Governmental Isolationism amid Corporate Outreach: a Post-Political World?

Warren Buffett's Berkshire Hathaway Inc. held its annual meeting today. For all the talk of frosty relations between China and USA, the American billionaire's longest ancillary presentations were China-related: "U.S.-China forum" and "U.S.-China Investor Forum." China-based BYD and Oglivy Global China also made appearances, with Oglivy indicating "rule of law" and "capital markets" were the major reasons USA businesses continued to succeed. 

Capital being mobile and American lawyers being no pillars of honesty or efficiency, one wonders if Chinese executives have already co-opted the best elements of America's corporate playbook. After all, it was China, not USA, that most recently issued an antitrust ruling against one its largest technology companies, and China that received more capital inflows than USA during COVID19 because of its deft (and draconian) handling of the pandemic. 

What was China's reaction to receiving "hot money" after its world-leading post-pandemic recovery? It increased its funds' limits on overseas investments, essentially transferring "paper" inflation risk to the United States and the EU. (If it sounds like Communist Chinese regulators are one step ahead of capitalist Americans, it may be because China has studied Hong Kong and Singapore.) 

Twenty years after September 11, 2001, the evidence is clear and convincing: given the size and influence of the informal economy, America's single-minded focus on terrorism guaranteed American isolationism and thus China's rise. More specifically, when American regulators demanded full compliance with financial regulations designed to catch criminals, capital reaction was swift: capital, being mobile, left to more neutral, business-friendly locations. In seeking status as the world's indispensable currency, the USD failed to acknowledge a conflict: it required legal monogamy and obedience from its partners at the same time it actively played the field. Cheating was inevitable. 

Consider sanctions: they work only if the party being blocked needs something from the sanctioning body. In other words, sanctions fail in a multi-polar world where parties can obtain goods and services from multiple sources at comparable prices. Where such goods and services are available at lower prices than sanction-happy competitors, the result is foretold: China's economic rise from 2001 to 2021 and beyond. Similar to America's gun laws, long-arm statutes pursuing international enforcement have produced not compliance but more creative sellers, leaving the already law-abiding as the only persons affected. In this context, USA's extrajudicial actions, such as arresting a Huawei executive (via Canada), make sense, as does the rise of non-traditional banking such as cryptocurrency. 

"Extrajudicial" is exactly what it looks like: outside the law. When lawyers fail to create workable alternatives to international competitors, whether formal or informal, they create disrespect for their country's laws while increasing opponents' opportunities. As of today, the effect is both domestic and international: after at least sixty years of failure, many American local governments are no longer interested in following federal policies on drugs or sex unless paid handsomely in federal grants. 

A geographically-isolated democracy in which lawyers and politicians cannot prove their legal model is ideal creates a vacuum that will be filled by multinational corporations, international mafia, and one-party governments. Why one-party governments? Because a world lacking idealistic, moral and wise lawyers favors the executive branch and thus non-democratic political systems. China's most significant 21st century contribution may not be replacing the United States but establishing a "post-political" world. Do we really want the most accessible cultural values to be determined by multinational banks, behemoth investors, and centralized governments? As long as more people are likelier to listen to Buffett than Biden, we'll find out. 

© Matthew Rafat (May 2021) 

"The Chinese government will allow businesses to flourish... [after studying Singapore] they changed Communism, and now we have Communism with Chinese characteristics." -- Charlie Munger (2021) 

Berkshire Shares to Split 50 to 1?

According to this article, Berkshire Hathaway shares might split, making them more accessible to the general public. Shareholders still have to approve the stock split, and the final vote tally might be close. Buffett started giving away his shares to the Bill and Melinda Gates Foundation, so it's unclear if any single person or group controls the outcome of the vote.

I bought my BRK.B shares so I could go to the annual meeting in Omaha, Nebraska. If shareholders approve the split, more people may attend the annual meeting. I'm not sure that's a great idea--when I attended in 2007, the meeting was extremely crowded. At the same time, Buffett is coming along in age, so perhaps he wants to give more people the chance to come see him.

Berkshire Hathaway's 2008 Annual Letter

Every year, Warren Buffett issues a fun, easy-to-read letter to his shareholders. Here are this year's highlights:

Cash is King: As the year progressed, a series of life-threatening problems within many of the world’s great financial institutions was unveiled. This led to a dysfunctional credit market that in important respects soon turned non-functional. The watchword throughout the country became the creed I saw on restaurant walls when I was young: “In God we trust; all others pay cash.”

Government will get bigger without a firm hand: Moreover, major industries have become dependent on Federal assistance, and they will be followed by cities and states bearing mind-boggling requests. Weaning these entities from the public teat will be a political challenge. They won’t leave willingly.

