Tuesday, November 25, 2014

Activist Targets IBM: “Bring Out the Belgian Waffle!”

IBM trades to highs on activist related speculation  (161.85 +0.95)—Briefing.com, November 23, 2014

IBM Chief Counsel: “Ginni?  Fred here.”
IBM CEO Ginni Rometty:  “What’s wrong?”
Chief Counsel: “Activists are circling.”
Rometty: “Oh geez.”
Chief Counsel: “Yeah.  I’ve got the biggest shark of all on hold.  He wants to talk.”
Rometty: “Carl Icahn??”
Chief Counsel:  “No.   Icahn watches Netflix and uses an iPhone.  He thinks we’re ‘old economy.’  Worse than Icahn.”
Rometty: “Donald Trump?”
Chief Counsel:  “No.   Even worse.”
Rometty:  “Worse than Donald Trump?  How is that possible?”
Chief Counsel:  “It’s possible.  It’s those guys from 3G.”
Rometty: “Yikes.  The Brazilians?   The ones who took over Burger King and slashed and burned?”
Chief Counsel: “Yeah.  And they bought Heinz with Warren Buffett—your pal.”
Rometty: “Well, he’s not my pal after we had to reset the ‘earnings roadmap’ and the stock tanked.   Stupid roadmap.   How did Palmisano ever come up with that idea?”
Chief Counsel:  “It worked, didn’t it?”
Rometty:  “Only long enough for Sam to exercise his stock options.   Not me.”
Chief Counsel:  “Well your options may be in the money soon enough, if these 3G guys go ahead.  You want to talk to them?”
Rometty:  “Put ‘em on.”
Chief Counsel:  “Right now?”
Rometty:  “It’s better than watching these Fast Money yahoos trash talk me on CNBC.”
Chief Counsel:  “Hold on… Okay, here we go.   Oscar?   You there?”
Oscar:  “Yes.  I have seven minutes before I have to fire 37 people and figure out how to convince young males to buy hamburgers made with wood shavings.   Let’s get going.”
Rometty:  “What do have in mind?”
Oscar:  “We at 3G would like to buy IBM—”
Rometty:  “Outright?   That’s not activism, that’s a hostile takeover!”
Oscar:  “Call it what you like.   We see great opportunity to run IBM more efficiently.”
Rometty:  “Oh yeah?   Starting where?”
Oscar:  “Layoffs.   IBM has too many employees.”
Rometty:  “Says who?”
Oscar:  “You have over 400,000 employees!”
Rometty:  “That number is so last week.”
Oscar:  “You’ve had layoffs in the last week?  Well then, I must congratulate you.”
Chief Counsel: “Careful, we haven’t publicly disclosed anything.”
Rometty: “Okay.   So what else does 3G think we need to change?”
Oscar:  “Well, according to our internal due diligence you have a very inefficient field staff reporting structure.  At Burger King we have 14,000 field staff reporting to seven MBAs who all work out of their cars.”
Rometty:  “That’s nothing.  At IBM our entire field staff of 80,000 reports to three college grads and a transfer student.”
Chief Counsel:  “Ginni, that’s never been disclosed—”
Rometty:  “Relax, Fred.  The transfer student doesn’t even speak English.”
Oscar:  “Somehow our due diligence did not discover that.   Well played.”
Rometty:  “Thank you.  What else you got?”
Oscar:  “Well, corporate overhead.   At Burger King we eliminated all corporate jets except mine, and everyone takes a Greyhound bus when they travel more than 300 miles.”
Rometty:  “What do they do under 300 miles.”
Oscar: “They hitch-hike.”
Rometty:  “That’s nothing.  All travel requests at IBM have to get approved by a cardboard cut-out of Dilbert.”
Oscar: “Brilliant!”
Rometty:  “It’s called returning value to shareholders, not employees.”
Oscar:  “And we admire that.  But your headquarters staff appears bloated to us—”
Rometty:  “That’s because it doesn’t exist.”
Oscar:  “Doesn’t exist?”
Rometty:   “No.  It was outsourced to India years ago.”
Oscar:  “Then why do the satellite images of the IBM parking lot in Purchase show so many cars?”
Rometty:  “That’s my security detail.   And my lawn service.”
Chief Counsel:  “Ginni, I really think this is inappropriate—”
Rometty:  “Not at all.  If this guy thinks he can tell me how to run IBM even less for employees and customers than we already do, he’s got another thing coming.  He’s a piker.”
Oscar:  “Well let’s discuss your taxes.  We at 3G know how to operate tax-efficiently across all multi-national platforms—”
Rometty: “Our tax rate was 15.6% last year.  How do you beat that?”
Oscar:  “We think applying a ‘Dutch Sandwich’ could lower that—”
Rometty:  “Been there, done that.”
Oscar:  “Well, a ‘Double Irish’ would reduce taxes on intellectual property—”
Rometty:  “You’re five years too late pal.  Next?”
Oscar:  “A ‘French Cuff’?”
Rometty:  So 90s.”
Oscar:  “The ‘Jamaican Bobsled’?”
Rometty:  “Who do you think invented the ‘Jamaican Bobsled’???”
Oscar:  “A ‘Hong Kong Stir-Fry’...‘Singapore Sling’...‘Portuguese Man-O-War’?”
Rometty:  “Puh-leeze.”
Oscar:  “Well, I must say, your tax avoidance skills seem quite advanced.   I’ve run out of options.”
Rometty:  “You didn’t ask about the ‘Belgian Waffle.’”
Oscar:  “Is there such a thing?”
Roometty:  “Wouldn’t you like to know.”
Chief Counsel:  This conversation is finished!   Ms. Rometty has nothing further to add!”
Oscar:  “El Diablo!”

