Berkshire Hathaway (2009) Live Blogging Link [UPDATE: LINK NO LONGER WORKS]

I can't believe I didn't see this link before:

http://www.omaha.com/index.php?u_page=1208&u_sid=10622671 [UPDATE: LINK NO LONGER WORKS]

Click on the "replay" button in the middle of the screen, and you'll get a live blogging report from the 2009 Berkshire Hathaway shareholder meeting.

According to the blogger, Charlie Munger made a comment about the subjectivity of bank earnings:

General accounting principles allow banks to show high earnings based on foolish investments. Munger says that kind of accounting should not be allowed.

War and its Consequences

I hate showing pictures like this, but it's important to see what "collateral damage" really means:

http://english.aljazeera.net/news/asia/2009/05/20095672330997508.html

A US led air strike in Afghanistan is believed to have killed as many as 100 civilians, including many women and children.

This is why war should always be the last resort--no matter how careful anyone is, women and children usually end up paying the price for governments' grand schemes.

On a somewhat related note, President Obama is refusing to release pictures of detainee abuse. It is true that the pictures will be used to recruit terrorists and to fuel fire against American troops, but once the information is made public, America can begin to address the causes of the inhumane conduct and prevent them from happening again. Without disclosure, we look hypocritical when we complain about human rights abuses in other countries. We also run the risk of implicitly condoning inhumane conduct and government secrecy. The worst part is that President Obama switched positions on releasing the pictures, which makes it seem as if the evidence of abuse is so terrible, once the President actually saw the pictures, he thought better than to release them.

Pierluigi Oliverio: My Kind of Politician?

San Jose District 6 voters are lucky to have Pierluigi Oliverio as their representative. He has recognized the need to cut spending and talks about the issue in a sensible manner. He has a blog:

http://www.sanjoseinside.com/sji/blog/pierluigioliverio

Update on October 13, 2009: I recently spoke with someone who is familiar with Pierluigi Oliverio. This person indicated that Pierluigi Oliverio said all the right things, but may not necessarily have the respect or consensus on the Council to garner enough support for his proposals. She did, however, praise Sam Liccardo and Chuck Reed.

Update on October 27, 2009: Mr. Oliverio recently voted against government transparency. Sam Liccardo, bless his soul, voted for government transparency. See here for more.

Update on November 10, 2010: perhaps my contact within the City issued a premature judgment about Mr. Oliverio. Mr. Oliverio helped support Measures V and W, which passed with overwhelming support.

Bonus: here is President Obama's ASU commencement speech. An excerpt:

In recent years, in many ways, we've become enamored with our own success - lulled into complacency by our own achievements.

We've become accustomed to the title of "military super-power," forgetting the qualities that earned us that title - not just a build-up of arms, or accumulation of victories, but the Marshall Plan, the Peace Corps, our commitment to working with other nations to pursue the ideals of opportunity, equality and freedom that have made us who we are.

We've become accustomed to our economic dominance in the world, forgetting that it wasn't reckless deals and get-rich-quick schemes that got us there; but hard work and smart ideas -quality products and wise investments. So we started taking shortcuts. We started living on credit, instead of building up savings. We saw businesses focus more on rebranding and repackaging than innovating and developing new ideas and products that improve our lives.

All the while, the rest of the world has grown hungrier and more restless - in constant motion to build and discover - not content with where they are right now, determined to strive for more.

I love President Obama's emphasis on complacency. America has become too complacent--we spend and spend and forget at some point, the bills need to be paid. We used to have the younger generation as our conscience, but we've loaded them with so much educational debt, they've become part of the establishment out of financial necessity. That's a shame. The road ahead will be long and hard, but America has fought through worse battles before and emerged stronger.

Random Thoughts: Tucker Max and Watergate

Random Thoughts:

1. Tucker Max is basically a frat boy version of Hunter Thompson. Am I right or am I right?

2. The song, "Sweet Home Alabama," contains these lyrics, which seem to condone Nixon's Watergate:

In Birmingham they love the governor
Now we all did what we could do
Now Watergate does not bother me
Does your conscience bother you?
Tell the truth

Well, to tell you the truth, it bothers me that my government engaged in campaign fraud, burglary, improper tax audits, and illegal wiretapping. I know the song is supposed to promote its own brand of rebellion, but this just seems to go too far. I can't enjoy this song now that I actually studied the lyrics for the first time. Yet another instance when curiosity killed the song. Sigh.

The Wire: Simon's 2008 Letter

As a fan of HBO's The Wire, I don't know how I missed this. Here is David Simon's 2008 (closing) letter:

http://www.hbo.com/thewire/finaleletter/

We are a culture without the will to seriously examine our own problems. We eschew that which is complex, contradictory or confusing. As a culture, we seek simple solutions. We enjoy being provoked and titillated, but resist the rigorous, painstaking examination of issues that might, in the end, bring us to the point of recognizing our problems, which is the essential first step to solving any of them.

Oh, the agony and the ecstasy of the truth.

Susan Faludi, 9/11, and the Military

I was wondering what Susan Faludi was up to these days. Turns out, she's written a new book, on 9/11. She also has her own website:

http://www.susanfaludi.com/index.html

She currently lives in S.F., so perhaps one day I'll get to meet her. I loved reading Backlash and Stiffed.

Surprisingly, the NY Times trashed her new book, The Terror Dream, which I haven't read. Ms. Faludi's main thesis seems to be that 9/11 caused American culture to revert to the old-fashioned paradigms--men as protectors and women as helpless beings needing male protection. I think Ms. Faludi makes a good point, but my angle would have been that fear became a big business post-9/11, which negatively impacts both genders.

When the culture is in a state of fear, it's easy to finance war and more difficult to speak up for peace. For instance, our deficits require us to cut spending, but the 2010 defense budget will be at least $533 billion--a 4% increase over 2009, and the largest expenditure in the 2010 budget when funding is viewed by department. Advocating defense spending cuts doesn't mean you also have to cut soldiers' salaries. It's possible to give America's armed forces a pay raise and still cut the defense budget substantially.

To put the Dept of Defense's $533 billion budget in perspective, the Dept of Homeland Security will receive $42.7 billion in 2010; the Dept of Treasury gets $13.3 billion; and the Dept of Transportation gets $72.5 billion. More stats can be found here.

