To market, to market to buy a fat pig. The Russians versus the West, this is just like the good old days, except there was nothing good about it then and there certainly is nothing good about it now. The Ukrainians are the pawns in this Chess match, the Russians because of their proximity to Ukraine no doubt have the upper hand. And this sounds nothing like a markets and companies report, because often these geopolitical dramas and real life tragedies impact on equity markets. And to top it all off, something we were just speaking about last week coincidently, the North Koreans fired four missiles into the ocean, that is about how far they can actually go, fortunately for everybody else.
But the upshot of it all is potentially real life trade threatened and potential for the Ukraine to default. The ex (or in his mind the guy still in control) Ukrainian president had a patsy press conference in Moscow on Friday, he is bulletproof and teflon like. John Kerry is heading to Kiev on Tuesday, as secretary of state of the US he has the unenviable task of unravelling this mess.
And if true that the former bosses of the Ukraine have looted the country by the billions of Dollars, the interim Prime Minister has accused the former president, Viktor Yanukovich of stealing 37 billion Dollars from Treasury, then returning it all will solve the monetary issues. But this week no doubt will be a tense one for the markets, geopolitically speaking. I would think that by 2014 we have enough sense to resolve these issues. And as far as I understand it, Presidents Obama and Putin have had some serious phone time together. Hopefully less big old red telephone, more lightweight equipment.
But this is a reminder that no matter how bad you may perceive your own country, there are always places that are much worse than your own. The media has the power and ability to unmask these horrible doings, that exist here and travel a long road with them. Seemingly the people of the Ukraine had no idea of the opulence of their leaders. None. The leaders have allegedly stolen tens of billions of Dollars. And apparently nobody knew. Just saying. We live in a place that is making progress, very slowly for some peoples liking and there are still many inefficiencies, but as long as we continue to work hard at exposing corruption, we are making progress. We are not Ukraine and for that you can be very pleased. But you must still demand excellence.
The upshot of this chest puffing is that the Russian market has plunged, down 13 percent plus and if that is not bad enough, the Central Bank has raised rates to 7 percent from 5.5 percent. The currency is taking some tap, down 1.7 percent plus today. I am just guessing out loud here, but I think that the market responding and the flight of capital could lead to the Russians holding the line. Because whilst they might have the ego, no country can act like this and expect the markets not to respond in a negative fashion. It is far harder to attract capital than it is to lose it.
The Russians have "seized" Crimea, an area that we know well because of the legend of Florence Nightingale. The Russians (and excuse me for jumping around here) have reserves in excess of 500 billion Dollars and feature in the top five of countries by foreign reserves. So I do not see them running out of money and having a cash crunch of any sort, BUT, foreign ownership of assets might sink quickly.
So. Markets down over eight percent in Moscow. And everyone all along has been saying that the Russian market is cheap, it trades on less than 6 times earnings. But this is why, cheap for a reason you see. Sometimes "investors" give your region a giant fat steer for a reason.
It is that time of the year again, when the Oracle of Omaha (Warren Buffett) releases his annual chairman's letter, possibly the most read of all annual letters. You can, in an electronic age read this too: Berkshire's Corporate Performance vs. the S&P 500 is how it starts. Whilst Berkshire may have under performed the market for two years in a row, since 1965 Berkshire has outperformed the market per year on average of 9.9 percent. Wow. And even more amazing, Berkshire has only under performed the S&P 500 ten times in a calendar year since 1965, that is 49 years of records. So, Buffett would have been in charge of this most amazing company. There are stories of people, ordinary people who bought Berkshire all those years back and now have an astonishing wealth from doing, well ..... nothing. What Berkshire does not give you however, is the benefit of dividends.
What is interesting about Berkshire is not that they have a unique philosophy in buying attractive assets at attractive prices, but that they almost never intend to sell their companies that they hold. And more recently, whilst they are not a private equity business, they do loads of funding (which sometimes converts to equity) with the intention to not unwind/re-list in the ordinary sense that private equity operates. Berkshire funds transactions and then sometimes converts that to equity at favourable prices for both Buffett and ordinary shareholders.
Charlie Munger (90) and Warren Buffett (83) have 108 years of investing experience and essentially form the core of the team that makes up Berkshire, but that will change over time. Buffett is a well know philanthropist with specific instructions that his stake be "invested" on his behalf after his death. Apart from the stake given to the Bill and Melinda Gates foundation, the portion for his wife is to be invested as such: 10 percent cash and 90 percent in an S&P 500 tracker, a Vanguard one he suggests. But do not think that there is no continuity at Berkshire, when both Munger and Buffett are gone. In fact both major equity managers (they manage 7 billion Dollars plus for Berkshire, each), Todd Combs and Ted Weschler crunched the market last year, as well as Berkshire of course.
