Tens of thousands of Warren Buffett's disciples and Berkshire Hathaway shareholders descended on Omaha, Nebraska last weekend for the annual Berkshire Hathaway shareholder's meeting.
Buffett, who wrote his first Tweet a few days ago, has since attracted a followship of more than 350,000. Oracle of Omaha is Buffett's most used handle, although I find a Jedi Master more appropriate: Oracle assumes some kind of clairvoyant qualities, while a Jedi master simply harnesses the information available to everyone in a skillful way. He's simply better than most of us at discerning, among the myriad of market stories, what info is useful and what is just noise.
Many of Buffett's devotees have spent the weekend inhaling his every word, looking for some clues of the workings of his mind. But the genius of Buffett is not that he has some magical powers or ability to foretell the future; it's that he can find value at a bargain price so he doesn't care what happens to the broader market — he still gets his cashflows. That, in essence, is his secret. Buffett is also unmoved by volatility because his investment horizon is indefinitely long; in fact he welcomes the erratic markets because that enables him to get value for much less. That's why he likes good companies which are in temporary trouble — just because their stock is down doesn't mean their future cashflows will suffer. Buffett's prowess has been established through many stunning deals he made over the decades, always getting good value in the end. But the Goldman Sachs deal he did at the height of panic in 2008 speaks volumes: back then even Goldman Sachs, itself a crafty firm that somehow always ends up on the right side of the trade, needed a rescue, a White Knight. Buffett, unlike everyone in those days, had billions in cash, which enabled him to pick good deals at rock-bottom prices. And it’s not like he had to look for bargains — Goldman came to him, asking for help. Whenever a big opportunity comes, Buffett is always ready. Is it not a manifested mastery of the Force?
"Berkshire is the 800 number when there is really some panic in the markets, and people really need significant capital," Buffett observed at the shareholders meeting last weekend. Indeed.
Buffett always shunned leverage and always understood the importance of having abundant cash. "I have pledged — to you, the rating agencies and myself — to always run Berkshire with more than ample cash. We never want to count on the kindness of strangers in order to meet tomorrow's obligations. When forced to choose, I will not trade even a night's sleep for the chance of extra profits," Buffett promised in his annual letter to shareholders in 2008.
Today, Berkshire Hathaway is yet again sitting on $49 bn of cash and looking for investments. Buffett's recent addition to his portfolio, in a $12.1 bn deal that took the company private, is ketchup maker H.J. Heintz. Heintz business model is rather "Buffettian" — rain or shine, recession or boom, people will always need to put ketchup on their hotdogs.
Insurance is another one of Buffett’s favorite business models: you receive premiums today but pay out the claims obligations much, much later, if at all. In the meantime, you reinvest those premiums. Buffett have admitted himself that he wants to expand the commercial insurance business "big time." Recently, a few AIG executives have reached out to Buffett and subsequently jumped ship from AIG to Berkshire Hathaway. Notice the trend yet? Buffett doesn't even have to make a move to close a good deal: the good deal comes to him. Not to mention that Berkshire has the highest insurer ranking (AA+ by S&P) out there (after all other big insurers have collapsed in the wake of the crisis). He's now the only game in town when it comes to commercial insurance.
Such a track record and the ability to be in the right place at the right time can't avoid attracting critics, of course. Some think he has some kind of insider info, others just think that he's a three-sigma event, a genius that no one can replicate. I think the reality is much simpler: Buffett is the ultimate capitalist, with a positive sign. He invests his own money in businesses with real products without using leverage or financial alchemy. Then he sits on those investments for decades. "Buffett’s genius was largely a genius of character — of patience, discipline, and rationality, Roger Lowenstein, one of Buffett's numerous biographers, summarizes in his book Buffett: The making of an American Capitalist.