Peet's Coffee and Tea Shareholder Meeting, May 21, 2008

I enjoy going to Peet's shareholder meetings because they always give away goodies, and their food and coffee are great (the "Special Offering" coffee, probably the Anniversary Blend, was great--much better than the Pike's Place Starbucks blend). This year, shareholders who attended the meeting in Emeryville, CA received a very sturdy bag made with some kind of recyclable material with "Peetniks" inscribed on it. Inside the bag were a pound of Peet's Coffee, Anniversary Blend, and a 1/4 lb. tin of Peet's Anniversary Breakfast Blend tea (Special Offering, 2008).

Patrick O'Dea, Peet's CEO, provided a lot of information in this 2007 interview:

Interview with O'Dea

This part of the interview was interesting:

How much of Peet's sales come from its stores?

Sixty-seven percent of our sales come from our retail stores. The other 33 percent comes from sales of whole bean coffee and tea through grocery stores, home delivery and foodservice.

There seems to be some strategy shift. Peet's is now trying to move more into grocery stores and based on my understanding, trying to increase its share of coffee bean sales in grocery stores and by direct mail. Apparently, its beans are cheaper when bought in grocery stores vs. its retail stores, probably because Peet's stores offer fresher beans.

Peet's is still true to its roots, when it was just a small company with a few employees. As a result of having many long-time employees, it runs its meetings like a big family event. This year, Gordon Bowker was honored for his contributions. He was one of the founders of Starbucks. As some of you may know, Peet's was the original Starbucks, and back then, Starbucks bought its beans from Alfred Peet. (Peet's first store opened in Berkeley, CA, but Peet's is still incorporated in Washington State, a vestige of the original Starbucks connection.) When Howard Schultz came in and bought the first Starbucks company from the founders, those founders then went on to found Peet's, due to the differences in philosophy at the time about whether consumers would pay 3 dollars for a cup of coffee. Mr. Bowker was ribbed for being the creator of the original Starbucks logo (with the ubiquitous mermaid). He is a soft-spoken man and accepted the award, which was a coffee tryer (looks like a Civil War pistol--it's used to taste coffee when its freshly roasted) mounted on a plaque. He told a story about how Mr. Peet went out of his way to ensure customer satisfaction, even with testy customers.

Here are the meeting's highlights:

The meeting took about two hours. The CEO mentioned that "coffee comes out of roasting like popcorn," and Peet's wanted their customers to be able to smell the coffee (Schultz expressed the same sentiment this year in SBUX's Seattle's meeting). The CEO said that Peet's was a "retailer who happens to sell coffee." Then, he touted the growth of the company. In 2002, Peet's had 1450 employees; now, Peet's has 3750 employees, a sign of how much it has expanded. Peet's emphasized that was upgrading its technology to improve retailing operations. It has an "ERP" system that allows it to coordinate and track not just inventory, but financial information, orders, and other aspects of the retailing operation. CEO O'Dea, after the meeting, even showed me that he had instant access to the Peet's retail managers by pulling out his Blackberry and instantly looking up the particular store I had indicated was not receiving enough vegan chocolate chip cookies.

Peet's touted its stock performance and said it had about 20% annual growth in earnings per share (this was non-GAAP, however), and had done well, especially when compared with the S&P 600 restaurant index. Then, a video was shown about the history of Peet's, broken up into different time periods, from 1966-1983, 1984-1996, etc.

After Mr. Bowker was presented with his plaque, another gentleman, a tall, red-headed male, Doug Welsh, got up to talk about Peet's beans and its efforts to search for the best beans available. This gentleman appeared to be a consummate professional, even more so than the CEO, who is prone to making some off-the-cuff statements (like, "Everything comes to Cincinnati 5 years late," in response to a question about why Peet's wasn't expanding in the Midwest). Mr. Welsh appears to be a vital part of the management team and would be my pick for the next CEO. A video presentation about Peet's in different countries ensued. The presentation focused on activities in Rwanda, Tanzania, and Nicaragua, and how Peet's had helped the local citizens basically become entrepreneurs, and now had exclusive rights to their coffee.

The Q&A session was insightful, but the problem was that no one went around the room with microphones, so it was hard to hear the questions, and the CEO didn't always repeat them.

