Berkshire Hathaway shareholder meeting reflections
I'm not at the Berkshire meeting, but Marketwatch has some articles, and Justin Fuller from Morningstar has a blog.
"Berkshire Vice Chairman Charlie Munger said some banks have assets that he described as "good until reached for" - assets that are considered valuable until firms try to sell or unwind them.
He said the culture of investment banks is in some ways "evil" and counterproductive to the financial health of the U.S. Traders in such firms are often eager to make overly risky investments, a practice which is difficult for the heads of brokerages to stop, he said. This in turn puts too much risk on the financial system as a whole, he said."
Berkshire owns no investment banks at present. Warren took over as CEO of Salomon Bros last decade, but obviously he's sold out of Salomon. I find that pretty interesting. Earlier in the above article, Warren said that the way some investment banks are acting these days, they're only going to survive until there's a 1-in-50 years shock to the system ... like the one that just happened.
Morningstar used to rate most of the major investment banks as wide moat and average risk (Bear Stearns was narrow moat and average risk). they've since reduced many moats to narrow, and upped the risk ratings. even the venerable Goldman Sachs now gets a very high uncertainty rating, though it still retains a wide moat. Merril and Morgan Stanley get narrow moats and very high uncertainty. when the credit crunch passes, I expect the fair value uncertainty ratings to go down to average, but I think M* will likely keep the moats at narrow. these businesses looked like they were very very good businesses when the market was going up. now, they don't look as hot, although I would still like to own Goldman if I could get it at the right price.
Elsewhere, Warren remarked that this credit crisis is worse than Enron. I guess I won't be buying any investment banks for a while - certainly I've taken some hits to my CAPS score through bets on Merrill and Morgan Stanley. However, investment banks are too uncertain to bet on right now. Morningstar recently replaced its business risk measure with a fair value uncertainty measure. business risk means the risk that a company could go out of business. obviously, that's one part of fair value uncertainty.
however, let's take Starbucks. because of the uncertain US economic environment, and because of their international expansion in emerging markets (with quite different cultures from the US), it's not easy to precisely estimate their cash flows. ergo, M* raised Starbucks' uncertainty rating to high (on a scale of low, medium, high, very high, and extreme). the risk that they would go out of business completely is probably average or less, given the mindshare they've captured.