Twice a year, Omaha is beholden to large swarms of out-of-towners.
In June, thousands stay for two weeks to see the College World
Series. But in May, Omaha belongs to Berkshire Hathaway's
shareholders.


This year about 24,000 made the pilgrimage to see the Oracle of
Omaha and his witty, if reticent, wingman Charlie Munger. The two
did not disappoint, as they dished out generous amounts of their
folksy wisdom and humor.


Many of the people that come here are...well, how can I put this
kindly? Sheep. They are mindless followers. They laugh hysterically
at every corny joke. They laugh at every tired, worn-out aphorism.
They say sappy,syrupy, sentimental and silly things about these two
old billionaires.

And when it's time for the Q&A, they ask fawning pointless
questions. Of course, only after they're done saying how wonderful
Buffett is and how wonderful Munger is and how they are a beacon of
some kind or another and... well, you get the picture.

Anyway...

Buffett and Munger had lots of interesting things to say, and not
all the rabble that lined up to ask questions were sheep. For
example, some of the good questions focused on drawing out their
thinking on the current investment climate and in specific areas
such as commodities, newspaper stocks, South America and more.

Some value investors have been digging around in the market's
discard pile and coming up with newspaper stocks. Many of the
nation's once great franchises are suffering and their stocks are
making new lows. Advertising revenue is falling. Readership is
declining.

What does Buffett, a long-time newspaper investor think? Buffett
thinks the current woes are part of a longer-term trend that is not
likely to reverse. And valuations on newspaper stocks don't reflect
this. As he says, there is always somebody who thinks he sees a
robin and the first day of spring.

Instead, newspaper stocks face a long, perhaps permanent, winter. He
said he was wrong in thinking newspapers were a bulletproof
franchise. It is clear they are not. Munger added that he once
thought, years and years ago, that General Motors was a bulletproof
franchise.

Bulletproof franchises are a rarity in the investment world. Nearly
all businesses face long-term competitive pressures. But the idea of
bulletproof franchises reflects Buffett and Munger's basic desire to
own businesses where the fundamentals will not change, or are not
likely to change, over a 5-10-year span.

Buffett cited the telecom industry as an example where substantial
change is likely. And he also talked about Intel, which Buffett said
he could not figure out at its birth and can't figure out now.
That's another business that is likely to face a lot of change in
the future.

Indeed, a good part of Berkshire's success over the years is in
sticking to what they know. Munger added, "We know the edges of our
competency better than other people know theirs." This helps limit
mistakes, though all investors make mistakes and lose money at times.

One of the great pieces of advice Buffett and Munger gave was in how
they would manage a small amount of money - say, several million,
instead of tens of billions: Go to your best idea and measure
everything against that. That's because it is very rare to find an
idea that's going to give you 20% per year for 40 years. In the real
world, you have to go with the best ideas you have. And they may
not, and are probably not, the best ideas you will eventually
uncover. Things change. (As the newspaper saga shows, once-thought
bulletproof franchises can suffer major reversals of fortune.)

Buffett sprinkled his talk with lots of other investment wisdom,
too. In another instance, he invoked one of the key ideas of his
famed mentor,Benjamin Graham: You are right because your facts and
reasoning are right and not because somebody agrees with you. This
goes back to the idea that you can't let the market sway you. "Make
the market serve you," Buffett advised, "it's not there to instruct
you."

And this is one key difference between a bottoms-up (micro) investor
and a top-down (macro) approach. The top-down, macro approach takes
its cues from the market -- hence, the common use of charts.

Buffett said investors should focus on things that are important and
knowable. One attendee asked Buffett and Munger a big-picture
question involving currencies, interest rates and current account
deficits.

I loved Buffett's answer and I think it helped illuminate some of the
differences between his and Munger's approach (rooted in the old-
school tradition of investing) and the more populous speculative
arena: "We don't play big trends. That's a bit too macro for us," he
said.

Asked about the viability of ethanol as a fuel additive and as an
investment, Buffett said it was easier figuring out if more people
were going to drink Coca-Cola and eat more See's Candies. Plus, the
fact that ethanol is so hot right now is a deterrent to Berkshire
getting involved.

Munger opined that since it takes more energy to produce ethanol than
ethanol itself delivers, he didn't think it was a good idea. He also
rolled out his oft-used concept of three buckets. "At Berkshire we
have three buckets," he said, "Yes, no and too hard."

Ethanol goes in the "too hard" bucket. This is a great concept that
I use regularly in investing. You don't have to investigate
everything, or have an opinion on everything. Some investment ideas
are just too hard, too difficult, too complex to forge a good, safe
investment opinion. On these difficult questions, the investor
always has the ultimate safeguard: He can just walk away.

On the question of whether or not commodities were in a bubble, the
famed duo had some wise advice. Buffett said, excluding agricultural
products, they do see something of a bubble in metals (especially
copper) and oil. He said, like most trends,the fundamentals drive it
in the beginning. And what the wise man does at the beginning, the
fool does at the end. As trends form and gather momentum, they
attract a speculative element. Eventually, that element takes over,
and then you are in the danger zone. "We are seeing that in the
commodity area," Buffett opined.

How high is it all going to go? Nobody knows. But commodities,
Buffett concluded, were a "speculative football."

On to other topics... What about South America? Buffett said the
problem is they have to put a lot of money to work to move the
needle at Berkshire, and that greatly limits the number of countries
they can invest in. Brazil, for example, is a big country and is not
off limits, but they'd have to get a lot of money in a business that
they understand at a price lower than comparable U.S. stocks.

They were asked many other questions (What about Russia? "Not
interested," Buffett said), but the above were some of the more
interesting topics to me. Since this letter is getting long, I'm
going to wrap things up.

I would say the only thing that irritates me about this pair is when
they talk politics. For example, is there any more ridiculous
spectacle than a billionaire (in this case, Buffett) complaining
about how he pays fewer taxes as a percentage of his income than the
secretary in his office?

My message to Warren: Hey, nobody's stopping you from writing a
bigger check to Uncle Sam anytime you feel you want to pay more.
Sheesh, a billionaire whining about how he wants to pay more taxes!

The other dopey thing Buffett said was about Social Security. When
Buffett praises it as "the most successful program in the history of
our government," I can feel the hairs rise up on the back of my
neck. And I wonder what he's drinking besides a can of Coca-Cola.
Social Security is a disaster that is bankrupting this country. The
sooner people realize that,the better. It also proves the point that
genius in one area (in this case, investing) does not necessarily
translate into other areas.

Of course, I forgive him for such transgressions. At the end of the
day, he and Munger have taught us all a lot about investing over the
years. Serious investors will study their careers as long as there
are markets.

Good Luck Market Traders