Jeff Matthews
Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”
(eBooks on Investing, 2014)    Available now at Amazon.com

© 2014 NotMakingThisUp, LLC

The content contained in this blog represents only the opinions of Mr. Matthews.   Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.  This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever.  Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored.  The content herein is intended solely for the entertainment of the reader, and the author.

Monday, November 17, 2014

Now That's An Idea That Would Never Fly

 Former BB&T* CEO John Allison has written a book about, well, about his time at BB&T, during which it grew from $275 million in assets to $152 billion (profitably) and some lessons learned along the way.
 American Banker, one of the publications Warren Buffett reads every day, is publishing excerpts from the book, covering everything from how BB&T got into the subprime auto lending business to how it looks for acquisitions (100 and counting during Allison's 35 years at the bank).
 And while Warren Buffett has long lambasted American CEOs for not providing shareholders with honest post-mortems about acquisitions where big things were promised but not delivered, Allison makes Buffett look like a piker when it comes to the notion that deals ought to be scrutinized in hindsight.
 Here's what Allison says, and it's so logical you wonder why everybody doesn't do it.  Well, actually, you understand why they do not...

 Of course, the economics had to work from our shareholders' perspective...In this regard, the board members were told that for 10 years after an acquisition was effected, they would be provided with a report on how well the acquisition performed relative to our projections. It is tough to remind your board for 10 years that you made a significant mistake, so this discipline encouraged rational, objective analysis.


 *Your editor has an interest in BB&T, just for the record, but we would have published this even if we didn't.

Monday, October 20, 2014

Don't Blame IBM. Blame Wall Street

 Well the biggest stock-market levitation act since HP under Mark Hurd is going the way of all levitation acts: IBM is throwing in the towel on its $20 EPS "roadmap" (reportedly mocked as "roadkill" in some internal IBM quarters) and admitting what anybody with a calculator and the IBM 10Ks before them has understood for some time--it is exceedingly difficult to grow earnings regularly, not to mention with to-the-penny precision, when your sales are falling, hard, nearly everywhere, quarter after quarter...no matter how many people you lay off, how many "one-time" charges you take, how many lagging businesses you sell at fire-sale prices, how many shares you buy back at whatever price, or how often you try to direct the gaze of Wall Street's Finest to shiny new objects like your years-too-late efforts in "the cloud," which happens to be the very thing that is causing your revenues to fall in the first place.
 But shareholders--in particular the small investors who have clung to IBM's earnings "roadmap"even when the potholes were there for any professional to see--should not direct their ire at IBM management.  
 After all, IBM's low-quality earnings were apparent and easily dissected, as you can read here, here and especially here if you like.   Most companies (not all--Berkshire Hathaway is a notable exception, as are some others we could mention) report earnings in their best light possible, and IBM executives were simply doing what most of Wall Street's Finest (not all--there were some skeptics) allowed them to, no questions asked.


Friday, September 05, 2014

Berkshire Hathaway: Wholesaler of Death?

