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I am back!
I
am back! It was an amazing trip.
It started with Warren Buffett’s Omaha. I flew into Omaha on
Thursday morning, and a few hours later received a call from the CFA Society of
Nebraska, asking me to give a talk to their members. Whitney Tilson and his partner Glen were
supposed to do a presentation on value investing that evening for the society’s
members but were stuck in NYC – due to tornadoes many East Coast planes were
grounded. To my pleasure I was told I’d
be joined on stage by Robert Hagstrom. Robert manages Legg Mason Growth
Trust mutual fund and has probably written half a dozen books. His first book, The Warren Buffett Way, was the one that introduced me to Warren
Buffett. So this was a humbling experience. As I arrived at the
event I was told that Robert and I would be the warmup for Whitney, who,
beating all the odds (and probably bribing a lot of airline clerks to boot) was
able to make it to the presentation just a few minutes late.
Robert
and I did a 30-minute Q&A, and then we let Whitney have the stage.
When asked what is the cheapest asset class, both Robert and I had the same
answer: high-quality large-cap stocks. Robert went further and said that
owning that asset class for the last 10 years was a very painful experience,
but he is not throwing in the towel on it, because these stocks have got to
insanely cheap valuations (I am paraphrasing). I wrote an article about
this asset class in the latest issue of Institutional
Investor magazine (I’ll send it along in a few days).
About
a month ago we had a potential client stop by our office. He brought his
portfolio to take a look at. His advisor/broker bought stocks about 12
years ago and had not sold a single stock, and so the million-dollar portfolio
was now a $700k portfolio – he owned Pfizer, Medtronic, Cisco, Microsoft,
Abbott Labs, J&J, etc.
Amazingly, his portfolio that was constructed a decade ago looked like
the portfolios of our clients today, though we bought most of those stocks in
the last few quarters, and all of them in the last few years! In the late
’90s investors loved these high-quality companies to death – they were great
American icons. It was almost a patriotic thing to own them then (though
I believe that only stocks that have a margin of safety are the patriotic ones
to own). Fast-forward 12 years, and these companies have matured, some
more gracefully than others (I am thinking about Microsoft as I type this –
more on it later), but their earnings have generally tripled since then, and
their P/E’s have declined from absurdly high to absurdly low levels.
I
have to tell you, if you are a value investor and you don’t go to Omaha for
Buffett’s weekend, you are shortchanging yourself (I can write this freely: I
already reserved a room for next May and am not afraid of competition for hotel
rooms). It is really not about Buffett, it is about going to idea lunches
and dinners with other value investors (I have a dozen stock ideas from those,
including one we may actually buy soon), making new friends (while standing in
line at 6 am on Saturday to get into Qwest center for the “main event”),
attending presentations and small conferences, and eating a lot of DQ ice cream
(since Berkshire owns DQ, when you eat ice cream in Omaha the cholesterol and sugar
you consume come with reduced guilt).
One
thing that Buffett said in the Berkshire meeting stuck with me. When he was asked what businesses do best in an
inflationary environment, he answered, “The ones that have royalty on someone
else’s revenue. You don’t have to invest
any more capital, no receivables, no fixed costs. Your revenues keep growing with inflation as
long as the product remains viable.”
Here are some businesses that came to mind that for the most part fit
that criterion: McDonalds (they receive a percentage of franchisee sales; in
fact almost any company that receives significant income from franchising fits
that category), credit card companies like Amex and Discover, and payment
processors like Visa and Mastercard (Amex and Discover are actually both a credit card and a
payment processor), and companies that just own brands, like Iconix Brands and
Cherokee, etc.
I
took a very early flight out of Omaha to Denver, spent three hours with my
kids, then grabbed my wife and we flew to Amsterdam. I’ve been to Amsterdam
three times and every time I love it more. I don’t have a particular
affinity with the red-light district or the legal marijuana, which you can
smell quite often as you walk the streets. (In fact – and this is the
honest truth – I have never smoked a single joint in my life! I do have a
very addictive personality: I smoked for seven years from age 14, almost two
packs a day. So knowing my limitations, I never dared to try pot.
And yes, I’ll admit the stock market is my current addiction.) I love
Amsterdam for its canals and Van
Gogh Museum. When I go to an art museum I usually rush to the
Impressionist section; and if I’m lucky I’ll find a dozen paintings by other
Impressionists and one or two by Van Gogh. The Van Gogh museum in
Amsterdam has the largest collection of his paintings in the world. We
spent three hours there and did not want to leave. Also, Amsterdam must
be the bicycle capital of the world. You
see people of all ages riding bikes: an eighty-year-old woman is riding a bike
full of groceries with the elegance and grace of a 20-year-old; a teenager is
taking his girlfriend on a date as she is sits balanced on the frame etc…
My
wife and I spent two days in Amsterdam, then rented a car and. with our final
destination being Frankfurt, drove through Den Haag, Bruges, Antwerp, and
Brussels. (This also gave me an opportunity to see
European retailers).
