Whitney Tilson email to investors

1) I’ve updated my slide presentation on Berkshire Hathaway to incorporate the Q1 earnings that were reported on Friday and have posted it at: www.tilsonfunds.com/BRK.pdf. My estimate of Berkshire’s intrinsic value has risen to $261,000, implying that the stock, which closed today at $218,000, is ~17% undervalued.

 

2) Buffett and Munger got a number of tough questions at the meeting about their partnership with 3G, through which Berkshire has acquired stakes in Burger King, Heinz and Kraft. I’ve long believed that they are the best operating managers in the world, in part because they are able to run businesses with far fewer employees. This is clearly beneficial to the owners of the business and, overall, to society, but there’s no doubt that significant layoffs take a real toll on the people being laid off.

 

Let’s be honest: 3G isn’t laying off the superstars, but rather the lesser performers – the ones who will really struggle to find another comparable job. These are the people who linger around for years in companies that are poorly run – but often highly profitable, which is why layers of fat can build up and nobody does anything about it. Obviously, 10% of the people in any company are in the bottom 10% and, in most cases, the company will perform BETTER if they are let go.

 

One of my big take-aways from Walter Isaacson’s brilliant book, Steve Jobs (probably the best business book I’ve ever read), is that Jobs was RUTHLESS in weeding out “B” players. He was unnecessarily cruel in the way he drove them out I think, but he was right to recognize that, especially in a tech company, “A” players will leave if enough “B” players are tolerated. Bill Gates understood this – and look what happened to Microsoft after he left.

 

Here’s Andrew Ross Sorkin on this topic in today’s NYT:

Some in Mr. Buffett’s audience questioned his recent embrace of the Brazilian investment firm 3G, which Berkshire has supported by investing alongside it in deals for Burger King and the recent merger of H. J. Heinz with Kraft Foods. One shareholder expressed concern that 3G’s zero-based budgeting approach — which looks at every cost as something to consider cutting — is out of sync with Mr. Buffett’s aspiration to “balance capitalism with compassion,” as the questioner put it.

But that disconnect may be misplaced. Mr. Buffett’s avuncular ways often disguise another truth: He isn’t always a cuddly teddy bear. While he says he prefers a hands-off management approach, he runs a pretty lean organization.

“We do have some businesses where we probably have more people than we need, and I don’t do anything about it,” he said. “But that doesn’t mean that I endorse it. I basically tolerate it.”

At another point, Mr. Buffett said: “Efficiency is required over time in capitalism.”

Mr. Buffett’s longtime friend and Berkshire’s vice chairman, Charlie Munger, went even further, suggesting that if businesses did not seek to be as efficient as possible, they would end up like those in the Soviet Union, declaring, “They pretend to pay us and we pretend to work.” The whole economy “didn’t work,” he said.

Mr. Munger added later, “There’s no question that waves of layoffs hurt people.” But then he asked rhetorically: “What would our country be if we kept everyone on the farm?”

And here’s a link to watch a 4-minute video of Buffett’s answering Becky Quick and Sorkin’s questions on it:www.nytimes.com/2015/05/05/business/dealbook/berkshires-warren-buffett-shows-his-teddy-bear-image-has-tough-side.html

 

3) I have yet to see anyone’s notes from the annual meeting, but did transcribe my question about income inequality and Buffett and Munger’s answer:

 

Question:

 

I’m Whitney Tilson, a shareholder from NY.

 

Mr. Buffett, I know many shareholders have felt irritation (to put it mildly) when you’ve weighed in on social issues such tax policy or endorsed and raised money for a particular candidate, but I for one applaud it. I think everyone, but especially people who’ve achieved wealth and prominence and, thus, have real ability to effect change, have a duty to try to make the world a better place, not just through charitable donations but also through political engagement – and I’d say that even to people whose political views are contrary to my own.

 

My question relates to one of the big issues today: rising income inequality and, related to this, the campaign to raise the minimum wage, which has had some recent successes with some of the largest businesses in the country like Walmart and McDonald’s.

 

How concerned are you about income inequality, do you think raising the minimum wage is a good idea, and do you think these efforts might meaningfully affect the profitability of corporate America?

 

Answer:

 

Buffett: I think it’s extraordinary in the United States to see how far we’ve gone. Let’s just go back to my own case. Since I was born in 1930, the average GDP per capita of the United States has gone up 6 for l.  And my parents thought they were living in a reasonably decent economy in 1930, and here their son has lived to where the average is six times what it was then. If you’d asked them at that time, and they’d known that fact, that it would go from $8 or $9 thousand in today’s terms to $54,000, they would’ve said, “Well, everybody in America is going to be enjoying perfect lives.” But clearly they’re not.

 

So I think it is a huge factor. There are a million causes for it, and I don’t pretend to know all the answers in terms of working toward solutions. But I do think that everybody that is willing to work should have a reasonably decent livelihood in a country like the United States. [applause] How that is best achieved…I’m actually going to write something on it pretty soon.

 

I have nothing against raising the minimum wage, but to raise it to a level sufficient to really change things very much I think would cost a while lot of jobs. There are such things as supply and demand curves, and if you were to move it up dramatically, I think you would…it’s a form of price fixing…I think you would change the opportunities available to people very dramatically.

 

So I’m much more of a believer in reforming and enlarging the earned income tax credit, which rewards people that work but also takes care of those whose skills don’t fit well into the market system.

 

I think you’ve put your finger on a very big problem. I don’t have anything against raising the minimum wage, but I don’t think you can do it in a significant enough way without creating a lot of distortions, whereas I do think the earned income tax credit makes a lot of sense, and I think it can be improved.

 

There’s a lot of fraud in it, it pays out just a lump sum so you get into these payday-type loans against it. There’s a lot of improvements to be made in it, but I think the answer lies more in that particular policy than the minimum wage.

 

As I said, I think I’ll write something on it pretty soon, and if there’s anybody I haven’t made mad yet, then I’ll take care of it in the next one. [laughter]

 

Charlie?

 

Munger: Well you’ve just heard a Democrat speaking, and here’s a Republican who says I agree with him. [laughter] I think if we raise the minimum wage a lot, it would be massively stupid and hurt the poor. And I think it would help the poor to make the earned income credit bigger. [applause]

 

4) I attended the Ira Sohn conference in NYC yesterday. Some great speakers, but fewer good investment ideas than usual – due mainly to us being six years into a powerful bull market. Here are links to someone’s notes:

 

  1. http://thereformedbroker.com/2015/05/04/notes-from-the-2015-ira-sohn-conference-part-i/
  2. http://thereformedbroker.com/2015/05/04/notes-from-the-2015-ira-sohn-conference-part-ii/
  3. http://thereformedbroker.com/2015/05/04/notes-from-the-2015-ira-sohn-conference-part-iii/

 

5) The best speakers were, as usual, David Einhorn, with an epic takedown of the oil frackers (mainly PXD), and Bill Ackman, laying out the case for Valeant. Both have released their presentations publicly – Ackman’s is attached and Einhorn’s is posted here: www.gurufocus.com/news/334266/meet-the-frackers–david-einhorns-ira-sohn-presentation.

 

6) During the afternoon, Magnus Carlsen, the chess grandmaster who, at 24, has already achieved the highest rating in history, played three players at once, blindfolded (and of course crushed them). It was amazing to watch. I’ve been in awe of him since I saw this 60 Minutes profile of him in 2012: http://www.cbsnews.com/videos/mozart-of-chess-magnus-carlsen/

Ira-Sohn-2015-Presentation

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