What Buffett Said (And What He Didn’t!)

Whenever Warren Buffett and Charlie Munger speak, it pays to listen.

Not only do they boast an enviable — and outrageously long! — track record of investment success, but they are also brutally honest and wildly entertaining.

All of that was on display this past weekend during Berkshire Hathaway’s annual shareholder meeting. An event equally, or perhaps even better, known as Woodstock for Capitalists.

Now, for the first time since 2010, I wasn’t paying attention to the meeting because of an active recommendation on Berkshire’s stock for the real-money portfolio I share with Income Superstars readers.

I actually recommended selling BRK.B shares at the end of 2016. My father locked in a 120.5% total return on his investment. (That was on top of a 99.3% total return he bagged with a separate sale of BRK.B back in 2014.)

Still, I WAS paying attention. And even if you weren’t, I’m pretty sure you’re being bombarded with snippets of what was said. After all, the event has become a media sensation, with live coverage and a million follow-up articles analyzing every single word that was uttered.

Of course, there was one particular Berkshire strategy that did NOT receive any attention at all. More on that in a minute.

First, let me say that I largely agree with the points that were made, including the following:

EBITDA isn’t a useful measure of a company’s profitability or attractiveness.

This idea has been drilled into my head ever since I started working on Wall Street. And while I still pay attention to the metric because it has become a common language, I would much rather base my investment decisions on more-traditional yardsticks that are less easily abused.

Apple has been one of the best values in tech.

I’ve recommended the stock to my paying subscribers on past sell-offs, and currently own some of the shares myself. Indeed, I have favored Apple over other big-name tech companies for years now — not just because of its dividend payments but because of its defensible brand and real earnings power.

Apple is trading at a record high. And just yesterday (May 8, 2017), its market cap hit $800 billion for the first time.

Capitalism isn’t a perfect system, but it’s the best one we’ve come up with.

Buffett’s point was that there will always be some losers in the game, but capitalism has created a wealthier society overall. And with adequate backstops in place, even the least fortunate are living better lives than they could have otherwise.

Puerto Rico’s bankruptcy is no surprise.

As Munger put it, "They behaved like idiots." I would add that although Puerto Rico’s implosion amounts to the largest municipal bankruptcy in history, it will not stay that way for very long. That’s because plenty of other state and local governments are being run just as poorly … especially when you consider the massive pension problems many of them face in the years ahead.

Our medical system needs serious improvement.

I’ve highlighted some of my own experiences in past articles, and I’m sure you have your own stories to share. Suffice it to say that our system is riddled with inefficiencies … outrageous costs … and many questionable outcomes. And no, I do not believe the new healthcare bill does enough to address those problems.

Valuing companies takes more than just looking at the numbers.

It is always a good idea to evaluate companies using fundamental analysis. However, you must also look at less-tangible things like brands, competitive advantages, and managerial talent.

There are some great values in China right now.

In fact, Munger basically said there are MORE values in China than the U.S. at the moment. I have certainly been finding some myself … including a Chinese stock that I recommended for my Dad’s real-money portfolio near the end of last year.

The Global X China Consumer ETF (CHIQ) is up 20% so far in 2017.

Jack Bogle should be celebrated as one of the greatest advocates for individual investors.

The idea of indexing is powerful, accessible, and now universally recognized as a great path for many American portfolios. However, that wasn’t always the case … and we owe it all to Bogle’s vision. Meanwhile, Vanguard itself is a rare financial company that is truly doing the right thing by its customers … and that is the reason I use it for all of my own family’s accounts.

Of Course, There’s Something Else Buffett & Munger
Could Have Discussed but Didn’t …

Berkshire Hathaway is widely known for owning great companies over long periods of time. But Buffett and Munger use additional strategies to boost their returns.

For example, there is one technique that Berkshire has used but doesn’t really talk much about … maybe because it involves derivatives — the very same type of investments Buffett has derided in the media plenty of times before.