The first question was about stock options. Peet's is involved in litigation for its stock option grant practices, so this question seemed a bit of a plant. In case you are interested, here is the CEO's salary:

O'Dea Compensation Report

The CEO mentioned that the company was reducing the level of options that the management team would be entitled to, and the goal was not to exceed 2% of the outstanding shares in order to keep it under the 2.8% institutional investor ownership goal. (The CEO's response was confusing, because a quick Yahoo finance search shows that institutional investors own 93.1% of the stock, and insiders own 3.91%.) The CEO said that initially, when new management is hired, option grants are high to attract key talent, but the level of option grants eventually decreases.

There was a mention that the Alameda facility was a gold-certified LEEDs facility, which means that it has achieved the highest level of compliance with environmental best practices.

The CEO said that he was looking forward to the Tanzania Kilimanjaro coffee.

A shareholder asked a question about costs, especially rising fuel costs. The CEO said that fuel wasn't a major cost.

14% of the expenses are related to buying coffee and tea (futures were pricing coffee at 1.38 and tea at 1.70--he didn't elaborate--see Futures Pricing for more)

3% of costs are related to milk.

Peet's buys its coffee 9 to 12 months ahead of time, so it is well-positioned to handle cost increases.

Peet's plans on having a total of 190 stores by the end of 2008. A question was asked about how many they planned on having in 2009. The CEO said he didn't know, but they had 140 stores in California. This is what steered the conversation into Peet's growth strategy. The CEO said that Peet's was focusing on growing its home delivery, office sales, and grocery store business/food services. (For an example of what might be sold to an office, see http://www.associatedcoffee.com/coffee_brands/peets.htm#colibri)

Peet's doesn't plan on television advertising at all. It wants to get the coffee in the consumers' hands and get business through word of mouth and quality. Its marketing campaign is basically a "grass roots" campaign (on the plus side, ad expenses will be low or non-existent). Basically, Peet's feels that its coffee speaks for itself.

I asked a question about whether Peet's planned on expanding internationally. I mentioned that Starbucks was closing some stores in the U.S. and opening stores abroad, and as a result, they might get a head start over Peet's in the huge international market in terms of brand-name recognition and consumer loyalty. Although I did not mention this, having international operations would also serve as a small hedge against inflation if the American dollar continued to plummet. The CEO said that Peet's had no plans to expand internationally.

The best response came from Mr. Doug Welsh about a question relating to Fair Trade coffee. Peet's said that Fair Trade wasn't as reliable anymore as an indicator of fair wages and sustainability. There were even competing certification firms for Fair Trade, implying that the name and Fair Trade "brand" were being diluted and would mean nothing in time. He said that it was better, such as the case of "Las Hermanas," Peet's experience and work in Nicaragua, to "tell the story directly." His response basically indicated that Fair Trade was a fad that would be declining. The real background is that Fair Trade doesn't always mean higher quality beans, and Peet's is interested in actual higher quality, not just a sticker or logo that indicates high quality.

All in all, the meeting was a very enjoyable experience. After the meeting, I spoke with a long time employee (14+ years). He ("Steve," one of the master roasters) was able to enlighten me about why Peet's wanted to go the direct sale route rather than the retail route. First, a new retail Peet's store costs 2 to 3 million dollars to build. A deal with Albertson's obviously doesn't cost Peet's anything. I mentioned that perhaps the profit margins were higher on sales made in the retail store, and he didn't know whether that was true, but he did say that coffee beans are cheaper in the grocery stores. Steve and I got to talking about Starbucks. He said that SBUX makes a profit of about 700K per store, while Peet's makes between 1.2 and 1.8 million dollars per store, twice as much. In addition, Peet's has much more room to grow because it only has about 166 stores, whereas Starbucks has thousands of stores. I mentioned that SBUX would probably become a media-type company focusing on music and other sales (chocolate, etc.) to boost revenue, while Peet's would remain more of a pure coffee operation. We both agreed that the institutional investors would eventually pressure Peet's to expand its retail stores. Because the current CEO, Mr. O'Dea, doesn't seem to favor this kind of quick expansion, there may be a conflict between some investors and the slow but steady growth Peet's currently has in mind. I remain neutral on the shares at the current price (P/E seems a bit high for the slow but steady growth Peet's is contemplating), but recommend that shareholders attend the annual meeting.

