May 15, 2000 at 12:00AM
"Over the next 20-30 years, Coke will be selling more soda and other drinks. They will also be able to raise prices moderately and increase margins. Therefore, if you own Coke, you'll do all right. [Regarding the stock's high valuation,] if you project growth long enough into the future, you can get high current valuations. So what you're seeing in Coke's stock price is the residual prediction that despite its recent stumbles, they'll be coloring a lot more water 20 years from now."
The Furniture Business
"Berkshire Hathaway now owns the leading furniture retailer in six states and, through CORT, has a substantial position in the rent-to-rent [as opposed to rent-to-own] furniture business. This all came about by accident. The furniture business is generally not a good one, but if you own the best companies, it's a fine business for us. It seems like CORT's business wouldn't be a good one, but it is."
"Who would have thought we'd buy an electric company in Iowa? But this is a perfectly decent investment. It also gives us a window into a field where a lot of crazy things are going on, which may give us other opportunities [see the discussion of the real options that MidAmerican has in my recent column]."
Net Jets' Expansion into Europe
"Europe is a bitch of a place to get into, with all its countries and rules. We are losing money and expect that this will continue for a while. But look at the situation faced by the 2nd mover: all the same troubles and we're already there. Coke has done this all over the world and look how it's paid off."
The Newspaper Business
"It is way less certain to be a wonderful business in the future. The threat is alternative mediums of information. Every newspaper is scrambling to parlay their existing advantage into dominance on the Internet. But it is way less sure [that this will occur] than the certainty 20 years ago that the basic business would grow steadily, so there's more downside risk. The perfectly fabulous economics of this business could become grievously impaired."
Earnings Manipulation and Accounting Shenanigans
"With so much money riding on reported numbers, human nature is to manipulate them. And with so many doing it, you get Serpico effects, where everyone rationalizes that it's okay because everyone else is doing it. It is always thus.
"Now, it's chain letter mechanics. Because it's mixed with legitimate activities like venture capital, it looks respectable. But we're mixing respectable activity with disrespectable activity -- hence my comment at the Berkshire Hathaway annual meeting about if you mix raisins with turds, you've still got turds. There is nothing in accounting that can prevent unscrupulous managers from engaging in a chain-letter-type fraud.
"I hate with a passion GAAP [Generally Accepted Accounting Principles] as applied to derivatives and swaps. JP Morgan sold out to this type of accounting to front-end revenues. I think it's a disgrace."
"Neither Warren nor I have any record of making large profits from interest rate bets. That being said, all intelligent citizens of this republic think a bit about this. In my lifetime, I've seen interest rates range from 1% to 20%. We try to operate so that really extreme interest rates in either direction wouldn't be too bad for us. When interest rates are in a middle range, as they are now, we're agnostic."
"Anyone has to be flabbergasted by Japan's recession, which has endured for 10 years, despite interest rates below 1%. The government is playing all the monetary games, but it's not working. If you had described this situation to Harvard economists, they would have said it's impossible. Yet at the same time, there's an asset bubble in Hong Kong. Why? Because Japan and China are two vastly different cultures. The Chinese are gamblers.
"This is a classic example of why, to be a successful investor, one must draw from many disciplines. Imagine an economist standing up at a meeting of economists and giving my explanation. It wouldn't be politically correct! But the tools of economics don't explain what's going on."
Advice to Other Investors
Opportunities for Small Investors
"If you have only a little capital and are young today, there are fewer opportunities than when I was young. Back then, we had just come out of a depression. Capitalism was a bad word. There had been abuses in the 1920s. A joke going around then was the guy who said, 'I bought stock for my old age and it worked -- in six months, I feel like an old man!'
"It's tougher for you, but that doesn't mean you won't do well -- it just may take more time. But what the heck, you may live longer."
"This is really important. For example, Hertz and Enterprise Rent-a-Car through practice evolution have developed personnel systems, etc. that work for them. They are like different species in similar ecological niches.
"Common stock investors can make money by predicting the outcomes of practice evolution. You can't derive this by fundamental analysis -- you must think biologically.
"Another example is Tupperware, which developed what I believe to be a corrupt system of psychological manipulation. But the practice evolution worked and had legs. Tupperware parties sold billions of dollars of merchandise for decades.
"We wouldn't have bought CORT if we didn't like the culture, which resulted from long practice evolution."
Mental Models for Investing
"You must know the big ideas in the big disciplines, and use them routinely -- all of them, not just a few. Most people are trained in one model -- economics, for example -- and try to solve all problems in one way. You know the old saying: to the man with a hammer, the world looks like a nail. This is a dumb way of handling problems."
Be Satisfied with What You Have
"Here's one truth that perhaps your typical investment counselor would disagree with: if you're comfortably rich and someone else is getting richer faster than you by, for example, investing in risky stocks, so what?! Someone will always be getting richer faster than you. This is not a tragedy.
"Look at Stanley Druckenmiller [who ran one of George Soros' funds, which is essentially being shut down due to large losses in speculative tech and biotech stocks]: he always had to be the best and couldn't stand that others were beating him by investing in these sectors.
"A lot of success in life and business comes from knowing what you want to avoid: early death, a bad marriage, etc."
Recommended Books and Comments on Silicon Valley
Munger was asked to name his favorite books of all time. He replied, "That's hard because I mix ideas from so many books. One fabulous book is The Selfish Gene, which provides basic insights on human conditions. [In the past, Munger has strongly recommended Influence: The Psychology of Persuasion, which I just read and liked enough to add it to my list of all-time favorite books related to investing.]
Later, Alice Schroeder, who covers the insurance industry for Paine Webber, asked if he'd read The New New Thing, Wall Street On Sale or the new translation of Beowulf. He had only read the former, and commented: "It was interesting enough for me to finish it. In some respects it describes an appalling culture. While Silicon Valley has made great contributions to society, some things come pretty close to 'the unacceptable face of capitalism.'"
Asked to elaborate on his comments at the Berkshire Hathaway meeting on Stern Stewart and their concept of Economic Value Added, Munger said:
"It's obvious that if a company generates high returns on capital and reinvests at high returns, it will do well. But this wouldn't sell books, so there's a lot of twaddle and fuzzy concepts that have been introduced that don't add much -- like cost of capital. It's accepted because some of it is right, but like psychoanalysis, I don't think it's an admirable system in its totality."
A number of people have asked whether I agree with Munger's dismissal of EVA. Sort of. I agree with his comment about the "twaddle," but fear that he may have deterred people from studying and understanding return on invested capital -- the single most important metric I consider when evaluating a company. Sure, Bennett Stewart's book, The Quest for Value, is unbearably dense, but ROIC is not a difficult concept nor is it difficult to calculate. For an understandable (not to mention free) take on ROIC, I recommend the Fool's School, A Look at ROIC, and Paul Johnson's Introducing ROIC as an Economic Measure (focus on pages 1-9 and 35-37). Johnson is one of the authors of The Gorilla Game, my favorite book on tech investing.
-- Whitney Tilson
Whitney Tilson is Managing Partner of Tilson Capital Partners, LLC, a New York City-based money management firm. Mr. Tilson appreciates your feedback at Tilson@Tilsonfunds.com. To read his previous guest columns in the Boring Port and other writings, click here.
- May 15, 2000 at 12:00AM