At least President Obama got rid of the costly F-22 project, for which he should be lauded. Some other defense items were also cut, including a program called a "transformational satellite" (TSAT). "The Government Accountability Office (GAO) noted that the revised date for the launch of the first satellite was 2019 -- almost four years later than previously scheduled."

Random fact: 227,500 men and women from California serve in the military.

Unconventional Thinking, Congress, and Facebook: the War against the Average American

I love these paragraphs from a recent New Yorker article on basketball (Malcolm Gladwell, May 11, 2009, "How David Beats Goliath"):

This is the second half of the insurgent’s creed. Insurgents work harder than Goliath. But their other advantage is that they will do what is “socially horrifying”—they will challenge the conventions about how battles are supposed to be fought. All the things that distinguish the ideal basketball player are acts of skill and coordination. When the game becomes about effort over ability, it becomes unrecognizable—a shocking mixture of broken plays and flailing limbs and usually competent players panicking and throwing the ball out of bounds. You have to be outside the establishment—a foreigner new to the game or a skinny kid from New York at the end of the bench—to have the audacity to play it that way. George Washington couldn’t do it. His dream, before the war, was to be a British Army officer, finely turned out in a red coat and brass buttons. He found the guerrillas who had served the American Revolution so well to be “an exceeding dirty and nasty people.” He couldn’t fight the establishment, because he was the establishment.

T. E. Lawrence, by contrast, was the farthest thing from a proper British Army officer. He did not graduate with honors from Sandhurst. He was an archeologist by trade, a dreamy poet. He wore sandals and full Bedouin dress when he went to see his military superiors. He spoke Arabic like a native, and handled a camel as if he had been riding one all his life. And David, let’s not forget, was a shepherd. He came at Goliath with a slingshot and staff because those were the tools of his trade. He didn’t know that duels with Philistines were supposed to proceed formally, with the crossing of swords. “When the lion or the bear would come and carry off a sheep from the herd, I would go out after him and strike him down and rescue it from his clutches,” David explained to Saul. He brought a shepherd’s rules to the battlefield.

The price that the outsider pays for being so heedless of custom is, of course, the disapproval of the insider. Why did the Ivy League schools of the nineteen-twenties limit the admission of Jewish immigrants? Because they were the establishment and the Jews were the insurgents, scrambling and pressing and playing by immigrant rules that must have seemed to the Wasp élite of the time to be socially horrifying. “Their accomplishment is well over a hundred per cent of their ability on account of their tremendous energy and ambition,” the dean of Columbia College said of the insurgents from Brooklyn, the Bronx, and the Lower East Side. He wasn’t being complimentary. Goliath does not simply dwarf David. He brings the full force of social convention against him; he has contempt for David.

I am citing this New Yorker piece in-depth because it perfectly summarizes my own mentality ("tremendous energy"). The "outsider" mentality may be one reason few people can tell I'm a lawyer. Like the immigrant basketball coach, I wholeheartedly agree with playing unconventionally to win, and I'd like to think my own outsider status causes me to act differently than 99% of lawyers. Like the New Yorker-profiled basketball team, I fight corporate Goliaths on a more-than-average basis, and I've gained the ire and disapproval of several of the ultimate insiders--judges. Why should you care? Because, as I will show you, America's legal and political systems are tilted in favor of the establishment and against the middle class.

The problem with the author's basketball/war analogies is they don't emphasize an unfortunate third party--referees. In a large athletic conference, in court, or in war, the bigger entities tend to get the benefit of the call (i.e., a favorable appellate court reversal or the ability to escape war crime prosecution) as well as the benefit of being repeat participants. The author mentioned that in one game when the referees didn't like the coach's style, they called fouls against the team at a 4-1 ratio, causing the unconventional team to lose. The same bias sometimes happens in court.

In court, the big firms and companies sometimes get "assists" from the legal system, even if neither side will ever admit it. Part of that is due to the convoluted evidence code and the expense in admitting certain documents, which are much easier to handle for corporations with large litigation budgets. But even removing the evidence code's rigors, bigger firms and companies are repeat players in court, which builds a familiarity with judges, clerks, and other government workers. For example, I had a case where my client had sued a county. The judge's office was in the same building as the lawyers representing the defendant/government. Whom do you think is going to get the benefit of the doubt in that case?

Making matters worse, many judges tend to be former D.A.s or city/county attorneys. Thus, in many modern day governments, workers in the legislative, executive, and judicial branches tend to know each other. Instead of breeding contempt, this familiarity tends to create an implicit "scratch-your-back and I'll scratch yours, and we'll all retire with our government pensions" culture. Such a culture is against the idea of America itself, which was created with three separate, independent branches so that various factions would fight each other if one branch attempted to increase its power. The founders may not have envisioned a situation where all three branches were riding high on government pensions, automatic payroll deductions from government employees via taxpayers, and lobbyist funding, thereby creating fewer incentives to look out for individual constituents. Indeed, when politicians have lobbyist money, who needs actual voters, except on one day every few years?

In short, corruption doesn't have to involve quid pro quo to result in public harm. All that's necessary is to align interests so no one in power wants to rock the boat. If you look at what's happened with gerrymandering--where the Dems and Republicans have carved up easy-to-win voting districts (in the name of racial justice, no less), it's an easy example of incentives causing corruption.

Consider defense spending. The defense budget is massive--easily one of the largest sources of government expenditures, i.e., taxpayer dollars. Many defense projects involve systems that will not be used more than a few times--making them questionable expenditures--or systems that will not be functional until 2017 and beyond, meaning such projects can afford to have further delays until America has a better balance sheet.

The defense contractors realized that they had to align incentives to keep the money coming, so they started building different pieces of their systems in different states, spreading the wealth and guaranteeing Congressional votes. Some of these projects are unnecessary, but no Senator wants to be the one who tells his district Lockheed Martin is taking its business to another state. So who wins? Defense contractors and defense employees. Who loses? The people--who have to pay the bills for these systems, which requires America to print more money, which weakens the American dollar, restricts future flexibility in spending, and/or causes inflation. Thus, taxpayers, our children, and the country suffer while defense contractors and employees run to the bank. It's not corruption per se, but another case of misaligned incentives.