I reiterate that Peet's appears to be a great company, and one that is concerned about employee welfare. After my comments about Mr. Doug Welsh and whether he would be staying with Peet's, I received a phone call from Peet's indicating that they hoped Mr. Welsh would be around a long time, and, as he's wont to say, "I'm just getting started." Bravo.

Update on May 23, 2008: I spoke with a Peet's employee who told me that the reason Peet's isn't expanding quickly in terms of its retail stores is because they have only one roasting facility in the Alameda (the Emeryville building was converted into offices). Each roasting facility also requires a "master roaster" to supervise production and roasting of the beans, and currently, she knew of only one master roaster, "Steve," the employee I spoke with after the annual meeting. It is difficult to find and hire master roasters because they require at least 10 years of experience.

She reiterated Peet's main focus on quality, saying that Peet's doesn't want to make larger batches of beans because that would reduce quality (she mentioned Starbucks and how they may have started mixing beans to keep up their supply). That "small batch" strategy makes sense, because in order to preserve quality, you cannot ship more coffee beans cross-country without an extremely efficient shipping line and several major production facilities, and with only one roasting facility, Peet's doesn't have the infrastructure yet to preserve quality and ship beans to too many stores nationally. Therefore, its slow growth strategy seems to revolve around its commitment to quality, i.e. making sure the roasting facility is set up to produce just the amount of beans they currently need and not to increase production until another roasting facility is created. For now, because so many of Peet's stores exist in California (140 out of the planned 190), having one roasting facility is acceptable. If, however, Peet's wants to serve NY and other Eastern states, it will probably have to set up a roasting facility in Ohio, or another place where land is cheap, and use that facility to ship beans to the East Coast.

It is clear that Peet's must expand to the East Coast, because its stores are already present throughout California's high income cities, and in order not to cannibalize its own California sales, it needs to move to other areas where the average resident makes at least 65,000 dollars per year. Outside of California, such areas are present primarily on the East Coast. Thus, Peet's has to expand outside of California. That necessity of expanding to the East Coast makes its business strategy of focusing primarily on grocery store alliances and direct sales rather than more store openings curious. If Peet's wants to ship to grocery stores all over the U.S. and preserve quality, it needs to open another roasting facility near the East Coast anyway. Why not, then, pursue a strategy of opening more stores on the East Coast as well as targeting grocery stores? It seems that the two go hand-in-hand, especially if Peet's doesn't plan on any major advertising.

There is also another issue: because so many East Coast residents use public transportation, they tend to shop at corner markets rather than huge chain supermarkets. Peet's strategy may fail if it tries to target only major grocery stores on the East Coast. Perhaps Peet's has not focused on the East Coast because land is so scarce, and it would need to spend quite a bit of money to open a roasting facility. But such concerns could be alleviated by opening a facility near the East Coast, perhaps near Chicago (Northbrook, IL?), and/or Cleveland (cheaper land, high college student population, which has high disposable income). This is one reason the CEO's comment about Cincinnati seemed ill-advised--why aggravate a huge potential clientele base in the Midwest by casting a large city there in a less-than-complimentary light? In any case, it appears that Peet's may be slowing growth unnecessarily by not pursuing all of its options in terms of creating retail stores as well as alliances with local grocery chains. Peet's curious business strategy of not aggressively pursuing more store openings is why I am currently neutral on the stock, as well as the fact that many American consumers are heavily in debt and may have less disposable income in 2009 than they did in 2007 and 2008. But make no mistake--Peet's coffee is still the best because of its emphasis on quality.

FYI: Peet's Coffee Earnings Call Transcript

Netflix, Inc. Shareholder Meeting, May 21, 2008

Netflix (NFLX) had one of the shortest and strangest shareholder meetings I've ever been to. I am now realizing the time and day a company sets its meeting is important in analyzing whether they even want people to show up. Netflix had its shareholder meeting on a day other than Friday; in addition, the meeting was held at 3:00PM, too late after lunch, and too early before getting off work for most people to attend. It looked like less than 10 non-employees appeared at the meeting. While short interest in Netflix is quite high, the stock has done very well compared to the rest of the market. You would think that Netflix would want to show off its comparative stock performance. You'd be wrong. There was no presentation whatsoever. Only the Netflix logo appeared in the background of what appeared to be an auditorium. The food--well, there wasn't any real food. Some sodas and cookies were on a table with napkins. Take all this together, and you've got a PR campaign opportunity missed for what is basically a media company.