The government's interference in credit markets is causing some disruptions: Though Berkshire’s credit is pristine – we are one of only seven AAA corporations in the country – our cost of borrowing is now far higher than competitors with shaky balance sheets but government backing. At the moment, it is much better to be a financial cripple with a government guarantee than a Gibraltar without one.

On bond insurers: By yearend 2007, the half dozen or so companies that had been the major players in this business had all fallen into big trouble. The cause of their problems was captured long ago by Mae West: “I was Snow White, but I drifted.” [Mae West, of course, was the rebel Hollywood sex symbol known for her wit.]

Public pensions are still a major concern: Local governments are going to face far tougher fiscal problems in the future than they have to date. The pension liabilities I talked about in last year’s report will be a huge contributor to these woes. Many cities and states were surely horrified when they inspected the status of their funding at yearend 2008. The gap between assets and a realistic actuarial valuation of present liabilities is simply staggering.

For more on this important topic, see my previous posts, here, here, here, here, and here.

On buying ConocoPhillips (COP) and the future of oil prices: I in no way anticipated the dramatic fall in energy prices that occurred in the last half of the year. I still believe the odds are good that oil sells far higher in the future than the current $40-$50 price. [Looks like investors who want to get a better deal than Mr. Buffett may want to consider buying COP.]

Just darn good writing and advice: Beware the investment activity that produces applause; the great moves are usually greeted by yawns.

On derivative contracts: Receivables and payables by the billions become concentrated in the hands of a few large dealers who are apt to be highly-leveraged in other ways as well. Participants seeking to dodge troubles face the same problem as someone seeking to avoid venereal disease: It’s not just whom you sleep with, but also whom they are sleeping with.

Questions at this year's annual meeting will be handled differently--various journalists will sort through the questions and pick which ones to ask: The journalists and their e-mail addresses are: Carol Loomis, of Fortune, who may be emailed at cloomis@fortunemail.com; Becky Quick, of CNBC, at BerkshireQuestions@cnbc.com, and Andrew Ross Sorkin, of The New York Times, at arsorkin@nytimes.com. From the questions submitted, each journalist will choose the dozen or so he or she decides are the most interesting and important. (In your e-mail, let the journalist know if you would like your name mentioned if your question is selected.)

Disclosure: I am bullish on ConocoPhillips (COP).

Fun Shareholder Meetings

A friend once asked me about the most fun shareholder meetings to attend. Here is my list:

1. Apple, Inc. (AAPL) To believe how charismatic Steve Jobs is, you have to see him in person. Long-time shareholders always attend, and the techies ask intelligent questions and swap user tips with other shareholders. Plus, the Board is filled with top-level people, including recently, Al Gore.

2. Berkshire Hathaway (BRK-A, BRK-B). You can buy the "B" shares to get into this meeting, which were selling at around $4,390 (much less than the "A" shares, which cost $132,350 for one share as of June 2, 2008). Berkshire Hathaway is fun because of the Q&A session with Warren Buffett and Charlie Munger; the live entertainment (Jimmy Buffett and Susan Lucci have appeared recently); and the annual video, which once showed Warren beating LeBron James in a one-on-one game (I still want to buy Warren's "1/8" number jersey, but they don't offer it anywhere!). Mr. Munger and Mr. Buffett work together so well, it's almost like seeing an elite, educational Laurel and Hardy show. In addition, there's lots of shopping to be done. I bought some great Fruit of the Loom underwear and some See's Candies at a discount.

Some caveats: the meeting's value depends a bit on the questions asked--if the questions asked are terrible, the meeting won't be as great. Also, this event has gotten so huge that it feels overcrowded--about 31,000 people attended this year. For example, I had to wait in line for about 45 minutes to partake in a food buffet. In addition, some of the events are spread out around Omaha, like Furniture Mart and Gorat's Steakhouse, so you need a car and GPS to be able to experience all the events.

3. Starbucks (SBUX). Starbucks' meeting is similar to Berkshire Hathaway's in the sense that a surprise guest comes every year to perform. In 2008, k.d. lang sang three beautiful songs, an experience worth attending just for her. Obviously, coffee is offered, but the meeting itself is the reason to attend. Starbucks usually unveils new goals and new items to the shareholders first, and I knew more about future plans than non-Seattle employees did for about a month after the meeting. A goody-bag is offered to shareholders on the way out. One downside--a huge line awaits all shareholders wanting to attend, so get there early and hope it doesn't rain!

4. Peet's (PEET). Peet's meeting is fun for several reasons. First, it is still a relatively small company, so the meetings feel like a family event. Second, the food and coffee are delicious. Third, sometimes the meeting is held at a roasting facility, which allows shareholders to get a sense of how the business is run.

