Our Trip to Omaha Javier Pérez and Antonio López Equity Managers - March AM MONTHLY STRATEGY REPORT June 2015 Monthly Strategy Report. June 2015 Our Trip to Omaha. “This month we will be presenting an article on the trip that two March AM fund managers made to the Mecca of their investment philosophy: a meeting organised by the world’s most famous investor, Warren Buffet, who manages one of the most profitable companies in history. In addition to discussing the adventures of their trip and the brilliant presentation by the organisers, the article also comes to the conclusion that value is a strong investment philosophy. The article concludes with a series of quotes of the great wisdom that comes from years of experience”. Saturday, 1 May 2015. 4:30 AM. We’re in Omaha, Nebraska. A glance at the map shows that Nebraska is the state that is practically in the centre of the US. With half a million inhabitants-- an average population by European standards, but very low for the US-- Omaha is a prosperous city thanks in large part to agriculture and livestock. Curiously, everyone with whom we spoke, even taxi drivers (who always tend to be the most pessimistic) told us that life there is reasonably good (in spite of the extreme weather), that the economic ups and downs of the rest of the country are not that noticeable, and that on a practical level, the cost of living is 50% less than in Chicago (the closest big city) but only 25% lower in terms of salaries. It’s 4:30 AM and we are in a hotel 20 km outside of Omaha. We woke up early, desperate to find a way to get downtown to the CenturyLink Convention Center where the doors would not open until 7:30 AM. There was no sign of the ride we booked to get to this city deep in the American heartland after 15 hours in the air on three flights, each one shorter than the last (Madrid-New York-Detroit). Our goal was to make it to what is known as “Woodstock for capitalists”: the annual shareholders’ meeting of Berkshire Hathaway. This year we, together with 40,000 souls from around the globe (some Spaniards, but with a surprising showing of Asians as well, in spite of the fact we are sure they don’t know English), are the lucky ones. After miraculously finding a cab at our hotel, we made it to the queue at five in the morning. We stoically waited for the convention centre doors to open so that we could hear the lessons imparted by two elder sages (84 and 91 respectively): the living legends of investment, Warren Buffet and Charlie Munger. This is the 50th anniversary of the creation of the most successful financial partnership of all time, and an empirical demonstration that management based on a philosophy of value, according to which by buying solid companies, good businesses with respected managers at reasonable prices, value (and plenty of it) is created for shareholders in the medium and long term. As value-based investors, attending this meeting makes us look, on one hand, like groupies going to a meeting of a mythical figures worthy of all admiration and, on the other hand, like professional investors going to a retreat to commune with the rest of the community partaking of the chalice of “value.” We were going to one of those “philosophical” get-togethers that investors need to attend at least once in their lives if they are believers in the philosophy emanating from Columbia University and its incunables: “Security Analysis” by Benjamin Graham & David Dodd (1934) and “The Intelligent Investor” by Benjamin Graham (1949). This retreat would give us a chance to get back to the basics of our investment philosophy and forget the “monetary noise” generated by Draghi and Yellen’s QE- bloated markets. Suddenly as soon as the event began, after 15 hours of planes and queues, and four hours of waiting outside in the cold, our misgivings as to what we were doing there dissipated. Putting these doubts aside, we understood why this simple “annual meeting” of a publicly traded company could generate this level of attendance and expectation around the world. Not only were our expectations met, but after around eight hours of the meeting with a mere one hour break to eat, we realised they had been amply surpassed. Monthly Strategy Report. June 2015 During those eight hours a level of transparency was on display. For five minutes Warren and Charlie discussed Berkshire’s year, qualifying it as “pretty good”; 30 minutes were spent on a video that made the whole trip worthwhile, and the rest (7.5 hours) were dedicated to Q & A. Special mention should be made of the video. Accustomed as we are to the circumspection of European investors, it’s hard to explain just how fun it is to see a scene where, for example, Buffet pretends to box Mayweather, protecting his teeth with nothing but a handful of candies without chewing them, after having warmed up by doing bench-presses (or more accurately by having two employees pull up his bar at each end) or where Charlie is the new billionaire flirting with Nicolette Sheridan (the actress from the series Desperate Housewives) to the envy of the rest of the neighbourhood, or when the two make off with her See’s Candies business, supposedly buying it from the stars of Breaking Bad. Truly second to none. After watching the video, a 7.5 hour Q&A session began, raising all types of issues. Warren, with his usual sense of humour answered first, both extensively and in detail, and then ceded the floor to his partner with a simple “Charlie...” who briefly and succinctly threw out pearls of unrepeatable investment wisdom. And all of this came wrapped in a tidy package with a bow on top. For us, attending this geek convention/value philosophy retreat led us to refocus on the purity of this management style, eliminating all ornamentation, and making us focus even further on whether it suits the way we mange investment funds at March AM: • We are convinced that, in the long term, it is much more attractive to buy good profitable companies with identifiable competitive advantages at a reasonable price than it is to buy bad companies (with low margins and returns) at bargain basement prices. Either way, since the price paid defines the risk assumed, there might be a place in our portfolio (on an exceptional, temporary basis) for companies that lack these ideal characteristics, but the discount they trade with compared to their intrinsic value lets us identify them as good investments, as long as they have an excellent management team. • As Warren and Charlie have told their shareholders over and over again, it’s better to “buy a good company with mediocre management than a mediocre company with good management.” In the former case, the management can be replaced. In the latter it’s extremely difficult to change the company’s characteristics. • In order to beat the market, it is crucial to look for investment opportunities without being constrained by the need to replicate a benchmark index. • We believe there is no way to predict the market’s short-term movements, but in any event we will try to take advantage of fluctuations to buy or sell if erratic movements can give us the opportunity to leverage low quotes for our investments. As Warren and Charlie noted, the market exists to serve us, not to inform us. • When analysing a company, discipline and patience are crucial to obtain the desired rate of return over the term of investment In conclusion, here are a few quotes from the meeting that we believe to be pure added value: “Corporate culture is key when choosing long term investors.” “The incentives for the company’s executives are key, even hidden incentives.” “When people are led by their ego they do things they shouldn’t do. Incentives acting on the ego should Monthly Strategy Report. June 2015 be eliminated.” “Unlike other people, I’d rather talk negatively about companies I have shares in. I’ll either be able to buy more shares or the companies can buy back their shares.” “It’s much more important to have one good salesman than a bunch of mediocre salesmen.” “There are still serious dangers in the financial system.” “I’ll never be in favour of leading a losing company.” “If you think interest rates will stay low for a long time then equity is cheap. If you think interest rates will start going up in the short term, then equity is expensive. Now all you need to do is place YOUR bet.” “China and the US should continue to cooperate closely and strengthen their ties.” “Sooner or later, the Euro will undergo a transformation, since it’s current form is unsustainable.” “Berkshire hires people who are not only smart, but who identify themselves more with Berkshire than they do with themselves and who are personally whole and balanced.” “Inflation is noxious for any asset that needs to be constantly invested, but it’s good for those that require a strong initial investment without subsequent reinvestment. It’s good for real estate, bad for electric companies.” “If inflation grows uncontrollably, we don’t know how the party will end.” “When you’re looking for a mate, you shouldn’t look for beauty, character, etc., but rather someone with low expectations.” “Good habits are crucial in life and you pick them up when you’re young.