The meeting was in Los Gatos, CA, NFLX's HQ. This is not a distribution center, so don't bring your DVDs to the building and expect them to take it. The CEO is Reed Hastings, and he went up to the podium, said that Netflix was a company that offered media content online and through a DVD subscription service. After that short statement, he immediately launched into the Q&A session.

One person asked how Netflix intended to grow, given that all the people she knew already had Netflix. Mr. Hastings replied that in the Bay Area, they had good penetration in the market. 20% of the people in the Bay Area were signed up already. However, in other cities, such as Chicago and Boston, market penetration and brand recognition were still not at high levels. Therefore, there was plenty of room to grow.

The CEO pointed out that NFLX had won a customer satisfaction award.

Another person asked how many distribution centers Netflix had, and their location. Mr. Hastings replied that they had 50 centers located in about the 50 largest cities in the U.S., covering 95% of their current subscribers.

The CEO pointed out that although the company has been around for about a decade, it named itself Netflix, not "DVD-by-Mail" because it knew that eventually, the real market would be online. Nevertheless, the DVD format is still very profitable for companies, who aren't yet completely on board with the online streaming media format. (The underlying current, as I interpreted it, was that media companies make so much money on DVDs that they have no incentive to change their business model.) As a result, Mr. Hastings said that the DVD market should remain in place and be profitable for the next 10 to 20 years. (This would be good news for Toshiba and its Blu-ray format; however, the CEO never mentioned Blu-ray at all.)

NFLX has 100,000 movie titles. One interesting question was about how Netflix would adapt to globalization in an age where anyone could relocate to a lower-cost locale and set up a competing company. This dove-tailed with a later question about whether Netflix had considered selling its service to other countries' citizens because of the scalability of delivering online content. The CEO said that to use each film, each country has to provide you with authorization and rights to use it; in other words, it's a "country by country" analysis, and NFLX was planning on staying in the U.S.

I asked two questions. One, what did Netflix think about the potential merger between Circuit City and Blockbuster, and how did it plan on responding to it? This caught the CEO somewhat off guard, and he said that I knew as much as he did about it, and that when and if it happened, he would take a look at it. My second question was what the company planned on doing with captions as it moved to more online delivery (most online delivery lacks captions, and on many older films, captions are non-existent, even on DVD--if someone is hearing impaired, they wouldn't be able to really enjoy the online delivery service without captions). The CEO replied that the caption was basically another file that had to be incorporated into the online delivery, but that the media companies hadn't yet focused on delivering that file. He expected that the media companies would eventually provide such files for online delivery, but given his earlier statement about media companies being happy with the status quo of DVDs, I'm not sure online content delivery will be accessible to older and/or hearing impaired persons anytime soon.

Almost right before the shareholder meeting, Netflix received publicity for its set-top box player, which allows its subscribers stream videos from the NFLX website into their TVs. This was a device developed with Roku, another company that was apparently founded by some NFLX ex-employees. 10,000 films and TV episodes will be offered for this service at this time. But NFLX may lose money the more people use its box and online service because it probably has to pay a fee or a higher fee to the media companies the more views its online films receive. With a DVD, once NFLX buys it, it belongs to NFLX and there's not much--at least under current laws--that the media companies can do to prevent NFLX from offering it to others. These would be good questions to ask at next year's meeting: Isn't it less profitable for NFLX to move its viewers into its online services? How is the fee structure set up between NFLX and the copyright owner of a film in terms of how the copyright owner gets paid for online delivery? Is it a one-time fee?

After the meeting, the CEO looked very uncomfortable talking to the remaining shareholders but humored us for a while. His main comments related to piracy, and how international expansion would be difficult because of all the piracy outside of the U.S. (However, a shareholder mentioned that online delivery was harder to steal because encryption could be more complex--you can't download an encrypted movie file as easily as you can copy a DVD--and that the encryption could have several layers that were constantly changing.) Another question was how NFLX was going to work with the X-Box and Microsoft. The CEO was very vague on that response. Once he was out of the auditorium, he practically bolted away, even cutting someone off in mid-sentence. I don't mean to say that Mr. Hastings is abusive or mean-spirited. He actually appears quite the opposite, i.e. he appears to be a good-humored, good-natured person, and went out of his way to make an older shareholder who wasn't a subscriber and who didn't quite understand the business feel comfortable.