5. Electronic Arts (ERTS). This one is a kick. If you want to see the environment in which video game designers work, check out this shareholder meeting. ERTS has an arcade, air hockey, foosball, and several other games, all for free. I spent an hour (okay, three) reliving my high school days in the arcade playing some John Madden football. Some other online games are apparently offered on the computers near the arcade, but I used that to check up on a work matter (I had to review a tentative court ruling the day of the meeting). ERTS has a Starbucks inside its company. You never have to leave the company, basically. It's a bit like Yahoo's set-up, where it's a little city within a company. The presentation also includes a preview of upcoming games on a big screen. And the best part of of it all? ERTS gives out a free video game to its attendees every year. Booyah!

6. Google (GOOG) is a new company, but it knows how to take care of shareholders. Food is offered (a friend told me they served filet mignon in 2008), and the founders sit on stools in casual-wear and answer questions in an informal setting.

7. Intuit (INTU). This one I mention only because they have given out valuable free software in the past. If you buy your Quicken software and live locally in Mountain View, CA, you might be better off just buying one share of the company and attending the meeting. The former CEO, Stephen Bennet, was very friendly at the meeting I attended a few years ago--he even replied to an email I sent. (I try to praise and point out responsive CEOs.)

Please add your own favorites in the "comments" section. I am always looking for fun shareholder meetings. I heard McDonald's and Coca-Cola's meetings are great, but I am not traveling across the country on my own dime for a shareholder meeting until I get more information. The big one I've neglected to mention is Walmart's annual meeting--it's supposed to be a big bash, but it's hard to take a few days off to travel to Arkansas and keep up on work.

Curt Hazlett, in a March 28, 2005 article, “Annual Meetings Can Be Valuable Tools for Journalists,” describes one reason I go to shareholder meetings–they offer valuable insight into a company:

http://www.businessjournalism.org/pages/biz/2005/03/
annual_meetings_can_be_valuabl/

Wesco Shareholder Meeting, May 7, 2008

Charlie Munger and myself
Charlie Munger and myself
President Jimmy Carter
If you're a Berkshire Hathaway shareholder, you know about Charlie Munger, the quick-witted lawyer who sits next to Warren Buffett and usually makes a brief comment that encapsulates in five seconds what Warren just took about three minutes explaining. Mr. Munger has his own company, Wesco (WSC), a subsidiary of Berkshire. To attend the meeting, which takes place after the Berkshire Hathaway meeting in Omaha, you can buy individual shares of WSC, or your ownership of Berkshire Hathaway automatically entitles you to admission. After going to the Berkshire meeting in Omaha, many fans, especially money managers, come to Pasadena, CA to hear Charlie speak. I saw so many money managers and dapper suits, I felt out of place with my jeans and more casual wear. The entire meeting, before it starts, really seems like one big networking event.

This year, the event took place at a special tent set up in the Pasadena Convention Center, about 25 minutes from Burbank Airport, the closest airport to Pasadena. Pasadena is a clean, diverse city that hosts the famous Rose Bowl and Rose Parade. I enjoyed walking around the older downtown area, i.e. the Old Pasadena section, which has several independent stores and old churches. While there, I discovered that President Jimmy Carter would be appearing at Vroman's bookstore to sign his new book about his mother. My friend bought a book, which came with two entrance tickets to see President Carter.

The meeting itself lasted about three and a half hours. Refreshments were basic--just coffee, some lemon bars, and some unsavory cookies. Mr. Munger had some interesting quotes, as always, in his version of "Socratic solitaire":

My favorite: "There will be a lot of chicanery in the new world."

We should expect returns of around 4 to 5% annually in the near future.

When talking about the overbuying of homes, which led to the bubble in housing prices, and the subprime mess, Mr. Munger talked about how investment "activities rely on momentum from self-fulfilling prophecies" and blamed greed, envy, and terrible accounting. Munger's fans were delighted when they heard, "Include me out," a favorite Mungerism.

Mr. Munger told a delightful story about keeping the big picture in mind and being willing to buck conventional thought. He talked about a boy in mathematics class who had to answer the question, "How many sheep are left in the pen when the gate is open and one leaves out of the ten?" The entire class told the teacher, "nine." One student, Billy, said, "ten." "Poor Billy," said the teacher, "you just don't understand math, do you?" Billy said, "No teacher, you don't understand sheep." That story got some uproarious laughs from the crowd.

"In accounting, liabilities are 100% good. It's the assets you have to worry about."

"Greenspan overdosed on Ayn Rand."

Those were some of the highlights of the day. Overall, it was fun listening to Munger speak, and I bought his book, Poor Charlies Almanack. Mr. Munger signed it and took a picture with me.

