Buffett and Munger on Fannie and Freddie

Fannie Mae and Freddie Mac

In 2000, Berkshire Hathaway sold its large, long-term holding in Freddie Mac. When asked to explain why, Buffett said: "We felt uncomfortable with certain aspects of the business as they developed, though they may not hurt the company. We did not sell because we were worried about more governmental regulation -- the opposite if anything. We felt the risk profile had changed."

Munger added, "Maybe it's unique to us, but we're quite sensitive to financial risks."

Buffett continued, "There are many things you don't know by looking at a financial company's financial statements. We've seen enough to be wary. We can't be 100% sure that we like what's going on. With some types of companies, you can spot problems early, but you spot troubles in financial institutions late."

Munger: "Financial institutions make us nervous when they're trying to do well."

Corporate Objectives?

An especially vivid statement of this point of view was expressed over 30 years ago by the CEO of a textile company called Indian Head Mills:

"The objective of our company is to increase the intrinsic value of our common stock. We are not in business to grow bigger for the sake of size, nor to become more diversified, nor to make the most or best of anything, nor to provide jobs, have the most modern plants, the happiest customers, lead in new product development, or to achieve any other status which has no relation to the economic use of capital. Any or all of these may be, from time to time, a means to our objective, but means and ends must never be confused. We are in business solely to improve the inherent value of the common stockholders’ equity in the company."1

Internal Yardsticks

At one point, he said, Buffett asked whether he'd rather be the world's best lover and have the world think he's the worst, or be the worst and have it think he's the best. The point was that a good investor should have faith in "internal yardsticks," and not second guess strategies just because they seem unconventional to others.

windfall tax. just plain stupid.

“I think it is very hard to have windfall taxes,” Buffett told CNBC’s Becky Quick on “Power Lunch” from New York City.. “Steel has doubled in price. Is that a windfall for the steel producers? Sure. Corn is $7 a bushel; soybeans are at $15 a bushel. I don’t think any candidate in his right mind with the number of electoral votes in farm states would say you ought to tax farms specially because they are getting a windfall.”

“But they [farms] are getting a windfall from commodity prices,” Buffett said. “Maybe they deserve it because commodities have been under priced, but to pick out one commodity – with copper at $3.60 a pound, you could say that the copper producers are getting a windfall. The networks are getting a windfall because of the Olympics. So, I don’t think that picking anybody that’s had a commodity that’s increased in price a lot and saying that there’s a special tax because of that makes any sense.

Getting past No

Joint problem solving relies around interests instead of positions. You begin by identifying each sides interests – the concerns, needs, fears, and desires that underline and motivate your opposing positions. You then explore different options for meeting those interests. You goal is to reach a mutually satisfactory solution in an efficient and amicable fashion.

Striking back rarely advances your interests and usually damages long-term relationships. Even if you do win the battle, you may loose the war.

Marking to myth

speed up your decision making cycle

1. let your hypothesis determine your analisys
2. get your analytical priorities straight
3. forget about absolute precision
   
4. triangulate around the tough problems

From the McKinsey Way.