Mike Kueber's Blog

February 28, 2012

Buffett’s wisdom – continued

Filed under: Investing — Mike Kueber @ 6:49 pm
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Yesterday I blogged about Warren Buffett’s most recent letter to the Berkshire Hathaway shareholders.  Compared to other editions of the shareholder letter, I thought this edition was relatively skimpy, and in my blog I noted only three significant Buffett insights – (1) a replacement CEO for Berkshire had been selected, (2) the economy in America would rebound vigorously as soon as the housing overstock was sold off, and (3) Berkshire Hathaway would continue buying back its stock because it was underpriced.

But no sooner had I posted the entry to my blog than I had a conversation on investing with an old USAA friend.  This friend has a seven-figure 401k, a beautiful house with no debt, and a sizable inheritance, yet he is concerned that his current cash flow will be stressed as his kids get to college.  Talk about looking far and wide to find something to be unnecessarily worried about.

My friend went on to express concern for preserving his estate for his kids.  Ever since the crash of 2008-2009, he has been too skittish to invest in the stock market.  He has inherited a sizable amount of agricultural real estate, but he is planning to sell that because he suspects that its current pricing is a bubble that is ready to burst.  The only safe investments probably would not keep up with inflation.  He was perplexed because he seemed to have no good choices. 

Following our conversation, I recalled that Warren Buffett’s most recent shareholder letter directly addressed my friend’s concerns.  In the letter, Buffett described three broad categories of investment – (1) currency-based investments, such as bonds and money-market funds (2) non-productive assets, such as gold, and (3) productive assets, such as businesses and real estate.

Buffett’s letter contained devastating critiques of currency-based investments and non-productive assets:

  • Currency-based investments.  Most of these currency-based investments are thought of as “safe.” In truth they are among the most dangerous of assets. Their beta may be zero, but their risk is huge. Over the past century these instruments have destroyed the purchasing power of investors in many countries, even as the holders continued to receive timely payments of interest and principal. This ugly result, moreover, will forever recur. Governments determine the ultimate value of money, and systemic forces will sometimes cause them to gravitate to policies that produce inflation. From time to time such policies spin out of control.  Even in the U.S., where the wish for a stable currency is strong, the dollar has fallen a staggering 86% in value since 1965, when I took over management of Berkshire. It takes no less than $7 today to buy what $1 did at that time. Consequently, a tax-free institution would have needed 4.3% interest annually from bond investments over that period to simply maintain its purchasing power. Its managers would have been kidding themselves if they thought of any portion of that interest as “income.”  Today, a wry comment that Wall Streeter Shelby Cullom Davis made long ago seems apt: “Bonds promoted as offering risk-free returns are now priced to deliver return-free risk.”


  • Non-productive assets.  Today the world’s gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At $1,750 per ounce – gold’s price as I write this – its value would be $9.6 trillion. Call this cube pile A. Let’s now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world’s most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B? Beyond the staggering valuation given the existing stock of gold, current prices make today’s annual production of gold command about $160 billion. Buyers – whether jewelry and industrial users, frightened individuals, or speculators – must continually absorb this additional supply to merely maintain an equilibrium at present prices. A century from now the 400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton, and other crops – and will continue to produce that valuable bounty, whatever the currency may be. Exxon Mobil will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions (and, remember, you get 16 Exxons). The 170,000 tons of gold will be unchanged in size and still incapable of producing anything. You can fondle the cube, but it will not respond. Admittedly, when people a century from now are fearful, it’s likely many will still rush to gold. I’m confident, however, that the $9.6 trillion current valuation of pile A will compound over the century at a rate far inferior to that achieved by pile B.


Ultimately, Buffett concludes that the ownership of productive assets is not only the most profitable, but also “by far the safest”:

  • Our country’s businesses will continue to efficiently deliver goods and services wanted by our citizens. Metaphorically, these commercial “cows” will live for centuries and give ever greater quantities of “milk” to boot. Their value will be determined not by the medium of exchange but rather by their capacity to deliver milk. Proceeds from the sale of the milk will compound for the owners of the cows, just as they did during the 20th century when the Dow increased from 66 to 11,497 (and paid loads of dividends as well). Berkshire’s goal will be to increase its ownership of first-class businesses. Our first choice will be to own them in their entirety – but we will also be owners by way of holding sizable amounts of marketable stocks. I believe that over any extended period of time this category of investing will prove to be the runaway winner among the three we’ve examined. More important, it will be by far the safest.