Afterwards, my friend and I went to see President Carter at Vroman's. Secret Service ushered everyone along very quickly, and people who wanted to take pictures could only do so for a few seconds before being told to move on. President Carter looked healthy and vibrant, and it was fun being in the presence of a former U.S. President, even if only very briefly. One tip: you cannot put your hand in your pocket anywhere near the President. I put my hand in my pocket to take out my camera, and was approached by two Secret Service agents almost immediately, who backed off only when they saw the camera.

I was exhausted when I returned to the airport the same day to head back to San Jose, but all in all, it was a pleasant experience, and one I would do again.

Warren Buffett and Berkshire Hathaway's Meeting

My last two posts were about shareholder meetings and heroes. They provide the perfect segue into my hero, Warren Buffet, and my experience at the Berkshire Hathaway meeting in Omaha, Nebraska in 2007. I chose to attend the meeting for several reasons, primarily because I was not sure whether my future schedule would allow me to take several days off, and to a lesser extent, whether Mr. Buffett would still be around in the next few years. Also, I have never been to the Midwest, except for Chicago, so I was looking forward to this trip.

First, if you plan to go to the meeting, plan early. All the hotels were booked almost seven months in advance, and I was lucky to get a great deal on priceline.com for the Comfort Inn at the Zoo. The location is far from some of the events, such as Gorat's and Borsheim's, but I did not rent a car and relied on the kindness of strangers, including a chance meeting with a Reuters reporter, to get me to various places. (He was very friendly, an ex-lawyer, and seemed to lament the fact that Bloomberg had sent several more reporters with more resources.) As almost everyone there was friendly, I had no problem getting around, but I do suggest renting a car if you go. Omaha, NE is spread out because they have such a low population density and lots of open space. As a result of this land affluence, the city planners could afford to build with disregard to future growth, creating sprawl. Taxis are extremely expensive because of limited competition and also the numerous highways they have to enter to get from one place to another. So even though Point A and Point B are literally one mile away from each other, sometimes you have to take two highways to get there. For a city slicker like myself, used to being able to walk anywhere or take public transportation in Singapore, Boston, San Jose, and D.C., it was a shock to see so much land and so much sprawl.

Other than renting a car, my second tip is to bring a raincoat. Spontaneous thunderstorms are not uncommon in Omaha, and its location smack in the middle of the country creates interesting weather. One day, lightning was so bad, closing the blinds at night made no difference in terms of ambiance. (Apparently, you can tell how close a storm is by counting seconds between thunder and lightning, and had I known that at the time, it would have added to the "Friday the 13th" weather atmosphere.) I (mistakenly) brought plenty of warm clothing, but Omaha is humid in May. So bring a light raincoat and some jeans, and you will be all set.

The first day I arrived at Omaha's main airport, I was happy to be there. Numerous people were there from all over the world, and I chatted up people from South Africa to San Francisco. One tip is to take the Hilton Omaha shuttle from the airport because you will be much closer to the city center and your hotel. The Hilton Omaha employees were so nice, they allowed me to take the shuttle from their hotel to my hotel at the Comfort Inn. (The Midwestern kindness is no lie.) If you have a decent-sized budget, the newer Hilton Omaha is the best hotel. It is right next to the Convention Center where the meeting is held, and its shuttles will also take you to various Berkshire events, such as sale day at the Furniture Mart (which is massive and sells much more than just furniture, including cameras, laptops, etc.). Another Hilton is a few blocks away and has a great restaurant that serves wonderful steak. This brings me to the best tip about Omaha. Have steak, more steak, and when you're done, top it off with a porterhouse steak. Gorat's Steakhouse is the most famous restaurant in Omaha due to Mr. Buffett's frequent visits, but the Hilton restaurants serve some mighty fine steak also. The only other place I had better steak was Michael Jordan's Steakhouse at NY's Grand Central station, but that's another story. (Just imagine two college students looking at the menu and trying to decide how to eat and not take out a small loan--and the bathroom had an attendant, which I had never seen before. It was all worth it, by the way.) So again, order the steak.

When I landed in Omaha, NE, I realized that I did not have my pass. Each shareholder is entitled to four passes/tickets. For most shareholder meetings, simply bringing the proxy is sufficient. Not so for this event. Here, you have to send back a small document asking for a pass when you get the proxy in the mail. If you do not do this, you can go the Convention Center the Friday before the meeting and get a pass. (I found this out after almost suffering a heart attack on Thursday, the night before I was to board the plane and saw an unusually colored paper sticking out of the annual report.) Everything worked out, and the staff was very friendly. The key point is that if you are a shareholder, you can bring three guests (at least in 2007).

I am still giddy about the visit, and there is much more to tell, but I will save the stories for another day. I shook Warren Buffett's hand, which was my last goal on my list of things to do before I turned 30. Yup, I am still giddy.