 Now that we have your attention with that admittedly provocative title, we are going to kill two birds with one stone here.
 Bird One is the fact that we haven’t posted anything in two months, mainly because whatever odd silliness visible in the darker corners of Wall Street seems irrelevant in a world where Vladimir Putin can invade his neighbors, take territory and shoot passenger planes from the sky while the civilized world sputters about such things not being fit for 21st Century-type behavior before moving onto actual 21st Century-type behavior like Tweeting about how sad it is that Joan Rivers died.
 Bird Two is something I’ve always wondered about when it comes to Berkshire Hathaway.
 But before getting to that, let me repeat, for the record and as I have said early and often in books, speeches and as a talking head, that Berkshire Hathaway is the product of the single best 49 ½-year investment track record that anyone in our lifetimes will likely ever witness, bar none. 
  Now, I have met a lot of conspiracy theorists since writing “Secrets in Plain Sight” who claim that Warren Buffett is either a) just plain lucky (“he was born at the right time”), or b) not really all that great (“you could have done better with a leveraged bond fund,” e.g.), or c) a beneficiary of his left-wing political connections (“the Keystone Pipeline isn’t being approved because it would hurt Berkshire’s railroad”), or d) just such a lousy rotten hypocrite that who cares what his track record is?
 But none of them (or anybody else, for that matter) has ever, never, not once brought up the actual fact that Berkshire Hathaway is, as best anybody can tell, the largest cigarette dealer in the United States (outside of the tobacco companies themselves), thanks to its ownership of McLane Company, the giant wholesaler that Buffett acquired from Wal-Mart in 2003.  
 The precise extent to which Berkshire Hathaway shareholders (your editor included) benefit from supplying smokes to addicts around the world (McLane has operations in other countries as well as the U.S.) are hard to come by, but, big picture, we know that a) McLane is the largest distributor of smokes, gum, candy and food to convenience stores in America, and that b) convenience stores are the largest source of smokes to cigarette addicts in America, which would mean Berkshire Hathaway owns what is very likely the biggest wholesaler of smokes (not to mention the kind of chewing tobacco that recently killed Padres great Tony Gwynn) in America.
  And despite all the efforts of government and regulators to end it, the tobacco business remains a very big business indeed.
 In fact, a press release on the McLane web site (copped from something called “Convenience Stores Decisions”) notes that $52 billion worth of cigarettes were sold at convenience stores in 2012, amounting to 8.75 billion smokes. 
 And while both figures were down slightly from the previous year according to the same report, its authors noted approvingly that “visits to the c-store [convenience-store] by tobacco customers remains [sic] strong, and that provides a steady opportunity to boost the market basket.”
 So the next time people flip out about Warren Buffett making a perfectly rational decision to invest Berkshire’s money in a highly profitable tax-inversion deal despite his long-standing opposition to the use of tax-aversion strategies by others (as they did a couple of weeks ago during the Burger King-for-Tim Horton hysteria), ask them whether it’s really as bad as making money wholesaling a highly addictive, cancer-causing, birth-defect-causing and emphysema-causing product by the billions to people who really can’t afford it to begin with?
 And the next time you run into one of Berkshire’s “comfortably numb” shareholders—to cop an old Pink Floyd label—ask them when are they going to stop doing it?

Jeff Matthews
Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”
(eBooks on Investing, 2014)    $2.99 Kindle Version at Amazon.com

© 2014 NotMakingThisUp, LLC              
The content contained in this blog represents only the opinions of Mr. Matthews.   Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.  This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever.  Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored.  And if you think Mr. Matthews is kidding about that, he is not.  The content herein is intended solely for the entertainment of the reader, and the author.

Friday, July 11, 2014

Okay FINRA, Who Had The Call From The FHFA?

 Last night at 4:05 PM E.S.T. the news hit Bloomberg that the Federal Housing Financing Agency was proposing an astoundingly, stupidly strict set of standards for private mortgage insurers who do business with Fannie Mae and Freddie Mac, the net effect of which would be to reduce the availability of credit for home buyers at the very time that credit is needed to keep our economic recovery going.
 We are not here to explain the issue, only to point out to FINRA, the self-policing body in charge of sniffing out strange behavior in the public markets, the enormous--nay, ginormous--option trades in the two publicly traded stocks most affected by the proposed standards just hours before the news hit the tape, betting on a drop in those stocks.
 Those two stocks, Radian and MGIC, are tickers RDN and MTG, and they stand out in this screen shot from our Bloomberg on outsized options activity by a mile:

 So, we wonder: who had the call yesterday from the FHFA...before it hit the tape?


Tuesday, June 17, 2014

Life in Wartime, or, One More Reason Why Companies Leave America

 These are the headlines on my Bloomberg for Annie's, the organic mac and cheese maker whose shares have fallen from unsustainable heights as the difficulties of running a public company while trying to meet the impatient quarterly targets of impatient quarterly-minded investors finally overcame the euphoria of a company that seemed to be in the right place at the right time.
 And this is one more reason why companies are leaving America.

 For the record, I like the new CFO (who helped flag the filing deficiencies) and would not bet against the company mending its ways.
 Nor would I blame them for moving to Ireland to get the Pittsburgh Law Office of Alfred G. Yates, Jr, the Lifshitz & Miller Law Firm, Brower Piven, Levi & Korsinsky, LLP, the Former Louisiana Attorney General, Federman & Sherwood, Morgan & Morgan, Fauqi & Faruqi, Holzer & Holzer, Crosby Stills Nash & Young, Peter Paul & Mary, and even John Paul George & Ringo off their backs.


