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Berkshire Hathaway
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By hartmanbirge
May 15, 2006

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I think that there comes a point at which we all need to periodically step back from the fray, detach, and examine things from different perspectives. After stepping back and reading that thread, I realized that I still have a long way to go on the aspect of self mastery which is so critical in not only successful investment but in many other aspects of life. If one can't master themselves, then ultimately they'll fail. It won't be too long before primordial emotions take control and lead us to do things that our rational being will later regret. In my case I have a very strong competitive nature � in many ways it's a defining characteristic. If not controlled then the competitive nature bumps into rationality and starts to control outcomes. Sometimes that's a good thing, but not always. In investing above all else, the rational being must be in control and it's a night and day difference in the psychological forces that one must bring to bear onto the investment landscape. So in that light I think I need some time to get away and try to figure out how to master the art of becoming rational dominant. In the interim I've been doing a heck of a lot of reading in what I'll call Chinese philosophy, Sun Tzu, annual reports, Munger's lists, and intensely studying the ultimate rational being � George Marshall. There's also the opportunity to do more stuff with the folks at work and family � not at all a bad outcome. It didn't take long for the prize of more free time to be quickly filled....

One book in particular is a prize. Duxbury gave me a great recommendation that I've taken to task � "Speculative Contagion" by Frank Martin. Fascinating book. There's a part in there which describes a bit of what Ben Graham went through in the depression and it's related to what I'm talking about above:

"At the quarter century mark of 1925, the great bull market was under way, and Graham, then 31 developed what he later described as a 'bad case of hubris.' During an early-1929 conversation with business associates Bernard Baruch, both agreed that the market had advanced to 'inordinate heights, that the speculators had gone crazy, that respected investment bankers were indulging in inexcusable high jinks, and that the whole thing would have to end up one day in a major crash.' Several years later he lamented, 'What seems really strange now is that I could make a prediction of that kind in all seriousness, yet not have the sense to realize the dangers to which I continued to subject the Account's capital.' In mid 1929, the equity in the 'Account' was a proud $2,500,000; by the end of 1932, it had shrunk to a mere $375,000. "

OK... So Graham gets smacked by reality... "Add to this the realization that I was responsible for the fortunes of many relatives and friends, that they were as apprehensive and distraught as I myself, and one may understand better the feeling of defeat and near-despair that ALMOST OVERMASTERED ME [emphasis added] towards the end."

Martin then says something very profound... "What has deeply impressed me about the 1934 edition of "Security Analysis" which Graham set to work on in 1932 was his uncanny ability to put MIND OVER MATTER [again..emphasis added]. He intellectually DETACHED himself from the travails that were wracking his portfolio, his confidence, and his sense of stewardship."

And in immersing myself in Chinese philosophy there is a ying and yang to life... a natural law of contrasts. You can't have dark without light. You can't have good without bad. Life can't have meaning without death etc. In examining what Graham went through in the depression it necessarily follows that his despair in the depths must have had an emotive and opposite corollary during the good times. What he ultimately did was remove himself and his ego from the process, rise above it, and look down rationally on the whole scene. One might say that he took control by letting go. This, I believe is the great secret to Warren Buffett and Charlie Munger. And as I've discovered far FAR easier observed than done....

When one steps back a bit from Berkshire Hathaway today one sees that there is a lot of pent up frustration on a lot of issues. I think that primarily it's related to a stagnant price and I loved the little quip of the birthday gift of a share of White Mountains and OSTK that Buffett got "so you'll remember what it's like to own a stock that actually goes up!!" And due to this stagnant price people get impatient....and they focus on things which in the great scheme are really them saying that they want the price to move. It's either deployment of the cash hoard or it's the share price or it's Buffett's mortality or it's the trading volume or the fear of supercats etc. In many ways I think that it was psychologically easier to watch BRK drop like a stone after the GRN purchase than to watch it "do nothing." I am not immune to those emotions and after I got away for awhile I realized that that's just what it was � emotion. And the yang to that emotive ying is excitement about BRK's prospects. And if I had indeed reached the level of rational control that I esteem to I wouldn't have been "excited" by this latest quarterly report � but I was. And I was certain that the price would finally move... and this has been immediately followed by more frustration. Why? Because I still have a long way to go to reach self mastery....

