The Boring Portfolio, Mar. 15, 1999

<THE BORING PORTFOLIO>
Berkshire's Annual
Buffett's Comments Reviewed

By Dale Wettlaufer (TMF Ralegh)

ALEXANDRIA, VA (March 15, 1999) -- The Boring Port took a step back today as Berkshire Hathaway (NYSE: BRK.B) gave back much of what it gained on Friday going into Saturday's publication of the annual report and chairman's letter to shareholders. I was particularly pleased to see Mr. Buffett comment on selective disclosure by corporations. One of our largest indirect holdings, Coca-Cola (NYSE: KO), really walks the line on this issue, in my opinion. The company's volume updates are not widely disseminated and Coca-Cola executives have met numerous times in the last few months with analysts without making provisions to meet individuals investors via teleconference or via a replay of the analyst conference call.

We wholeheartedly agree with our chairman's comments: "Today, many companies matter-of-factly favor Wall Street analysts and institutional investors in a variety of ways that often skirt or cross the line of unfairness. These practices leave the great bulk of shareholders at a distinct disadvantage to a favored class. At Berkshire, we regard the holder of one share of B stock as the equal of our large institutional investors." To date, my communications with Coca-Cola on this issue have been fruitless. I hope they listen to one of their largest shareholders on this issue and take action to modify the means by which they communicate with shareholders, many of whom have stood by the company through the last couple years of poor performance.

Mr. Buffett also discussed merger & acquisition accounting shenanigans in which a company will stuff into one quarter "extraordinary items" amounting to huge diminution in shareholders' equity. Analysts look past the extraordinary items routinely and then look at net income in future quarters sans the accumulated expenses that come out of the accrued restructuring reserves on the balance sheet. Ben Graham routinely discussed the appropriation of surplus (shareholders' equity) and some of the shenanigans in that. By the way, this year Janet Lowe is publishing a collection of Ben Graham's writings, lectures, addresses and so forth. It's all primary materials, so I think it's highly valuable. I've read the galleys a couple times already and will read them a few more times. If Warren Buffett ever does write a book, I think you will see in that a lot of what you saw on pages 11-14 of this year's letter to shareholders.

Apropos of the discussion of how the market measures economic output, I'm a little dismayed to see management at Cisco Systems (Nasdaq: CSCO) paying so much attention to the question of pooling versus purchases of other companies. In a recent interview with the Fool's Brian Graney, Cisco Executive Vice President Don Listwin commented:

"I'd like to take the opportunity to suggest that it is very much our position that pooling is an advantage in the Internet economy for companies large and small. It is a transaction capability that helps smaller public companies particularly compete with larger companies. We would like to not see a change in the accounting practices [that would] take away that type of flexibility in the Internet economy."

I understand that technology-intensive companies want to write off purchased R&D right away, since spending to maintain and replace the acquired assets is recorded right away. So you have to mix capitalized spending with immediate spending, which distorts the income statement. So I agree with Mr. Listwin's sentiments there. But capitalization of acquired R&D or goodwill also gives a truer picture of the financial resources that a company has had to deploy to generate cash flow and what it will need to deploy in the future to maintain and build cash flow. I've discussed this at greater length in a couple articles I did for the Fool's Evening News recently:

• The Evening News 02/25/99: Financial Karma's Gonna Get You
• The Evening News 02/26/99: Financial Karma, Part 2

I called those articles "financial karma" because the market eventually figures out through looking at the income statement, cash flow, and balance sheet what's going on at a company, in general, unless there's outright fraud. Companies are rewarded or penalized in time for the true economic value they build. I believe too many executives think investors only know how to look at the income statement. The income statement is only useful if it accurately portrays the economic cash flows of a corporation. In that it ignores incremental working capital needs for growing businesses and in that it double-counts many expenses or allows managements to under-count other expenses, the income statement often is not useful as a stand-alone financial statement. But CEOs and CFOs should remain secure in the knowledge that the market does know how to asses cash flows properly.

Other Notes

Someone sent me this article from what some Omahans affectionately call the Omaha Weird Harold (that's a Fat Albert reference -- it's really the Omaha World Herald). The article is about plans for Berkshire's 1998 annual meeting, held on the first Monday in May.

I'm going to be on MSNBC tomorrow morning talking about Dow 10,000. I was on last Friday morning and I think I jinxed the Dow. Actually, I talked more about getting your credit card debt paid down, investing in an index fund, and starting early. I think we'll talk about the same things we talked about on Friday. I also wrote some thoughts on the issue on Friday about how indexes understate performance by not including dividend reinvestment. Also, a few e-mailers pointed out to me the inferiority of the price weighting method used for the DJIA rather than the market cap weighting average or non-weighting methods used for other indices.

I took some time to look at past Washington Post (NYSE: WPO) annual reports this weekend. Its 10-K should be out within the next ten days or so. Take a look at the assets of this company -- it's a pretty neat collection of businesses.

On recent Borefolio acquisition candidates, take a look at this article from Florida's Insurance News on American Bankers Insurance Group (NYSE: ABI). In it, lawyer Charles Grimsley alleges that American Bankers' certificate of authority is at risk. If this company was not being taken over and we were still looking at it, we would have to look at this article carefully. But since those don't apply any longer, I just include it here as a point of interest.

I answered questions on why we bought Gateway (NYSE: GTW), posed to me in last Friday's Rule Maker portfolio report, if anyone's interested.

Alex today wrote the Fool on the Hill on Buffett's discussion of options. By the way, someone took my title "We Love Buffett, But We Don't Deify Him" and shortened it to "We Love Buffett." There's a bit of a difference in those two.

Have a good Monday and we hope to see you on the Boring message board soon.

• Discuss Boring Investing on the Boring Port message board.
• 10/01/98: The New Boring Port Transitions Facts

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Stock  Change    Bid
BRKb  -152     2490.00
CSL   +  15/16 43.69
CSCO  +1 3/4   105.00
GTW   +2 3/4   70.25

                   Day    Month   Year  History
        BORING   -0.53%   4.24%  -0.26%  33.93%
        S&P:     +0.98%   5.57%   6.67% 117.65%
        NASDAQ:  +2.10%   6.27%  10.89% 133.58%

    Rec'd   #  Security     In At       Now    Change
  6/26/96  225 Cisco Syst    23.96    105.00   338.31%
  8/13/96  200 Carlisle C    26.32     43.69    65.95%
 12/31/98    8 Berkshire   2244.00   2490.00    10.96%
   2/9/99  100 Gateway 20    72.38     70.25    -2.94%


    Rec'd   #  Security     In At     Value    Change
  6/26/96  225 Cisco Syst  5389.99  23625.00 $18235.01
  8/13/96  200 Carlisle C  5264.99   8737.50  $3472.51
 12/31/98    8 Berkshire  17952.00  19920.00  $1968.00
   2/9/99  100 Gateway 20  7237.50   7025.00  -$212.50


                             CASH   $7658.52
                            TOTAL  $66966.02