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.

Cypress Semiconductor Annual Shareholder Meeting (2008)

Cypress Semiconductor (CY) runs its meeting professionally. Doors are closed after the meeting time, although a security guard allowed me to enter. Two employees check your proxy card, along with your ID, and write out a name tag before letting you in. CY gave away a nice bag this year to all attending shareholders. Also, the food spread was more than your typical coffee and cut fruit--it was a smallish buffet, with some shish kabob and several selections of cheese and whole fruits. In the back of the room, there are several displays about how CY's technology is used in applications as diverse as timers and solar panels.

CY has one billion dollars in cash-that's the first thing I noticed from its presentation. CY is headed by an engineer (T.J. Rodgers), and he gave us a lecture on how CY's technology is more efficient and creative than its competitors. For example, his PSoC, or Programmable System on a Chip, allows companies to move components on a reference design board to get the result they want. In addition, the PCBs do not require the use of a Cypress proprietary IC chip, allowing more flexibility. By being more flexible about the chips necessary for its software and design boards, CY may be able to charge for its boards and software at some point in the future. In contrast, its competitors typically give away their boards and software because they are only functional with the companies' own IC chip, where the company plans on making sales and profits. CY, however, works with several different companies, including NOK and MOT, which use Cypress chips in some of their phones. With respect to "sideloading," which includes the task of uploading movies or content onto a phone using a USB device, I thought it was interesting that the RIMM and MOT phones were currently among the fastest, while the Sony ERIC phone was the slowest. Apple's iPhone speed was in between.

CY's PSoC design may also be more environmentally friendly, because fewer boards and components are necessary to accomplish several different tasks. The presentation included showing us how one such board could create several different kinds of light in different intensities, all from one board. (We were treated to a fun, small-scale Disney Fantasia show, where the CEO, who was holding a rectangular 8 watts LED light, would tell an associate across the room, "Blue! Now turn it up [in intensity]. Now green. Now white." You get the picture.)

This is where it gets interesting. CY's technology encourages the use of LED lights, which last longer and use less power, and are therefore more environmentally friendly. There are three types of lights: LED, CFL (compact fluorescent), and INCAND (incandescent), in order of most environmentally friendly to least. The LED light required the most upfront investment--around 12 to 20 dollars--but over its life of multiple years, sometimes even as long as 17 years, the buyer would spend less because electricity bills would be lower. Therefore, while the INCAND bulb only cost around 4 dollars initially, it actually cost 300 dollars more than the LED light over the same period of time because of the extra "juice" it requires. The CFL was in between, but the LED light was clearly superior when lifetime costs, not just initial costs, were factored in. The lesson I took was to try to find LED lights whenever possible, despite the higher upfront cost.

However, despite this new angle and method of designing semiconductors, the charts showed that semiconductor sales were decreasing and have been declining for quite some time. Most of CY's growth comes from its earlier acquisition of Sunpower, a solar panel technology company. [Update: CY has spun off Sunpower.] CY focused on the fact that its solar panels are far more efficient than its competitors, especially those using "thin film" or "conventional" solar panels. CY also mentioned that it was going to present the tax consequences of spinning off its Sunpower company to shareholders to the Board that same day.

I was very impressed with the presentation and this company. Few companies present themselves so professionally and are on the cutting edge of innovation.

Top 4 Traits for Success

The author of http://www.businesspundit.com/ posted this shorthand list of traits designed for success:

1) the ability to postpone short-term gain for a greater long-term reward;
2) optimism;
3) ability to deal with stress; and
4) initiative.

The discussion referenced whether IQ was genetic or learned, and the author's point was that even large differences in IQ did not matter in the modern world as much as the four traits above. I have always said that delayed self-gratification is extremely important to success, but with so many higher paying careers involving an understanding of mathematics, an ability or willingness to understand mathematics will also be important. As technology slowly eliminates the need for various service careers, those sectors will have to unionize or determine how to move the workers who are displaced into more productive positions. Yet, no IQ test can pinpoint desire (#4 above), which can overcome many inherent flaws.

Angry Bear

Mr. Houghton has published a fascinating piece on the cost of living in different cities:

http://angrybear.blogspot.com/2008/05/spacial-price-index.html

(This article references http://www.bea.gov/papers/pdf/aten_estimates_state_metro_2005.pdf)

Who wrote this? You'll be surprised...

"The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit...But the fact is that there are now more claims outstanding than real assets...In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value...Deficit spending is simply a scheme for the confiscation of wealth."

It's not Ron Paul. But it is another well-known libertarian, speaking in 1966.

Speaking of changing values, "Seanbaby," a local columnist for a free San Jose local magazine, writes a humorous column. This is from his most recent column: "What our parents wouldn't dream of doing until they were married and strapped into safety equipment is how children say hi to each other today. Hell, I couldn't believe what 15-year-olds did when I was 16. We're less than a generation away from Baby Gap selling thong panties." (The Wave, Vol. 8, Issue 10) Absolutely hilarious.

SIRF Meeting --Canceled

When I went to the Doubletree Hotel in San Jose to attend the SIRF shareholder meeting, three people informed me that the meeting had been re-scheduled to August 19, 2008. Apparently, because SIRF is a Delaware corporation, the meeting has to be done within a strict time period after providing notice to shareholders of record, and SIRF had the record date a few days too early. They wouldn't tell me what law firm failed to do the research and due diligence, but at least I learned some new tidbits on incorporating in Delaware.

I won't be able to attend the upcoming Google shareholder meeting, but I did read the annual report and letter from Larry Page. It's not a Warren Buffet letter, i.e., a comprehensive letter that touches on national and international issues as well as investing, but it's pretty darn good. I wouldn't mind hanging out with Mr. Page, based on the tone and enthusiasm he seems to have.

Most interesting in Google's annual report are the risk factors, which all annual reports have, but Google's risks seem more detailed and realistic than other reports. Google talks about more than just the IP and legal risks commonly found in other company reports. Google talks about how anti-spamming filters, ad blocking software, and copyright protections may affect its ability to find data. Google struck me as moving towards the direction of "free information" in an era where everyone is trying to protect information and make it more onerous to copy anything online. Google also listed a risk factor of not being able to control bandwidth providers and data centers, meaning that Google's growth is ultimately reliant, like most online companies, on the Baby Bells and other internet service companies to ensure that consumers get internet access at a reasonable cost. This reliance struck me as somewhat odd, because I thought I heard a while back that Google had purchased some wireless spectrum in an government auction, but perhaps I am confusing two different issues. Google also reiterated its anti-dividend philosophy.

I will be going to Wesco's shareholder meeting tomorrow in Pasadena to see Buffett's right-hand man, Charlie Munger. The Berkshire Hathaway meeting is over in Omaha, and Mr. Munger is back in California.