There are numerous instances of these kinds of misaligned incentives, and the legal system is especially rife with them. First, who makes the laws? You think your Senator and his/her staff are in a D.C. office typing up the next draft of legislation? Usually not. Typically, it's the lobbyist who pays money to get the Senator's ear and then who gives the Senator a proposed bill of law. Who can afford lobbyists? Megacorps and large organizations (such as national unions), not Joe the Plumber or Matt the Small Town Lawyer. Can you see the problem of misaligned incentives yet?

Let me make it even more clear. Congresspersons rely on donations for re-election campaigns and happy constituents. These factors tend to favor the status quo and rich people. For instance, whom do you think has the most money to donate to political campaigns? Joe Six-Pack, Big Labor, or Big Corp? If you think Congress spends its days trying to help the little guy, just remember this: politicians still have to get elected, and to get elected, they need the majority and/or money; thus, Congress can't realistically force the majority to give anything substantial to the minority. In other words, as long as Congress makes the laws, the laws will rarely help minorities who lack substantial assets, such as people of color (generally speaking), the average American family, most small business owners, etc.

One example of corporate America's obvious influence over Congress is copyright law. The internet companies managed to get Congress to pass a law (Digital Millennium Copyright Act, or DCMA) protecting them for hosting copyrighted material on their sites. To summarize, YouTube, Google, Yahoo, Craigslist, and other internet companies get a free pass as long as they follow some guidelines. Now, you'd think Congress would try to protect the end user, i.e., the internet user, who tends to vote. Not at all. If you download a copyrighted song or TV snippet on your PC that belongs to Viacom, Viacom can come after you and sue you and receive statutory damages. If it has filed for a copyright, it may ask for its attorneys' fees, even if it hasn't suffered any actual monetary loss (it's hard to prove that companies actually lose money, because many people wouldn't necessarily have bought the song or TV show they've downloaded for free). [See 17 USC 505 for attorneys' fees provision.]

The attorneys' fees provision is especially terrible for the consumer because it creates an incentive to go after the casual internet user, even if this person hasn't caused the company more than de minimus financial loss. It's also unnecessary, because corporate America has plenty of lawyers on call it can afford to pay out of pocket--it doesn't need a fee-shifting statute to protect its rights.
But what about the small town author who writes a book, only to see someone put it online for free? I've thought about this issue, and I can't come up with a reasonable compromise involving attorneys' fees, but I'm still inclined to just remove the attorneys' fees provision. Without such a provision, copyright holders would leave individuals alone and only sue entities or individuals that caused them major damages or that had enough money to pay damages. (If readers can think of a way to allow copyright holders attorneys' fees in a way that doesn't provide an incentive to sue small-time infringers when damages are de minimus, please add your comments.)

In any case, Congress gave corporate America a sweet deal when it came to copyright laws. Why didn't Congress make some effort to protect the average internet user? Well, the people who drafted the DCMA legislation were affiliated with major internet companies. They wrote what the internet companies wanted and helped get it passed. Congress rubber-stamped the proposal and didn't seem to care enough to protect the average American. Copyright is an issue that impacts almost every average voter. If Congress didn't care enough to protect the average American on this issue, what do you think happens when other laws are passed?
Here's another quick example that shows Congress passes laws to help corporations, not consumers. Facebook users, by using Facebook, have to consent to this provision (as of the time of this publication):

"If anyone brings a claim against us related to your actions or your content on Facebook, you will indemnify and hold us harmless from and against all damages, losses, and expenses of any kind (including reasonable legal fees and costs) related to such claim."

In other words, if you post a music video on your wall, and Facebook gets sued because you posted copyrighted material, you have to pay Facebook's legal fees and damages if it loses in court. Facebook has made you, the average American, an insurer for its business. Will Facebook actually utilize this provision against one of its users? Probably not. Still, the lesson remains the same: Congress clearly cares about corporations and their lobbyists, not the average American; otherwise, it would have made such one-sided indemnification provisions illegal, or at least placed a cap on indemnification reimbursement. In the end, people who think they can change society through new laws are naive. Most of the time, a new law just gives a power-hungry lawyer who happens to know the state Governor or legislator the power to interfere in your life.

I will talk more about the legal system another time. For now, I'll just say that if more non-lawyers knew how the legal system actually worked, more Americans would be libertarians. You want to make America a better place? Start with the tax code. The tax code may be a set of laws, but it's really a system of financial incentives that happens to be codified. Right now, the tax code favors big corporations, nonprofits, large banks, and housing speculation. It doesn't help small businesses much. It doesn't help families enough. That's a shame, but at least it shows who Congress is looking out for these days--mortgage lenders, developers, insurance companies, and big corporations. Where's the anger?

Sports Time: Chauncey Billups

Just a great, great article on Billups, by Tom Friend:

http://sports.espn.go.com/espn/eticket/story?page=090511/billups

Fantastic reporting. I always liked Billups. Now that I know his background, I like him even more. years ago, I saw Billups and Richard "Rip" Hamilton doing a "Love Connection" celebrity show for charity. Billups and Rip had such a good relationship, it was as if they were real-life brothers.

What's even better about the Denver Nuggets is that they have another player, Chris "Birdman" Andersen, who was also considered washed-up before he joined Denver. Andersen provides the "Dennis Rodman" grit every playoff contender needs. I don't like Kenyon Martin (remember the days when he would flagrantly foul everyone?), and I'm lukewarm on Carmelo Anthony, but Denver has a good shot at making the finals. They have great scorers and decent defenders. When J.R. Smith is on fire, he can make treys from anywhere. With 'Melo giving his teammates open looks, Billups controlling the ball, and Martin, Nene, and Andersen protecting the paint, Denver looks like a good team. Not good enough to win a ring, but maybe good enough to make the finals.

Bad Teachers: the System Will Protect You

Good teachers, especially the newer ones who haven't had their idealism stamped out, should be treasured. Bad teachers, on the other hand, absolutely tick me off:

http://www.latimes.com/news/local/la-me-teachers3-2009may03,0,679507.story

Kathleen Collins, associate general counsel for L.A. Unified, explained it this way: "Kids don't have a union."

Why do California taxpayers--who are footing the enormous education bills--put up with this?