The buying continues of their major stakes (not to mention the Heinz deal and NV Energy - major ones in the year) in Coca-Cola, Wells Fargo, American Express and IBM, the company adds when they see fit. I can certainly see how Coca-Cola with their lacklustre price performance on some average volume growth across the globe would have lagged the market, and as such how Berkshire would have been buyers. But remember that these stock holdings are not even major stakes, in the bigger picture, but because these businesses are so huge, even the big four as Buffett calls it, they have a major impact on the overall portfolio. But this part is interesting, and goes to the core of the Berkshire philosophy and how they manage to find gems:
"The four companies possess excellent businesses and are run by managers who are both talented and shareholder-oriented. At Berkshire, we much prefer owning a non-controlling but substantial portion of a wonderful company to owning 100% of a so-so business; it's better to have a partial interest in the Hope diamond than to own all of a rhinestone."
The Hope diamond origins are unknown, it has been around for centuries, other than we know that it was formed deep in the earth and is over 1.1 billion years old according to Wikipedia. But whilst (block your ears and shut your eyes kids) Charlie Munger looks a billion years old, I think that the enduring qualities here of Berkshire is that the company holds businesses that the Berkshire management can trust. You know the old Buffett line: "I try to buy stock in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will." But of course Buffett and Munger own quality, but you know what they mean. You can't mess up shaving cream and razor blades, perhaps the hipster culture of growing beards can scupper their business.
After all is said and done, this is quite simply a business as usual Buffett letter. Keep buying American stocks and invest in the future of the country that he knows and loves so well. Keep adding quality when the opportunity presents itself. Stay passionate about the business, or leave, disinvest. Just stay the course.
Michael's musings: Socialism
The word on the street is that the National Union of Metalworks of South Africa (NUMSA) is in the process of forming a new political party. The parties name will be the United Front and Movement for Socialism, Irvin Jim NUMSA's general secretary saying that "We need a movement for socialism"
Coming from an economics background I was a bit embarrassed that I could not give a definitive answer to what the difference between Socialism and Communism. So the best short description of each system is the following, "From each according to his ability, to each according to his deeds (socialism). From each according to his ability, to each according to his needs (communism)", which is a quote popularised by Karl Marx.
Based on those definitions, socialism would sit somewhere between capitalism and communism. Socialism advocates having producing private property (companies) in the hands of the many instead of the hands of the few, so everyone would still be paid a wage based on what job they do, but when it comes to sharing the profit the shareholders of the companies is now society instead of a few private shareholders.
Communism is more extreme in that the "public" own everything, even going as far as to determine what peoples religion will be, i.e. atheism. The biggest problem with Socialism in my opinion is that it has to be run by people, who have less of an incentive to be efficient and innovate. Taking it a step further how do we attract foreign capital and skills if there is no mechanism for investing; compensating people for the risk that they take/punishing people for not being efficient and innovative enough.
The modern economy is littered with socialist policies, for example bigger social security nets (cradle to grave), having free schooling or health care and higher tax on the rich. Society has determined that this is the best way to spend government's money, and if a particular country gets the spending mix wrong investment/skills will flow from that country to another country (which should hopefully result in a correction is the government funds). As Sasha always points out, a large chunk of the working class have pensions which means that they are capital owners as well, which is a good thing for everyone involved.
As an investor, Socialism normally means a transfer of ownership from the investor or higher taxes to pay for socialist policies, both of which hurt returns, so not a good thing. I might not agree with what are likely to be the policies of the new party, but for democracy competition is a great thing and the amount of new parties that have been formed over the last year shows that our democracy is a healthy one.
Home again, home again, jiggety-jog. Ukraine. I crane ... my neck and wonder what and where and when this will end. Will it impact stocks forever? No. In the mean time it is fun to watch the oldest and best stock picker of our generation. That is Warren Buffett. He is certainly a lot less depressing than the fact that Leonardo DiCaprio is never going to win an Oscar (he will), nor whether or not we escape at Newlands (unlikely) or every single person and their obsession with an Oscar. And lastly, the Ukraine, that will pass, but for now it weighs heavily on markets.
Sasha Naryshkine, Byron Lotter and Michael Treherne
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