Saturday, May 24, 2014

Berkshire Hathaway: Beyond Buffett

If this is failure, I want more of it.”
—Charlie Munger
“The only succession for Ajit Jain is reincarnation.”
—Warren Buffett
Omaha, Nebraska, May 3, 2014. It’s one year later, and I’m driving in pre-dawn darkness through downtown Omaha to the 2014 Berkshire Hathaway shareholder meeting, which, up until about a week ago, was looking like another cakewalk for Warren Buffett.
 After all, Berkshire’s net worth increased 18% in 2013, representing a staggering $34 billion jump in value.
 And while, as some wet-blanket observers have pointed out, Berkshire’s 18% gain paled in comparison with the S&P 500 (up 32% including dividends—its best year since 1995), a $34 billion increase in value would be a grand slam home run for any company, in any year…let alone for a decentralized conglomerate in its 49th year under the watchful but aging eyes of two men, one in his early 80’s and the other who just turned 90.
 Indeed, so well did Berkshire’s businesses perform last year that Buffett—who so frequently dwells on the negatives in his self-assessments that Charlie Munger says, “Warren wants to make it eccentrically difficult for himself”—kicked off his year-end shareholder letter by writing, “just about everything turned out well for us last year.”
 Then along came Buffett’s April 23 CNBC interview with Becky Quick, and all anybody has talked about since is his Coca Cola vote.
Kind of Un-American to Vote ‘No’ at a Coke Meeting
 During that fateful discussion, Quick—one of the three journalists asking questions at the meeting here today—brought up Buffett’s recent decision to abstain from voting Berkshire’s shares of Coca Cola against a large option package for Coke management.
 The Coke option grant had become something of a cause célèbre on Wall Street after one “activist” Coke shareholder calculated that the options could dilute existing Coke shareholders as much as 17% over time, and he publicly urged other shareholders to help him vote it down.
 Buffett, who doesn’t like to be railroaded into doing anything, let alone going against the wishes of his longstanding friends at Coca Cola, decided to abstain rather than vote against Coke management.
 When Buffett was pressed by Quick on his decision to avoid joining the activist uprising and merely abstain from voting Berkshire’s shares, Buffett—normally a harsh critic of corporate “fat cats”—seemed off his game.
 “I love Coke, I love the management, I love the directors, so I don’t want to vote no,” he told Quick and everyone watching. Then the investor most famous for staying rational in the frequently-irrational world of investing gave Becky the least rational reason he could have given for his decision: It’s “kind of un-American to vote ‘no’ at a Coke meeting,” he said.
 Cries of hypocrisy and corporate cronyism swiftly appeared in New York Times opinion pieces and across the Internet.  It didn’t help that the options package had been approved by Coke’s board of directors, which happens to include Buffett’s oldest son, Howard.
 The resulting kerfuffle prompted Buffett to give several defensive TV interviews in response, but it was too late.  The story has dominated the news leading up to the Berkshire Hathaway shareholder meeting ever since.
 And it will no doubt be the first topic of the question and answer session due to start soon.
Hello, Goodbye
 The Coke controversy is one big difference between this year’s shareholder meeting and last year’s relatively quiet gathering, but it is not the only difference.
 For starters, the weather is way nicer this year—the air was positively balmy leaving the hotel this morning—and the Omaha skyline continues to sprout new buildings. The growth and optimism are palpable, with new restaurants and bars springing up seemingly everywhere, and apartment buildings going up in what used to be a very quiet downtown after hours.
 But the biggest difference between this weekend and any of the last half-dozen shareholder meeting weekends is that in three days of driving around Omaha, I still haven’t seen a picture of Warren Buffett.
 The billboards with his giant headshot, the airport displays with his face on them, and even the trucks driving around town with his photo on the sides—advertisements for the University of Nebraska (“Warren Buffett, Class of 1951”)—they’re all gone.