All in all, a very strange experience. I got to thinking perhaps this company was going to be bought out and needed to keep mum. But given the recent alliance with Roku, a smaller company, and the level of short interest, that appears to be less of a sure thing. Still, a company like Netflix will definitely be one to watch, if only because they appear focused on their business--so focused, in fact, that they don't seem to want to have any shareholders show up and see what they're up to, at least not in person.

Update on May 25, 2008: I read the company's 10K. Here are some interesting highlights:

1. Netflix says it is calculating the value of options under a "lattice-binomial model" rather than the more popular Black-Scholes model. I have no idea what this means, but it's definitely interesting--is NFLX trying to hide something, or does it have cutting-edge economists on its staff?

2. From 2006 to 2007, Netflix grew from 5,083,000 subscribers to 6,718,000 subscribers.

3. Netflix settled some litigation with Blockbuster and received 7 million dollars. I would have liked to see more about the content of that litigation, but it's settled, and so the parties probably have to stay mum.

4. See page 12 of the 10K for some information on the online delivery payment format. "Our ability to provide our instant-watching feature...depends on studios licensing us content specifically for Internet delivery...Unlike DVD, Internet delivered content is not subject to the First Sale Doctrine [where you can do whatever you like with a DVD once you buy one of them]. As such we are completely dependent on the studios providing us licenses in order to access and distribute Internet delivered content. In addition, the studios have great flexibility in licensing content. They may elect to license content exclusively to a particular provider...For example, HBO licenses content from studios like Warner Bros., and the license provides HBO with the exclusive right to such content against other subscription services, including Netflix."

It looks more and more like Netflix has to be bought out by a major producer of content to move towards its goal of being primarily an Internet delivery company.

Update on May 26, 2008: looks like Netflix's meeting wasn't always so brief. See

http://www.hackingnetflix.com/2006/05/netflix_annual__1.html

China and Pollution

My neighbor, who is retired, just got back from a trip across China. He enjoyed the Forbidden City (Beijing) and the terracotta warriors in Xian. His major complaint was the pollution in China. He indicated that the sky was basically gray everywhere he went, and the farther west he went, the sky didn't get better--he just ran into sandstorms (China has deserts like many other countries). Many of the tourists with him started wearing mouth-masks and taking cough drops because they were coughing due to the pollution. As China advances, it will have to incorporate good environmental policies to continue sustainable growth. Companies, such as Cypress Semiconductor (CY), who are already wise to the opportunities in China, may be able to keep growing by investing in creating sustainable energy rather than older semiconductor technology. By some measures, China is already doing this; apparently, Shanghai's goal is to be completely electric in terms of vehicles by a certain date.

One-Liner

Mike LaSalle, the SF Chronicle's movie critic, had this great line in his review of "Before the Rains":

The leading character "is excellent as a professional man, no worse than most men, but one embodying the moral carelessness inherent in the blithe assumption of superiority."

An astounding sentence--it tells you everything you need to know about the character.

MGM Mirage Shareholder Mtg, May 13, 2008 (and "Star Trek: The Experience" Review)

I recently went to Las Vegas to attend the MGM Mirage annual meeting, which took place at the Luxor. The food spread was fabulous, as you might expect. There were several different kinds of jam, honey, pastries, and fruit juice, in addition to the usual coffee. Kirk Kerkorian was in the audience, and it was fun seeing his cameo appearance on the two large screens used to broadcast the speakers at the podium. The background on the stage used changing colors to highlight the theme this year, "Vision." (The full theme was listed in the annual report: "Vision with action can change the world." -- Futurist Joel Barker)

MGM opened by presenting how well they had done last year in terms of revenue. Of course, the stock was down about 40% this year, so the presentation, while entirely accurate in terms of breaking new records, seemed more historical than future-seeking. The CEO, J. Terrence Lanni, then made his own presentation and answered questions. He emphasized the new City Center project, which looks like a model city, combining retail, housing, and a resort, all in one location on the Strip (http://www.citycenter.com). MGM apparently owns more real estate on the Strip than any other casino operator, and is making good use of it. When asked a question about congestion, CEO Lanni said that he agreed that the project was contributing to the "Manhattanization" of Vegas, but there was no other option because of the limited land available for development near the Strip. He also said that residents should be thankful, because it was projects like these that allowed them not to pay any state income tax.

