“When investing, pessimism is your friend, euphoria the enemy.” –Warren E. Buffett, chairman, Berkshire Hathaway
It’s been a rough year – one of the worst in my lifetime, at least – and most of the trucking experts I talk to think next year will only bring more of the same. That being said, though, 2009 is certainly NOT the worst year on record in the U.S. and though hard times are here to stay for a while, there is that unique liberation that comes from knowing you are at the bottom; for when you are at the bottom, there is no way to go but up.
Warren Buffett is, of course, a past master of profiting not only during the good times but from the down cycles as well. He’s also a man that needs no introduction, as he’s perhaps one of the most successful investors in U.S. history. While Buffett and his company, Berkshire Hathaway, garnered huge headlines earlier this month for the $44 billion deal to acquire the Burlington Northern Santa Fe Corp. (BNSF) railroad – the largest single acquisition in Berkshire Hathaway’s existence – they aren’t newcomers to the world of freight by any means.
In fact, Berkshire bought trailer leasing firm XTRA Leasing back in 2001 for many of the same reasons that it acquired BNSF – transportation is one of those “must have” wheels in any economy, and, in the words of Eric Starks, president of research firm FTR Associates, “You want to buy when you’re at the bottom and this is as close to the bottom as you can go.”
Yet Buffett is also something of a throwback (a term used here in a very positive way) when it comes to investing and the conduct of business in general. You can buy any number of books about him and his business beliefs, but they are really very basic – something that, in this day and age of increasingly indecipherable world of acronyms, complex risk-assessment algorithms, and obtuse regulatory language, should be closely examined by truckers large and small.
In good years and bad, Buffett and his partner Charlie Munger focus on four simple goals – and you can read this in any of his letters to the company’s shareholders:
(1) Maintaining Berkshire’s Gibraltar-like financial position, which features huge amounts of excess liquidity, near-term obligations that are modest, and dozens of sources of earnings and cash;
(2) Widening the “moats” around our operating businesses that give them durable competitive advantages;
(3) Acquiring and developing new and varied streams of earnings;
(4) Expanding and nurturing the cadre of outstanding operating managers who, over the years, have delivered Berkshire exceptional results.
He also references a lesson learned from fellow investor Ben Graham: “’Price is what you pay; value is what you get.’ So whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.”
One of Berkshire’s “bedrock” pieces of its vast portfolio is stock in electric utility companies. Yet it’s not about milking such companies’ dry of their cash flow. Take a look at how Berkshire manages ownership of MidAmerican Energy.
“In 1995, MidAmerican became the major provider of electricity in Iowa and by judicious planning and a zeal for efficiency, the company has kept electric prices unchanged since our purchase and has promised to hold them steady through 2013,” said Buffett. “MidAmerican has maintained this extraordinary price stability while making Iowa number one among all states in the percentage of its generation capacity that comes from wind … growing from zero to almost 20% of total capacity.”
Yet MidAmerican has not paid a dividend since Berkshire bought into the company in early 2000. Rather, the company’s earnings have been reinvested to develop the utility systems its customers require and deserve, said Buffett. “In exchange, we have been allowed to earn a fair return on the huge sums we have invested,” he noted. “It’s a great partnership for all concerned.”
Paying attention to the needs of customers generates profits: not rocket science, you know, but something many big wigs in finance routinely ignored on Wall Street as the U.S. headed towards the brink of economic collapse last year. Buffett also noted that maintaining a good business reputation also helps when federal regulators inevitably become involved, as well.
“It is they, rather than selling shareholders, who judge the fitness of [utility company] purchasers when transactions are proposed,” Buffett explained. “There is no hiding your history when you stand before these regulators. They can – and do – call their counterparts in other states where you operate and ask how you have behaved in respect to all aspects of the business, including a willingness to commit adequate equity capital.”
When MidAmerican proposed its purchase of PacifiCorp in 2005, regulators in SIX states immediately checked MidAmerican’s record in Iowa, he said.
“They also carefully evaluated our financing plans and capabilities,” Buffett noted. “We passed this examination, just as we expect to pass future ones. There are two reasons for our confidence. First, Dave Sokol and Greg Abel [MidAmerican’s top executives] are going to run any businesses with which they are associated in a first-class manner – they don’t know of any other way to operate. [Second] we know that our business behavior in jurisdictions where we are operating today will determine how we are welcomed by new jurisdictions tomorrow.”
[For a little insight into Buffett’s view of business behavior – specifically integrity – watch the video below from as speech he gave over 2 years ago. While the video quality isn’t that good, the message he’s trying to convey comes through loud and clear.]
This is all part of Berkshire’s long-avowed goal is to be the “buyer of choice” for businesses – particularly those built and owned by families. “The way to achieve this goal is to deserve it,” said Buffett. “That means we must keep our promises; avoid leveraging up acquired businesses; grant unusual autonomy to our managers; and hold the purchased companies through thick and thin – though we prefer thick and thicker.”
That circles back to another crucial principle Buffett believes in: A promise is no better than the person or institution making it. “As Ben Franklin once said, ‘It’s difficult for an empty sack to stand upright.’ We focus on blocking and tackling, day by day, doing the little things right and never getting off course,” Buffett noted. “We never want to count on the kindness of strangers in order to meet tomorrow’s obligations. When forced to choose, I will not trade even a night’s sleep for the chance of extra profits.”
And yet amid all the bad economic news this year (and the still ongoing wars in Afghanistan and Iraq we’re involved with), Buffett remains an optimist – echoing the great Winston Churchill in this regard, when, during the truly dark days of World War II, with Nazi bombers raining death night after night on England, he had this to say: “For myself, I am an optimist. It does not seem too much use being anything else. For a pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty.”
“Never forget that our country has faced far worse travails in the past,” noted Buffett. “In the 20th Century alone, we dealt with two great wars – one of which we initially appeared to be losing – a dozen or so [financial] panics and recessions; virulent inflation that led to a 21.5% prime rate in 1980; and the Great Depression of the 1930s, when unemployment ranged between 15% and 25% for many years. America has had no shortage of challenges.”
Yet without fail, however, we’ve overcome them, said Buffett. In the face of those obstacles – and many others – the real standard of living for Americans improved nearly seven-fold during the 1900s, while the Dow Jones Industrials rose from 66 to 11,497.
“Compare the record of this period with the dozens of centuries during which humans secured only tiny gains, if any, in how they lived,” he stressed. “Though the path has not been smooth, our economic system has worked extraordinarily well over time. It has unleashed human potential as no other system has, and it will continue to do so. America’s best days lie ahead.”