For the first nine months ended September 30, our average account appreciated approximately +52.45%.
In our first quarter letter we quoted the April 4 New York Times declaring value investing “an old fashioned approach (left) for dead.” Neither of us expected to feel so vigorous so soon after having been left for dead. We had another profitable quarter and we found an exciting new investment. That is a near to unbeatable combination, since it usually requires pretty stiff sell-offs to find pickings this good.
We are so enthusiastic at our prospects for the next year partly because the dominating anxiety afflicting Wall Street these days strikes us as looney. We mean, of course, the concern over year 2000 computer dating mistakes. We think the enormous concern over this issue is astrology for technophobes. No one’s computers are going to do them such harm as to damage the financial system, adversely effect the economy, or even be much remembered by springtime of next year. The holiday is going to be celebrated on a Friday night, however, and there is certain to be plenty of drinking done. Please drive safely.
We have commented in many letters in the last five years that the worldwide trend toward unchecked capitalism should result in equities carrying greater valuations than they had in the past. Certainty of title and higher growth rates ought to take care of that. What surprises us is how many “new era” beneficiaries continue to sell at Cold War prices. A case in point is Bear, Stearns & Co., which we have been buying again recently. Bear, Stearns sells at 1.25 times book value and 8 times earnings, yet its return on equity tops 17% over the last eleven years. Few businesses have such consistently high returns without resorting to write-off legerdemain, yet the firms naysayers are ever eager to argue these returns cannot be maintained going forward. Alan Greenberg, the long time chairman, whom we have both known man and boy these many years, always says he has no idea how they will do it again. Then they do. It doesn’t really matter whether anyone else ever sees what we see here. If Alan and crew just keep it up at 17% a year, that’s good enough.
Our other find of the quarter is Berkshire Hathaway, managed by the ever vigorous 69 year old Warren Buffett. If Isaac Newton had not once been Chancellor of the Exchequer, there is no doubt Buffett’s would be considered the pre-eminent mind ever to turn its powers to finance. The gravity defying Berkshire currently has the greatest net worth of any corporation in America, and Buffett is quick to point out that stated book value isn’t even the measure he has been seeking to maximize. The shares are depressed for two reasons that, while not related, are compounded. The company is seen as a poorly performing closed-end mutual fund, and simultaneously as an insurance company saddled with heavy losses in its major subsidiaries General Re and Geico. Obviously it cannot exclusively be both at once, but the worried sellers in each camp can both show up at the same place to sell shares. On the first score, the very best money managers have their slow periods (see Levy, Harkins & Co.’s third quarter 1998 letter). That is the time to invest with them, not bolt. Secondly, most of the perceived insurance problems are by Buffett’s own design. He informed the world that he intended to aggressively go after business by slashing prices in auto insurance because it would lead to higher growth and greater long term investor value. Considering that his annual reports are amongst the most breathlessly awaited pronouncements in the investing world, why the panic in October when he makes good on February’s promise? Even Warren probably can’t answer that one.
The great helmsman of this vast enterprise has guided a prominent brokerage house analyst to an estimate of break up value 50% higher than the current price. Knowing his character, and many particulars of most of the businesses, we think the analyst is probably low. Besides, we don’t want it broken up; we want Buffett to go on forever. He is of the same mind, claiming he wants his epitaph to read, “Boy, was he old.” Buying the best businesses at a discount, and getting the best manager for nothing, is our idea of a fun day at work.
It would be barbarous if we did not say something laudatory about Echostar and Qualcomm. We met with both managements in the quarter, and they never fail to impress us with their talent and energy. These are wonderful businesses in the midst of great growth spurts, and we look forward to plenty more from them.
Sincerely,
Michael J. Harkins
Edwin A. Levy