Mike Kueber's Blog

April 5, 2013

Getting to a lean, tightly-run city

Last week, I went to the downtown library to attend a VIA presentation on the status of its streetcar project.  While waiting for the presentation to begin, I decided to peruse the library’s New Book section.  That is where I encountered a new category called Express Collection for the most popular new books.  Each book in the Express Collection was stickered, “7 day checkout; no renewals or holds.”

Checking out a popular new book from the San Antonio library often requires placing a hold on the book and then waiting several weeks.  With this new category, I found many desirable new books just waiting to be grabbed. 

With the excitement of finding something free, I grabbed three even though there was no way I would be able to read them in seven days.  They were:

  1. The Signal and the Noise by Nate Silver
  2. Tap Dancing to Work by Carol J. Loomis
  3. My Beloved World by Sonia Sotomayor

Nate Silver is famous for his NT Times political column titled FiveThirtyEight (the number of people in Congress), but his signal skill is prognosticating.  In his book, Silver applies this skill to sports, poker, the financial world, weather, earthquakes, and global warming.  I just scratched the surface of the book during the seven-day checkout period, but Silver’s thinking, especially as related to poker, seems both brilliant and common-sensical.

Which is a perfect segue to Loomis’s book.  Her book is mostly a compilation of Fortune magazine articles on the most brilliant, common-sensical man, Warren Buffett.  Although Buffet is a veritable font of wisdom, something he said about running a lean operation seems expecially appropriate to my race for the San Antonio City Council:

  • Our experience has been that the manager of an already high-cost operation frequently is uncommonly resourceful in finding new ways to add overhead, while the manager of a tightly run operation usually continues to find additional methods to curtail costs, even when his costs are already well below those of his competitors.”

One of my Council opponents, Ron Nirenberg, reminds me of the high-cost operator.  In his campaign brochure, he says:

  • Emergency services are the single largest investment of our tax dollars, and we need to make sure that we don’t cut them in an effort to “get lean” during the budget process….  Police and fire should be our top budget priority even in lean years.

Does that sound like someone who will continually strive for a tightly run operation?  No, it sounds like someone who considers “getting lean” to be something of a last resort.  And that is not what San Antonio needs.

March 12, 2012

Is Warren Buffett a hypocrite?

Filed under: Business,Issues,Politics — Mike Kueber @ 11:02 am

While visiting with my conservative drinking friend last Friday, I was informed that conservative talk radio was all over Warren Buffett for his alleged hypocrisy in arguing for increased income taxes on the rich while at the same time his company Berkshire Hathaway was engaged in tax litigation with the IRS in order to avoid paying almost a billion dollars of corporate income tax.  My friend and I quickly got into a heated argument as I tried to explain that those positions are not inconsistent because Buffett’s argument for increased taxes is a personal opinion whereas Berkshire’s IRS litigation against paying taxes is a corporate position.  Without resorting to discussions of logical fallacies, I suggested to my friend that as a stockholder in Berkshire I would be pissed if Buffett let his personal opinion regarding higher personal taxes to control his corporate actions regarding Berkshire’s payment of taxes.  Not surprisingly, my friend wasn’t buying that.

When I got home, I decided to see what stirred up this matter, and sure enough there was an article in the Huffington Post.  I’ve read that conservative radio tends to draw its stories from the Huffington Post and The Drudge Report, so the recent spate of Buffett stories tends to confirm that connection.  In its article, the Huffington Post pointed out a new example of Buffett’s alleged hypocrisy – i.e., one of Berkshire’s subsidiaries, NetJets, apparently hired a “squadron” of K Street lobbyist to secure favorable tax treatment in Congresss for private jet companies, of which NetJets is the biggest.

This example is equivalent to the Berkshire tax litigation with the IRS and is flawed for the same reason – i.e., Buffett’s personal views regarding personal income tax shouldn’t influence the actions of Berkshire and its subsidiaries.  Obviously, they should pay as little in tax as the law requires, and they should not be precluded from legally lobbying for lower taxes. 

Wearing two hats – one corporate and one personal – does not make Buffett a hypocrite.    




February 28, 2012

Buffett’s wisdom – continued

Filed under: Investing — Mike Kueber @ 6:49 pm
Tags: , ,

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
Tags: ,

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.