Indeed, during the height of the financial crisis, Buffett told Berkshire shareholders:

"Derivatives are dangerous. They have dramatically increased the leverage and risks in our financial system. They have made it almost impossible for investors to understand and analyze our largest commercial banks and investment banks. They allowed Fannie Mae and Freddie Mac to engage in massive misstatements of earnings for years."

Elsewhere, he described the same investments as "financial weapons of mass destruction," a phrase that got TONS of attention from reporters.

So how do we explain this seeming contradiction? I’ll let Buffett do it himself from an old shareholder letter:

"Considering the ruin I’ve pictured, you may wonder why Berkshire is a party to 251 derivatives contracts … The answer is simple: I believe each contract we own was mispriced at inception, sometimes dramatically so.

"Our derivatives dealings require our counterparties to make payments to us when contracts are initiated. Berkshire therefore always holds the money, which leaves us assuming no meaningful counterparty risk."

Translation: Berkshire uses these investments conservatively … it typically sells them rather than buys them … and it collects money upfront for doing so.

This strategy is almost identical to Buffett’s other insurance businesses. And it has already handed Berkshire BILLIONS in "free" cash flows.

And what’s more amazing is that regular investors can use this same strategy in their own accounts!

I know it might sound esoteric, complicated, or dangerous. But that is simply NOT the case.

In fact, I recently told you how it works in this article about selling put options.

So by all means, pay close attention to everything Warren Buffett and Charlie Munger have been saying. I think much of it is spot-on.

But pay even closer to attention to what they have been DOING — not just in terms of what stocks they’ve been buying, but also what other strategies their firm uses behind the scenes.

Best wishes,
Nilus Mattive

Your thoughts on “What Buffett Said (And What He Didn’t!)”

  1. The truth is long term investments in equities did well over a 70 year period. Now, is the next 70 years going to do the same, yes, most likely. Here is where the fact of the investing gets definitive, DO YOU THE READER, THE INVESTOR, have 40 years, or 50 years to wait, after taking a hit with a major down, from ALL TIME HIGHS IN EQUITIES, WHERE THE MARKET IS LIVING TODAY? i SAY no you don’T. Do you think if another DOWN SIDE of equities, that happened in 2006/2008, recovery will happen like we witnessed again? Was the return of a higher market since that time, a result of earnings or production, I say no, it is a result of inflated equity values, FROM MORE DEBT. Inflated EQUITIES.

    Real security backed investments, like holding a mortgage on real property, or holding land, or a timber stand, or other hard assets, ( you know what other hard assets I insinuate) that is investing with conviction, and security. When compared to the investment of an equity, that is not backed with security value of any type, do you believe in, words spoken, to put “investment” funds in a non security backed HIGH MARKET OF EQUITIES. Is it good investing not only to put money in a non “security” back investment like equities, in the highest market the world has ever seen? Choose your posion my dear friends. Right now non secured investments are as risky as your participating in a dual with only your host having a pistol, and you are 10 steps away from your host facing him/her. In history, and in investing 101, percentages to purchase high and HOPE it goes higher is not the play right now. Look elsewhere to a return on capital, or be satisfied with no return on capital for now. Hold, Hold. I could tell you more but will not. Put your thinking cap on, don’t be so trusting, and open with your need to distance your self from managing your investment funds, you see, in years past, we handed funds to a professional in a place we call the Stock Market, and returns were expected, and attained for the most part. Now, today, to do such is an invite to purchase high from a professional/market entity, that understands what I am saying. Most educated stock professionals with a ounce of experience, know.

  2. When one purchases an investment with no security he is always at the mercy of forces that one can not control. So, no matter what the ANYONE says, unless they are willing to put up security, on the deal (mula, bucks, had assets) they are talking about, don’t believe a word that is spoken. Mortgages, holding the asset (real asset), or hard, hard investment items, it is all hog wash. The investing industry wants you money now your investment.

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