Thursday, May 7, 2009

Book Review: Pilgrimage to Warren Buffett's Omaha by Jeff Matthews

The Woodstock for Capitalists occurred over the weekend. To capture the mood, I read the book Pilgrimage to Warren Buffett's Omaha: A Hedge Fund Manager's Dispatches from Inside the Berkshire Hathaway Annual Meeting by Jeff Matthews. Living in tumultuous financial times has increased the relevance of receiving sage financial advice, and who better to turn to than the “Oracle of Omaha” himself?

The book covers the 2007 and 2008 Annual Berkshire Hathaway(BRK-A) (BRK-B) shareholder meetings. It’s basically a collection of blog posts which Jeff wrote on his website. The book is divided into two sections (for 2007 and 2008). Jeff’s perspective as an outsider rather than a “Buffetologist” is valuable as he takes a more critical look at the events and adulation surrounding the firm and the man.

Amongst the questions Jeff seeks to answer include:

  • Does Buffett's famed penny-pinching cripple his companies?
  • Why does Buffet--a bridge partner and best friend of Bill Gates--not own any technology stocks?
  • How does the extremely rational Buffett square his well-known social progressiveness with his lily-white audience of investors?
  • Is Buffet really an "Oracle"?
  • Will Berkshire-Hathaway survive his death?
Jeff notes that the meeting has changed over the years from a gathering of 250-300 investors to over 30000 last year. The focus of questions has changed from Berkshire investments to almost anything under the sun. The attitude is that of worship and adulation of Berkshire and Warren Buffett. Statistical fluke or technologic phobic, Warren Buffett has deservedly become a role model for thousands of aspiring young people. The Pilgrimage to Omaha is well worth the price.

Likes: Jeff’s criticism of Buffett and Berkshire has some merit. For instance, Buffett has been critical of CEO compensation, but was on the Board of Directors of Coke when Robert Goizueta got his $1 billion package. The book starts with a classic Charlie Munger quote: "What we have created is, to some extent, a cult." His labeling of the cohort as a cult actually hits home. It almost seems like people are flocking to see their messiah, seeking relief and the answers to their questions. He points out the lack of genuine probing business related questions. Jeff’s friend Chris actually sold his Berkshire stock after the 2007 meeting, and it just may have been the right thing to do.(Though I wonder if he’s bought it back.) Barron's had a similar opinion around that time. Interesting anecdotes like when Buffet’s kids bought their father “The Father’s Handbook” to try to get through to the old man keep the discussion personal and interesting.

Could Warren Buffet be too thrifty for his own company’s good? Jeff makes a convincing point that what’s good for Berkshire and it’s shareholders may not be good for the subsidiary companies themselves, for instance the Nebraska Furniture Mart(NFM). He points out the technological obsolescence at Nebraska Furniture Mart. While he makes a valid point, Berkshire has essentially relied on Buffett’s role as a capital allocator. It is assumed that reinvesting NFM’s earnings in other businesses would provide better returns on invested capital than in growing NFM. I thus disagree with Jeff on this, and will elaborate further on this point in a later post.

Berkshire’s investment process: Berkshire’s investment rigor can be summed as doing “lots of reading and thinking”. Their investment principle? “Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily-understandable business whose earnings are virtually certain to be materially higher five, ten and twenty years from now. Over time, you will find only a few companies that meet these standards – so when you see one, you should buy a meaningful amount of stock.”

Here’s something Buffett said in the 2007 meeting: “Corporate America is living in the best of all worlds – and history has shown this is not sustainable. I would imagine that it will not be." Little did we know that he would be right so soon. If you followed this year’s meeting, you’d remember that Munger and Buffett both had full praise for the prompt action by the administration to mitigate the current downside. This gives me optimism that we’ll come out of the Great Recession in fairly good shape, and perhaps the equity markets agree with that assertion.

Dislikes: The book doesn’t cover other events which occur over the weekend. Jeff’s perspective is that of an outsider and he doesn’t really participate in any of the festivities. His criticism on the absence of African Americans while relevant is misplaced as the class difference cannot be attributed to Berkshire. I also disagree with his assertion that Buffett’s neglect of technology stocks is a mistake. (More on this in a later blog post).

If you are looking to get value investing insights or a peek into Warren Buffet’s methodology, you’ll be disappointed. The book is a narrative of the author’s trip to Omaha, and of the Question and Answer session(Q&A) held over the weekend.

Conclusion: The book piques your interest in the proceedings and you do feel like attending the meeting! As an FYI, if you are strictly looking for a Q&A session type material, the internet has detailed meeting notes for 2007 and for 2008, and a section on quotable quotes from the 2008 meeting. Get the book to get an idea of the experience, the environment and the festivities involved in the Woodstock for Capitalists.

As long as your expectations are rational, you will enjoy reading Pilgrimage to Warren Buffett's Omaha: A Hedge Fund Manager's Dispatches from Inside the Berkshire Hathaway Annual Meeting.