January 13, 2012

The Sage of Omaha speaks

Filed under: Business,Economics,Issues,People,Politics — Mike Kueber @ 3:26 pm

Although Warren Buffett is a Democrat, he is one of my all-time favorite public persons.  I aspire to have a value system as sound as his.  He acquired his value system from his dad, and he calls it his “inner scorecard.”

Buffett is sometimes called the Sage of Omaha, and he made news a few weeks ago when he suggested that rich Americans should pay more taxes.  He argued that most rich Americans would accept this sacrifice as their patriotic duty to help America out of its fiscal mess.  Cynical Republicans in Washington, led by Senators John Thune of SD and Mitch McConnell of KY, responded by introducing a bill that allows the federal government to accept voluntary contributions from such patriotic Americans.  McConnell declared that he was calling Buffett’s bluff.

This week, Buffett is on the cover of Time magazine, and in the accompanying article, titled “Warren Buffett is on a Radical Track,” he calls McConnell’s bluff by declaring that he will match dollar-for-dollar any contributions to the federal government that congressional Republicans make, and in the case of McConnell, who is worth $30 million, Buffett will pay 3-1. 

Buffett’s challenge to McConnell was all over 24-hour news yesterday, but it is merely a snippet in the excellent Time article.  Although Don Imus complained on his show this morning that Buffett should get off the stage, I couldn’t disagree more.  America needs his values and wisdom more than ever.  Among his most sagacious comments were the following:    

  1. Shared sacrifice.  Shared sacrifice, to Buffett, means not just higher taxes for the rich–who often pay extremely low rates on money made by moving money around–but also curbs on short-termism. He’d like to see speculative-trading gains taxed at much higher rates. He believes CEOs of publicly bailed-out institutions should be on the hook for everything they own if their institutions go bust. He’s only half joking when he says he’d like to see private schools banned so that rich families would be forced to invest in the public K–12 system. (No Buffett in Omaha has ever gone to a private school, he notes proudly.) And he’s for a complete overhaul of health care, which he calls “a tapeworm in America,” one that cuts corporate competitiveness far more than taxes do.  It’s the opposite of the Darwinian capitalism embraced by many prominent conservatives who believe the market is the only means to distribute the economy’s assets. “The market system rewards me outlandishly for what I do,” Buffett says, “but that doesn’t mean I’m any more deserving of a good life than a teacher or a doctor or someone who fights in Afghanistan.”  He doesn’t want to stop bond traders from making their billions: “Capitalism has unleashed more human potential than any other system in history.” But, he says, “we need a tax system that essentially takes very good care of the people who just really aren’t as well adapted to the market system but are nevertheless doing useful things in society.” Bond traders and corporate raiders of the world, take note: your higher taxes should subsidize bridge builders and child-care workers.
  2. A frugal lifestyle.  Aside from his indulgence in private air travel (he named his first jet the Indefensible), he estimates his personal yearly expenses to be no more than $150,000.
  3. Income inequality.  His worry that in this era of late-stage capitalism, the next generations won’t be as lucky as he has been. The problem of inequality is likely, he says, to get worse. When people can’t climb up the ladder, it’s bad for the economy–and for his companies. He doesn’t believe that the U.S. can innovate its way quickly back to a 1950s level of shared prosperity, nor does he think education will entirely close the gap. “The truth is that there will always be a bottom 10% in terms of capacity,” he says. “Someone in America who has a 90-point IQ is qualified for many fewer jobs today than he was 100 years ago.”
  4. Income redistribution.  And his views on wealth redistribution–which are basically the opposite of the trickle-down theory–go back even further, echoing those of another Nebraskan, progressive Democrat William Jennings Bryan, who believed that “if you legislate to make the masses prosperous, their prosperity will find its way up and through every class that rests upon it.”
  5. The influence of his first wife, Susie.  She was “a great giver,” he says, “and I was a great taker.”….  Seven years on from Susie’s death, Buffett is still coming to terms with it all. When I ask if he regretted being apart from her in her final years, he insists, “We didn’t live that separately. We were as connected in the last years of her life, perhaps more connected, than we’d ever been. We had exactly the same view of the world. We just didn’t want to go about it in the same way.” He tells me about her interview with Rose, the only major one she ever granted, which was done with his encouragement, because he wanted the world to better understand the woman who was most important to him.  Then his cheerful face crumples, and he bursts into tears. “Her death is–it’s just terrible. It’s the only thing that’s really up there,” he says, his voice shaking. “I still can’t talk about it.”
  6. Future prospects for the American economy.  Buffett believes that once the housing market recovers, the U.S. economy will be back on track. “Once we get back to a million housing starts per year”–the current tally is 685,000–“I think pundits will be surprised just how fast unemployment will come down in this country.”…  But Buffett insists his optimism isn’t emotional but quantitative: he focuses not on media headlines about America’s inevitable decline or cheerleading about innovation and education but on the underlying data. Basic demographics favor the U.S. over nearly every other rich country in the world. And with corporate America so lean and inventories so low, the growth engine, in his view, has to kick in soon.
  7. Government regulation.  Unlike many liberals, he’s not a great believer in regulation as a curb for corporate excess. He doesn’t want to crush Wall Street’s animal spirits or control market volatility or cap executive pay by force; better tax policy would take care of all that, in his view. He’s not worried that rising inequality is going to result in social unrest, at least in Middle America. “I drove by Occupy Omaha, and there was maybe one guy there,” he says. “I just don’t think this is a country that has the tinder for social instability. I mean, the classic test of that was actually the 2000 election. If you think about it, half the people in America felt that they were screwed, and the next day, they all went to work.”  But on taxes and the debilitating growth of partisan politics, he doesn’t mince words. He was horrified by the debt-ceiling debacle this summer and shocked that Republicans were willing to play a game of political chicken with the goodwill and faith put in the world’s reserve currency.

