My Question For Warren / Charlie

[TREVNI]

If I'm fortunate enough to get a microphone this year I'm planning on asking the following question.  I'd like to hear Warren / Charlie get into the weeds so-to-speak and talk about working capital.  I'd be interested in hearing what this forum has to say.  What would you give for an answer, and how would you improve the question?  Buffett has obviously gone into the subject in the past, I'd just like to pick his brain a bit on some of the nuances of working capital.

 

My question:

 

"My question is about the way one should think about working capital.  Is it okay to think of it as simply a component of the total capital that a business requires to operate, with the other component typically Property, Plant and Equipment?  How should one think about seasonal fluctuations in working capital as it relates to calculating return on invested capital?"

 

[LC]

I'd just like to pick his brain a bit on some of the nuances of working capital.

 

 

ask then otherwise u will get a canned answer.be detailed and specific

[bonkers]

Is working capital really the one thing you want to ask?

 

Especially, do you think this issue has the biggest impact in making you a better investor?

[Picasso]

Is working capital really the one thing you want to ask?

 

Especially, do you think this issue has the biggest impact in making you a better investor?

 

+1.

 

But to be fair, there aren't a lot of questions one can ask Buffett to make oneself a better investor. Buffett has already given 99% of the wisdom required to do well. It's just a matter of reading through it all and turning it into your own formula for success.

[TREVNI]

LC, bonkers, Picasso, I'd be interested to hear your answer to my question.  Would you also be so kind as to point me to words/works by Buffett on the topic? 

 

To Picasso's point, everywhere I look Buffett has already answered many of my questions. It's not a question I put together on a whim.  How does Buffett look at Sees with its need for seasonal working capital.  Is a company that requires a bank line of credit for two months out of the year inherently more risky than another that doesn't but maybe earns a lower ROIC? Should that two months' of capital 2/12ths or 1/6th be counted in the denominator when calculating returns on capital?  What other dynamics should one pay attention to?  Usually structural changes in requirements for additional PP&E are fairly slow.  Working capital can change overnight if a customer can't / won't pay you.  I believe there is much more to be learned on the topic, making me, as you say, a better investor. 

[LC]

Ok so if that's ur question, what do you think his response will be?

 

My guess is something to the effect of "its not less risky if you are certain you will sell in those 2 months"

 

 

I'm more interested in what his plans for the railroads are if/when solar power becomes wide-scale. Or will they have paid for themselves at that point and he can sell the land to developers?

 

Or something about the insurance business.

[TREVNI]

Ok so if that's ur question, what do you think his response will be?

 

My guess is something to the effect of "its not less risky if you are certain you will sell in those 2 months"

 

 

I'm more interested in what his plans for the railroads are if/when solar power becomes wide-scale. Or will they have paid for themselves at that point and he can sell the land to developers?

 

Or something about the insurance business.

 

I'll just say I'm glad I'll be asking Buffett. 

 

You're inferring that the railroads will somehow become obsolete "if/when" solar becomes more common. My question for you is how?  How is the grain needed to feed our country going to move from Point A to B because of solar?  How are the goods from China going to leave our ports and move throughout the country, because of solar?  Trains have a 3:1 efficiency advantage over trucks.  Even if they become driver-less and massively more efficient (say, solar / electric powered) they'll still be less efficient than trains.  I suspect your answer will be on par with those who thought the internet would kill the old economy.  That is, I think you're 100% wrong.  BNSF will still be here 100 years from now. 

[LC]

I'm sure we're all glad you're asking Buffett and not me! How will we ever know how seasonal businesses manage working capital!?  ;D

[Picasso]

It seems like you've answered your own question.  You just have to look at the business and ask yourself whether there are certain risks in the working capital needs.  The higher the risks maybe the less you want to pay for that business.  I doubt there are any big insights Buffett could add to your question. 

 

Plus he talks about changes in working capital in several Berkshire letters.  That's just part of what he calls "owner earnings."  If you think there are extra risks within that working capital then just give it a lower multiple, no?

 

There was a guy at the last DJCO meeting that went on and on about what discount rate to apply to different businesses.  Charlie just answered by saying "of course you give a different rate to different businesses."  I'd expect Buffett to say something along those lines as well... "of course you'll want to pay a lower multiple for a business with higher working capital needs."

[LC]

I agree w Picasso. I think if you want to get the most out of your question you need to ask something with a 15-20 year time horizon (something really long term to get his wheels spinning) but also make it detailed (so he doesn't give you a canned, generic answer).

[TREVNI]

Thanks, guys. I do sincerely appreciate the feedback.

 

BTW, I was there in LA when that gentleman asked the question about discount rates. Boy was that painful!

[tede02]

Have Buffett or Munger commented on the Fannie/Freddie situation (the current litigation and future of the firms)?  I would like to get their opinion, particular Munger's because of his legal background. 

[Kiltacular]

I agree w Picasso. I think if you want to get the most out of your question you need to ask something with a 15-20 year time horizon (something really long term to get his wheels spinning) but also make it detailed (so he doesn't give you a canned, generic answer).

