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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.”
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.
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. 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. 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 – 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.
P.S. Painting “Handyman” by my father Naum Katsenelson
Copyright Vitaliy N. Katsenelson 2011. This article may be republished only in its entirety and without modifications.
I am the CEO at IMA, which is anything but your average investment firm. (Why? Get our company brochure here, or simply visit our website).
In a brief moment of senility, Forbes magazine called me “the new Benjamin Graham.”
I’ve written two books on investing, which were published by John Wiley & Sons and have been translated into eight languages. (I’m working on a third - you can read a chapter from it, titled “The 6 Commandments of Value Investing” here).
And if you prefer listening, audio versions of my articles are published weekly at investor.fm.