Every year around this time, Buffett issues a lengthy letter to his Berkshire shareholders, of which I am one.  I look forward to reading the letter because it contains, not only Buffett’s view of what has happened and what is going to happen with the American economy, but also his wisdom on life.  The article in Time magazine serves as a perfect complement to the shareholder letter because it benefits from a skilled writer’s perspective.

October 28, 2011

An open letter to Bill O’Reilly

Filed under: Uncategorized — Mike Kueber @ 2:37 pm
Tags: , , ,
For the past few days on The Factor, Bill O’Reilly has railed against a poll that shows people believe that income in America is unfairly distributed.  O’Reilly argues that income is not “distributed” by anyone; rather it is earned, given, inherited, stolen, whatever.  He also declares that he doesn’t feel guilty about all the money he makes because he has “earned it,” and therefore should be able to do whatever he wants with it.
For the fun of it, I decided to play the devil’s advocate with an email to The Factor.  O’Reilly insists that letters to his show be succinct (and the first sentence has to be catchy), so I didn’t have the luxury of developing several promising angles.
Bill, regarding unfair income distribution in America, methinks thou doth protest too much.
You say that America doesn’t “distribute” income and that you don’t feel guilty about the millions of dollars that you earn.  You are wrong on both counts.
Although the American government doesn’t distribute income, the American economy does, and many people believe it is doing a piss-poor job because the well-connected have rigged the system in their favor.
Furthermore, no one suggests that you should feel guilty about earning so much money.  Rather, they are merely suggesting that you are shirking your fair share when you insist that you should never have to pay more than 35% for federal taxes.  You should feel guilty about fighting higher taxes that could be used to enhance opportunity for poor kids to climb the socio-economic ladder in America instead of being wasted on your lavish personal spending.  The nuns who taught you would be ashamed.
For such a big man, you look awfully small alongside Warren Buffett.
Mike Kueber
San Antonio, Texas

October 22, 2011

Sunday Book Review #50 – The Most Important Thing by Howard Marks

In my most recent book review – Islam, a short guide to the faith – I noted that the “little, highly readable” book reminded me of Harvey Penick’s Little Red Book on golf.  That description applies even more to Howard Marks’ book on investing – The Most Important Thing.

Marks describe his little book (180 pages) as a collection of insights (20) about investing that he has made over his 40-year career.  Each insight was initially a stand-alone comment that Marks might have fleshed-out in a memo to clients.  But over the years, as Marks’ insights gained critical mass, he began to realize that, although these insights could stand alone, they were more effective when considered as part of a package.  (Of course this alleged synergy justified consolidating the memos into book form.)  Although I have never heard of Marks, he is apparently famous as a value investor and the cofounder of Oaktree Capital Management, with $80 billion under management.