On the other hand, it's a rational act to examine one's own best loved idea and challenge it � viciously. And I can tell Buffett and Munger that at least in this little corner of the world that in the past month they've been put through the ringer. In the end my rational conclusion is that I am very satisfied to be partnered with them and I have reaffirmed my biases. And this I conclude is probably a lifelong commitment � more due to rational attachment than emotional attachment I hope. I realize that the high share price and low volume is partly meant to test the shareholder base. They don't want "flipping, flipping, flipping...fees, fees, fees." They want loyal partners and they want trust. To give that means that I've got to remove from my emotive reality the concern on what the rest of the world is doing.... The concern on the share price.... The building pressures to deploy the cash... Concerns on dividends and share buybacks... the concerns on the upcoming hurricane season.... The concerns on all that "stuff" that has nothing to do with the underlying business. We're partly in business to deal with hurricanes � as Buffett says, the fact that one comes doesn't mean we "failed."

And it's always going to come down to 1) The people you're aligned with; and 2) the business results. Those two things are the key � period. So long as those two factors are rational there's "nothing to add" as Munger would quip. As such, I have sentenced myself to an exile of sorts where I have banned myself from looking at the daily share price. Ah, the curious mind trained to absorb all data wants to know!! Try it sometime... it's HARD as hell not to look at the price. All that useless data craving to "confirm" that I'm right about the underlying business. All the postings here to "confirm" that others may agree. The share price and a peer group at any given moment doesn't confirm anything... it's not about a moment in time.... it's about a continuum of time. In this light, why should I really CARE what the quoted price is after the meeting? Why should I CARE what others pontificate on BRK's situation? The inescapable fact is that I did... so there's still much work to do. And I knew this meeting would be a "test" of sorts - and I failed - miserably. Yes, still much to do.

On the part that really matters I think that things couldn't be better. Most people here know this. Some who use secret sauce voodoo methods like "the Sharpe and information ratios" may form different conclusions. What was it? BRK's probability of under performing cash over 10 years is now 44%?" No....not 45%....not 43%....but 44%. Just looking at it tells you that it's a joke.... Oh how I wish I could bet the farm on that! But the company itself is chugging along nicely � in fact better than even my own optimistic projections anticipated. When I read the annual report which showed 2005 operating earning results of $2441 I couldn't have dreamed that nary 3 months later that I'd be calculating them to now be $3300 - $3400 or so once everything gets rolled in; seems like a good business result to me. And my view on the Iscar purchase is not so much what it brings in terms of earnings and potential growth. But it shows that Berkshire has an entire low-priced global market all unto itself. The fast money and the dealmakers are essentially locked out. I'd love to hear the screams of pain in the room next door as they can't play. They can't affect the purchase price. The market itself, awash in liquidity, can't do squat about it. Berkshire, due to its vast sums of integrity and honor is the only place in the world for some people. And because of this no matter what the external conditions, BRK has access to this global market. No one else in the world can compete. It's a global monopoly of sorts, and I for one conclude that integrity and honor, which brings low purchase prices no matter what, is a hell of a moat.

The macro scene seems to be unfolding in somewhat predictable patterns. The dollar is falling � fast. Commodities are in the grip of speculators. Interest rates are rising. Inflation seems on the verge of busting out... And I think the Fed Chairman has created a little crisis of confidence. In trying to be precise with his message (we'll rely on the data) he has in essence sent NO message. Data as we all know can be conflicting... So what we have is some people hanging on belief that rates will rise... others think he'll pause... there is no common picture. The market now is going to be gripped by every slice of data... in my view, what this means is that things won't necessarily move in lockstep as they're assumed to... If rates are expected to go UP...then the dollar should not be sinking... that's just one disconnect. I would imagine that somewhere in the bowels of derivative hedges that things are disconnecting. We'll see.

And if it does all "detach" and things start turning south rapidly, one has to be psychologically prepared. It doesn't necessarily follow that BRK's price would buck that emotive trend. But that's why we're here. We're built to manage chaos. Chaos is an environment that brings clearly defined winners and losers. If everyone wins, no one wins - our education system amongst others would do well to learn this truth. And when and if chaos arrives, one has to be psychologically detached enough to rationally act... It's the great secret of battle and it's the great secret of investing... joined at the hip.

In the meantime there is still much to be done on this quest for self-mastery. Frankly it's enlightening (how far one has to go) if not very discouraging (how "weak" one really is). For now, it's back to the books....


HB


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