Dear Mr. Buffett_ What an Investor Learns 1,269 Miles From Wall Street - Janet M. Tavakoli [118]
Obviously, this is a gross oversimplification. My point is there is substance behind the numbers. First and second quarter 2008 earnings were down, but Berkshire Hathaway’s businesses continued and will continue to generate earnings. As noted before, there was an unrealized loss on derivatives, but shareholders know it is unlikely a payment will ever be due, Berkshire Hathaway has wisely invested the premium income, and Berkshire Hathaway is not leveraged and has lots of cash.This is why Warren Buffett and Charlie Munger are right to call this fluctuation meaningless. Meanwhile, the operating businesses generate earnings, and Warren is on the hunt for more good companies to grow operating revenues.
Intelligent investors revisit the stocks they own periodically, especially as market conditions change, but they do not overreact to a change in market prices. Although one’s favorite holding period may be forever, you do not have to hold stocks you no longer favor. If you are a value investor, you won’t have to check your portfolio every day, but you should periodically reevaluate your decisions.
Berkshire Hathaway may never match the stellar returns of its early years, but it is likely to remain a great steady performer returning 10 percent to 15 percent returns over a five-year period. Even if a prolonged recession hurts returns, I am still likely to be much better off than the rest of the market. Berkshire Hathaway’s companies make things people use, want, and need. While results may not be as exciting as they were in previous decades, they are likely to be satisfactory in the long run.You will not gasp with delight one day only to gasp for air the next. It is not my only holding, but it is one I do not worry about.
When we had lunch, Warren encouraged me to use what I know, so I fell back on my engineering background to look for opportunities. For example, in the late spring of 2006, it seemed to me oil pipe replacement orders were not keeping up with stress corrosion cracking and ordinary corrosion. A pipeline at Alaska’s North Slope proved the point by leaking oil through a corroded pipe shortly after I bought steel shares. The smaller steel companies were ripe for takeover and produced gains of more than 30 percent.
In December 2006. I wrote Warren that I had rejected a pitch by a California-based hedge fund manager that did not seem to offer anything new and demonstrated some inconsistencies. They strongly believed in the housing bubble, so they did not own their own homes. Yet this strength of conviction did not extend to their personal transportation. They strongly believed energy prices (and gasoline prices) would explode; yet they drove gas guzzling sports cars (except for the salesman, who seemed smug because he said he drives a hybrid). I was already long energy and oil-related stocks. I had bought shares in two steel companies, which produced gains of more than 30 percent when they were acquired by larger companies, and I profited when my shares in a small potash company was acquired by a large chemical company, and I do not charge myself high fees. Warren Buffett takes advantage of these kinds of market opportunities when he finds them. These are called merger and acquisition (M&A) opportunities, and they are sometimes loosely (and not technically correctly) called merger “arbitrage” opportunities. These are not meant to be long-term holdings, but are a way of taking advantage of a good opportunity when it seems to fall in your lap. Sometimes, however, you can be wrong (it is not a genuine arbitrage) and you fall off your chair. The other problem with merger and acquisition opportunities is that once the acquisition occurs and one pockets a gain (currently a short-term gain is taxed higher than a long-term gain and often these are short-term