Warren Buffett Watch: Lesson in stock-picking as fundraiser pits World-Herald team against others - Omaha.com
Published Sunday, November 24, 2013 at 1:00 am / Updated at 4:50 pm
Warren Buffett Watch: Lesson in stock-picking as fundraiser pits World-Herald team against others

Reporters don’t get many chances to imitate their sources, so an invitation from Boys & Girls Clubs of Omaha to compete in a stock-picking fundraiser last week sounded like an opportunity to put Warren Buffett’s investing philosophy to the test.

Our World-Herald team would match investment wits with dozens of other teams from Omaha companies in a stock market computer simulation, using electronic dollars to see who ends up the richest.

Our strategy, advocated mostly by Michael Holmes, editor of the editorial pages, and executed by business reporters Cindy Gonzalez, Cole Epley and me, adopted two concepts from Buffett:

1. If you don’t have great insight or skill, pick an index fund.

2. If a fat investment “pitch” comes your way, swing for a home run.

So we created the Holmes Index, investing $10,000 in each company (there were 42), and then, to test the “fat pitch” theory, sank the leftover bucks into what we hoped would be five winners.

We sought advice from Berkshire Hathaway Inc., our parent company. Investment lieutenant Todd Combs emailed, “There’s no silver bullet to this stuff, as it’s all contextual. If you had one idea that was 10x > than the next then you’d obviously put it all in that one idea.”

Otherwise, he said, our hybrid-index strategy made sense.

So how’d we do?

Overall, we gained 23.5 percent over 60 “days,” earning $117,586 and finishing 24th out of 42 teams. (One team didn’t make it because of the weather.) We also had a relaxing evening because we ignored the stock tips and press releases that circulated around the market.

Our index gained $164,371, but the stocks we overweighted lost $46,785. Obviously, we picked them without knowing enough context.

Salad oil swindle

While the nation was shocked by the assassination of President John F. Kennedy 50 years ago, the great salad oil swindle unfolded on the New York Stock Exchange and ended up with a tie to Buffett.

Bryan Taylor of Global Financial Data wrote about the incident in an article posted by the Reformed Broker last week.

Among those cheated by Anthony “Tino” De Angelis was American Express, which loaned him money for storing what it thought was salad oil in its warehouses (turned out to be mostly water). The scandal broke the day Kennedy was shot, endangering the finances of some vital Wall Street companies that also had loaned money on the phantom vegetable oil.

While the nation’s attention was focused on the Kennedy death and funeral, the NYSE quickly assessed its members to make up the deficits, saving the companies and the market’s reputation. But investors dropped American Express’ stock price by 40 percent over the next few months.

“Believing this was temporary, Warren Buffett began buying shares,” Taylor wrote, and by 1973 American Express shares had risen tenfold. “American Express was one of the first of the many successful investments Warren Buffett made.”

Plant closing rankles

H.J. Heinz Co.’s decision to close its 740-employee ketchup plant in Leamington, Ontario, brought some bitter reaction. Berkshire owns half of Heinz, but the management decisions are being made by 3G Capital, a Brazilian hedge fund that owns the other half.

“Congratulations, Mr. Warren Buffett,” Fred Mitchell of Kingsville, Ontario, wrote to the Windsor Star newspaper. “It may not be too late for you to catch Mr. Bill Gates as the richest man in the world. Just buy up some more companies, close 100-year-old plants and devastate small towns. I guess life is good in Omaha.”

The plant closing is part of an overhaul of the company by 3G Capital, which cut expenses at Burger King by 30 percent when it became the owner.

The Star also reported that nearby farmers who had been supplying the plant with tomatoes for decades want millions of dollars in compensation from Heinz for specialized equipment and for fertilizer and field preparations they have made for next spring.

Farmer Walter Brown, director of a vegetable growers association, said growers spent millions on a pipeline to irrigate the fields, plus thousands of dollars on research that doubled their yields over the past 20 years while keeping their costs competitive.

The farmers grow $25 million worth of tomatoes a year for the Heinz plant, about half their crop on 5,000 acres.

Demand for bigger jets

Berkshire’s NetJets Inc. division will send bigger, more luxurious jets to Russia, Turkey and Ukraine, where demand is growing, Bloomberg reported.

East European customers need bigger planes because they often fly farther for meetings in the Middle East, Central Asia and Russia’s Far East, said Marine Eugene, sales director for NetJets Europe.

NetJets is buying $17.6 billion worth of jets over the next 10 years, including Bombardier Inc.’s Global 6000, which can fly for 13 hours, and Challenger, which has a 4,600-mile range.

The long distances even bring a 20 percent discount in per-mile charges on a new membership card NetJets issued for Russia and Turkey.

“The card is a strategy to make sure that we keep our edge in areas in the market that are more dynamic than our core historical market,” Eugene said.

Not just for billionaires

Howard Husock wrote in Forbes magazine that the Giving Pledge organized by Buffett and Bill and Melinda Gates may give people the idea that only billionaires can support successful charitable efforts.

Nor do charities need huge staffs and large-scale international partnerships to improve lives, Husock wrote.

Modest charities with effective ideas and support from donors large and small can accomplish great things.

He cited the Thiel Foundation’s investments in technology startups and a $200,000-per-year prize awarded by Mo Ibrahim, a Sudanese-British mobile communications billionaire, to democratically elected African leaders who leave office at the end of their terms rather than becoming dictators.

“Effective philanthropy certainly takes giving — but does not require billions,” Husock wrote.

The Omaha World-Herald Co. is owned by Berkshire Hathaway Inc.

Contact the writer: Steve Jordon

steve.jordon@owh.com    |   402-444-1080    |  

Steve covers banking, insurance, the economy and other topics, including Berkshire Hathaway, Mutual of Omaha and other businesses.

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