Tone-Deaf People Can Teach a Lot!

I'm referring to the Ones that have earned their right to be so...

Photo by Matt Seymour on Unsplash

Last Saturday, Warren Buffet released the 2020 Annual Letter for his shareholders at 5 pm Dubai time. I had finished reading it by 6 pm, made some notes about my position in BRK.B, and was happy to have bought into the company, its antifragile business model, its financial position, and the future being built within, add to all of this was Warren Buffet’s Asset Allocation skills.

What surprised me was the tweets/comments/news headlines that followed in the next 24-72 hours. And it was the stuff I read in these 2-3 days that inspired me to write a blog about few things in the letter, a few outside, and few learnings in this entire episode.

Just for fun, I will be including clippings of news articles/tweets I picked up for this blog post.

So let’s get started -

What is tone-deaf in the first place?

Google defines it as “1: relatively insensitive to differences in musical pitch. 2: having or showing an obtuse insensitivity or lack of perception particularly in matters of public sentiment, opinion, or taste.”

And why would Warren Buffet be referred to being tone-deaf?

Simply because, he did not talk about COVID, elections, Trump-Biden, Black Lives Matter, Crypto, ESG, Robinhood, Peak Valuations, SPACS - none of it. It is like getting angry with a doctor while he handles your family member being treated in the ICU, just because he did not speak about NMC Fraud, Dubai Property Crisis, Oil Prices, Job losses, ever-increasing inflation, or the potential de-pegging of USD AED currency 😃

That’s exactly how it seems to be. Guess everyone has an expectation of others and when you don’t live up to their expectations, then your looked down upon because you fell short. Happens every day and maybe in our jobs/lives/societies - we have to live up to others’ expectations since our survival may depend on this bar being met.

But this doesn’t apply to those who have made it to the top, achieved the pinnacle of the industry they belong to, created fortunes for millions of people in the journey with them, educated the whole industry to raise their standards, be as transparent as you would like from your company’s board/CEO. The ones who have earned the stripes can take the path least traveled and that’s what Buffet exactly did.

Let’s look at his role in a general sense -

1. His role requires him to manage the business of Berkshire Hathaway in a manner that it remains indestructible and keeps getting bigger and better along the way. As often stated in his own words “To make Berkshire a Fort Knox”.

2. Communicate to the shareholders about the business in the most transparent manner possible.

3. Allocate Capital efficiently, which would facilitate the growth of the entity and compound the capital invested in the business via stock ownership.

4. Choose the right leaders for running the various operations and provide the right environment and incentives for them to perform in.

5. Given his age, create a succession plan for business continuity in case he was to kick the bucket anytime.

If you look at these roles, he has done a fairly good job. I would give him full marks on points 1,2,4 and 5. I may give him 6ish for Capital Allocation since he could have bought Google, Walmart, or avoided buying Precision Cast Parts or Kraft Heinz at the loft valuations that he did.

These are mistakes done by him and humbly admitted too in his letters. Hence full marks on communication but 6 marks for capital allocation, especially in the last decade.

Overall, still, a damn good job done. The job he is hired to do. He is the CEO/Chairman of one of the biggest companies in the world but does he need to give an opinion on black swan events, financial madness in the markets, political events in DC or other socioeconomic shifts taking place. He ain’t a politician or an economist or an epidemiologist or a virologist. He is a Businessman with a massive business to run.

Anything more is a bonus and a moment to be cherished. All his teachings are a treasure trove. His autobiographies or the HBO documentary is a goldmine in Investing Rationally and avoiding human biases. His influence on the Investment Industry runs through Fund Managers from the US to Europe to Asia to Australia. I haven’t heard an Investment Podcast to date where a reference isn’t made to him directly or indirectly. Now that’s what becoming an institution feels like.

Guess, that’s where the expectations come from.

The reactions to Warren’s 2020 Annual Letters reminded me of the Netflix movie on Pele. He did not want to play the 1970 World Cup but the pressure on him was immense from the then dictatorship in Brazil. Add to that the expectations of the entire nation to represent their country at the World Cup and win it for them. Add to that the failure on his part to not give in to the demand or the request for him to play.

If you see this documentary, and I highly recommend you do, you will witness a scene where he admits that the titles and adulation and all the fame had kind of become a burden on him tearing him apart. He did not want to be the Pele people were wanting him to be. Kudos to him he did, guess he did not have an option as an American would have in a free country like America.

