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January 07, 2019 at 10:37 AM
The best investing opportunities often occur in the midst of a convulsion: The key is to buy when others are paralyzed. That’s what legendary value investor Warren Buffett told attendees at Berkshire Hathaway’s 2006 annual shareholders meeting, at which he cautioned — two years before the financial meltdown — against the housing bubble, derivatives and the weaker dollar.
Indeed, there’s no reason that Buffett’s enduring stock-buying advice shouldn’t hold true nowadays, says Daniel Pecaut, chair and CIO of Pecaut & Co. The RIA has attended more than three decades of Berkshire meetings and turned his copious notes into a book, “University of Berkshire Hathaway: 30 Years of Lessons Learned From Warren Buffett & Charlie Munger at the Annual Shareholders Meeting,” written with Corey Wrenn, president and CEO of Pecaut.
The fly-on-the-wall tome is voyeuristic, but in a good way.
(Related: Warren Buffett’s 10 Nuggets of Investing Wisdom: Berkshire Letter 2018)
Buffet is famed for acquiring all or part of a business at bargain prices and typically helping its value to soar.
Berkshire has been Pecaut’s biggest client holding for nearly 25 years. The RIA manages about $200 million in client assets.
The book covers a chapter for each Berkshire meeting from 1986 through 2015. About 500 people showed up for the first one, Pecaut reports. In 2015, 40,000 were in attendance.
In the interview, he discusses the investing wisdom Buffett and longtime partner, witty curmudgeon Charlie Munger, Berkshire vice chair, dispensed at the meetings and how it can be applied today.
The RIA also pointed to a big clue about Buffett’s investing strategy embedded in Berkshire’s quarterly reports. Hint: An enlightening, revealing appendix of his book shows Berkshire’s cash/bond/stock ratios from 1979 through 2014.
In the interview, Pecaut talks, too, about Buffett’s stance concerning Wells Fargo; his 2013 forecast for investor behavior when interest rates would rise again; what he pays attention to most in sizing up companies; and the concerted action he has taken amid the health care crisis.
Berkshire started as a textile company in 1839. Fifty-plus years ago, Buffett took over. The conglomerate — with star subsidiaries including Geico and See’s Candies — represents half-a-trillion dollars in assets.
Pecaut, 61, is a Harvard-grad grandson of Russell Pecaut, who founded Pecaut & Co. as a brokerage in 1960. Corey Wrenn, 59, formerly with Berkshire for about nine years, joined Pecaut as a partner in 1992; and his notes are the basis of certain “University…” chapters.
ThinkAdvisor recently interviewed Daniel Pecaut, on the phone from the firm’s Sioux City, Iowa, headquarters.
Here are highlights of our conversation:
THINKADVISOR: How did attending the Berkshire Hathaway meetings help you the most?
DANIEL PECAUT: To think rationally about business, to have clarity of mind — because there are so many factors that pull the brain way from rational thinking.
How would you characterize the meetings?
For those early meetings: “electric.” You could feel in your body that [Buffett] was an exceptional talent.
What specific piece of wisdom that you picked up do you value most?
When you buy a stock, you buy a business. So be a business analyst. That has guided every day of my career. The “life” piece would be: Your best investment is yourself.
In 2013, Buffett predicted that when the Federal Reserve stops buying securities, investors would re-evaluate their investments, especially those made based on low interest rates. Is that what’s happening in the market now?
That is exactly what’s happening. The Fed has raised rates, which inhibits liquidity. But the other factor is that QE — quantitative easing — has stopped, and it’s become QT — quantitative tightening.
So how was that forecast of his six years ago reflected in Buffett’s own investing?
Over time, he’ll let the cash portion grow late in a bull market. So, in 1999-2000, and then in 2006-2007, he had a much higher-than-average cash position. In 2017-2018, he had over $100 billion in cash. Keep watching these figures, which are in the Berkshire Hathaway quarterly reports. They give you a clue that he’s saying — without saying it — that things are high, and they could get cheaper. He’s happy to sit on the cash and earn nothing for the opportunity to buy something at a big discount in the future.
At the 2006 meeting, Buffet said that the best opportunities occur in the middle of some “convulsion” and that the key is to buy when others are “paralyzed,” according to Corey Wrenn’s note-taking. Does that apply to right now?
It’s not as bad as that yet. But certain industries are there, and other industries will get there.
What were the most prescient of Buffett’s forecasts?
He has the ability to see around corners and warn of things going badly. In 1987 he and Munger began to predict the S&L [Savings and Loan] crisis. No one else was saying this, that I know of. In 1989-’90, sure enough, it happened. It was the biggest financial crisis in post-War history, up to that point.
What other forecast stands out?
In 1994, Buffett said [he wouldn’t be surprised if the failure in derivatives caused a financial catastrophe in the next decade] — and in 1998 we had the Long-Term Capital Management debacle. He sees problem areas forming and then goes public about where they’re getting out of control.
At the 2008 shareholders’ meeting — during the financial crisis — Buffett said: “Buying securities made of tranches of other instruments was madness.” Had he warned of that earlier?
Yes, well before. In fact, he owned a lot of Freddie Mac and made a lot of money on it. But he sold the entire position. He was very upset about what was happening in the mortgage world and the way that Freddie Mac itself was operating. One way to manage client money is to avoid [a crisis], and that’s something Buffett does exceptionally well. It’s really important to his long-term track record.
What’s Buffett’s attitude about Wells Fargo in view of the bank’s scandals? He reportedly began investing in Wells in 1989.
Wells is one of his largest holdings and has been for a long time. He believes the current problems are fixable, and are getting fixed, and that it will therefore be a better company going into the future. But he thinks the episode of the last few years was pretty boneheaded.
He said that?
“Boneheaded” is my word. But he’d use a similar word.
Does he still love banks, in general, as much as did?
Yes. In fact, he bought $10 billion in bank stocks in the third quarter of [2018], added about $6 billion to his Bank of America position and added $4 billion to his position in JPMorgan.
Is he still adding to Wells Fargo?
No. he maxed out. I think he probably would buy more, but he has to stay under 10% because at 9% you’re just an investor [vs. an owner]. After 10%, the regulations change.
What’s the biggest investing mistake that Buffett and Charlie Munger have made? Was it Dexter Shoe Co.? In his 2008 letter to shareholders, Buffett said so.
That’s a big one! I think the quickest mistake was World Book. [Almost as soon as they bought it], Encarta [Microsoft’s digital encyclopedia] came out. [Encyclopedias] went to digital form — a whole new way of getting information — within about a year of his purchasing World Book, and it just destroyed the business.
But didn’t Buffett foresee how the internet would change industries?
Clearly, no [not then]. These things happen. It’s a dynamic world. Once in a while, there’s a big shift, and suddenly you have a business that’s obsolete.
What happened with World Book?
They still own it. And there’s a digital version. They tried to adapt to the new [online] model, but it’s nowhere near the brand it was.
By 1999, Buffett was saying that the internet would change retail, as well as retail real estate. Having gained that insight, what did he do regarding his investing?
The No. 1 thing was to avoid companies that would get run over by technology.