GE's former CEO Jack Welch talked about teachers' unions at a recent Commonwealth Club event in Santa Clara. He said if you support teachers' unions, you're not pro-kids--you're pro-management. He's correct--teachers' unions represent teachers, not children. If teachers' unions cared about children, they wouldn't make it so hard to get rid of under-performing teachers. They'd also give up some of their lavish benefits, which would allow taxpayers to pay new teachers higher salaries.

The GOP's Problem

Want to know why the GOP has lost its way? John Georgiton from Columbus, Ohio, summed it up perfectly in the WSJ (May 7, 2009, Letters to Editor, A16):

http://online.wsj.com/article/SB124165448243293979.html

Government expenditures can be broken down into major categories: the military, Social Security, Medicare and Medicaid. All other government agencies constitute the final 20% of the budget. The GOP has a hands-off policy for the military and it is not politically possible to make large cuts in Social Security, Medicare and Medicaid and still get elected. If the GOP ran for office telling the 80 million people who will rely on these programs over the next 20 years that the GOP plans to cut their Medicare and Social Security benefits by 50% to give wealthy taxpayers tax cuts, it just wouldn't fly.

The author points out that the GOP considers defense spending a sacred cow. Consistent with its small government platform, the GOP should be willing to cut defense spending. We spend $1.2 trillion on defense--more than the next largest fourteen countries combined. The sooner the GOP returns to its glory days of Eisenhower and Goldwater, the better.

Update: the May 8, 2009 WSJ says we will spend at least $550 billion on defense spending in 2010.

Safeway Inc.'s Annual Shareholder Meeting (2009)

Safeway Inc. (SWY) held its 2009 annual meeting at its Pleasanton, California corporate headquarters. Shareholders were offered fruits and other food items on a large table. After the meeting, shareholders received a reusable bag with eco-friendly light bulbs and a box of tissues from Safeway's in-house brand, "Bright Green."

Safeway ran its meeting professionally--there were no glitches, and everyone knew exactly what to do and when to do it. One way to measure a well-run meeting is whether the company allows comments on shareholder proposals. (Google did not, causing problems at its meeting.) Safeway passed this basic test--it allowed shareholders to comment on various proposals prior to closing the polls. It also limited comments on the proposals to two minutes.

General Counsel Robert Gordon handled the business portion of the meeting. He started off with some jokes about politicians and lawyers, drawing laughs. He then moved on to the shareholder proposals.

One shareholder submitted two proposals. The first dealt with cumulative voting. According to the SEC, "cumulative voting is a type of voting process that helps strengthen the ability of minority shareholders to elect a director." Put more simply, cumulative voting allows minority shareholders more power by allowing them to concentrate their votes on a single candidate. For example, let's assume you own 100 shares, and there are two director vacancies. Ordinarily, you could only vote 100 shares for each director; however, with cumulative voting, you could combine your votes and vote 200 shares for one director. This proposal failed.

The second proposal was a shareholder "Bill of Rights":

1. Shareholder proposals should be binding, not merely advisory; after all, shareholders own the company and should be treated as owners, not advisory members.

2. Auditing firms should be rotated every five years, because long tenure tends to dilute independence and vigilance. (After several companies have restated results due to shoddy accounting practices, I sympathize with this idea. Who's the watching the watchmen?)

3. Institutional owners should not be able to vote blocks of shares without express approval from their shareholders. (Shareholder Shelton Ehrlich pointed out this might require shareholders who hold mutual funds to sift through hundreds of corporate proxy statements each year. I've seen similar shareholder proposals, including one that required institutional owners to abstain from voting at all.) This proposal also failed.

The final proposal was submitted by Scott Adams (not related to Dilbert's Scott Adams) of the American Federation of State County and Municipal Employees Pension Plan Fund (AFSCME). I've seen Mr. Adams make similar proposals, seeking to ban "golden coffins." He is very effective because he speaks clearly and entertains his audience with humor and visual props, such as a gold-plated nail. "Golden coffins," which AFSCME wants to ban, reward executives and upper management for dying. (You read that right.) Many CEOs, upper managers, and their families receive cash payments when they die. In this case, Safeway also pays former executives cash if they die when they're not working for Safeway, i.e., during retirement. (Again, you read that right.) The key sticking point is that death benefits are unrelated to executive performance and therefore amount to a giveaway of shareholder money. This proposal received 38% of the vote.

I agree with the proposal. If executives want death benefits, why can't they use their own ample salaries to buy themselves and their families life insurance policies? One would think after being paid millions of dollars, executives could afford a policy or an annuity. More important, there is no "pay for performance" element involved in this executive benefit. Companies offer it because other companies also offer it. It's never a good argument to do something because someone else happens to be doing it. Companies and their compensation committees need to understand that executive compensation has become a lightning rod for criticism. As a result, companies that offer excessive salaries and unnecessary benefits reveal how out-of-touch they are, and no one wants to invest in a company that's out-of-touch.

CEO Steve Burd handled the rest of the presentation. I've never met Mr. Burd before, but I became a huge fan. He doesn't avoid questions, knows his company inside-out, is focused, and projects professionalism and confidence without arrogance. I have no doubt that Safeway would be in much worse shape if not for him. During his tenure, Safeway introduced "O Organics" and handily caught the organic food wave. It is now trying to capture the "green" consumer wave with its "Bright Green" product line. Safeway also offers a line of "Eating Right" products to help consumers eat more healthy food. Safeway's other product lines, like "mom to mom" and "Waterfront Bistro," would benefit from more advertising and promotion, but in time, they may become as successful as "O."

It is easy now to admire the strength of Safeway's in-house products, but it is never easy to establish a brand. Under Mr. Burd, Safeway created its "O" brand in less than three years. That's remarkable.

Mr. Burd was especially proud of how his company has managed healthcare expenses. He said Safeway had "flat-lined" healthcare costs, while its competitors had seen 38% increases in costs. Mr. Burd hasn't seemed to sacrifice quality, either. During the meeting, a Safeway employee and cancer survivor stood up and shared an emotional story about how Safeway helped her fight and beat cancer. Mr. Burd was recently invited to the White House to discuss his success in managing healthcare costs with President Obama.