Den
Haag is only an hour from Amsterdam. It
has a terrific Mauritshuis museum. My wife and I rented
an audio guide, and to our surprise even the most innocent-looking, unsuspected
paintings carried some kind “amorous” meaning! Our favorite painting was
by Peter Paul Rubens, “Old Woman and a Boy with Candles.” According to the museum, the painting is
about an “old woman who reflects at night on lost opportunities for love.
Perhaps she is the crone portrayed here, who passes light to the boy, thus
urging him to enjoy love before it is too late.” (Here
is my wife Rita looking at that picture).
When
we drove into Antwerp, where we intended to spend the night, to our great
surprise our hotel was in a neighborhood full of orthodox Jews – it felt like
we had found a little Israel in the middle of Belgium! As I discovered
from almighty Wikipedia, after NYC, London, and Paris,
Antwerp has one of the largest orthodox Jewish communities outside Israel, with
a population of 15,000, and they are mostly involved in the diamond
trade. We went to a kosher restaurant and had one of the best meals of
our whole trip. After this meal, my wife (who is an incredible cook)
almost apologetically told me that she’ll have to get some new recipes.
My
son asked me once if I enjoy driving a car.
I had to think about it, and I replied “Sometimes.” I have little
patience for traffic and the rude behavior of other drivers (in Denver we say
that they must have come from California), so in general I am an unenthusiastic
driver. However, driving in Europe, especially in Germany, was a
pleasure. The roads (especially the autobahn) are flawless, there is no
speed limit to worry about, and drivers follow a strict etiquette - leaving the
far left lane for very, very high-speed vehicles and passing – and to top all
that, the scenery was absolutely incredible: early May is a magical time of the
year, with the fields yellow with rape flower. Our Audi A6 topped out at
109 miles an hour (I got the feeling, however, that Sixt, the car rental agency,
had installed a governor to limit my enthusiasm). I thought I was going
fast, until I found myself being passed by car after car. Unfortunately,
at the beginning of our trip my Nikon camera died – the lens refused to come
out – so most pictures on this trip were taken with my iPhone 4. Here
are some more pictures from Europe.
I
hated Germans for a good portion of my life. I was not alone; I shared
the hate with generations of Russians after WWII. Probably two-thirds of
the movies made in Russia after WWII were about WWII. Though hate is not an
emotion that should propagated, I completely understand its source: tens
of millions of Russians were killed by Germans. Being Jewish and knowing
what was done to my ancestors only added extra hate towards Germans. Hate
was an emotion that was just dormantly there; I never acted on it, never really
gave it much thought; it was just a normal part of me.
However,
over the last few years I’ve met Germans at different value events, and I
detected an inner conflict: though I was programmed to hate them, I did
not. I could not connect the dots between Nazis and the people I met,
especially since all of them were born after the war. On this trip I saw
another side of German people, which really touched me. I was one of the
speakers at the conference in Frankfurt. The last point on the agenda of
the conference was a tour. Dr. Claudia Giani-Leber – the wife
of the conference organizer, Dr. Hendrik Leber – was our tour guide. I
thought she’d be showing artwork on the Goethe-Universität campus, where the conference
was held. She did not. As I learned, during WWII, what is the
university campus was the location of an I.G. Farben chemical factory that used
Jewish slave labor. Instead of showing us artwork, Claudia led us to the
memorial of Norbert Wollheim (spend some time on this
site, watch the interviews) – a German who grew up
in an assimilated Jewish family and played an important role in transporting
Jewish children to England. He also filed a lawsuit against I.G. Farben.
Claudia spoke for half an hour, describing the suffering of the Jewish people
and what the Nazis did to them. She even
read part of the testimony from the trial that described in graphic detail the
living conditions and suffering inflicted on the slaves. This tour looked
like an act of self-lynching. This group of a few dozen people (none of
them alive during the war) were purposely reliving the pain and shame of acts
that their ancestors had perpetrated on Jews. They don’t hide from
it. I realized that these Germans hate Nazis as much as I do, even if
many of their grandfathers were those Nazis.