The presentation also mentioned the DubaiWorld alliance, where DubaiWorld, now a 9% owner, could eventually become a 20% owner. The CEO welcomed the investment and said he looked forward to expanding in Dubai and Abu Dhabi, saying that both countries had substantial experience in attracting tourism and building exquisite resorts. I had welcomed the international diversification of MGM's portfolio, but I had not considered the additional advantage of partnering with Dubai, which does have excellent experience in building luxury properties.

Some mention of an alliance with an Indian reservation in Detroit was mentioned, where MGM would lend its name and expertise to the resort in exchange for revenue-sharing. Another casino was also scheduled to open in Atlantic City, increasing MGM's geographic reach.

The alliance with the Detroit casino was part of an interesting revenue model called "capital-lite." Basically, MGM is willing to license its name to other casinos to give them credibility in exchange for revenue. It appears that such a business model will generate significant cash while involving minimal investment; however, in the long term, if these casinos do not do well or reduce quality, MGM's image may suffer.

The first "question" was from a government official from Detroit, thanking MGM for coming into their city and saying that they had a history of making the cities they entered better (a not-so-subtle request for more charitable donations for Detroit to ensure MGM's status as a cooperative, good neighbor). Some other questions dealt with personal issues, such as someone who was injured over a decade ago at the Excalibur property. The CEO said he couldn't take credit or detriment for whatever happened, because the event occurred before MGM bought out the property, but he was sorry for what happened. It was a very deft answer. Another person bemoaned the high prices for certain services, such as internet access at hotels. The CEO answered this question deftly also, asking whether the speaker had escalated his concerns to a manager at the time (the speaker said he had not). Someone else, apparently not happy with the complaints, got up and said that he had invested in MGM many years ago with Kirk Kerkorian's group, and apparently bought MGM bonds in the 80's and had done very well and encouraged people to stay in the stock for the long term.

That was sort of the theme of the day--that although the economy wasn't doing well, and the situation would be challenging, in the long run, MGM was positioned well, and much better positioned than its main competitors, the Las Vegas Sands (LVS) and the Wynn. Those two stocks were down more than MGM's stock year to date, and apparently, the newest LVS project, the Palazzo, wasn't doing as well as expected. There was some mention of how the federal government and California were taking away certain funds, thereby increasing the cost of building a highway directly from Southern California (Orange County?) to Las Vegas. The CEO mentioned the possible 20 billion dollar deficit was causing the California Governor to dip into other funds to balance the budget, thereby impacting transportation projects.

I asked two questions. One, which casinos brought in the most revenue and profit, and which brought in the least? The CEO mentioned that in terms of both revenue and profit, the top casinos were Bellagio, Mandalay Bay, and Mirage. I wasn't expecting the usual players to be on both lists, and I was hoping that some international resort, like the MGM Macau, would also be among the top producers, but it does make sense that the more established casinos would be the major revenue and profit generators. The CEO facetiously asked if he got a prize for answering correctly, but forgot to answer the question about which were the worst revenue and profit generators.

I also asked the last question, which basically went like this: "I feel there's a missing gap here today. You keep mentioning that there's going to be a recession, but you're spending money and you're not cutting back on expansion. In a recession, you make money by either cutting expenses or increasing prices, and you haven't said anything concrete that makes it sound like you're going to do either one. Some of the people who asked questions here today sounded like nudniks, but perhaps the one gentleman had a point about certain prices, especially internet use prices, being too high. Maybe MGM should reduce certain prices to attract more casual and mid-week visitors. As it stands, you're basically telegraphing that you're going to lose money because you're expanding and spending money while entering a recession."

The CEO responded by saying that the board had gone though several recessions [a dig at my younger age] and had done well eventually after each one. He said that lowering prices wouldn't work, because it would be like the failed strategy that gas stations took in the old days, when one station would lower prices by a penny, causing the competitor across the street to lower his prices, leading everyone to lose money. [This sounded like an anti-trust issue, and it concerns me generally when CEOs say they won't cut prices in any circumstance as a matter of policy.] He ended on a high note saying that MGM had made money in all kinds of economic environments, that its stock price would increase in the long term, that its stock price was too low right now, and he hoped that the investors would stick with MGM, and MGM would stick with its investors. His response received enthusiastic clapping from the audience, and the meeting was done.