 Interestingly, Buffett’s public profile has been reduced recently in other ways as well. NetJets, for example, no longer advertises in the Wall Street Journal with photos of Warren Buffett flying in comfort on the Berkshire-owned company’s time-sharing jets.  In his place, the Berkshire Hathaway name is promoted instead.
 Furthermore, the Berkshire brand was slapped on the company’s disparate real estate brokerage holdings last year—the first time since Buffett took control of Berkshire Hathaway in 1965 that the name had been used on anything outside its old textile business other than insurance.
 Just last week the company’s Mid-American Energy business was renamed “Berkshire Hathaway Energy.”
 The move away from Warren Buffett’s iconic image, and towards Berkshire Hathaway’s own name, seems clearly designed to ready the company for the day Buffett is no longer able to run the company he built, and a successor takes his place as CEO.
 It also makes what the radio happened to play when I first started up the car this morning a bit spooky.   Like last year, it was a Beatles classic; unlike last year it wasn’t “Back in the USSR.”
 It was “Hello, Goodbye.”
 We’ll get some more clues about Buffett’s successor even before the question and answer session starts later this morning—during the cartoon, in case you’re wondering—and those clues may just be the most obvious yet.
 But we’ll also see that Warren Buffett isn’t going anywhere soon, and neither is Charlie Munger, by the looks of things.
 Both men will take the stage after the usual rousing movie, to the usual rousing applause, from the usual packed arena. 
 And at ages 83 and 90 they’ll prove to be in top form, answering more than 60 questions during the course of more than five and a half hours of Q&A, while offering up a few more “secrets” for those who’ve made the journey to Omaha.
 First, however, they’ll have to deal with the Coke controversy.
Forty-Five to One
 Easily the most disappointing part of the Berkshire Hathaway meeting weekend actually begins after the movie that kicks things off, but just before Buffett calls for the first question from Carol Loomis.
 That’s when Buffett typically spends five or ten minutes reviewing Berkshire’s quarterly earnings and any other unusual company business that might have come up ahead of the meeting.
 Today, that unusual company business happens to be a Berkshire Hathaway shareholder’s proposal calling on Berkshire to pay a dividend.  It had been on the proxy statement voted on by Berkshire’s shareholders, and Buffett wants to discuss the voting.
 Now, we all know a dividend will never happen as long as Warren Buffett is around—after all, why give Berkshire’s cash to shareholders when Warren Buffett can invest it better?—but a shareholder had gotten it on the ballot anyway.
 Buffett first puts up a slide of the proposal, and while it reads kind of snarky, it’s very straightforward:
 “Whereas the corporation has more money than it needs and since the owners unlike Warren are not multi-billionaires, the board shall consider paying a meaningful annual dividend on the shares.”
 Buffett acknowledges the chuckles at the sarcastic language, and then puts up another slide showing how the voting came out.  He is clearly pleased.
 It turns out the Berkshire shareholders sided with Buffett in a landslide, voting down the dividend proposal by an overwhelming forty-five to one margin, despite the fact, as Buffett says proudly, “we employed no proxy solicitation firm” to lobby shareholders to shoot down the idea.
 In fact, Buffett says, the result was “better than I expected.”
 The message from Buffett is clear: shareholder votes matter, and when something comes along a shareholder doesn’t like, they should go ahead and vote their conscience, because boards and their CEOs pay attention.
 He then calls on Fortune magazine Editor Carol Loomis to ask the first question, and almost immediately contradicts that message.
This Very Un-Buffett-Like Behavior
 Carol Loomis kicks off the Q&A, as usual.
 She is a close friend of Buffett and longtime Berkshire investor, but despite their relationship Carol never shies from starting with the question that’s on everybody’s mind, no matter how uncomfortable.
 In this case, it’s about Buffett’s Coke vote.  Or, rather, about Buffett abstaining from the Coke vote.
 The question Carol has chosen (the reporters get thousands of emailed questions prior to the meeting) asks Buffett to justify “this very un-Buffett-like behavior.”
 And Buffett begins his answer.
 He first explains that the option plan wasn’t as egregious as the calculations thrown around by the activist had made it seem, and goes into a typically Buffett-esque, to-the-decimal-point analysis of the numbers, which he clearly knows cold.
 Nevertheless, he says, he did think the plan was “excessive” and tells us he expressed that concern in a meeting with the Coke CEO “right here in Omaha.”
 All in all, however, he simply didn’t want to “go to war with Coca Cola,” and felt abstaining on the vote while making his opposition known to Coke’s CEO “was the most effective way of behaving for Berkshire Hathaway.”
 Charlie Munger backs up his friend, in his usual crisp, dry fashion, saying, “I think you handled the whole situation very well.”
A Person Should Just Pick His Spots
 But many shareholders in the arena clearly don’t agree.
 During previous meetings when Buffett has been similarly challenged (during the David Sokol affair, for example), he had been applauded for staunchly defending his behavior.
But he gets no applause this morning, and further muddies the waters a few questions later when Andrew Ross Sorkin asks a terrific follow-up question on behalf of yet another shareholder upset with Buffett’s behavior.
 Noting that Buffett’s son, Howard—who is expected to become Berkshire’s board chairman should anything happen to Warren—is not only on the board of Coke but voted for the same option plan his father thought was “excessive,” Sorkin’s questioner wants to know how in the world Howard Buffett would “enforce the Berkshire culture,” which is firmly against the kind of corporate self-enrichment the Coke plan represents, when Howard is running Berkshire’s board meetings after Warren is gone?
 This time Buffett launches into an unfortunate—but brutally honest—depiction of boards of directors that leaves some of us wondering if somebody spiked the Cherry Coke Buffett drinks while on stage.