After going through various slides, Mr. Burd opened the floor to questions. A shareholder asked about Safeway's pension and whether it was underfunded. Mr. Burd said that market conditions had reduced the pension's assets, but under a 2006 law, Safeway has time to correct underfunding and increase contributions. (The law is the Pension Protection Act of 2006, and it appears that companies have seven years to correct underfunding).

I asked questions about Safeway's relationship with its unions. I asked what percentage of the company was unionized (i.e., part of a bargaining unit). I also asked what made Safeway able to do so well while offering substantial employee benefits. I added that Safeway must have a special relationship with its unions because most unionized companies fail, or major tension exists between management and labor. One look at car companies (GM, Ford, Chrysler) and airline companies (Delta, Northwest, etc.) shows that unions tend to harm companies that rely on discretionary consumer spending. Safeway and other grocery companies seem to have dodged the union bullet.

Mr. Burd said 80 to 85% of Safeway's workforce is unionized, and Safeway had "very good" relations with Safeway's unions (he seemed to push back on my assumption that Safeway had a great or "special" relationship with its unions). He talked about having realistic expectations. He said that Safeway competes with several non-union companies, and this competition adds discipline [to negotiations]. He also mentioned Safeway's success in controlling healthcare costs. Having relatively fixed healthcare costs means there is more money for overall compensation. (From my angle, saving money on healthcare because employees are healthier not only frees up more money for shareholders and employees, but also results in a happier workforce.)

I also asked Mr. Burd what he was most worried about in terms of competition. Mr. Burd said he wasn't a worrier. He said, "I worry about my kids [not Safeway]." Coming from anyone else, this response might have seemed flippant or arrogant, but when Mr. Burd said it, he sounded sincere. He said his concern was a variant of the real estate mantra of "location, location, location." In his case, however, it was "sales, sales, sales." He pointed out that Safeway was in a unique position--it could borrow money at "less than 1%" interest.

After a few other shareholders asked questions, the meeting ended.

Before I go into my analysis of the stock, I want to commend Safeway's employees. Whenever I go into a Safeway, I receive excellent customer service. Every single time I've asked a question, a Safeway employee will go out of his or her way to help me. In an era where good customer service and just plain decent manners are declining, Safeway stands head and shoulders above most of its competition. I chatted with a Safeway employee on the way to the meeting, and he said he's worked for Albertson's before. He said Albertson's didn't have a good relationship with its union and its employees. I asked what made Safeway better. His response was classic: "Safeway treats me like a human being." Based on my own limited anecdotal evidence, I feel Safeway is doing exceptionally well when it comes to customer service and employee job satisfaction. The only other grocery store where I get a similar feeling is Nob Hill Foods, a Raley's division.

Even though I like shopping at Safeway, I don't own many Safeway shares, which are trading near a 52-week low. Despite having a great CEO and a decent dividend, Safeway shareholders may have a long road ahead. First, as Mr. Burd mentioned, 80 to 85% of Safeway's workforce is unionized. As a shareholder, it's difficult to justify investing in a company where 85% of its workforce, if unhappy, can strike and bring the company to a standstill. (Although Safeway is doing well overall in labor relations, just a few weeks ago, Safeway workers in Denver, Colorado voted to go on strike.)

But Safeway's biggest problem may be what I call the "curse of the middle." In almost every business catering to Americans, the "middle" players have been crushed because of America's steadily declining middle class. In retail, for example, Neiman Marcus and Tiffany (upscale players) have done reasonably well, as have Walmart (WMT), Ross (ROST), and Target (TGT) (cost-conscious players). Mid-level players, however, like Sears, Mervyn's, and Montgomery Wards, have gone bankrupt or are not major threats. The lesson to me seems simple--you either have to win on volume at the lower end of the scale, or on margin at the higher end.

Safeway is a middle-level company, in size and focus. It's much smaller than Walmart and Target, but bigger than Whole Foods Market (WFMI) and Trader Joe's. Safeway's competition is focusing on specific customer niches to win market share, which may harm Safeway's profits. For example, Walmart and Target are aggressively expanding their selection of food products. Safeway's products are generally priced higher than Walmart's. If Walmart continues to expand its selection of food products, it could take business away from some of Safeway's cost-conscious consumers. Meanwhile, affluent consumers may already be going to Trader Joe's or Whole Foods Market instead of Safeway. Thus, Safeway is caught in the middle and may have to rely on cost-cutting to improve shareholder value. As great as Mr. Burd is, a company can only cut expenses so much, especially when it is heavily unionized.

At the same time, Safeway has many positive factors. Most consumers will not buy their produce or food from Target or Walmart. There seems to be a built-in bias right now against buying food at Target or Walmart. Also, Safeway will remain competitive because it offers better quality, convenience, and service than Walmart, Costco (COST), and Target.

I will continue to keep an eye on Safeway. If it maintains its dividend, it could represent a decent value play. Although Safeway stock probably won't ever be a large percentage of my portfolio, I will be rooting for Mr. Burd. At the very minimum, America can learn from Safeway's experience cutting healthcare costs.

Disclosure: I own fewer than 10 shares of Safeway (SWY).

Update on June 13, 2009: CEO Burd recently wrote an op-ed on cutting healthcare costs:

http://online.wsj.com/article/SB124476804026308603.html

Lawyers Paid Not to Work?

Sounds like the GM jobs bank, doesn't it? Some lawyers are getting paid $80K not to work:

http://finance.yahoo.com/career-work/article/107024/Getting-Paid-Not-to-Work

Before you rush to submit your law school application, remember, these are big, prestigious law firms--there's only about 100 to 150 of them nationwide. Consequently, only the top 10 to 15% of law school graduates get these jobs. If you do some rough math, most law school grads have less than a 10% chance of getting these positions, unless they attend a top twenty law school.

Most lawyers probably work for the government; insurance companies; or insurance-related companies. My dreams of following in Thurgood Marshall's footsteps did not work out exactly as I'd planned. Oh, well. Even if someone had told me back then what I was in for, I wouldn't have listened.

Shareholders of the World Unite: Power in Numbers

This is such a great idea, I can't believe I didn't come up with it myself:

http://features.csmonitor.com/economyrebuild/2009/05/07/one-mans-bid-to-bolster-shareholder-power/

Go to isuffrage.org to learn more.

Update on May 24, 2009: I am now affiliated with this program as a "field agent."

