Wednesday, November 17, 2010 5 comments ++[ CLICK TO COMMENT ]++

Warren Buffett receives presidential medal of freedom... plus thoughts on several other issues

I think he is deserving of it—some won't agree—but it looks like Warren Buffett will receive the Presidential Medal of Freedom. Although awards of any sort are always controversial, given questionable recipients in the past, this is an important one. This is the highest civilian honour in the United States of America (the highest civilian award in Canada is the Order of Canada, although some seem to suggest it is the Order of Merit). You can't get anything higher unless you are in the military. Warren Buffett will be receiving the medal along with several other prominent individuals such as Yo-Yo Ma (artist), Bill Russell (basketball player), George H. W. Bush (former president), Angela Merkel (German chancellor), and a few others.

Although some may disagree with awarding it to Warren Bufffett, I think it is an appropriate choice. If America represents capitalism, it is only fitting the greatest capitalist of modern times, Warren Buffett, receive the highest civilian honour bestowed by the US government.

Moving on to unrelated matters...

In Defense of Government

In an opinion piece for The New York Times today, Warren Buffett defended the actions of the government during the financial crisis a few years ago. Here is an excerpt:

DEAR Uncle Sam,

My mother told me to send thank-you notes promptly. I’ve been remiss.

Let me remind you why I’m writing. Just over two years ago, in September 2008, our country faced an economic meltdown. Fannie Mae and Freddie Mac, the pillars that supported our mortgage system, had been forced into conservatorship. Several of our largest commercial banks were teetering. One of Wall Street’s giant investment banks had gone bankrupt, and the remaining three were poised to follow. A.I.G., the world’s most famous insurer, was at death’s door.

Many of our largest industrial companies, dependent on commercial paper financing that had disappeared, were weeks away from exhausting their cash resources. Indeed, all of corporate America’s dominoes were lined up, ready to topple at lightning speed. My own company, Berkshire Hathaway, might have been the last to fall, but that distinction provided little solace.

Nor was it just business that was in peril: 300 million Americans were in the domino line as well. Just days before, the jobs, income, 401(k)’s and money-market funds of these citizens had seemed secure. Then, virtually overnight, everything began to turn into pumpkins and mice. There was no hiding place. A destructive economic force unlike any seen for generations had been unleashed.

Only one counterforce was available, and that was you, Uncle Sam. Yes, you are often clumsy, even inept. But when businesses and people worldwide race to get liquid, you are the only party with the resources to take the other side of the transaction. And when our citizens are losing trust by the hour in institutions they once revered, only you can restore calm....

Well, Uncle Sam, you delivered. People will second-guess your specific decisions; you can always count on that. But just as there is a fog of war, there is a fog of panic — and, overall, your actions were remarkably effective.

I don’t know precisely how you orchestrated these. But I did have a pretty good seat as events unfolded, and I would like to commend a few of your troops. In the darkest of days, Ben Bernanke, Hank Paulson, Tim Geithner and Sheila Bair grasped the gravity of the situation and acted with courage and dispatch. And though I never voted for George W. Bush, I give him great credit for leading, even as Congress postured and squabbled.

You have been criticized, Uncle Sam, for some of the earlier decisions that got us in this mess — most prominently, for not battling the rot building up in the housing market. But then few of your critics saw matters clearly either. In truth, almost all of the country became possessed by the idea that home prices could never fall significantly...

I have no idea why Buffett wrote this article at this point in time—Buffett is smart and always has a reason for everything—but my wild guess is that this piece is to defend the government against attacks by Congress and some prominent public individuals. There has been some public criticism of the Federal Reserve in the last week, including suggestions to strip the quasi-independency of the central bank and bring it more under the power of Congress. I hope this never succeeds. Many conservatives, as well as prominent investors like Jim Chanos and Seth Klarman, appear to be critical of the Federal Reserve; while many liberals, including individuals such as Paul Krugman, is supportive of the Federal Reserve. Even some hardcore conservatives like John Mauldin, who are skeptical of Quantitative Easing II, are against the attempts by Congress to strip some power from the Federal Reserve.

I am against trying to strip the Federal Reserve of its power. One of the promoted strategies of changing the mandate of the FedRes of battling inflation and unemployment, to just inflation, seems misguided. Although I think the US government did the right thing in the 1930's/1940's of literally "taking over" the Federal Reserve, I don't that would be the right decision today.

Todd Combs, Who Knew Ye?

I haven't commented on the recent hire by Berkshire Hathaway, Todd Combs. I am not familiar with hedge funds so I don't know anything about him (it appears others aren't familiar either). The pick is surprising but it is in line with the thinking of Warren Buffett and Charlie Munger. Todd Combs appears to have a strong record (unverified returns can be found here: set 1, set 2), albeit a very short one, but I think he got hired for his personality, knowledge future goals, and ethics, rather than anything to do with returns.