No wonder Muhammad Ali could stand up for his rights and not tow the line mandated by US Government. I loved his response when being forced into going to Vietnam “My conscience won’t let me go shoot my brother, or some darker people, or some poor hungry people in the mud for big powerful America,” he had explained two years earlier. “And shoot them for what? They never called me nigger, they never lynched me, they didn’t put no dogs on me, they didn’t rob me of my nationality, rape and kill my mother and father. … Shoot them for what? How can I shoot them poor people? Just take me to jail.”

That’s America and if you have earned your stripes, you can be tone-deaf, even to the government.

Warren Buffet has stated time and again in his annual letters that he won’t be able to outperform S&P 500 due to the size of the organization. He states many times in interviews too that the best thing to do would be buying S&P 500 if you want to bet on the US. Though he compares S&P 500 performance to Berkshire stock performance but he isn’t managing the business so that the stock beats S&P500.

But the expectations on him have been to run a company well, keep it indestructible, keep it growing, beat S&P, pay dividends, give more money to Todd & Ted to manage, make every right decision, never go wrong. Only becoming a Superman is left. Guess we will see that too from many others. 2021 still has 9 more months of expectations to be tweeted and reported 😊

But when I read his annual letter, I must tell you that I really liked the way he has expressed himself, in a manner that is subtle and makes a point, if you know how to read between the lines. Let me share a few nuggets -

The final component in our GAAP figure – that ugly $11 billion write-down – is almost entirely the quantification of a mistake I made in 2016. That year, Berkshire purchased Precision Castparts (“PCC”), and I paid too much for the company. No one misled me in any way – I was simply too optimistic about PCC’s normalized profit potential.

Last year, my miscalculation was laid bare by adverse developments throughout the aerospace industry, PCC’s most important source of customers. In purchasing PCC, Berkshire bought a fine company – the best in its business.

Mark Donegan, PCC’s CEO, is a passionate manager who consistently pours the same energy into the business that he did before we purchased it. We are lucky to have him running things. I believe I was right in concluding that PCC would, over time, earn good returns on the net tangible assets deployed in its operations. I was wrong, however, in judging the average amount of future earnings and, consequently, wrong in my calculation of the proper price to pay for the business.

PCC is far from my first error of that sort. But it’s a big one. - Page 6 of the 2020 Annual Letter.

You could learn to be humble and admit your mistakes and errors. No one is perfect and no one can be. You also learn how to shower praise on someone even if the business isn’t doing great. You also learn to express gratitude when you are dealt the cards you could count your blessings for, even amidst chaos. Instead of taking the whole credit yourself and blaming others for the failures, which is what you generally see from many captains steering their corporate ships.

…Often, the tools for fostering the overvaluation of a conglomerate’s stock involved promotional techniques and “imaginative” accounting maneuvers that were, at best, deceptive and that sometimes crossed the line into fraud. When these tricks were “successful,” the conglomerate pushed its own stock to, say, 3x its business value in order to offer the target 2x its value.

Investing illusions can continue for a surprisingly long time. Wall Street loves the fees that deal-making generates, and the press loves the stories that colorful promoters provide. At a point, also, the soaring price of a promoted stock can itself become the “proof” that an illusion is reality.

Eventually, of course, the party ends, and many business “emperors” are found to have no clothes. Financial history is replete with the names of famous conglomerateurs who were initially lionized as business geniuses by journalists, analysts and investment bankers, but whose creations ended up as business junkyards.

Conglomerates earned their terrible reputation. - Page 6 & 7

You could learn how to communicate without mud-slinging or calling names. You could be subtle and let the reader read between the lines. You could label the press as wrong/misguided or refer to them as vulnerable to good storytellers. You could learn to be diplomatically right and be right at the same time.

…our conglomerate will remain a collection of controlled and non-controlled businesses. Charlie and I will simply deploy your capital into whatever we believe makes the most sense, based on a company’s durable competitive strengths, the capabilities and character of its management, and price. If that strategy requires little or no effort on our part, so much the better.

In contrast to the scoring system utilized in diving competitions, you are awarded no points in business endeavors for “degree of difficulty.”

Furthermore, as Ronald Reagan cautioned: “It’s said that hard work never killed anyone, but I say why take the chance?” - Page 7

You could learn to be cognisant of your circle of competence and stay within that circle and still succeed. Everyone doesn't need to chase the next technology that will change the world. You could learn to be humorous while not willing to bite the narrative that TECH is the future and GROWTH stocks is the only place where Growth is.