 

I like the idea of asking something with a long time horizon.  It made me think.  I'd probably not make the question too detailed.  Like a politician, a public figure on stage like Buffett will often only answer the easiest part.  Or, if it is too complex, answer something different.

 

Based on the long horizon insight, here's a question I'd like to see Buffett asked:

 

"You've said in recent years that America's best days are ahead -- do you think that's true even if GDP per capita shrinks over time?"

[oddballstocks]

What about this:

 

"You've collected a set of businesses that reflect your upbringing in the US in the 1940s/50s, what era do you expect your successor to continue to build the empire from?"

 

 

[jawn619]

I suggest

"Warren you have said that you look for people with intelligence, integrity, and energy. What is your advice for those with integrity and energy but lacking in intelligence?"

 

 

[LC]

Here's why I would suggest a detailed question...

 

"You've said in recent years that America's best days are ahead -- do you think that's true even if GDP per capita shrinks over time?"

Canned Buffett response: "Absolutely, no other country in the world can bring out the best of the human spirit the way capitalism in America can. Even if GDP per capita drops, which, let me be clear, I don't think will happen, your and your children's standard of living will still be greater than even mine is today."

 

"You've collected a set of businesses that reflect your upbringing in the US in the 1940s/50s, what era do you expect your successor to continue to build the empire from?"

"You know, what I look for in a business hasn't changed over the last 50, 60 years. We're still looking for the same thing: a business with a strong moat. That is the #1 thing we look for. But looking forward is difficult, I am glad that I don't have to do it! We think we have the best people available to do that job, they wouldn't be here if they didn't want to. So they have the right incentives, they're very smart, we think they're the best people for the job. Berkshire is in excellent hands."

 

"Warren you have said that you look for people with intelligence, integrity, and energy. What is your advice for those with integrity and energy but lacking in intelligence?"

"Haha! Well you know, I always focused myself on the integrity and energy part of the equation. And I was lucky enough, fifty years or so ago to be introduced to my partner, Charlie Munger, who has all three in spades. So that would be my advice: seek out someone with all three, and it's amazing what you can do with time and energy. Charlie, what do you think?

 

Charlie: I have nothing more to add."

 

A bit tongue in cheek  but yeah :)

 

[Picasso]

Here's why I would suggest a detailed question...

 

"You've said in recent years that America's best days are ahead -- do you think that's true even if GDP per capita shrinks over time?"

Canned Buffett response: "Absolutely, no other country in the world can bring out the best of the human spirit the way capitalism in America can. Even if GDP per capita drops, which, let me be clear, I don't think will happen, your and your children's standard of living will still be greater than even mine is today."

 

"You've collected a set of businesses that reflect your upbringing in the US in the 1940s/50s, what era do you expect your successor to continue to build the empire from?"

"You know, what I look for in a business hasn't changed over the last 50, 60 years. We're still looking for the same thing: a business with a strong moat. That is the #1 thing we look for. But looking forward is difficult, I am glad that I don't have to do it! We think we have the best people available to do that job, they wouldn't be here if they didn't want to. So they have the right incentives, they're very smart, we think they're the best people for the job. Berkshire is in excellent hands."

 

"Warren you have said that you look for people with intelligence, integrity, and energy. What is your advice for those with integrity and energy but lacking in intelligence?"

"Haha! Well you know, I always focused myself on the integrity and energy part of the equation. And I was lucky enough, fifty years or so ago to be introduced to my partner, Charlie Munger, who has all three in spades. So that would be my advice: seek out someone with all three, and it's amazing what you can do with time and energy. Charlie, what do you think?

 

Charlie: I have nothing more to add."

 

A bit tongue in cheek  but yeah :)

 

Man, I can picture them saying all those things. 

[Poor Charlie]

It would be interesting to ask a question about their early investment days.  Something to the effect of 'Warren what investments did Charlie make in Wheeler-Munger that you admired and did you copy any of them?'  Would also ask about the influence certain investors had on Warren when building BRK.  He mentioned investors like Gurdon Wattles (Eltra Corp.) and Pritzker (Marmon & Rockwood) having an influence but never really talked about the specifics. 

[LC]

They would never answer a question like this in a revealing way but I wish someone would ask what the least ethical (investment/business related) thing they ever did was, and what their thinking was at the time, and how they view it looking back. I mean, nobody is perfect but I'm certainly curious what skeletons are hidden in their closets.

[northernlight]

It would be interesting to ask a question about their early investment days.  Something to the effect of 'Warren what investments did Charlie make in Wheeler-Munger that you admired and did you copy any of them?'  Would also ask about the influence certain investors had on Warren when building BRK.  He mentioned investors like Gurdon Wattles (Eltra Corp.) and Pritzker (Marmon & Rockwood) having an influence but never really talked about the specifics.

 

I think this is a great idea - I've found a question that is:

 

1) Detailed (Not overly broad or "what should I do with my life")

2) Shows you have done your homework/research (about a stock or historical situation, i.e. the Amex Salad oil scandal, etc.)

3) Doesn't repeat a question previously asked (keeps it interesting for them)

4) Doesn't impact current investments and/or reveal any (current) investing secrets (They historically ignore these questions)

 

...usually works well.