California Dreamin': Fiscal Irresponsibility

This is old news, but still worth sharing, because of California's upcoming special election:

http://online.barrons.com/article/SB123941269948510457.html

Chris Street, treasurer of Orange County, Calif., warns if the federal government backs California's debt, the market for city bonds will be harmed. "Why would anybody buy the debt of a local issuer if they can get federally backed debt sold by the state?" he asks. He should know. The OC declared bankruptcy several years ago. Barron's is too smart not to notice the irony of quoting an OC official about the demand for municipal bonds.

Just in case you forgot--the CS Monitor reminds you that taxpayers back and insure government employees' retirement plans. Ultimately, every dollar that goes to them--the police, firefighters, and teachers--comes out of our pocket. Other states besides California also pay disproportionate amounts for their public pensions, showing the system itself is fundamentally flawed. For example, Illinois had $40.9 billion in future general and special obligation bond debt service as of June 30, 2006 ($22.7 billion principal and $18.2 billion interest). $10 billion of that–almost half of the principal--was tied to public sector pensions. (From http://www.wh1.ioc.state.il.us/fiscalcondition/DebtLevels.htm.)

Meanwhile, in California, things keep getting worse:

San Jose officials said Tuesday that the tanking stock market could force taxpayers to pony up as much as $50 million extra the following year to cover losses in the city's retirement funds.

Things look even worse in the longer term, as city officials say the cash-strapped general operating fund could have to pour tens of millions of additional dollars into the city's two pension programs by 2013.

If it's not painfully obvious by now, the current government retirement system--which is tethered to the vagaries of the stock market--is untenable. It promotes civil war between taxpayers, Wall Street, and government employees. We need to eliminate the special pension plans given to public sector employees and let them have the same retirement plan most private sector workers have--namely, a 401k or a 403b plan. In exchange, taxpayers can boost some government salaries, which are easier to track and not tied to the stock market.

As for the upcoming special election, California's governor wants Californians to vote "yes" on all the measures in the upcoming special election. I've already voted by absentee ballot, but I voted "no" on some measures. I am sick of my legislature not being able to handle basic accounting. When your income declines, you need to cut expenses. Will Sacramento ever learn third grade math?

Bonus: Robert Frank on people buying property.

Bonus II: Steve Malanga on public sector unions:

http://online.wsj.com/article/SB124227027965718333.html

Sarah Jones: Incredible Performance

Lawyers and Dysthymia

Lawyers tend to suffer from all kinds of maladies. Now, we have to worry about "dysthymia," too:

My kind of depression is termed “dysthymia” in the DSM IV (mental health’s diagnostic “Bible”). With dysthymia, a person can still function—after a fashion. However, life’s colors are faded. It’s more difficult to enjoy pursuits that had, not long ago, brought pleasure. We withdraw from our closest relationships.

More here. I think the lesson is not to go into divorce law, aka family law. I used to make appearances for other lawyers in family court, and I got really sad after spending just an hour in court. Many people in family court are self-represented (pro se). It is hard to see people go at each other in public, especially when kids are involved.

Teacher's Unions Suing California

The CFT--California Federation of Teachers (how many teachers' unions are there?)--is suing California to get taxpayers to give them more money:

http://www.mercurynews.com/ci_12328660 (SJ Merc article published on 5/8/09, Sharon Noguchi)

Unbelievable. The timing of the lawsuit makes it appear they're trying to usurp the voters if we go against their funding demands. It's important to try to work with all entities, especially when education is involved, but that's hard to do when California's teachers' unions sue the state. After all, they're really suing the taxpayers.

WH Auden on Mass Media

Attributed to W.H. Auden, one of my favorite poets:

What the mass media offers is not popular art, but entertainment which is intended to be consumed like food, forgotten, and replaced by a new dish. This is bad for everyone; the majority lose all genuine taste of their own, and the minority become cultural snobs.

• "The Poet & The City" (p.83)

Google's Annual Shareholder Meeting (2009)

I attended Google's (GOOG) annual shareholder meeting today, May 7, 2009. As usual, the meeting took place on Google's campus. In the past, meetings were an intimate, casual affair. Larry Page and Sergey Brin, Google's founders, would sit on stools and answer shareholder questions. I loved watching these two young men up-end Santa Clara County's normally uptight corporate culture. Sergey was especially fun to watch, because if he didn't think your question or comment had merit, he'd take you on directly. During one meeting a few years ago, when a shareholder chastised Google for not doing enough to combat China's censorship, saying other companies were being more pro-active, Sergey sneeringly pointed out that Yahoo had just helped China jail a reporter. In any case, I should have known it was all too good to be true. This year, neither founder attended the meeting. The meeting took place in a larger conference hall instead of an upstairs room above the cafeteria. I suppose this development is a natural progression--more shareholders attend the annual meeting, and most companies move away from their founders as they grow. Still, I hope Sergey and Larry come to next year's meeting. It wasn't the same without the two of them sitting up there, jeans and all, ready to answer questions without a corporate-style verbal filter.

I missed the lunch, which was held at 12:30PM. (I still managed to get two It's-It ice cream treats and a cold salad to tide me over). The meeting itself started at 2:00PM. David Drummond, Google's Senior VP and Chief Legal Officer (and a Santa Clara University graduate--go Broncos!), handled the formal part of the meeting. During the formal part of the meeting, a Chinese activist [Update: his name is Jing Zhao] wanted to make some comments on a shareholder proposal relating to online censorship; however, Google's procedures do not allow ordinary shareholders to make comments on proposals prior to voting. Google only lets the shareholder who placed the proposal on the ballot to speak for a few minutes. Thus, Google acts as a partial censor at its annual meeting--at least with respect to comments that may impact how shareholders vote on stockholder proposals.

Many shareholders vote their shares in person at the meeting and may be influenced by shareholder comments. Allowing ordinary shareholders to comment on proposals only after voting is closed is tantamount to the American government banning CNN from making political comments until after national election polls are closed. Google ought to limit the time a shareholder can speak on proposals to three minutes and let anyone who wants to comment specifically on a proposal have their say. This change would strike a reasonable balance between allowing activists to disrupt the meeting and restricting the flow of information to shareholders.