Buffett concedes that Berkshire keeps between $10 and $20 billion in currency-based investments for business-purchasing purposes, and my USAA friend obviously has liquidity needs related to his kids’ college education.  But if I were in my friend’s financial position, I would put my assets to work and stop being concerned.

Buffett’s 2011 letter to his shareholders

Filed under: Investing — Mike Kueber @ 3:34 am
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Although the timing of my retirement (March 2009) was excellent for purposes of investing in the stock market (the market has doubled since then), my timing for investing in Warren Buffett’s Berkshire Hathaway (April 2009) couldn’t have been worse.

In Warren Buffett’s annual letter to his shareholders, he always begins by comparing his company’s performance to the S&P 500.  In the past 48 years, Berkshire Hathaway has averaged a 19.8% gain as compared to 9.2% with the S&P, and Berkshire Hathaway has outperformed the S&P in 40 of those 48 years.  Unfortunately for me, two of those bad-performing years were 2009 and 2010.  According to Buffett’s most recent shareholder letter, Berkshire in 2011 finally returned to supremacy over the S&P, but just barely – 4.6% to 2.1%.  That’s better than nothing.

The big story from the 2011 letter is that Buffett’s successor has been selected, although the successor’s identity was not disclosed:

  • Your Board is equally enthusiastic about my successor as CEO, an individual to whom they have had a great deal of exposure and whose managerial and human qualities they admire. (We have two superb back-up candidates as well.) When a transfer of responsibility is required, it will be seamless, and Berkshire’s prospects will remain bright. More than 98% of my net worth is in Berkshire stock, all of which will go to various philanthropies. Being so heavily concentrated in one stock defies conventional wisdom. But I’m fine with this arrangement, knowing both the quality and diversity of the businesses we own and the caliber of the people who manage them. With these assets, my successor will enjoy a running start. Do not, however, infer from this discussion that Charlie and I are going anywhere; we continue to be in excellent health, and we love what we do.

In the letter, Buffett also suggested that (a) the American economy will enjoy a vigorous rebound as soon as the excess supply of houses is inevitably exhausted, and (b) Berkshire will continue to buy back its shares because they are underpriced. 

I think I will hold onto my shares.

February 27, 2011

Warren Buffett’s annual letter to his shareholders

Filed under: Business — Mike Kueber @ 4:09 am
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Earlier this week, Warren Buffett issued his annual letter to his stockholders.  Even before I invested in Berkshire Hathaway, I looked forward to this annual letter.  Despite his brilliance, Warren has an exceptional talent for communicating at a level that can be understood by normal people.  The 2010 letter doesn’t disappoint, although it doesn’t seem as full of folksy wit as his typical letter.  Examples of that wit in the current letter:

  • What companies do with their retained earnings.  “The difference in outcome can be huge. A dollar of then-value in the hands of Sears Roebuck’s or Montgomery Ward’s CEOs in the late 1960s had a far different destiny than did a dollar entrusted to Sam Walton.…”
  • Future plans for Berkshire. ” We will need both good performance from our current businesses and more major acquisitions. We’re prepared. Our elephant gun has been reloaded, and my trigger finger is itchy.”
  • Proactive management.  “There are managers to whom I have not talked in the last year, while there is one with whom I talk almost daily. Our trust is in people rather than process.  Our ‘hire well, manage little’ code suits both them and me.
  • Frugality.  “At Berkshire’s World Headquarters our annual rent is $270,212. Moreover, the home-office investment in furniture, art, Coke dispenser, lunch room, high-tech equipment – you name it – totals $301,363. As long as Charlie and I treat your money as if it were our own.”
  • Home ownership.  “Home ownership makes sense for most Americans, particularly at today’s lower prices and bargain interest rates. All things considered, the third best investment I ever made was the purchase of my home, though I would have made far more money had I instead rented and used the purchase money to buy stocks. (The two best investments were wedding rings.) For the $31,500 I paid for our house, my family and I gained 52 years of terrific memories with more to come.  But a house can be a nightmare if the buyer’s eyes are bigger than his wallet and if a lender – often protected by a government guarantee – facilitates his fantasy. Our country’s social goal should not be to put families into the house of their dreams, but rather to put them into a house they can afford.”
  • Leverage.  “When leverage works, it magnifies your gains. Your spouse thinks you’re clever, and your neighbors get envious. But leverage is addictive. Once having profited from its wonders, very few people retreat to more conservative practices. And as we all learned in third grade – and some relearned in 2008 – any series of positive numbers, however impressive the numbers may be, evaporates when multiplied by a single zero. History tells us that leverage all too often produces zeroes, even when it is employed by very smart people.”
  • Credit.  “Borrowers then learn that credit is like oxygen. When either is abundant, its presence goes unnoticed.  When either is missing, that’s all that is noticed. Even a short absence of credit can bring a company to its knees.  In September 2008, in fact, its overnight disappearance in many sectors of the economy came dangerously close to bringing our entire country to its knees.”