 “The nature of boards,” says Buffett, “is such they’re part business organizations and part social organizations.”   Buffett hammers home his point by noting that directors are “getting paid $200,000-$300,000 a year,” so “believe, me, they are not independent.”
 Now, everybody here either knew that already or suspected as much—but we’ve also had it drilled into our heads by Buffett and Munger in this same venue that boards are not supposed to be anything but representatives of the shareholders who own the company.
 The mood is sour enough after this preamble, but then Buffett drops the bombshell: “As a director,” he confesses, “I voted for comp plans, and some acquisitions, that didn’t make sense.”
 It’s like hearing Derek Jeter casually admit he’d helped inject Alex Rodriguez with steroids.
 Charlie Munger gamely backs up his friend, saying he doesn’t think “a person should just shout disapproval all day long,” and “If we all did that all day long you wouldn’t be able to hear each other.”  That gets some applause and Munger follows it up by saying simply, “I think a person should just pick their spots.”
 Buffett tries to finish off the discussion with a classic Buffettism that is as unsatisfying as it is catchy: “If you keep belching at the dinner table you’ll be eating in the kitchen.”
It’s unlikely anybody in this arena thought they’d ever hear Warren Buffett equate voting against management pocket-stuffing to “belching,” but he’s just done it.
 Coke discussion over, the Q&A session moves on to less jarring topics.
I Don’t Think You Need to Squeeze the Last Nickel Out of a Business
 Thanks to the Q&A format—three reporters and three analysts alternating with shareholders—the focus this year is on the business, not on the personal stuff. As a result, Charlie Munger is doing a lot of the talking, and that’s always a good thing.
 When asked whether Berkshire plans to adopt the ferocious cost-cutting measures of 3G (his Brazilian partners in the Heinz acquisition), for example, Buffett demurs. “I do think 3G does a magnificent job running businesses,” he says, but adds without elaborating, “It’s a different style.”
 Munger, as he often does, puts Buffett’s thinking in plainer terms: “I think a lot of great businesses spill a little because they don’t want to be fanatic, and that’s alright.   I don’t think you need to squeeze the last nickel out of a business.”
That Was The Best Use of our $3 Billion That Day
 As usual, both men travel the same wavelength. (Buffett will later say, “Charlie and I have never had an argument,” and they’ve known each other 55 years.)  When Buffett is asked a wonky question about Berkshire’s “cost of capital,” both men deliciously pick the concept apart.
 Now, “cost of capital” is a very hot topic among public companies. So long as the projected returns on an acquisition or new plant exceed a company’s “cost of capital,” they can tell shareholders, with a straight face, the investment makes sense.  It leads to a lot of bad behavior, and both Buffett and Munger know it.
“I figure our ‘cost of capital’ is what could be produced by our second-best idea,” Buffett says, employing a common-sense approach completely at odds with the highly theoretical, academic notion employed by most companies to justify whatever spending they were going to do anyway. “I’ve heard so many ideas about ‘cost of capital,’” Buffett begins to expand his answer, but Munger cuts him off.
 “I’ve never heard an intelligent one,” Charlie says flatly.
 When the laughter subsides, Buffett resumes the discussion, heavy on reality and light on theory: “We bought a company day before yesterday (an electricity transmission company in Alberta), and we are spending close to $3 billion (on the deal), and we think we will be better off financially, and that was the best use of our $3 billion that day.”
“Cost of capital” dispensed with, the meeting moves on.
Envy Dampeners
 A shareholder wants to know why Berkshire doesn’t disclose more about the salaries paid to its top earners in its securities filings, the way many other companies do.
 It’s an interesting and timely question, coming in the aftermath of the financial crisis, which started a trend towards more complete disclosure by all public companies, especially financial giants like Berkshire.
 Like “cost of capital,” this notion has a nice-sounding label: “transparency.”  
 And like “cost of capital,” Buffett will have none of it, and neither will Munger.
 “There’s a real question whether it’s in the interest of the company,” Buffett says, recalling his days as interim CEO of Salomon Brothers, when disclosure of salaries backfired. “Virtually everybody was disappointed with what they were getting paid … they looked at what everyone else was getting and it drove them crazy.”
 Munger adds, “In a spirit of ‘transparency’ you’re asking for something that wouldn’t be good for shareholders …. I would say that envy is doing the country a lot of harm, and our practices are envy dampeners.”
 “Transparency” unmasked, Buffett is asked by another shareholder to describe Berkshire’s “weak points.”
 And his answer is itself a weak point.
Sweep Accounts and the Alzheimer’s Home
 Buffett avoids the substance of the question altogether (the weak points at Berkshire Hathaway, as Buffett knows, would certainly include the retailing businesses, which are being undermined by the Internet in general and Amazon.com in particular) because he also knows that many of the managers of those businesses are sitting in the arena here today, and he would never want to embarrass them.
 So he gropes for something substantive to say that isn’t hurtful to anyone before latching onto the lack of “sweep accounts” at Berkshire’s many operating companies.  The idea is that Berkshire could make a few extra dollars if it stripped all its companies’ cash out every night, but nobody’s buying it as a “weak point,” so Buffett moves on to one that is more substantive: the fact that he and his business partner are “slow to make management changes,” a well-known trait of theirs, but also not particularly offensive to anyone here in the arena.
 Munger swiftly elaborates on the management issue by telling a brief, Charlie-being-Charlie story about how he and Buffett act so slowly moving out aging CEOs that “you and I took one man from the executive chair to the Alzheimer’s home.” It shocks the audience when they realize he’s not kidding.
 Then, as the uncertain laughter dies down, Munger softens the matter-of-fact harshness of his story by adding, “we made it easy for the man.”
Ignorance Removal
