Key Market Facts

May 15, 2007

There has been a very long hiatus since my previous newsletter and for that I do apologize. Going forward I am committed to issuing "Markets @ A Glance" on a quarterly basis starting with this issue, Spring 2007. I cannot think of a better way to restart this correspondence than by reporting to you on my trip to Omaha, a journey that a record 27,000 shareholders of Berkshire Hathaway made to attend the company's annual meeting, or Woodstock for Capitalists as it has become know.

I was very excited to be finally attending this event after eleven years in the investment management business. The trip itself took the better part of the day. What first impressed me was how far reaching the wisdom of Warren Buffett is. The 21 year old business student from Victoria, BC who sat beside me on the plane was also attending the weekend's event. He had purchased a Class B Berkshire Hathaway share just so he could attend the annual meeting before graduating from university. I was soon to learn that he was one of many young people who were making the trip to listen to over 159 years of combined life experiences, Warren Buffet (WB) 76 and Charlie Munger (CM) 83, and the resulting lessons they had to share.

I arrived at the conference centre at 6:45am (it opened at 7:00) so I could position myself into a reasonable seat. The line-up at that time was unbelievable. People camped out during the night so that they could be the first to enter and potentially get an opportunity to ask a question of the duo. Once my seat was staked out I visited the trade show to view representation from many of Berkshire Hathaway's businesses and to purchase the must have paraphernalia that comes with such an event. At 8:30 I was back in my seat to watch the "must see" one hour movie on Berkshire Hathaway and at 9:30 the real show begins as WB and CM start the six hour question and answer period. (It is at this point that they also start to drink Cherry Coke and eat See's candies and fudge non stop) The entire question and answer session was exceptional. To follow are my highlights. I hope you enjoy some of the insights I had reinforced for me. Investing should be kept simple!

Favorite Quotes from the Meeting

"Be reliable! Do what you say you are going to do. If you are reliable it is hard to fail."
"Hedge funds are compensation schemes disguised as a new asset class"
"I don't know where stocks will be 3 to 5 years from now, but I do know where they will be 10 to 20 years from now. They will be higher"
"Areas of investment do not make opportunities, brains make opportunities"
"In general, there are more problems with poor managers than there are with poor compensation systems"
In response to a silver investment "I bought it too early, I sold it too early. Other that that it was a perfect trade! No one asks us about silver for a good reason"
Invoked the Mark Twain saying that "history does not repeat itself, but sometimes it rhymes"
"Very smart people do very dumb things, and we want to find out who they are so we can avoid them."
"Read, read, read"
"Running cars on corn is about the dumbest idea. Raise the cost of food so we can run cars! This decision was not my home state's finest moment"

Investment Wisdom From WB & CM

• Think "buying a business". If you would not want to own a business entirely then you have no business buying 100 shares.
• The financial world's measure of volatility is not an accurate measure of risk.
• Be prepared to pay a price close to fair value for a business. WB does not believe you need a wide margin of safety when you do not think you are wrong. He stressed that investors should not try to get too precise in their estimation of the value of an asset but that you should always feel you are getting a discount.
• WB stated that investing for short-term gains in unhealthy. "It's a fool's game to try to beat the markets every day, week or month." He lamented that portfolio theory taught widely around the world does not work in the real world.
• Use common sense. WB stressed the circle of competence concept, that investors should invest in what they understand. He claimed that a majority of ideas end up in the "too hard" pile, suggesting that it is not possible to value all businesses all of the time.
• If forced to choose between equities and bonds at 4.75% he would choose equities. Although his expectations are moderate, they do exceed 4.75%
• When asked about global investing WB simply stated they are not on the radar screen outside of North America. They have no bias against buying securities or businesses outside of the US. They are working on getting Berkshire Hathaway on the radar screen globally. They have come up against strict reporting requirements in some countries with respect to the purchase of marketable securities and as they do not like to broadcast what they are doing, would not purchase securities under such criteria.
• In response to a question on Chinese banking concerns WB believes that any growing pains in the system would be overcome by the strength of the Chinese economy – he also noted that the US has had banking problems in the past.
• They believe that the US dollar will continue to depreciate relative to the global currency index and that the best protection is with US exporters.

My Personal Highlights

• Although the noise around us makes it difficult at times, we must remember to focus on keeping things simple. Allowing ourselves to get caught up in anything that deviates from our investment discipline must be avoided. It is challenging to stick with what may seem very simplistic in a complicated world. Having the discipline to do it is not easy but will make you successful over time.
• Be reliable in what you say you are going to do and it will be hard to fail. This was CM's response to a 10 year old girl who asked for advice on what she could do now to help her become successful in her life.
• The respect and compassion WB demonstrated when responding to the tearful pleading of a first nations woman and four of her peers was unbelievable. They were dressed in traditional costume. Four of them approached the front of the room while the fifth asked WB for his assistance in closing the dams, owned by Pacific Corp one of the companies controlled by Berkshire Hathaway, that are killing "their" salmon and their livelihood. The audience was dead silent awaiting his response and it was not until the woman was finally able to finish (with encouragement from WB) that he responded very respectfully. At no other public company meeting would such a display be permitted inside the building, let alone be allowed to be heard and make their point. It was truly unbelievable and demonstrated that amongst other things WB is a true humanitarian.

All and all the weekend was a wonderful experience. It was one of the few things I have done in my life that I had high expectations for and found that my expectations were surpassed. Despite the Tornado warnings, rain, thunder and lightening storms which made the flying interesting, it was one of the best trips I have done and one that I hope to be able to repeat next year.

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