We
left our car in Frankfurt and took an overnight train to Prague – the most
beautiful city in Europe (yes, Paris, move over). We took a bike tour of
Prague, and our guide told an interesting story. A very old building that
used to be a musical conservatory had statues of thirty European composers on its
roof (here
is a picture of it). During WWII the Nazis turned it into their
headquarters. However, they discovered that one of the statues on the
roof is of the Jewish composer Felix Mendelssohn. The Nazis could not
allow a statue of a Jewish composer to remain on the roof of their
headquarters. But the problem was that the statues were not named – and
the Czechs refused to identify Mendelssohn. In a stroke of genius, the
Nazis sent two soldiers onto the roof to find the statute with the biggest nose
and knock it down. They did. However, it was later discovered that
Mendelssohn’s statue was untouched but Richard Wagner’s statue was knocked
down. (Side note: Wagner was Hitler’s favorite composer.)
My
wife and I flew to NYC on Monday, May 9th. The next day I gave
a presentation at the Hard Assets conference, on China and Japan (my
updated slides can be found here),
which was extremely well-received, and a few dozen people nearly mugged me with
questions when I got offstage. I was a bit surprised, as the theme of the
conference was “hard assets” – the stuff I argue will come back to earth fast
when the Chinese bubble bursts.
A
few hours after my speech I finally got to see our kids – my brother-in-law had
brought them from Denver. For the next two and a half days my wife, kids,
and I were tourists in NYC (here
are some pictures). We went to see the Statue of Liberty, Ellis
Island, went on top of the Rock – an incredible view of the city! – rode bikes
in Central Park, and then rented a boat – my son learned how to row.
On
our last day in NYC I took my son to the Yahoo studio, where I taped a show
hosted by my friend Jeff Macke and Matt Nesto (I met Matt for the first time, a
very nice guy); and wonderful Aaron Task, who hosts Daily Ticker on Yahoo, joined us. (Here
is a link to the show.) We talked
about China, Microsoft, and Cisco. Jeff, despite being my friend, did not
pull any punches regarding Cisco and Microsoft – I did not expect any less of
him. Jeff even wrote “R.I.P.” on Cisco’s chart.
We
own both stocks; Cisco we bought recently, Microsoft a few years back. We own
Microsoft despite
its management. I strongly believe Steve
Ballmer needs to be replaced, but the business is too good (it is still a
monopoly) and the stock is too cheap. But we own Cisco because of the management. I’m in
the minority, but I am a big fan of John Chambers; I believe he has done a
terrific job running the company. Since
he came on as CEO in 1996, Cisco’s revenues and earnings per share are up about
10-fold. But, as any successful company, it got too happy and too
fat. Recognizing this is half the battle, fixing it is the other
half. I encourage you to listen to Cisco’s last conference call (or at least read the transcript) – John
Chambers gets it. He said they’ll
streamline operations (cut out bureaucracy), cut $1 billion of costs,
refocus the company on core business through divesting underperforming and
non-core units, and continue to buy back stock (at today’s valuation they can
create a tremendous value). He admitted that at the high end their
switches are not as good as competitors’ – they’ll fix that. Switches are
about 30% of sales, and sales were down 9%; but other sales of other business
were very healthy.
Vitaliy N. Katsenelson, CFA, is Chief Investment Officer at Investment Management Associates in Denver, Colo. He is the author of The Little Book of Sideways Markets (Wiley, December 2010). To receive Vitaliy’s future articles by email, click here or read his articles here. . Copyright Vitaliy N. Katsenelson 2011. This article may be republished only in its entirety and without modifications.
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What the f*ck is this? Reader's Digest?
--
no offense pal, but
why some people think its cool to publish his own personal diaries..?
what is it? some kind form of 'Exibisionism' ? is it lack of true friends?
I wonder what George Carlin would say about that kind of people and diaries? I do remember what he said about 'photo pictires' :)))
George you are the man , always be remembered
alx
“This article may be republished only in its entirety and without modifications.”
-Yeah, I'll get right on that.
Dear Mom,
Went to Amsterdam, avoided everything fun. Then did a tour through the rest of europe, it had stuff and people in it. They were funny looking. Took pictures, I'll send them. Wrote a three page craptacular on how paper from companies that were worth something 50 years ago were under valued, nobody got it, so they are dumb. Mentioned an old, dead dot.com hardware company in hopes of saving my position on a suckers bet, even though cisco is a short into the floor opportunity from 23 bucks a couple of months ago.
Love Vittles.
Seriously man, what are you five? Sounds like a great trip. Get to the fucking point.
Okay that's it...I'm writing an article, if this buffoon can publish nonsense...I'm submitting double plus extra nonsense.
Just had to re-read this again. I wouldn't serve a dogs cock for breakfast to hilter for the non-pleasure of this nonsense.
Warning to typical ZH readers - DO NOT READ this puff-piece. Worse then Leo's stuff. Save yourself the time.
agree btw, both are not born in America..
Leo is greek some sort of , Vitaly is russian jew..
basically they're from what is called s. europe
seems guys dont get that core part of american character is
'KEEP MOUTH SHUT AND mind own business'
or as rich guy said 'public be damned'
alx