In the past, it has been suggested that 3 or 4 portfolio managers will be hired but I have a feeling that Todd Combs will be the most important investment manager of any that are hired. It is also likely that he will be the "main" capital allocator at Berkshire Hathaway (unless a superstar somehow joins the company). This is all pure speculation on my part but I say this because Combs appears to be an "insurance guy"—I believe he worked at a competitor to Geico and concentrates his investments in financial companies—and Berkshire Hathaway is still primarily an insurance company. Insurance exposure is also what can cause massive losses and destroy the company. My guess is that future hires will likely not have the same knowledge of insurance. However, my guess is that other portfolio managers will likely produce far higher returns than Todd Combs (I say this because I have a feeling financials are entering a long-term secular decline. The US economy, as well as most of the developed world, has likely "tapped out" when it comes to financial profits, financial services, financial employment, and so forth.)

Because the CEO role is being split—Buffett holds both, CEO and CIO—the company's daily operations will also be quite different in the future. The public face of Berkshire Hathaway will be the CEO, not Todd Combs or another portfolio manager. The annual shareholder meeting will also lose its popularity in the future.

The track record is way too short to say much but one big difference with Todd Combs is that he actually sells short quite a bit. I'm not much of an expert on Warren Buffett but I don't think he used short-selling as a key strategy. I think he did sell short in his hedge fund days but I can't recall much capital being allocated to short-selling since then. Unless you are really good or into macro investing, short-selling tends to be a losing strategy in the long run.

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5 Response to Warren Buffett receives presidential medal of freedom... plus thoughts on several other issues

Andrew Opala
November 18, 2010 at 9:43 AM

I'm not familiar with the succession planning at BH, but I'd have to guess that the place will not become a total shambles quickly, but that Buffet will put people in key places slowly and then train them for a few years and then go to the next key position.

He's quite methodical that way.

Parker Bohn
November 18, 2010 at 3:39 PM

I've been reading the blog, but too busy lately to post.
However, I couldn't pass up a chance to bitch about the fed and quantitative easing :)

Parker Bohn
November 18, 2010 at 3:39 PM

I'm certainly not qualified to do Bernanke's job, but I think QE2 is a horrible idea.

In Bernanke's own words "Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action"... "higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending."

Basically, Bernanke is attempting to pump up the stock market & create a "wealth effect" so that people spend more money & stimulate the economy.

As Bernanke said, QE2 serves to make both stocks and bonds more expensive.  Let's see how this affects various actors.

1)  The working young (ie people like us, who are nowhere near retirement) - we are hurt by stocks being expensive, since we are expected to fund our retirement in large part through investments we make today.

2)  The elderly - old people are hurt by low interest rates, and QE2.  Its hard to fund your retirement when bond yields are super-low.  The fed is costing retirees lots of income, and I imagine pushing many of them out of gov't bonds and into riskier assets, like stocks, corporate junk bonds, and municipal bonds.

3)  The rich - 10% of the population owns 80% of the stock, and these people are helped in several ways by low interest rates and QE2.  Their wealth increases with the stock market.  The companies they own get access to cheap money, either as direct loans, or as equity issuance.

4)  The poor - I imagine there is little effect on the poor.  They don't own stock, they have little in savings, they can't afford houses (so low mortgage rates are irrelevant).

If we really want to stimulate the economy, we have to get money into the hands of poor and working class people, who will spend it all, and not by inflating assets held by the rich.

In any case, I don't think it should be the feds place to purposefully create asset bubbles.


Sivaram Velauthapillai
November 18, 2010 at 8:51 PM

Berkshire Hathaway has a succession plan in place. It involves splitting the CEO and CIO position--Buffett holds both now--into separate jobs, and hiring several investment managers for the CIO position.

I didn't mean to imply that Berkshire Hathaway will fall apart; I definitely don't think it will. The market will likely mark down the valuation of the company slightly but that's about it. My commentary is more related to the new portfolio manager that was hired. I think it's a good pick in terms of character but it remains to be seen how well he performs.

Sivaram Velauthapillai
November 18, 2010 at 9:03 PM

The proper way to stimulate the economy is through fiscal stimulus but the right in USA aren't in favour of it. So it's down to whatever is left. Quite frankly, I don't think QE II is going to help much; but I doubt it will do much harm either. I doubt it will have much impact on the asset prices (other than some short-term push) and I don't think it will result in hyperinflation or high inflation as some expect. In fact, it would not surprise me if the stock market is lower in an year or two's time than when QE II was announced.

The US economy is around $12 trillion and the stock market is around there too. It's doubtful the $600 billion QE II program will have that much impact. This is around 5% of the GDP (for reference, recall how China's lending spree last year was something like 30% of GDP--I'm not advocating China's strategy but mentioning it for context).

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