Warren’s letter announced that the annual meeting will be held on April 30 this year.  I planned to go last year, and even obtained credentials, but at the last minute I decided that it was not worth driving 1000 miles.  I’m inclined to go again, but we’ll see.  Last year I even submitted questions that might be posed to the Sage from Omaha, and I’ve already started thinking about questions this year.  So far:

  • “Ben Graham mentored you; you don’t seem to be mentoring anyone.”

Warren is quite bullish on America and the market, and his purchase in 2010 of Burlington Northern Santa Fe railroad reflected that.  But he doesn’t address the fact that, although Berkshire has gained 32.8% the last two years, it has underperformed the S&P 500 by 8.9%.  Other than 1967-68, which were his third and fourth years in the business, when he underperformed the market by 11.9%, Warren has never had a worse two-year streak.  Too bad that’s how long I have owned Berkshire stock.

I have a friend who owns a couple of Berkshire A shares ($125k each), and he is worried that Warren is past his prime.  Warren says that his objective is to outperform the S&P index – perhaps not always in good years, but definitely in the bad years.  Further, he says the Berkshire companies will not manipulate number for short-term impressions.  I’m satisfied with that.

January 8, 2011

My first foray into the stock market

Filed under: Business,Investing — Mike Kueber @ 2:43 am
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A few days ago, I blogged about retirement investing and the stock market.  But I neglected to provide any war stories about my successes and failures.  I will remedy that defect now. 

When I considered which stocks to invest in, I followed the advice of the world’s greatest investor, Warren Buffett, who suggested investing in companies with products that you like, even admire. 

With that advice in mind, my first stock purchase was Warren’s company, Berkshire Hathaway, which is essentially a diversified mutual fund controlled by Buffett.  For the last 30 years, Berkshire has routinely significantly outperformed the S&P market and returned about 20% per year.  Because of its past performance, I placed almost 30% of my stock portfolio in Berkshire.  Unfortunately, since I bought my Berkshire stock, it has underperformed the market.  Although it has gone up 30%, the S&P 500 has gone up almost 70% during the same period.  I am refusing to give up on Warren and am stubbornly holding on to the stock.

Among the other stocks that I bought were Ford (because my dad was entirely loyal to Ford), AIG and GM (because I thought they were too big too fail), Lifetime Fitness (because I loved my fitness club), Wal-Mart and Southwest Airlines (because they were the most admirable companies in America), and Argonaut and Valero (because friends and relatives worked there).    

When the market rebounded in April and early May of 2009 and then sank like a rock in late May and June, I found out that AIG and GM were not too big to fail.  Although the federal government saved the companies, it correctly allowed the stockholders to take a huge hit – the GM stock turned out to be essentially worthless and the AIG stock became worth a fraction of what I paid for it.  I also sold Valero because its price dropped precipitously under its new management and my Wal-Mart, SW Airlines, and Argonaut stock because they lagged the market.

Fortunately, I had two stocks that balanced out those losses.  The best was Ford, which I bought at $4 and a few weeks later at $6.  Currently, it is selling for over $18.  My other winner has been Lifetime Fitness, purchased at $16 and $19, and currently selling for nearly $40.  I am lucky that I decided to double down on two stocks that have continued to excel.