According to Marks in Chapter One, the most important thing is “second-level thinking,” which he describes as something a little deeper or more nuanced than the conventional wisdom. An investor needs
to focus on achieving second-level thinking because only with this ability can an investor consistently out-perform the market.

According to Marks in Chapter Two, the most important thing is understanding market efficiency and its limits.  The efficient-market hypothesis generally posits that the market absorbs all available information and then generates pricing that reflects that information.  Marks’ position is that the market is incredibly efficient, but he defines efficient as “speedy, quick to incorporate information, not necessarily right.”

By now you should be understanding the format of this book.  It reminds me of MMA fighting.  Every few months, my son tells me about an upcoming fight that he invariably calls the fight of the century.  After a few such fights, I pointed out the ludicrousness of the claim, and he responded that I shouldn’t take everything so literally.  The same rule applies to Marks’ insights.  Each one may be the most important thing, but not really.

According to Marks in Chapter Four, the most important thing is value.  In this chapter, Marks briefly describes fundamental analysis, technical analysis, random-walk hypothesis, and momentum investing, and then focuses on the difference between value investors and growth investors.  He describes value investors as those who buy stocks because their current value is high relative to its current price.  By contrast, growth investors buy stock because its current value is likely to grow enough to cause substantial appreciation in the future price.  Marks endorses value investing because it is easier to consistently make profitable purchases.  Growth investing is more speculative.  According to Marks, “In my book, consistency trumps drama.”

Chapter Four describes the relationship between price and value.  According to Marks, no asset is of such good quality that price is not the dominant consideration.  Stating the obvious, Marks points out that
investment profits can be derived from (1) an increase in the intrinsic value of an asset, (2) selling an asset for more than it is worth, or (3) buying something for less than its value.  The last of these is the most reliable, but even that is not foolproof because “the convergence of price and intrinsic value can take more time than you have; as John Maynard Keynes pointed out, ‘The market can remain irrational longer than you can remain solvent.’”

Chapters Five, Six, and Seven deal with risk – understanding risk, recognizing risk, and controlling risk.  Marks suggests that the conventional thinking equates risk with volatility.  He disagrees.  He equates risk with the possibility of loss, or even more, the risk of permanent loss.  That makes sense.  Personally, I believe the market will inevitably recover before I need to cash-in most of my investment assets, and
therefore I don’t think the current volatility creates an inordinate amount of risk.  If the market is down significantly in 20 years, then I will have make a bad decision, and my estate and me will suffer the consequences.

Chapters Eight and Nine warn investors to be attentive to cycles and pendulums, with cycles referring to economic expansion and contraction and pendulums referring to investor optimism and pessimism.

Chapter Ten advises investors to combat the negative influences of human nature – e.g., greed, fear, a willing suspension of disbelief, a tendency to conform to the view of the herd, envy, ego, and capitulation.

Chapter Eleven endorses contrarianism, which makes sense for anyone trying to beat the conventional wisdom.  The trick is identifying what about the conventional wisdom is likely incorrect.  For example, when the market is crashing, most experts say, “We’re not going to try to catch a falling knife; it’s too dangerous.  We’re going to wait until the dust settles and the uncertainty is resolved.”  Marks
interprets this to mean that they are too frightened and unsure of what to do.  “The one thing I’m sure of is that by the time the knife has stopped falling, the dust has settled, and the uncertainty has resolved, there’ll be no great bargains left.”  If you know what you are doing, this is the time to do it.

Chapter Twelve recommends finding bargains.  These are usually unattractive assets that provide value because of their unreasonably low prices.  Because of their “unusual ratios of return to risk, they represent the Holy Grail for investors.”

Chapter Thirteen prescribes patient opportunism.  Marks credits Warren Buffett for articulating this concept in one of his annual shareholder letters.  Buffett taught the concept by first describing a baseball batter who is punished by baseball rules if he takes a juicy pitch right down the middle.  Pass on three such pitches and the batter is declared out.  By contrast, investors can take as many pitches as they want, even if the pitches are right down the middle.  Because of this unlimited opportunity, wise investors can wait until really good investments come along before pulling the trigger.