 Jonathan Brandt—one of the three analysts asking questions today—queries Buffett about the declining prospects at See’s Candies, one of the best acquisitions Berkshire ever made, but a business that now seems past its prime.
 Buffett has long lauded See’s profitability as well as its products, keeping a conspicuous box of See’s peanut brittle on the table between himself and Munger during the Q&A session every year.   But—and quite surprisingly, given his reluctance to say anything less than glowing about a Berkshire business in public—he admits the prospects for boxed chocolate makers have diminished over the years.  Even more surprisingly, he offers no prospect it will get better.
 Still, Buffett points out, as he has in the past, See’s “opened my eyes to the power of brands…. In 1972 we bought See’s and in 1988 we bought Coke.”
 Munger concurs. “There’s no question about the fact its main contribution to Berkshire was ignorance removal,” he says. “The secret to Berkshire is we are good at ignorance removal.”
 After some laughter, Munger adds, “The good news is we have a lot of ignorance left to remove.”
 A logical follow-up to the See’s question comes to mind: did Buffett’s habit of taking most of his companies’ cash to invest in other opportunities (see Chapter 36, Decline and Fall of the Sainted Seven, in “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett,” eBooks on Investing 2014) hurt See’s ability to expand over the years?
 Unfortunately, it isn’t asked.
I Don’t Want to be Holier Than Thou
 What is asked is a question about a popular tax-dodge technique currently all the rage among major US corporations.
 Asked by a shareholder if Buffett would consider doing a “tax inversion”—whereby US companies buy foreign companies in low-tax jurisdictions, change their corporate address to the low-tax country and thereby massively cut their cash taxes—Buffett says flatly, “The answer to that is no.”
 Munger concurs. “I think it would be crazy to be as prosperous as Berkshire and get our taxes to zero.”
 When applause starts to ripple through the arena, however, Buffett tamps it down.
 “I don’t want to be holier-than-thou,” he says, noting, “The wind deals we do (Berkshire Hathaway Energy is the biggest wind farm operator in the country), the solar deals we do, those are tax-driven. They wouldn’t make economic sense otherwise.”
 It’s an answer that will drive more than a few editorial opinion writers crazy—Warren Buffett admitting he uses the tax code to cut Berkshire’s tax bill. But if they had been paying attention over the years it wouldn’t have surprised them in the least.
 What might have surprised them, however, is how well Warren and Charlie are doing here today.
Both Lennon and McCartney
 Buffett and Munger haven’t slowed down one bit.
 The meeting started at 9:30 a.m., broke for lunch at noon, resumed a bit after 1 p.m. and will go until just after 3:30 p.m.
 Thanks to the more controlled format, with reporters and analysts sharing questions with shareholders, the number of “What should I do with my life?”-type questions has been cut almost to zero.
 Also, since Buffett didn’t give his usual warning about “no two-part questions” at the start, he and Munger have been getting a number of two-or-three-part questions all along.  So while they will collectively take questions from 62 individuals today, the total number of questions they’ll answer will be closer to 70—nearly 50% more than when it was a shareholders-only Q&A.
 Even better, since so few of them are about life-lessons from Warren Buffett, Charlie Munger will speak up on all but three questions the entire day.
 It’s like getting both Lennon and McCartney, not just one or the other.
 In fact, the Beatles analogy seems exact: Buffett as Paul McCartney: amiable, eager to please, but very likely the smartest guy in the room.  Munger, of course, as pure John Lennon: just as sharp and just as quick, but, best of all, more inclined so say exactly what’s on his mind.
 For example …
We’re Very Peculiar
 On the returns generated by corporate acquisitions: “I think the sum total of all acquisitions done by American industry will be lousy,” says Munger.  “It’s in the nature of corporations to be talked into dumb deals.”
 Berkshire’s acquisition style—buying great businesses at reasonable prices and holding them forever—is, he says, quite different from the norm. 
 “We’re very peculiar.   Luckily a lot of people don’t want to be peculiar in our way.
The Pursuit of the Uneatable by the Unspeakable
 Not surprisingly, Munger disapproves of the current fad of “activist” investors pushing public companies to get their stock price up any way they can.
 “In the culture we live in most people don’t care how the money is earned, they just care about the money …. Reminds me of Oscar Wilde’s definition of fox-hunting: ‘The pursuit of the uneatable by the unspeakable.’”
It’s Slow
 On why Berkshire doesn’t get more “copycats,” Munger says simply, “I think it just looks too hard to do. It’s slow.”
The Behavior on Wall Street is Remarkably Improved
 On whether the U.S. government should bring criminal charges against bankers for their behavior during the financial crisis: “I think the behavior on Wall Street is remarkably improved,” he says, but adds, “Prosecution of individuals does more to stop bad behavior” than prosecuting companies. 
Where Do You Think We’re Vulnerable?
 On the topic of the Internet, Munger says flatly, “I think the Internet is very disruptive. It is changing the world. I think retail is especially going to be hurt.”
 Buffett immediately follows up by asking his partner, “Where do you think we’re most vulnerable?”
 It is a question that almost certainly rings in the ears of the many managers and employees from the Berkshire retail businesses, ranging from Borsheims to Ben Bridge Jeweler to Nebraska Furniture Mart, who are sitting in the arena today, but Munger demurs. “Well, I don’t want to say,” he says carefully.
 “Now you’ve got them all wondering,” Buffett grumbles, to laughter.
If This Is Failure, I Want More Of It
 When the subject of Berkshire’s relative underperformance in 2013 comes up, both men defend the status quo—but Munger makes the case far more forcefully than his partner.
 “In the last two years the book value of Berkshire has gone up $90 billion pre-tax,” Munger says the first time the issue comes up. He lets that sink in before adding, “If this is failure, I want more of it.”
 It brings down the house.