As for the person who wanted to speak, his first language isn't English. I've seen him at other shareholder meetings commenting on stockholder proposals relating to China. He is against China's censorship policies, but his broken English makes him difficult to understand. In this case, when he wasn't given an opportunity to speak, he quietly walked out of the meeting. When he tried to speak at Cisco's annual shareholder meeting, the CEO allowed him to speak briefly. After the meeting, a Cisco investor relations representative took him outside and listened to him. Cisco handled the situation much better than Google, but I am confident Google will learn from this experience.

CEO Eric Schmidt handled the informal portion of the meeting. He spoke for about ten minutes. His main points were these:

1. There is no recession in information.
2. Google is making advertising ridiculously easy.
3. Mobile is wherever you are. ["Search" can be part of the person, unrestricted to a place.]

During the Q&A session Mr. David Drummond talked about censorship as being bigger than just China. He said it also took place in non-authoritarian countries. In a really interesting comment, he said that police have visited Google in the middle of the night because Google would not share information. He later mentioned Germany and France as two non-authoritarian countries that apparently engage in some censorship.

A shareholder asked about company morale now that Google's "legendary" perks have been reduced. CEO Schmidt said Google still had amazing perks, including fifteen(!) food options/cafeterias. Mr. Schmidt is correct--Google still has fantastic perks, and the perks aren't limited to tangible items. A casual stroll through Google's offices shows that employees have the freedom to do pretty much anything. One employee, Mr. Tan Chade-Meng, has pictures with lots of famous speakers posted outside his office, and most Google employees decorate their work space as they see fit. I saw a bunch of international flags, stickers from different American states, and even pictures promoting a pirate club. Google even has on-site medical doctors who can prescribe medication, so no employee has to go to the hospital unless something really serious happens. Of course, Google employees still get free food, soft drinks, coffee, and massages (Google gives massage certificates to employees on their birthdays). Google employees may also bring a friend twice a month to the cafeteria for a complimentary meal. In short, I wouldn't worry about Google's employees. They are expected to work hard and are allowed wide latitude as long as their work gets done.

Another shareholder asked Google not to split its stock. He was concerned with market manipulators and short sellers.

Other shareholders commented on how to improve various services, especially Google's language translation tools.

Overall, Google's shareholder meeting was well-done, but not a great experience. It almost felt like the company had matured into just another big corporation. Many shareholders fell in love with Google because of Larry and Sergey's vision. Without them at the meeting, Google risks having a so-so shareholder meeting instead of an annual event on par with Berkshire Hathaway, Apple Inc., and other wonderful companies.

Bonus: here is Eric Savitz's take on the meeting. The picture above is of Eric and me. For those of you who follow his blog, he seems like a really cool guy.

Audiocasts of annual meetings are here. Video of the annual meeting is here.

San Jose Water Company Annual Meeting (2009)

SJW Corp (SJW), otherwise known as San Jose Water Company, held its annual shareholder meeting on May 6, 2009 at its local headquarters. A plate of cookies, coffee, water, and a selection of moist cake slices were offered. About ten shareholders attended, but most of the room was filled with company employees. Most of the shareholders were senior citizens who had probably bought SJW for its consistent dividend. (SJW currently yields 2.8%.)

Norm Mineta, San Jose's former mayor, is on SJW's Board of Directors. It was a pleasure meeting him. If you're ever in downtown San Jose, go to City Hall and go to the second floor (same floor as the Council Chambers). Right outside the elevator is a wall with pictures of San Jose mayors. Mr. Mineta's picture is on the wall of mayors, and it's a fantastic picture, because he looks so young. Mr. Mineta was one of the few government officials who spoke out against racial profiling post-9-11. As a result, many San Joseans--a very diverse lot--are forever grateful to him.

SJW has an enviable business model: one, a captive customer base; two, a product everyone needs, no matter what the business climate; and reasonable government cooperation. With banks and car companies failing left and right, many investors are looking for a stable business. It's worth noting that San Jose Water Company has been around since 1866.

There are some problems, however. The pension is underfunded by around $38 million (See 10K: page 56). With only 324 employees (10K: page 52), that means the pension has a gap of $111,111 per employee. The CFO indicated the pension is less than 80% funded, triggering various IRS rules which activate after various thresholds have been breached. Also, the company is top-heavy--with only 324 employees, it has 101 "executive, administrative or supervisory personnel" (10K: page 53).

The company's CFO addressed some of these issues: first, the $38 million number does not include recent stock market gains; and second, the company recently modified its pension plan, "replacing a defined benefit pension formula with a more portable cash balance formula" (See attachments to letter to shareholders).

I asked whether the company had insurance in case a natural disaster affected operations. The company does not buy insurance--it's too expensive--but has been given permission to set up a fund into which customers will pay for disaster damage through rate increases. SJW's "insurance" is basically its customer base.

I asked whether the company has preferred shares. It does not.

Another shareholder asked why the company was expanding in Texas. (A Board member, Kathleen Armstrong, has been added to assist the company with Texas operations.) The company indicated that Texas was a growing state with a better political climate.

Another shareholder asked whether SJW employees get free water. The company responded that employees within the service district receive discounted--not free--water, and the company only had 324 employees.

Another shareholder talked about accounting problems at a southern California water company. SJW did not want to comment on another company's issues.

It was a short, amiable meeting. I will attend next year to see if I can take a picture with Norman Mineta. I will ask him if the fabled "baseball bat" stories are true. ("Damn government took my bat again" has got to be one of the best quotes ever by a public official.) If SJW has some initiative, it may want to buy a Louisville Slugger and have Mr. Mineta sign it every year at the shareholder meeting. Most companies should be creative when it comes to their shareholder meetings. With a distinguished citizen like Mr. Mineta on its Board, why waste an opportunity to boost company morale?

For more SJW's Q1 2009 earnings call transcript, click here.

Disclosure: I own fewer than 10 SJW shares.

S&P Hits Target

On April 1, 2009, I predicted the S&P would hit 950:

http://willworkforjustice.blogspot.com/2009/04/personal-s-target.html

I later clarified that my prediction was a range between 920 and 950. The S&P hit my range on May 6, 2009. My prediction was correct. From April 1, 2009 to May 6, 2009, the S&P rose 13.3%.

