Introduction
I look for valuable investment lessons from exposure rather
than only from annual reports, company statements, and the financial media. I
often find lessons learned from beyond the investment arena as more meaningful.
Over the last weekend I was blessed to have three exposures which gave me
valuable insights. The three were: The Vienna Philharmonic Orchestra, General
George Washington, and Warren Buffett.
Investment
Lessons from “The Vienna Phil” Friday Night
They played an all Brahms Program beautifully. I will let others in the packed audience
comment on his Academic Overture (university drinking songs), eight variations
on Haydn’s masterful work, and his long delayed symphony No 1. But sitting in
Carnegie Hall Friday night, two important observations came to me. The first
with the aid of The Playbill was that it was very difficult to produce high
quality music in very different musical formats. In particular, it was said at
the time no one liked his first symphony, except that over time it became
viewed as the best first symphony ever written. Further, Brahms was considered
the best composer of his era and the best successor to Beethoven’s crown.
In thinking about the comments on his work, it is somewhat
parallel to what we and many others do in assembling a portfolio of managers or
securities. At any given point in time one or more managers or securities fail
to do well in the period and we are deemed to be less good investors to those
highly concentrated portfolios of only the most winning holdings in the period.
From a career risk standpoint we get penalized for this underperformance, yet
similar to Brahms, taken overtime the complete work through multiple market
cycles can produce much more credible “lifetime” results. The lessons are that
diversification can hurt results, particularly in short time periods, and we
should therefore pick clients more carefully as to their time frame focus.
In addition, there was another critical observation that
came to me Friday night at Carnegie Hall. When I was a college student sitting
in the cheap seats in the highest balcony, the audience below looked a bit like
a bunch of fury animals, with women and some men encased in full length
furs. Friday night, at one of the
highlights of this season’s top concerts, I did not see one human draped in
furs. Clearly there has been a major change in the audience’s thinking. It was
an important reversal. Sitting there, I started to look for a similar reversal
from today’s investment fashion. I began to wonder whether in a number of years
“intelligent” portfolios will own index vehicles or even this year’s model of
ETF/ETNs? The lesson for all of us is to think what will be different when our
children or grandchildren have our investment responsibilities.
“The
General” Speaks and Too Few Listen
Each February my wife Ruth and I attend a birthday
celebration for President George Washington. This year I had the pleasure to
spend some time with a young but noted historian. I asked him about the
“Whiskey Rebellion” where President Washington had the task of dealing with an
organized bunch of angry western Pennsylvanian farmers. At the urging of
Alexander Hamilton, the largest American army formed since the Revolution was
raised to deal with the rebellious farmers. I asked the bright historian what was
really going on in this rebellion. I knew that the excise tax being levied was
a small six to nine cents a gallon. He agreed with me it was not the size of
the tax, but the resentment of the western farmers to the easterner’s wealth.
(Sounds somewhat
familiar to the resentments between the blue and red states today.) Hamilton’s
solution through negotiation was to have the central government assume all of
the war debts of the various states, which lowered the tax burden of many and
led to a sound national debt policy.
The reason for my question is that I am seeing the
potential for a surge in indirect taxes. These are sales, use taxes and fees
paid to the government. Once these indirect supports to a government are in
place they are difficult to reverse, except with enormous popular demand. I am
told that today in Egypt they are still collecting an excise tax that that
ancient Pharos initiated! My concern is that Federal, State, and Local politicians
will gravitate to increased use taxes to reduce any shortfall created by
changes in the income tax. For some jurisdictions indirect taxes equal about
half of corporate income tax payments.
Many years ago the late chair of the US House of
Representatives Ways and Means Committee asked me about his favorite tax
raising approach, the Value Added Tax. I replied, did he want to convert US
citizens to French citizens who at that time had made an art form of not paying
their share of taxes? It did not go forward then, but is being raised again
now. I hope we don’t as a nation have to go back to The Boston Tea Party and
the Whiskey Rebellion to express our concerns for these sly ways to take more
money from us. We need to be on watch.
Warren’s
Investment Policy Lesson
As most every investor knows, on Saturday morning Warren
Buffett issued his annual letter portion of Berkshire Hathaway’s annual report.
I believe very few of the media pundits caught what I believe is a very
important affirmation to his and Charlie Munger’s thinking. The letter revealed
that Berkshire began a slow but deliberate program to eventually buy 80% of
Pilot Flying J (PFJ), which has about 750 locations that we used to call truck
stops. I am sure that it is a good business, but to me it reinforces what has
become a major tenet
of their thinking in terms of many of the operations. They seem to be drawn to
products that need to be shipped by trucks, trains, or pipelines. While they do
own some service companies beyond insurance and finance companies, it seems
that goods production and transportation tend to be rather unique vehicles
which are often built and owned by entrepreneurial families, which at their
current stage are producing excess cash flow to their growing needs. Most of
these are domestically located. The greater volume they do,
the more closely their results will parallel the Gross Domestic Product, but
they will grow faster because of smarter use of leverage and freedom from
normal corporate disciplines.
In
Conclusion
From a long term investor’s viewpoint there are a lot of
positive factors. I am not too concerned that the recent recovery appears to me
to be a weak test of the recent lows. I wonder for 2018 whether we have seen
both the highs and lows for the year or possibly neither, but in the long run
it may not be important either way.
Question: What do you think?
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