This weekend I attended the Berkshire Hathaway annual meeting in Omaha, NE. This was the largest Berkshire Hathaway meeting ever with over 35,000 people attending. This was a surprise to me because of the recession and the stock has posted its worst year ever. Despite this it was a big and busy meeting. The company movie this year was better than previous years even though it was scaled back. The company movie contains many commercials from the many companies the Berkshire owns of owns controlling stakes in. It also contained funny things about the general economic situation as well as guest appearances by celebrities. This year it was Tiger Woods with Warren Buffet as his caddie.
The format of the Q&A section after the company movie changed and was much improved. In the past all of the questions came from the audiences and many of the topics stayed away from the business of Berkshire and instead moved to other topics, it also included protesters which was quite annoying from a shareholder perspective. This year however shareholders were asked to submit questions to 3 preselected journalists who then choose the best questions to ask. This was augmented with live questions from the shareholders in attendance. This format worked much better and kept the meeting mostly on the topic of Berkshire and the general economy.
It was this Q&A section that I found the most interesting. Being a college student in the business school and being interested in Finance, and the markets I found one question more interesting than others. That question I found most interesting were the questions about the use of higher mathematics and modern portfolio theory. Both Buffet and Munger were in agreement that students and investors should stay away from theories requiring computers and calculators. The Wall Street Journal had an excellent article on this and the following quotes below are from this article http://blogs.wsj.com/marketbeat/2009/05/02/buffett-and-munger-stay-away-from-complex-math-theories/
Mr. Buffett: “There is so much that’s false and nutty in modern investing practice and modern investment banking, that if you just reduced the nonsense, that’s a goal you should reasonably hope for.â€
Mr. Buffett on the efficient market hypothesis, the idea that all information is instantly priced into the market: “There’s this holy writ, the efficient market theory. How do you teach your students everything is priced properly? What do you do for the rest of the hour?â€
Mr. Buffett on the use of higher-order math in finance: “The more symbols they could work into their writing the more they were revered.â€
Mr. Munger on the same theme: “Some of the worst business decisions I’ve ever seen are those with future projections and discounts back. It seems like the higher mathematics with more false precision should help you but it doesn’t. They teach that in business schools because, well, they’ve got to do something. â€
Mr. Buffett adds: “If you stand up in front of a business class and say a bird in the hand is worth two in the bush, you won’t get tenure…. Higher mathematics my be dangerous and lead you down pathways that are better left untrod.â€
Mr. Buffett on the persistence of bad ideas in finance: “The famous physicist Max Planck was talking about the resistance of the human mind, even the bright human mind, to new ideas…. And he said science advances one funeral at a time, and I think there’s a lot of truth to that and it’s certainly been true in finance.â€
To me this is all very interesting because much of this efficient market hypothesis and how to build a portfolio is what I have been learning this semester in my finance classes. It contains a lot of math (Which I don’t like, or understand many times) the formulas are complicated and most of all many of them rely on discounting and future projections. Mr Munger’s quote here I think is right on and seems right to me. I just wish that the end of the semester was in a few weeks. I think we could have a great time discussing a lot of these ideas in my financial investment class.
It seems as though the hedge funds that have tried this “fancy math†theory have failed time and time again. One that we just learned about in class was LTCM (http://en.wikipedia.org/wiki/Long-Term_Capital_Management) which worked good when the market was “normal†but failed hugely when the market was not normal. If history and the past few months show us anything is that the market is not normal and these practices cannot be relied upon 100%. Instead Buffets practice of buying undervalued businesses that are well run and managed.
In the end I think its interesting that the Oracle of Omaha basically thinks that a majority of what I have been learning in Business School is crap, and just time filler. The entire thing just makes me really take a step back and look at what I have “learned†this semester and wonder about graduation next year and what I will be doing after.
1935 Dusenberg SJ553 Beautiful Car
1935 Dusenberg SJ553 Amazing Car
