The Berkshire Handshake, Munger Down Under, Costco Hot Dogs, and Dividend Snowballs
The Berkshire Handshake, Munger Down Under, Costco Hot Dogs, and Dividend Snowballs
Sellers know that they can trust Warren Buffett -- and he only goes into business with those he trusts, too
Happy Thursday and welcome to our new subscribers!
Remember: Time in the market > Timing the market.
The Berkshire Handshake 🤝
Watching from the sidelines, as Elon Musk and Twitter gear up for a prolonged legal battle over spam/bot accounts and binding contracts, makes me appreciate the tact and propriety of Berkshire Hathaway all the more.
Berkshire is built on trust. Trust that Warren Buffett is a straight shooter, that he’s not just waiting for the ink to dry before pulling the rug out from under a potential seller, that there won’t be another shoe to drop after reaching a verbal agreement.
When Buffett and Berkshire shake hands on a deal, that’s that.
No drama. No muss, no fuss.
And, while Buffett goes to great lengths to instill trust and confidence in those dealing with Berkshire, he also places a great deal of trust in them, too.
When buying Nebraska Furniture Mart from Rose Blumkin in 1983, Buffett didn’t even audit her books. Nor did he when snapping up National Indemnity from Jack Ringwalt in 1967.
Sellers know that they can trust Warren Buffett — and he only goes into business with those he trusts, too.
In his 1990 letter to shareholders, Buffett included a sample of what he sends to any company that expresses an interest in being purchased by Berkshire. In paragraph after paragraph, he earnestly spells everything out — taking great pains to point out the pros and cons of any potential deal.
One passage, in particular, stands out:
There would be no chance that a deal would be announced and that the buyer would then back off or start suggesting adjustments (with apologies, of course, and with an explanation that banks, lawyers, boards of directors, etc. were to be blamed). And, finally, you would know exactly with whom you are dealing.
In most cases, Buffett is dealing with men and women who built a business from scratch, kept it in their family through thick and thin, and now care deeply about finding the right (permanent) home for their labor of love.
Buffett realizes that, in many ways, he’s buying that founder’s hopes and dreams — and acts accordingly.
For the cynics out there, perhaps Buffett’s true motives fall short of sainthood. Maybe it’s all self-interest.
But, no matter how you judge Buffett’s virtue, it’s smart business. Berkshire’s long-term success speaks for itself.
And it rests squarely on trust.
Just compare Berkshire’s acquisition of Alleghany Corp. with the Musk/Twitter $54 billion soap opera. I’m rooting for Elon, but the difference is stark.
No prize for guessing which approach a drama-free guy like me prefers.
Munger Down Under 🇦🇺
Earlier this week, Charlie Munger granted a rare interview to The Australian Financial Review — and, as usual, he didn’t mince words.
🔥 On cryptocurrency:
“Anybody that sells this stuff is either delusional or evil. I won’t touch the crypto. I’m not interested in undermining the national currencies of the world.”
“Crypto is an investment in nothing … I don’t want a piece of nothing, even if somebody tells me they can’t make more of it. I regard it as almost insane to buy this stuff or to trade in it.”
“I just avoid it as if it were an open sewer, full of malicious organisms.” 🦠
💰 On investing:
“I don’t pay much attention to macroeconomic trends. Like the weather, I just ignore the weather. I just try to invest whatever capital I have as best I can and take the results as they fall. I just seize whatever opportunities I can and I hope I get my share.”
“I’m just trying to invest my own money and Berkshire’s money sensibly. All these people that are blabbering on television don’t think the way that I do.”
♻️ On the future of energy:
“I think we’re going to be using fossil fuels for a long time ahead, because we have to. If you stop to think about it, the present population of the world couldn’t eat if we didn’t use natural gas to create nitrogen fixer fertilizer.”
“We’re not going to get rid of fossil fuels, we’re just going to use less of them.”
“I also think more of the world’s power generation will come from renewables. Both things are going to happen. Berkshire is one of the biggest creators of renewable energy in the United States. In Iowa, where we own most of the electric utilities, way more than half of all electricity generation comes from renewables.”
Munger also revealed that he has invested a small portion of his personal wealth in Stonehouse Corporation, an Aussie investment company that he considers to be a “soul mate” and “kindred spirit” of Berkshire Hathaway.
Costco 🌭, the Inflation Slayer
An anxious American public can finally take a deep breath and relax: CEO Craig Jelinek reaffirmed this week that Costco will not raise the price of its iconic $1.50 hot dog and soda combo. The price hasn’t budged in decades — and even today’s runaway inflation won’t change that.