In hindsight, my results have been average – with some big winners and big losers – except for my outsized bet on Berkshire, which has not come through.  But if I had to do it all over again, I would not hesitate to bet on Warren Buffett.

June 3, 2010

My philosophy on investing for retirement

Filed under: Investing — Mike Kueber @ 1:17 am
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While running for Congress, I participated in seven or eight candidate forums, and most of the questions in those forums were predictable – abortion, guns, immigration, and global warming.  But one question threw me for a loop.  

The moderator at KLRN public TV asked me to describe the new public programs that I would push for to help people prepare for retirement if they were currently living paycheck-to-paycheck.  The question was difficult from a number of aspects, the most obvious that, as a conservative, I wasn’t in the business of pushing for new government programs. 

The tricky aspect of question was that it seemed to be related to retirement savings, but that only masked the real underlying problem, which is living paycheck-to-paycheck.  Anyone living paycheck-to-paycheck can’t save for retirement until they quit living paycheck-to-paycheck, and most financial guidance is focused on that objective – things like cutting your expenses and reducing your debt.  But my post today is not for those who are living paycheck-to-paycheck.  Rather is for those who already have some extra money to put away for retirement.

My investing philosophy has five fundamental considerations:

  1. Don’t stuff your money in a mattress.  People joke about stuffing money in a mattress.  I feel the same way about any money that is not invested in stocks.  Money is either working or it is sitting on the sidelines.  If your money is not in stocks, you are essentially playing like a small-time banker who loans out money and receives a little interest.  Everyone knows that significant financial rewards are reserved for businesses entrepreneurs.  If you invest in stocks, you are an entrepreneur.
  2. Root for a booming economy.  If you have your money parked in bonds or cash, while your friends have theirs in stocks, you might be tempted to root for the stock market to do badly.  I hate that feeling.  I want to root for the economy to soar, not for it to tank.
  3. The stock market is not Las Vegas.  Although stocks are risky, they are fundamentally different than gambling.  Stock prices go up and down wildly because of speculation, but the underlying value of a stock depends on its future profits.  Most corporations regularly return handsome profits, and those profits don’t evaporate into outer space.  Rather, they are used by the corporation to acquire additional assets and those assets are reflected in the long-term direction of their stock price. 
  4. Stocks almost always out-perform cash and bonds.  Until recently, financial advisors pointed out that the stock market out-performed cash and bonds over every 10-year period except the Great Depression.  Then last year, there was a lot of talk about the stock market losing money over a 10-year period.  While that is true, please remember that this period includes investors who bought into the market at the height of the dot.com boom in 2000 and then sold out at the bottom of the mortgage crash of 2009.  Yes, those people lost money in the stock market, but their timing was incredibly bad.  In virtually every other scenario, buying stocks was the right move.
  5. Proper asset allocation.  Almost every financial advisor suggests that investors shift most of their 401k-money out of stocks and into cash and bonds as they reach age 50, assuming that they will start withdrawing from the 401k at age 59 or 62.  My experience with professionals at my previous employer USAA is that employees may retire at 59 or 62, but they don’t seriously tap into their 401k at that time.  Instead the 401k-money sits there while the employee taps into a pension, social security, or other assets.  Thus, I think the correct advice for asset allocation of 401k accounts is to stay in stocks until you get within 5-10 years of making significant withdrawals from the 401k.  That will mean leaving a much larger percentage of the 401k-money in the stock market during the early part of your retirement.
  6. Index funds.  John Bogle of Vanguard has convinced me that index mutual funds make sense for most of us investors because of their low cost.  And even the world’s greatest investor Warren Buffett of Berkshire Hathaway says that most investors should be in index funds instead of stock-picking.  But I enjoy stock picking, so I do it.  Although my investment in Warren’s stock has been mediocre, I have had great success with stock in my fitness club – Lifetime Fitness – and my dad’s favorite car – Ford.  If you are familiar with a company’s operation and prospects, I think it is a good bet to invest 5% or 10% of your money in that company. 

Think about getting the boat with me – investing in stocks.  Whether you pick your stocks or invest in mutual funds, remember that a rising tide floats all boats.