Actions Coming from China, Berkshire Hathaway, and Caltech

Introduction

I am always looking for help in investing clients’ and my family’s money each week. I review my exposures to breaking news and views. l have reviewed the actions of the latest week and there was a lot to learn.

China

One of my basic beliefs for the next fifty or so years is that what happens in China will have material impacts on global markets as well as individual lives in many locations. Whether these impacts will be positive or negative will probably be a function on how well we are prepared to understand the implications of the actions taken in the Middle Kingdom.

Market reports noted growing illiquidity in both the internal stock and commodity markets. The volume in the steel contracts is twice the combined volume of the two largest Chinese stock markets. This demonstrates that speculative interests can find outlets in local as well as global markets. I do not know how much of the steel action is short covering or anticipation of growing infrastructure spending which could well impact global commodity demand and therefore the craving for industrial stocks.

To get a handle as to how important the Chinese markets are to the global picture, one needs to understand that almost half of the derivatives traded in the world are traded in China. Because of the huge amount of leverage that can be involved in derivatives they can be a source of disruption that will affect both the banks and the stock markets in general. Thus my fellow domestic stock and equity fund holders need to keep an eye on the commodity and derivative markets in China. This is particularly true as government policy is favoring restructuring the Chinese economy and society into companies with fewer employees producing products and services in which demands exceeds supply. This is not an easy task even in a command economy.

Berkshire Hathaway's Annual Shareholders Meeting

Some may have come away from the 51^st annual meeting with the belief that very little new information was released. However, there were a number of forward-looking comments that could be useful in thinking about future investing. Some of the nuggets are as follows:

1. Too much capital going into a sector or asset class can reduce its attractiveness. A UK manager, Marathon Asset Management, has developed a successful record using the swings in capital market flows.

2. Increasingly consumers are being attracted to "pull" over "push" marketing, particularly through the Internet. Consumers are actively pulled into the net as distinct from reacting defensively when pushed. This favors manufacturers/distributors over the retailers.

3. Eventually the real value of hydrocarbon production will be to supply chemical feedstocks. Remember Dustin Hoffman’s discovery of plastics in the film “The Graduate.”

4. There are areas that are unattractive for investment that include packaged goods, general leasing, and reinsurance.

5. Cash has imbedded an option cost inherent when it is not employed.

6. As a private company rather than a public company there are distinct operating advantages (such as freedom from quarterly earnings pressure) that Berkshire can offer to an entrepreneurial, publicly traded company.

Caltech Fund Raising

Those of us that have deep interest in both commercial and non-profit activities are well familiar with fund raising. Most of the time money is being raised to expand physical capacity. More people are to be hired to serve a greater market size.

As usual, the California Institute of Technology is unusual in its fund raising. Using its own words, “Transformative investigations underway at Caltech will come to life as institute scholars recount the powerful questions they are posing and the surprising answers that emerge.”

This weekend it is entering the public phase of a $ 2 Billion campaign after raising $1 Billion in its private phase. What is unusual is the new capital is not being raised to add students to its small base of undergraduates, graduates, and post doctoral students. The money, in effect, is being raised to expand its intellectual capacity to evolve groundbreaking research. New planets and black holes are to be found, new linkages from advanced developments of biology, chemistry, physics. What particularly interests me is developing an understanding how different elements in the brain lead to various micro and macro decisions; e.g., getting married.

The big investment lesson that I draw from the Caltech campaign unlike most capital raising, is its intent is to get better not bigger which is a tall order because on many scales it is already the best at what it does. For those of us in the investment business it is a call to get better at what we do rather than getting more money to manage.

Question of the week: What are your reactions to these lessons?

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