Costco’s decision is only possible because the membership-only retailer has weathered the inflationary storm with aplomb. At least so far.
It’s early days, but sales remain strong and there’s been no sign of the excess inventory problem that’s plaguing competitors Walmart and Target.
Of course, Jelinek’s stubborn refusal to change the price of Costco’s hot dogs might have a simpler explanation. In a memorable Mental Floss article on the subject, Jelinek recounted the last time he broached a possible hot dog price hike with company founder Jim Sinegal.
Sinegal listened, nodded, and then did his best to make his take on the situation perfectly clear. “If you raise [the price of] the effing hot dog, I will kill you. Figure it out.”
Jelinek did. The $1.50 price lives on.
And, while the hot dog and soda combo definitely qualifies as a loss leader, Costco has had little trouble creating wealth galore over the past few decades.
If you purchased $10,000 of Costco stock in January 1997, when Charlie Munger joined the company’s board of directors, you would now have a cool $572,000. That’s good for a 17% annual return (assuming all dividends were reinvested).
Over the same time period, the S&P 500 only returned 8.4% annually.
I didn’t cherry-pick these numbers, either. Munger sings the praises of Costco at almost every opportunity, whether in small groups or in televised interviews broadcast to millions. We all had the chance to listen to him.
Here’s a quick example from the Berkshire annual meeting in 2011:
“Costco, of course, is a business that became the best in the world in its category, and it did it with an extreme meritocracy and an extreme ethical duty, self-imposed, to take all of its cost advantages as fast as it could accumulate them and pass them onto the customers. And, of course, that created ferocious customer loyalty.”
That’s when Buffett jumped in — eager to lampoon his partner’s proclivity to evangelize the good news of Costco.
“Charlie and I were on a plane recently that was hijacked [and] the hijackers picked us out as the two dirty capitalists that they really had to execute.
But they were a little abashed about it. They didn’t really have anything against us, so they said that each of us would be given one request before they shot us.
They turned to Charlie and said, ‘What would you like as your request?’
Charlie said, ‘I would like to give, once more, my speech on the virtues of Costco — with illustrations.’
The hijacker said, ‘Well, that sounds pretty reasonable to me.’
He turned to me and said, ‘And what would you like, Mr. Buffett?’
And I said, ‘Shoot me first.’”
Buffett’s jokes aside, Costco is pretty incredible. And we can all be thankful that its humble hot dog still stands athwart inflation, yelling stop.
Dividends: From ❄️ to Snowball
Being a dividend investor ain’t easy.
Not only must you carefully select companies to invest in, painstakingly poring over financial statements to ensure that those dividends will continue to grow and be well-covered by free cash flow and profits, but some particularly thorny mental blocks pop up to hinder your progress almost immediately.
Unless you’re investing a serious amount of money up front, those first few years are tough. You’ll probably feel like Jerry Seinfeld, signing Japanese royalty checks that amount to mere pennies, as minuscule dividends roll into your account.
(Believe me, I’ve been there. In the days before mobile deposit, bank tellers looked at me a little strangely when I showed up with a $0.09 dividend check.)
Even the most grounded and patient investor might wonder if this will ever pay off.
I hate seeing people give up before their dividend snowball even gets a chance to start rolling, so I was pretty excited by a recent post over at The Profit Zone. It recommends turning early-stage dividend investment into a game — one that makes it easier to power through and stay committed when your dividends probably seem frightfully meager.
I decided it was time to start setting measurable and attainable goals. Small milestones that I could check off along the way that would keep me on track towards my goal of financial freedom. I switched from having no plan, to trying to cover each one of my expenses with dividend income.
I started with my smallest expenses first. I wouldn’t actually use my dividends to cover the expense (I reinvested them all), but I did create a game within the game. It was the peace of mind that came with knowing you could cover the expense at any time. That’s powerful.
The first one I started with was my phone bill. It was (and still is) $50/month. Once I was making $50/month in dividends, I moved to my grocery bill. I average about $200/month on groceries (I just buy for myself) and still have yet to hit this milestone, but I’m getting closer every month.
And on and on until — someday — all expenses are covered and you’re financially independent.
That’s the dividend dream in a nutshell.
If you’ve enjoyed reading this issue of Kingswell, please hit the ❤️ below and share it with your friends (and enemies) so they don’t miss out. It just costs you a few clicks of the mouse, but means the world to me. Thank you!
Disclosure: This is not financial advice. I am not a financial advisor. Do your own research before making any investment decisions.