on these securities means investors expect inflation soon.
Several online travel websites are banding together to block Google's $700 million purchase of ITA Software, the leading flight info provider. Expedia.com, Kayak.com, and other companies operating travel websites formed FairSearch.org to convince the Justice Department Google's purchase would give it too much power in the travel sector.
The companies are also sending lobbyists to Capitol Hill to block the deal. If Google does purchase ITA Software, the competing travel websites are finished. Most of them use ITA Software. If Google cuts them off, they'd have to reinvent themselves quickly or die. And these are large companies. Expedia has an $8 billion market cap. Orbitz is around $700 million. This will be an interesting situation to watch. We could see a lot of value disappear.
Buying back stock can be a great way to return profit to shareholders. By reducing the outstanding share count, you give existing shareholders a larger slice of the equity. But before deciding on a stock buyback, a company must evaluate its share price and the opportunity cost of buying back stock. Repurchasing stock at low prices is generally smart, whereas repurchasing stock at all-time high prices is generally dumb. Take a look at the chart below... Would you repurchase stock at current prices?
Neither would we. That's why we're surprised IBM (the owner of the chart above) just announced an additional $10 billion in buybacks, bringing the total money authorized for buybacks to $12.3 billion. IBM's stock is at a record high. This isn't likely the best use of its money... though it's a typical corporate move.
New highs: Imperials Metals (III.TO), Anheuser-Busch (BUD), Prestige Brands (PBH), DirecTV (DTV), Chimera Investment (CIM), W.R. Berkley (WRB), Enterprise Products (EPD), Washington REIT (WRE), McDonald's (MCD), Altria Group (MO), Philip Morris (PM).
Not much in today's mailbag... Surely you can't be that satisfied with us... Hurl your latest invective at feedback@stansberryresearch.com.
Regards,
Dan Ferris and Sean Goldsmith
Baltimore, Maryland
October 26, 2010