 

I've asked two questions at BRK, and the one that got the best response followed this formula (not that it makes me an expert). I asked several years ago how one builds barriers to entry in an industry that has none, and they sort of batted it away with "It's too hard...we buy barriers, we don't build them".

 

I asked in 2015 about a brief comment Buffett made (on Charlie Rose, I think?) a while ago about how the Wall Street Journal had huge advantages but let them slip away. I felt he dug into the question, saying how it should have been Bloomberg, as WSJ had the (Telerate?) stock ticker service and lots of other resources, but it was operated like a cash cow by the owning family, (and not helped by the Lawyer who ran the trust?) and didn't see the distruptive threat coming in Bloomberg. At least that's what I remember.

 

I'm interested to ask why he wanted to buy the New Yorker Magazine back in the 1970s (and why he didn't). I assume because it was a great brand (with a avid readership, I assume then) going through a period where the owner wanted to sell -sort of the BRK playbook.  I know Conde Nast bought it, and I read (if I remember correctly) that BRK avoided it in part because the readership may have been up in arms that a "conglomerate" was taking over their beloved magazine. On the other hand, his hands-off management style may have worked very well in this case (BRK being a great home for a beloved asset).

 

I'd also like to know why they didn't try to invest in or buy the only privately-owned bridge between the US and Canada.  Munger has (sort-of) joked that any toll hike would make you instantly hated...but not sure if there is more than that (I imagine there is, to some extent).

 

Would love to hear about any other obscure but interesting questions that might get a good response.  Anyone is welcome to ask these--I'll be trying as well. Just getting them answered is a win!

 

[Palantir]

"Mr. Warren, you have routinely criticized the compensation policies of hedge fund and private equity managers. However, when you ran the Buffett partnerships you used a similar compensation structure. Why the change of mind?"

[wknecht]

"Mr. Warren, you have routinely criticized the compensation policies of hedge fund and private equity managers. However, when you ran the Buffett partnerships you used a similar compensation structure. Why the change of mind?"

How was his compensation similar?

 

My understanding is that it wasn't very similar. They charge on AUM/committed capital, Buffett didn't. Buffett had a true return hurdle (vast majority of PE doesn't, they get catchup or no hurdle; not sure about HF).

 

I thought Buffett's issue with most structures is the pay for non-performance. He only got paid after his LPs made money.

[Mephistopheles]

"Mr. Warren, you have routinely criticized the compensation policies of hedge fund and private equity managers. However, when you ran the Buffett partnerships you used a similar compensation structure. Why the change of mind?"

How was his compensation similar?

 

My understanding is that it wasn't very similar. They charge on AUM/committed capital, Buffett didn't. Buffett had a true return hurdle (vast majority of PE doesn't, they get catchup or no hurdle; not sure about HF).

 

I thought Buffett's issue with most structures is the pay for non-performance. He only got paid after his LPs made money.

 

+1

 

Also the net returns (after fees) for his partners were > the benchmark.

[Guest longinvestor]

"Mr. Warren, you have routinely criticized the compensation policies of hedge fund and private equity managers. However, when you ran the Buffett partnerships you used a similar compensation structure. Why the change of mind?"

How was his compensation similar?

 

My understanding is that it wasn't very similar. They charge on AUM/committed capital, Buffett didn't. Buffett had a true return hurdle (vast majority of PE doesn't, they get catchup or no hurdle; not sure about HF).

 

I thought Buffett's issue with most structures is the pay for non-performance. He only got paid after his LPs made money.

 

+1

 

Also the net returns (after fees) for his partners were > the benchmark.

+1

He didn't come out and say it, but he was not about to disappoint his partners as his AUM got bigger at the same time that the market looked to go into turmoil. I believe he figured out that the fees he or anyone else charged would be the reason for disappointment. He is too smart to go up against mathematics. He took up the sport he's still playing where there are no expectations while trying to outperform. Like Munger says this game requires them to be simply better than the idiots.Way different than charging egregious fees

[John Hjorth]

"Mr. Warren, you have routinely criticized the compensation policies of hedge fund and private equity managers. However, when you ran the Buffett partnerships you used a similar compensation structure. Why the change of mind?"

How was his compensation similar?

 

My understanding is that it wasn't very similar. They charge on AUM/committed capital, Buffett didn't. Buffett had a true return hurdle (vast majority of PE doesn't, they get catchup or no hurdle; not sure about HF).

 

I thought Buffett's issue with most structures is the pay for non-performance. He only got paid after his LPs made money.

 

+1

 

Also the net returns (after fees) for his partners were > the benchmark.

+1

He didn't come out and say it, but he was not about to disappoint his partners as his AUM got bigger at the same time that the market looked to go into turmoil. I believe he figured out that the fees he or anyone else charged would be the reason for disappointment. He is too smart to go up against mathematics. He took up the sport he's still playing where there are no expectations while trying to outperform. Like Munger says this game requires them to be simply better than the idiots.Way different than charging egregious fees

Longinvestor,

 

I like your way of phrasing a huge paradox.