 And when the topic reoccurs during the last question of the day—“Is there a practical way to break up Berkshire Hathaway into four companies?” a shareholder asks—Buffett tries to respond logically while his partner goes for the gut.
 “We would lose value,” Buffett says. “There are large advantages” to Berkshire staying together, he adds without elaborating. “There’s no advantage (to splitting up).  It would be a terrible mistake.”
 Munger doesn’t argue the matter.  He simply concludes the discussion, and ends the afternoon session, by referring to the move in Berkshire’s Class A stock during the last four years from below $100,000 per share to nearly $200,000 as of today’s meeting: “You’re not being deprived when the stock goes from $100 to $200,” he says drily.
The Dynamic Duo
 There was one more difference between this year’s meeting and last, besides the lack of Warren Buffett photos around town and the brouhaha over the Coca Cola vote, and it involved something that’s been on the minds of Berkshire Hathaway shareholders for years.
 Calling Buffett and Munger a “dynamic duo,” a shareholder inquired whether there is “a successor for Charlie?”  
 It’s a question that had never been asked before.
Most 90-Year Old Men in the World Are Gone Soon Enough
 Buffett first responded with a joke about Charlie’s age—“Well, Charlie is my canary in the coal mine,” he said. “Charlie turned 90 and I’m finding it very encouraging how he’s handling middle age.”
 After the laughter died down, Buffett turned serious, describing how other companies such as Coca Cola and Cap Cities ran very successfully when a pair of “complementary” executives shared the load. “It’s a great way to operate,” he said, adding he’d be “very surprised” if his successor didn’t have an alter ego like Charlie. “But so far nobody’s brought up any successor to Charlie.”
 Munger dismissed the issue, and his own importance in the continued success of Berkshire Hathaway, as only he can. “I don’t think the world has much to worry about. Most 90 year-old men in the world are gone soon enough.”
 Sixty-two-year-old men, however, are a different matter. 
The Only Succession for Ajit Would Be Reincarnation
 Asked early in the meeting today who will succeed Ajit Jain, the 62 year-old head of Berkshire Hathaway’s giant reinsurance business, Buffett’s answer was swift and certain.
“The only succession for Ajit would be reincarnation,” he said flatly.
 Buffett’s admiration for Ajit Jain is well known. He wrote, “Ajit’s mind is an idea factory” in this year’s shareholder letter, and has mentioned Jain glowingly several times today—and in ways that made it clear Ajit runs his own show.
 For example, asked about providing insurance for railroads moving crude oil—a high-risk business if ever there was one—Buffett says, “Ajit has offered some very high limits, but they (the railroads) don’t like his price.”
 Moreover, he has depicted Jain not merely as the head of a Berkshire subsidiary, but as a business partner, akin to Charlie Munger.   For example, when asked about the impact of climate change on Berkshire’s operations, Buffett began his answer, “When Ajit and I talk about what we’ll charge for catastrophes …”
 It was a very telling moment, and left few doubts as to who has been tapped to be Berkshire Hathaway’s CEO if and when Warren Buffett can no longer fulfill that role.
 But it was the cartoon during today’s movie that really said it all.
87% Chance of Winning
 The cartoon is an innocuous bit of fun that always kicks off the movie that starts the Berkshire Hathaway annual meeting.
 And today’s cartoon seemed to be nothing special—a standard Berkshire-esque fantasy about a U.S.-Russia face off in the Olympics ice hockey final (the timing was unfortunate, because in the real world Russia has been ripping apart Ukraine)—but its subliminal message was very special.
 The premise is that the U.S. hockey team has been mysteriously taken ill at the last minute, and Buffett recruits his Berkshire friends to take their place—Charlie Munger, board members Bill Gates and Tom Murphy, GEICO’s Tony Nicely, and a cartoon version of “Mrs. See” from the Berkshire-owned candy company—against the Russians, who are drawn as large goons that say—and I am not making this up—“We make minced borsch out of you, ha ha ha.” (I said it was nothing special.)
 However, the coach of the Berkshire team just happens to be Ajit Jain.
 And when the team is in danger of losing, Coach Jain draws up an amusingly complex final play, as you’d expect from a guy who deals in complex reinsurance products.   In Jain’s real voice, he declares it gives the U.S. team “an 87% chance of winning.”
 Of course, the play works: the U.S. scores the winning goal as time expires, and the cartoon Berkshire hockey team gathers to celebrate.  While the credits roll, the Berkshire team tosses two figures in the air: Warren Buffett and Ajit Jain.
 But it’s not just cartoons and kind words that make Ajit Jain the likely successor to Warren Buffett at the helm of Berkshire Hathaway.
 Berkshire is, at its core, an insurance company—and one with an unusual book of business that, in the case of the Lloyds of London asbestos claims for example, covers unknowable obligations stretching out for decades. And Warren Buffett is not going to trust his legacy to just anybody: he wants someone as capable of assessing risk as he is—someone who, as he put it several years ago, can “envision things that have never happened” so that those obligations will be paid, and his legacy is never endangered.
 Which means that, like all the “secrets” in “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett,” the last “secret” we’ll reveal is sitting in plain sight: the most logical CEO successor to Warren Buffett at Berkshire Hathaway—and, since Warren Buffett is a very logical man, the likely choice of the Berkshire board—is Ajit Jain.
 And that should be immensely reassuring to Berkshire Hathaway’s managers and investors for years to come.

Jeff Matthews
Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”
(eBooks on Investing, 2014)    $2.99 Kindle Version at Amazon.com

© 2014 NotMakingThisUp, LLC              
The content contained in this blog represents only the opinions of Mr. Matthews.   Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.  This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever.  Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored.  And if you think Mr. Matthews is kidding about that, he is not.  The content herein is intended solely for the entertainment of the reader, and the author.