Berkshire Hathaway shareholders hear wise words
Last month, some 24,000 Berkshire Hathaway shareholders descended on Omaha, Neb., to listen to Chairman (and superinvestor) Warren Buffett and his partner, Charlie Munger, answer questions for five hours. Here are some snippets, paraphrased:
On speculation: Once people hear that their neighbor made a lot of money on something, the speculation impulse takes over. We’re seeing that in commodities and housing. … Orgies tend to be wildest toward the end.
On successful investing: If you start young and read a lot, you’ll do well. There are no secrets to investing that only some select priesthood knows. Successful investing requires a quality of temperament, not a high IQ. … You must be able to think for yourself and constantly look for opportunities. You can’t act every day, but you can learn every day. Follow a framework that’s been successful.
On education: The public education system in this country is dreadful. … I (Buffett) don’t like the idea of a two-tiered school system, one private, one public. I don’t care about the quality of the public golf courses in Omaha, because I play on a private course. It’s the same in education: If the wealthiest and most privileged families send their children to private schools, they won’t care about the public schools and the public schools will suffer. In the U.S., everyone should have equal opportunities.
On the trade deficit: The trade deficit is at $618 billion. … The U.S. is an incredibly huge, rich country. Suppose it were a vast farm. Assume that each year, we consumed 6 percent more than the farm produces, and paid the difference by selling off, or mortgaging, little pieces of the farm. We can’t even see what we’ve sold, since the farm’s so big that we don’t even feel it. The rest of the world is happy to take a little piece of our farm. That’s been going on for a while and has accelerated. Eventually the world will own a big part of the U.S. We send $2 billion of our wealth abroad daily.
We’ll offer a few more nuggets next week. In the meantime, read Buffett’s educational letters to shareholders at www.berkshirehathaway.com.
Ask the Fool
Q: I see that US Airways posted a profit for its latest quarter. Is this a good time to invest in the airline industry? — R.T., Syracuse, N.Y.
A: Think twice about it. According to Fortune magazine, between 1995 and 2005, the industry’s annual rate of return to shareholders was a negative 16 percent, worse than just about every other industry. (Homebuilders topped the list, gaining an average 29 percent annually.) At any time, the airline industry is usually facing at least some of the following challenges: volatile fuel costs, fare wars, the high cost of equipment, union negotiations, complicated scheduling logistics and costly empty seats. Southwest Airlines, long profitable, is a very rare business in the industry.
Q: What do “same-store sales” numbers represent? — K.W., Bloomington, Ind.
A: They reflect sales at stores open a year or more. Imagine that Buzzy’s Broccoli Beer (ticker: BRRRP) reports sales of $200 million in 2004 and $400 million in 2005. That looks great — 100 percent growth! But now assume that Buzzy’s had 10 stores open in 2004 and 20 open in 2005. If its same-store sales for 2005 came in at $200 million, then sales at its stores open for at least a year have been flat. That’s a big difference.
If you double your number of stores, then of course your total sales will probably go up. Some retail chains might open many new units, but their average sales per store might be going down. Same-store numbers (also called “comps”) can help you see things clearly, comparing apples to apples.
Expansion can be good, but companies should be increasing sales at their existing stores, too. Sales growth solely through adding stores is unsustainable.
My dumbest investment
When I started trying to speed up my retirement account, I was guided to stocks. This was just before the peak of the dot-com boom. I listened, watched and read everything. CNBC was my window to the world. The Street.com was my online home page. I signed up for trial memberships with all the respected brokerages in order to read their research and recommendations. I then invested my meager $20,000 life savings on margin (borrowing additional money). Within a year I was up to $80,000, but the market’s bubble burst, and I ended up $80,000 in debt. The sad lesson: The recommendations from the “respected” firms were B.S. — hyped to create profits for themselves. — J.M., Santa Rosa, Calif.
The Fool Responds: You might take some comfort in recent brokerage settlements that have major brokerages now offering more objective research alongside their own.