Chapter Fourteen warns about knowing what you don’t know.  Marks thinks most investing mistakes are made by persons who don’t know what they don’t know.  In this chapter, he contrasts actions taken
by investors in the “I don’t know” school vs. those in the “I know” school.

Chapter Fifteen compares three ways of dealing with inevitable cycles – (1) refuse to accept that cycles are unpredictable and try to predict them better than the average Joe, (2) ignore cycles and employ a
“buy and hold” strategy, or (3) instead of prediction or ignoring cycle, have a more limited objective of trying to figure out where we stand in the current cycle and what that implies for our actions.  We should be able to discern whether other investors are acting with reckless exuberance or undeserved caution, and that would suggest contrarian moves.  I think Warren Buffett said something like, “When others are fearless, I fear.  When others are frightened, I am emboldened.

Chapter Sixteen talks about appreciating the role of luck.  Although Bill Parcells is famous for saying a team is as good as its record, that is not necessarily true.  Some actions may look brilliant in hindsight, but the result was not pre-ordained.

Chapter Seventeen advises investing defensively.  There are old investors, and there are bold investors, but there are no old bold investors.

Chapter Eighteen says that the most important thing is to avoid pitfalls.  An investor needs to do very few things right as long as he avoids big mistakes – Warren Buffett.

Chapter Nineteen says the most important thing is to add value.  That value can be gaining more than the market when it goes up or losing less than the market when it goes down.  Marks, like Buffett, prides
himself in keeping up with the market in good years and then separating from the market (in a good way) in the bad years.

Chapter Twenty says the most important thing is to pull it all together.  This chapter contains 27 aphorisms that re-state the insights contained in the 19 previous chapters.  Among my favorites:

  • The relationship between price and value holds the ultimate key to investment success.  Buying below value is the most dependable route to profit.  Paying above value rarely words out as well.
  • The superior investor never forgets that the goal is to find good buys, not good assets.  (I wonder if Buffett agrees with this.)
  • Economies and markets cycle up and down.  Whichever direction they’re going at the moment, most people come to believe that they’ll go that way forever.  This thinking is a source of great danger since it poisons the markets, sends valuations to extremes, and ignites bubbles and panics that most investors find hard to resist.
  • Underpriced is far from synonymous with going up soon.  Thus, being too far ahead of your time is indistinguishable from being wrong.  It can require patience and fortitude to hold positions long enough to be proved right.
  • Never forget the six-foot-tall man who drowned crossing the stream that was five-feet deep on average.


September 30, 2011

Buffett’s perspective

Filed under: Economics,Issues,Politics — Mike Kueber @ 11:04 pm
Tags: ,

This morning, while watching Imus in the Morning on the FOX Business channel, I learned that Warren Buffett was going to be interviewed on the floor of the stock exchange by a FOX correspondent in a few minutes.  What a pleasant way to start the day!

The ten-minute interview reminded me why I like Buffett so much.  Most of the interview focused on the Buffett Rule, which has been proposed by President Obama.  The rule is really nothing more than a minimum income-tax rate (probably 25%) for people who make more than $1 million a year.  As Buffett pointed out, hundreds of these people currently pay less than 25% because the bulk of their earnings are taxed at the 15% rate for long-term capital gains.  This new minimum rate seems perfectly fair, and it does not raise the specter of a rate so high that it discourages entrepreneurs.

The other major issue discussed by Buffett was the lagging economy.  Buffett said that that things were improving, with most of Berkshire’s operational companies on schedule for record profits, except for his homebuilding companies.  When the FOX correspondent wondered what could be done to revive homebuilding, Buffett sagely told her that nothing needed to be done – i.e., he didn’t want to see more houses being built now.  He went on to explain that the bubble caused America to build more houses than it had households, and that resulted in an excess inventory of houses.  Today, America was creating more households than houses and this was slowly reducing the excess inventory.  It’s just a matter of time before homebuilding picks up.

When asked what American government should do from a macro-economic perspective, Buffett said that fiscal or monetary policy cannot supply the answer.  When pressed for an answer, Buffett said that we have already done as much as we can with fiscal and monetary policy, and that we need to give the economy some time.  Ultimately, the “natural regenerative juices of capitalism” will prevail.