Some insurers, as well as other bond investors, may try to juice the pathetic returns now available by shifting their purchases to obligations backed by shaky borrowers. Risky loans, however, are not the answer to inadequate interest rates. Three decades ago, the once-mighty savings and loan industry destroyed itself, partly by ignoring that maxim. - Page 8

You could learn to evaluate the risk your taking for the returns your chasing. You could learn to get good at evaluating whether the payoffs are in your favor or against. You could learn to question the solutions your working upon to solve the problems you are being faced with.

I’ll have more to say about BNSF and BHE later in this letter. For now, however, I would like to focus on a practice Berkshire will periodically use to enhance your interest in both its “Big Four” as well as the many other assets Berkshire owns. - Page 8

You could learn to play an inclusive game where everyone wins together or you could play a “me” game where its about you winning at any cost, even if others don’t.

In 1940, Jack Ringwalt, a graduate of Omaha’s Central High School (the alma mater as well of Charlie, my dad, my first wife, our three children and two grandchildren), decided to start a property/casualty insurance company funded by $125,000 in capital.

Jack’s dream was preposterous, requiring his pipsqueak operation – somewhat pompously christened as National Indemnity – to compete with giant insurers, all of which operated with abundant capital. Additionally, those competitors were solidly entrenched with nationwide networks of well-funded and long-established local agents. Under Jack’s plan, National Indemnity, unlike GEICO, would itself use whatever agencies deigned to accept it and consequently enjoy no cost advantage in its acquisition of business. To overcome those formidable handicaps, National Indemnity focused on “odd-ball” risks, which were deemed unimportant by the “big boys.” And, improbably, the strategy succeeded.

Jack was honest, shrewd, likeable and a bit quirky. In particular, he disliked regulators. When he periodically became annoyed with their supervision, he would feel an urge to sell his company. - Page 10

You could learn to inspire others by telling a good story. Telling a good story, and an authentic one, with the context of teaching or imparting a value system is a skill worth developing.

And the best one -

Berkshire is a Delaware corporation, and our directors must follow the state’s laws. Among them is a requirement that board members must act in the best interest of the corporation and its stockholders. Our directors embrace that doctrine.

In addition, of course, Berkshire directors want the company to delight its customers, to develop and reward the talents of its 360,000 associates, to behave honorably with lenders and to be regarded as a good citizen of the many cities and states in which we operate. We value these four important constituencies.

None of these groups, however, have a vote in determining such matters as dividends, strategic direction, CEO selection, or acquisitions and divestitures. Responsibilities like those fall solely on Berkshire’s directors, who must faithfully represent the long-term interests of the corporation and its owners. - Page 12

You could learn to state the goal in the most straightforward manner possible and let others know what matters most. You could learn to let others know that you hear what they expect but you will do what is right in the long-term interest of the entity you are hired to serve. You could learn to be decisive in your action and your communication.

There are many more nuggets in the annual letter and I encourage you to read the same. There is something to learn from it irrespective of you being an analyst, investor, trader, shareholder, or even anti-Warren Buffet. But if you have the hunger to learn, you won’t be ending the letter without learning something for your kind of trade.

In spite of the work he has done and the education and inspiration he has provided to the trillion-dollar industry, he will still fall short of expectations. He is human after all. But he will still continue with his broom work, just to ensure that his shareholders (long-term ones especially) can sleep peacefully knowing that their money is parked in a business that continues to chug along handsomely without any stupidity being allowed or entertained anywhere in the system.

All the trolling and tweets attacking Warren Buffet and Berkshire reminds me of the Stanovich quote - “Humans are cognitive misers because our basic tendency is to default to the processing mechanisms that require less computational effort, even if they are less accurate.”

Trolling, commenting, looking down, judging is easy and it is just a lazy choice. And you could choose to do that. Or you could learn to learn from every opportunity you get. Warren Buffet is still learning, even at 90. He is still willing to put in 10 + hours of reading so that he can put his money to work.

He is tone-deaf but he can teach a lot. Surprisingly, while I was writing the previous paragraph, it reminded me of Gandhi’s speech from the movie Gandhi. He continues with his speech even if no one was hearing since they were busy in the chatter with others, some were moving out, some had zoned out. But Gandhi still went ahead, tone-deaf to the situation. And the result is for you to see in the video here -

As Charlie Munger puts it, “The wise [investors] bet heavily when the world offers them that opportunity. They bet big when they have the odds. And the rest of the time, they don’t. It’s just that simple.”

In my words, the best investors are tone-deaf when the opportunities don’t have favorable odds. The rest of the time, they keep moving ahead, marching ahead and hitting the ball out of the park when the ball is in the sweet spot for the hit ⛳️

Wishing you loads of love and luck.

Manish