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Dave Sather's Money Matters: 'To finish first, you must first finish'

By BY DAVE SATHER
May 7, 2014 at 12:07 a.m.


The Berkshire Hathaway shareholder meeting continues to be a highlight every year. Not only do we meet with many of the world's top investment managers over a four-day period, but we also get to learn from the wisdom and expertise of two of the best investors ever: Warren Buffett and Charlie Munger.

In assessing my 10 pages of notes, possibly one of the most meaningful topics came almost at the very end.

With the benefit of hindsight, Buffett recalled some of Berkshire Hathaway's decisions during the 2008-09 financial implosion.

As the world's financial markets locked up and liquidity ceased, many companies that appeared healthy were knocking on Buffett's door in need of serious assistance.

Berkshire was able to lend money to companies like Dow Chemical, General Electric, Tiffany and Harley-Davidson. Although Berkshire was able to command 10 percent to 15 percent interest, Buffett recognized he actually left money on the table.

With the benefit of hindsight, Buffett said Berkshire would have been far better off had it bought the common stock of Harley-Davidson instead of merely lending it money at a whopping 15 percent interest.

During the same time frame, Buffett was acquiring shares of one of his favorite high quality banks - Wells Fargo. Again, he admitted that Berkshire would have earned higher returns if he had eschewed quality and bought the junkiest of the banks.

Although it is always interesting to assess decisions with the benefit of hindsight, I doubt Buffett would have done anything differently. There are a couple of reasons for making this statement.

Buffett and Munger have openly managed Berkshire with the philosophy of "In order to finish first, you must first finish." Simply put, many investment managers look great for a period of time only to blow themselves and their clients up by being too aggressive. This helps no one. As such, Buffett and Munger have always prepared Berkshire Hathaway to be "bulletproof" for decades. This often means opting for less aggressive strategies.

As they explained their logic, Buffett said Berkshire will always have $20 billion on hand, explaining that cash is like oxygen - you never know how much you need it until you don't have it.

Berkshire never wants to rely on the kindness of strangers (bankers), debt markets or lines of credit, as these can be taken away when you need them the most.

Buffett and Munger went on to state that they don't know when it will happen - maybe next year, or maybe 100 years - but the financial system will fail, and all lines of external funding will fail. When that happens, Berkshire will be in a position to "self-fund" and, in the process, survive and thrive.

As quickly as the super investors made this statement, they opined on the philosophy that "cash is king," saying that although cash provides necessary short-term liquidity, it will never keep pace with inflation or maintain long-term purchasing power.

Given this, there are some simple but immensely important lessons for all investors.

First, borrowed money can make you look very smart for periods of time - but it can also put you at risk for total default. You never want to put yourself in a position of being wiped out. Live to fight another day.

Slow and steady wins the race. Investing in consistent and predictable companies may be boring, but it allows you to be standing at the finish line.

Third, although cash is an important part of satisfying shorter term needs, it is an inferior long-term asset class. With just average inflation, cash loses more than half of its purchasing power over a 20-year period. You must balance short-term liquidity needs with the ability to grow wealth over many decades.

Although these philosophies may seem simple and boring, they seem to have worked well for the Berkshire billionaires.

Dave Sather is a Victoria certified financial planner and owner of Sather Financial Group. His column, Money Matters, publishes every other week.

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