What did Buffet think about stock market prices?  Berkshire was buying stocks every day, and in the 2nd quarter they had a net increase of $4 billion in the market.  Talk is cheap, but that’s his money talking.  I wish I had $4 billion to put in today’s market.

Regarding the recent retirement planning going on at Bershire, Buffett claimed that he was merely making sound precautions “should he drop dead tonight.”  But he had no plans to retire or slow down.

Long live Buffett.






August 23, 2011

Increase the capital-gains rate and balance the budget

Filed under: Issues,Politics — Mike Kueber @ 6:33 pm
Tags: , , , ,

As the federal government struggles with its deficit and debt, an item that has escaped much public attention is the preferred treatment of capital gains.  As Warren Buffett recently pointed out, this preferred treatment enables him to pay taxes at a lower rate than his secretary:

  • “Some of us are investment managers who earn billions from our daily labors but are allowed to classify our income as ‘carried interest,’ thereby getting a bargain 15 percent tax rate. Others own stock index futures for 10 minutes and have 60 percent of their gain taxed at 15 percent, as if they’d been long-term investors.”

James Stewart, a business/finance columnist for the NY Times, recently elaborated on Buffett’s argument about carried interest:

  • For most hedge fund and private equity partnership managers, carried interest is compensation in the form of a percentage (usually 20 percent) of any gains they generate for investors. If a hedge fund manager generated $1 billion for investors by betting against mortgage-backed securities before the real estate market collapsed, the hedge fund manager is entitled to keep $200 million as compensation. The tax code treats that as a capital gain, taxed at a lower 15 percent rate. (The top rate on ordinary income is 35 percent.) The argument that this should be ordinary income rests on the notion that hedge fund managers earn these fees from their labor, just like other workers get a salary for theirs and are taxed at ordinary income rates.

Although managers of private equity and hedge funds provide a (un)popular target for tax reform, the far richer target is the complete elimination of a separate, reduced rate for capital gains.  If the capital gains rate were the same as an individual’s income tax rate, Warren Buffett wouldn’t pay taxes at a rate lower than his secretary.  Furthermore, the elimination of the reduced rate is not an extreme idea.  In fact, it was included in the estimable report of the bi-partisan Simpson-Bowles commission.

The aspect of this reform that fascinates me is the prospect of implementation would surely motivate millions of people with locked-in capital gains to claim those gains at 15% before the new 35% rate kicks in.  I have searched high and low to find an estimate of how much capital gains are waiting to be taxed, but I have been unable to find an estimate.  Although the capital-gains tax plays a relatively small part in supporting the federal government (see below), I suspect that the surge of activity to avoid a higher rate would go a long way toward balancing the federal budget that year.

Table 1 Sources of Federal Revenue (billions of 2003 dollars)


Capital gains tax 45

Corporate income tax 132

Individual income tax 794

Social Security taxes 713

Total revenues 1,782


August 16, 2011

An open letter to Joe Nocera re: Buffett’s tax on the rich

Filed under: Issues,Media,Politics — Mike Kueber @ 4:32 pm
Tags: , ,


I was disappointed with your column in support of a boycott on campaign contributions.  Although the idea is getting lots of publicity (I just saw Scott Pelley on the CBS Evening News interview the Starbucks CEO Howard Schultz), I haven’t heard anyone, other than Schultz, who thinks the idea will work.  As Pelley indicated, if the good-government types withdraw to the sidelines, they will be leaving an uncontested field to the bad-government types.  That would be analogous to violating the physician’s oath by providing treatment that makes the patient worse.  Most people agree that campaign contributions corrupt the political process, but instead of tilting against windmills by idealistically urging an ineffective boycott of contributions, you should be exposing the corruption.

An excellent example of the corruption appeared this weekend in a NY Times op-ed piece by Warren Buffett in favor of raising taxes on the rich.  As part of his argument, Buffett described two tax loopholes that unfairly benefit the rich – specifically, preferred tax treatment for the income earned by fund managers and day traders.

My suggestion is that you or the NY Times should investigate how such loopholes came to exist.  It is hard to imagine any Congressman or Senator would work in favor of such loopholes unless they had prostituted themselves to the fund managers or traders.  Perhaps by revealing this sordid symbiotic relationship, the voters will be motivated to punish legislators who prostitute themselves to special interests.


Mike Kueber


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