I want to emphasize something. As of May 7, 2009, I am not making any prediction about the future direction of the market. I have no idea what's going to happen. As a result, I am mostly in cash and money market funds, along with some TIPs. I've also opened up two credit union accounts. I'm only earning 1.5% interest there, but it's better than my brokerage's 0.5% rate.

Kudos to the SJ Mercury News

The SJ Mercury News has done a great job exposing excessive government spending--see links below:

http://www.mercurynews.com/news/ci_12116499

http://www.mercurynews.com/business/ci_12119850

Old news, but still worth sharing. I just attended a City Hall event where a Councilmember said that average employee salaries have increased from $78,000 to $117,000.

Charlie Munger on NBR

Here's a recent NBR interview with Charlie Munger (Susie Gharib, May 1, 2009):

http://everythingwarrenbuffett.blogspot.com/2009/05/nightly-business-review-susie-gharib.html

We can't have a modern civilization without strong financial companies. But we don't need them as swashbuckling and as crazy and as venal as they've been.

More here from Munger:  http://willworkforjustice.blogspot.com/2010/05/wisdom-from-charlie-munger.html

Update: I replaced the link below, because it no longer worked: http://www.pbs.org/nbr/site/onair/gharib/charlie_munger_of_berkshire_hathaway_090501/

Resources Lifespan

The New Scientist has a great chart showing the finite span of certain resources. See full chart here.

Environmental implications aside, I'm going to check what SLV is selling for these days.

Munger on Economics

In honor of Berkshire Hathaway's recent meeting, here is a 2003 speech Charlie Munger gave in California: [warning: PDF file]

http://www.tilsonfunds.com/MungerUCSBspeech.pdf

Here's a fun snippet:

I think that economists would be way better off if they paid more attention to Einstein and Sharon Stone. Well, Einstein is easy because Einstein is famous for saying, “Everything should be made as simple as possible, but no more simple.” Now, the saying is a tautology, but it’s very useful, and some economist – it may have been Herb Stein – had a similar tautological saying that I dearly love: “If a thing can’t go on forever, it will eventually stop.”

Sharon Stone contributed to the subject because someone once asked her if she was bothered by penis envy. And she said, “absolutely not, I have more trouble than I can handle with what I’ve got.”

Also, Munger saw our financial problems well in advance:

[Question]: …financial destruction from trading of derivative contracts. Buffett said that the genie’s out of the bottle and the hangover may be proportionate to the binge. Would you speculate for us how that scenario can play out? [The question was garbled, but the person asked about derivatives, which Buffett has called “financial weapons of mass destruction.”]

Munger: Well, of course, catastrophe predictions have always been quite difficult to make with success. But I confidently predict that there are big troubles to come. The system is almost insanely irresponsible. And what people think are fixes aren’t really fixes. It’s so complicated I can’t do it justice here – but you can’t believe the trillions of dollars involved. You can’t believe the complexity. You can’t believe how difficult it is to do the accounting. You can’t believe how big the incentives are to have wishful thinking about values, and wishful thinking about ability to clear.

Running off derivative book is agony and takes time. And you saw what happened when they tried to run off the derivative books at Enron. Its certified net worth vanished. In the derivative books of America there are a lot of reported profits that were never earned and assets that never existed.

If you're interested, my review of Munger's 2008 shareholder meeting is here.

Random Thoughts of the Day: Widows and Signs of the Apocalypse

First, a big thank you to federal Judge Christina A. Snyder. The United States government was attempting to deport foreign-born women who married American men and moved to America. In some cases, these widows had U.S.-born children with their husbands. "60 Minutes" did a story on this potential tragedy several months ago. I wrote a letter to Senator Diane Feinstein's office about this issue. Her office sent me an email a few weeks ago. Senator Feinstein supported the widows. Here is her email:

I want to thank you for writing to share your concerns regarding the so-called "widow penalty," which affects the immigration status of legal permanent resident spouses when the sponsoring U.S. citizen spouse dies.

I have great compassion for foreign nationals whose applications for legal permanent status are put into question when the sponsoring American spouse passes away. Under current immigration laws, an individual may only continue to seek adjustment of legal status if he or she was married for at least two years prior to the U.S. sponsor's death. If a couple is married for less than two years prior to the U.S. citizen sponsor's death, a foreign national cannot continue the adjustment of status process and faces the possibility of deportation.

I am an original co-sponsor of S. 815, which Senator Bill Nelson (D-FL) introduced on April 2, 2009 to ensure that surviving spouses of deceased U.S. citizens are not unfairly penalized. This bill would allow spouses who have been married for less than two years at the time of the U.S. citizen's death to continue to petition for status adjustment as an immediate relative, as long as they can prove that they entered into their marriage in good faith and not for the purpose of obtaining immigration benefits. This legislation has been referred to the Senate Judiciary Committee, on which I serve. It is my hope that this legislation will move forward in this Congress.

Judge Snyder ruled that the Dept of Homeland Security could not reject the foreign-born widows' residency applications merely because the Department failed to process the residency paperwork before the American spouses died. In case America needed more evidence that the Dept of Homeland Security is, in fact, the Dept of Douchebaggery, this story ought to be the nail in the coffin.

I hope Congress passes Senator Nelson's proposed legislation.

Second, did anyone want to slap the homeowners mentioned in this SJ Merc story? ("Sellers of high-end Silicon Valley homes put dreams on hold," 5/2/09)

Basically, a local homeowner is upset that the house she bought decades ago isn't selling for the millions she thinks it's worth. She's lowered the price from $2 million to around $1 million. She wants to move to Puget Sound, and gosh darn it if local homebuyers aren't cooperating with her well-laid plans. So what does she do? She compares her situation with the Great Depression:

"I called my mom and asked her what it was like in the Depression," said Negler, who owns the Victorian. She realized, though, that she "sounded pretty selfish. We stopped looking at ourselves as the center of the universe."

I guess she should get some credit for calling herself "selfish"--it shows she has some self-awareness that her comparison to the Great Depression is off-kilter.

Update on Trading: FXM

I bought FXM last week, believing it had dropped too much. FXM went up 4% today. I sold my shares. The trading took place in a retirement account, so I don't suffer a tax hit. For some reason, my record on short-term price movements is much better than my long-term predictions.