I prefer CEOs that are humble (see John Deere's CEO, Robert Lane) and not so much "showman-y," but I am sure Mr. Lanni's colleagues consider him to be charismatic. In addition, Lanni was a former CFO, so he obviously has substance. Overall, I believe MGM will not be able to replicate its record in 2007 and will make less money in the short term, but I will watch its stock price carefully, and if it continues to plummet, at some point, it should make a good value buy.

For those of you who are interested in my Las Vegas accommodations, I stayed at the Las Vegas Hilton, which is different than the Hilton Grand Vacations Club (though both are near each other). The Hilton Vacations Club is on the Strip, though far from the main drag, and is the more traditional Hilton hotel. The LV Hilton is located behind the Rivieria Hotel and takes some physical effort to get there. When deciding where to stay, you should probably use the Hilton website (www.hilton.com) rather than the LV Hilton website (http://www.lvhilton.com). While you can still get Hilton points from either hotel, the LV Hilton is owned in part by a different company.

The LV Hilton hosts "Star Trek: The Experience." If you are staying at the hotel, you get a discount on an all-day pass (at least when I was there). The "Experience" consists of three parts--first is the open restaurant, Quark's Bar and Restaurant; second is the Borg Invasion; and third is the Klingon Encounter.

Quark's Restaurant looks just like the Deep Space Nine restaurant. If you are lucky, you will see an actual Ferengi come by and chat you up, and you can buy the rules of the Ferengi next door at the Star Trek store. When I went to a female Vulcan to ask a question about opening and closing times, she greeted me by saying, "Yes, human?" I started cracking up, but she kept a straight face. All the actors in the events are well-trained. That professionalism alone did it for me, and made me a fan of the "Experience."

The Borg Invasion is basically an invite into a genetic study that goes awry when the ship is attacked by the Borg. Several Borg entities, including the Queen, make an appearance, but I won't spoil it for anyone by saying more. This event is like Michael Jackson's "Captain EO" and Great America's "Days of Thunder," where the show revolves around 3-D effects (in the Borg event, it's actually "4D") and you, as the audience, get to participate in what is occurring.

I preferred the Klingon Encounter, because it is more action-oriented. It involves a roller-coaster type ride and really makes you feel like you are under attack. I enjoyed hearing Captain Picard's voice and actually seeing the interior of the Enterprise. If you can't go to both events, go to the Klingon Encounter, unless you are a bigger fan of Deep Space Nine and the doctor on that show.

There is also a "Behind the Scenes" tour, which I was unable to attend. Two people in line ahead of me went and raved about it. They also received a certificate of attendance, which was high-quality and something a fan would probably frame. Overall, I had a good time in Las Vegas and would recommend a trip there to anyone who is willing and able to walk long distances--the way the Vegas Strip is set up, you have to walk quite a bit to get from attraction to attraction.

© Matthew Rafat (2007)

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.

Was Plato a Libertarian?

"Good people do not need laws to tell them to act responsibly, while bad people will find a way around the laws." -- Plato (427 - 347 B.C.)

In an unrelated note, the DJIA closed at almost 13,000 today. I already sold most of my individual stock holdings last month, but today I sold most of my mutual funds also. I now hold 30% of my retirement portfolio in various ETFs, international bond funds, and preferred shares, and 70% in money market funds. With my non-retirement funds, I have about 90% of my monies in money market funds. I just don't see a good investing horizon with 125 dollar a barrel oil (predicted to go to 200 dollars by Goldman Sachs); a stronger dollar, which will reduce earnings of multinationals, who haven't adjusted earnings guidance downward yet; a possible recession; no Medicare solution in sight; a 12 to 20 billion dollar deficit projected in California, one of the world's largest economies; a possible Democratic Congress and Democratic presidency, which I may support, but which will lead to a higher capital gains tax; and the tapering off of the effects of the Fed's actions.

Given these facts, only those with opaque rose-tinted glasses would be optimistic about the stock market over the next year and a half. But I hope I am wrong.