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Berkshire Hathaway
Mass and Audacity - Spirit of the Offense!

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By hartmanbirge
October 17, 2005

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Well the results are in. Some of the biggest bluest chips are historically cheap. I cannot recall another time in my life that things have fallen out quite like this. I think it was the 1970s bear market that last left us with the best companies selling so cheaply en masse but at that point in my life I didn't know what investing was � so this time is unique for my age bracket. Why is it that the NASDAQ holds up fairly well while the blue-chip stalwarts I love are mired in a never-ending slump with little to no "price movement?" Perhaps a better question is why should I care the reason? Or is it just a case of it is what it is? I think that investment devolves to two essential elements � analysis and temperament. When it comes to the analytical portion, of all the thousands of well-known Buffett quotes it is this one which I always carry in my mind:

"The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage. The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors."

The key to that quote is a focus on sustainable quality. It trumps everything else. In this light I will risk embarrassment and discuss the biggest purchase I've made since my initial purchase of BRK some seven years ago. Beginning with a look at all the companies with "sustainable moats" I think the most important question is to ascertain whether the great blue-chips are relatively cheap due to something inherently fundamental with their businesses. We have Berkshire, of course, which actually does have a somewhat rational reason (internal issues of alleged mismanagement and uncertain environment post Katrina). But there are also companies like BUD and Wal Mart and heck even Microsoft to name a few. Are the problems temporary or permanent? Time will tell but I tend to believe the former. They're ALL relatively inexpensive which lends some credence to the argument that company specific risk isn't the issue so much as market psychology. Of all of them I firmly believe that at this price level Wal Mart stands above the pack. WMT is lying there � prone and stricken for all sorts of reasons that I quite frankly find to be superficial. That said, the merits of value, debatable though they are, are probably relatively easy to derive. Looks cheap � is cheap. As such, the question now moves from the critical one of analysis over to one of temperament � the critical and over-looked second leg of successful investing.

Temperament

Bet big on high probability events � or in military terms � the "spirit of the offensive." There are two sacred principles of the offensive, which I will try to tie to investing because it is certainly core to the Munger and Buffett philosophy. Mass and audacity. Simply put mass is the accumulation of assets at a point in place or time and audacity is the willingness to use them in such a way as to take advantage of an opportunity � a temporary moment of weakness or vulnerability. In this light, finding a great company at a decent valuation seems meaningless to me unless one is going to seize the day and make it a sizeable position. The debates on the merits of this approach are legion on this board. I ask - What's the point of taking action if it adds up to nothing? It's nothing but action for action's sake or just another in a long series of "little decisions" that we constantly force upon ourselves. Anathema! An offensive taken across a broad front ala WWI is an abomination of the core principles of mass and audacity or the massing of force or effects on a narrow point in time and place.

There's a line from the movie "Patton" which I play over and over again (yes the HB household watches that movie every few months just so the lessons of competition and audacity sink in and become deeply ingrained in our children). Patton - "I don't want to hear any reports that we're holding our positions. We're not holding anything. Let the enemy do that. If we're holding anything we're going to hold him by the nose, and kick him in the ass. We are constantly advancing. We're going to go through him like crap through a goose! My God I...I actually feel sorry for those poor bastards we're going up against. I really do." Etc. Those aren't just words � it's a core philosophy and it certainly applies not only to the military but to all walks of life - business and investing being no exception. It's the way the game of life should be played. "We play to win all the time. I wouldn't give a hoot in hell for a man who lost and laughed. That is disgraceful."

When it comes to our personal reality, one can't just spout those words � they have to be seized and internalized to have meaning. Patton later did just what he said he would do. How? Was he constantly expending his force in a scatter-brained approach across a broad area? No. He massed his force at the right place and then intuitively seized opportune times. Once identified, he attacked with extreme decisiveness and audacity. Once he broke through he used maximum speed, violence and shock (audacity) to create mass effects of chaos and confusion. He had a "feel" for the enemy's vulnerable points and he seized upon that vulnerability and drove through the guts. When the time came there was no hesitation. He didn't sit around pontificating over his options and do a long series of what-ifs and decision matrixes. That crap takes valuable time at the very time that the moment of vulnerability or opportunity needs to be seized. Time must be seized lest it evaporate. The thinking comes prior to the moment in time � not during.

Why is it that Patton can do a brilliant maneuver and turn Third Army 180 degrees and attack the southern flank at The Bulge en masse, and break through to the besieged 101st Airborne at Bastogne? Others said it was "impossible" and even "reckless." I would submit that they hadn't really thought about it � causing decision sclerosis. Patton already had the plans in place. He executed with violent precision and seized the day � using a brief moment of time (temporary factors that could be leveraged) to his advantage. One of the big reasons for this ability is that Patton had very early in his life captured the "spirit of the offensive." He played to win as opposed to playing not to lose.

It's easy to see but hard to do. When Buffett is accumulating cash by the billions he is building investment mass. I would guess that when that mass is employed that the execution will be sudden and "violent," and done in such a way that it will radically change the Berkshire asset base. Others would not dream of doing it that way because of the perceived "risk" and "recklessness." Words that Patton was well accustomed to.

Is Wal-Mart such an opportunity? Always debatable of course but yes I think it is. I loaded up on Wal-Mart (>15%) the past several weeks because I firmly believe that it has a sustainable moat that will last a good chunk of my remaining lifetime. It hasn't been this cheap in a long time. It's cheaper than when Buffett said he "missed it." The management is well regarded and shareholder friendly. The return on capital is high. It has critical mass and enormous efficiencies of scale. It has momentum. It has the ballast to seize foreign opportunities and only has 3% of the global retail market as I recall. It is a trendsetter in logistics efficiency. It is a monopsony power of the highest order � I cannot recall another monopsony which is as dominant. It has slowly squeezed the life out of the competition (destroyed actually) across the retail spectrum and continues to do so. I LOVE companies that do that.

What happens to that competition when the macro environment gets ugly and the easy money is gone? My guess is that they whither and die as they deservedly should. WMT is well positioned to take more business from the squeezed consumer who rationality will dictate a one-stop-shop on the cheap. In so many words I love this company. How much capital would it take for a good competitor to displace it? It would be in the hundreds of billions of dollars. I did a lot of sell x to buy y and bought as much as I could. I can't explain the timing with much other than a strong gut hunch that this was a rare opportunity so best seize the day with audacity and mass. Everyone on earth is sitting there and staring at WMT � some will act and others will sit. If it gets cheaper I buy more when I can. In my preferred scenario, I may not have to do anything else in my portfolio for the next five to seven years. Life just got a whole lot more simple. Two companies that I have to "monitor."

For the naysayers I ask, how often does one find "sustainable competitive advantage" that is fairly easy to recognize selling for historic lows?? It certainly doesn't happen all that often � about once per decade or so. In this light I think that the individual investor has a big advantage. We can load up for years and then pounce on a rare opportunity in such a way that it sets us up for the next five or ten years. All we have to do next is accumulate our excess cash and wait for the next rare opportunity. Meanwhile we can concentrate on our day jobs. If I'm wrong and blew it with this move then so it is � best to die the way you want to live.

HB


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