May 17, 2010 Selected Notes from Sequoia Fund, Inc. Meeting May 14, 2010

We attend quite a few investor meetings. The Sequoia group is a firm which we greatly respect. The following are just a few of our notes from their annual meeting.
1. Sounds like some time in future there will be deflated currencies and inflated costs.

2. Municipalities and States are addressing fiscal issues. NY could feel pain some time next year. Getting people to take the pain is an enormous challenge. (Later in the meeting, Goldfarb mentioned he was really talking about NJ. Not sure how material or correct that might be.) I think the point is that States and Municipalities are going to face difficult periods. Higher taxation expected. Concerned with Legacy costs being so high. Cited a county in CA, which Goldfarb claims is at a 40% of Revenue collected being paid to pensions. Not sustainable by any means.

3. Reminder to myself – Read a book about Henry Singleton and Teledyne. My understanding the book, ‘Distant Force: A Memoir of the Teledyne Corporation and the Man Who Created It” by George Roberts is a great book.

4. Becton, Dickinson (NYSE: BDX) – competitive advantage, low cost, high quality provider. Simpler to get hands around compared to J&J and Medtronic.

5. They like Mettler-Toledo International, Inc. (MTD).

6. Price discipline can not be over-emphasized. What return can we expect if we buy at a specific price.

7. They discussed investing for inflation. They mentioned timber, oil and companies with strong balance sheets and pricing power. Possibly next cycle could be more about inflation and less than weak demand. Need to focus on companies with less debt.

8. I asked the following question (I am quoting to the best of my memory.) “You have discussed that to invest in an inflationary environment, you need to find companies that are financially strong, little debt and have pricing power. Templeton and others have indicated that stocks are good inflation hedges. Yet, Buffett in an article in Fortune in 1977, wrote emphatically that inflation can not be beat with stocks. Would you please discuss, and would Jon Brandt also comment?”

Interesting responses (and let me add that I admire these guys a great deal, especially Goldfarb and Brandt.)

A. BG mentioned that Buffett meant companies with a lot of cash, and minimum capital requirements are terrific inflation hedges. Find low capital intensive businesses.

B. I forgot which of the two reminded us that the article was called, “How Inflation Swindles the Equity Investor.” Incidentally, here is a copy of the article Link

Here are some quotes from the article.

“The central problem in the stock market is that the return on capital hasn´t risen with inflation. It seems to be stuck at 12 percent.”

“It is no longer a secret that stocks, like bonds, do poorly in an inflationary environment. We have been in such an environment for most of the past decade, and it has indeed been a time of troubles for stocks. But the reasons for the stock market’s problems in this period are still imperfectly understood.”

“It was long assumed that stocks were something else. For many years, the conventional wisdom insisted that stocks were a hedge against inflation. The proposition was rooted in the fact that stocks are not claims against dollars, as bonds are, but represent ownership of companies with productive facilities. These, investors believed, would retain their Value in real terms, let the politicians print money as they might.

And why didn’t it turn but that way? The main reason, I believe, is that stocks, in economic substance, are really very similar to bonds.”

“Quite logically, the marking-up process began to reverse itself. Rising interest rates ruthlessly reduced the value of all existing fixed-coupon investments. And as long-term corporate bond rates began moving up (eventually reaching the 10 percent area), both the equity return of 12 percept and the reinvestment “privilege” began to look different.”

“An irony of inflation-induced financial requirements is that the highly profitable companies – generally the best credits – require relatively little debt capital.”

“More leverage, whether through conventional debt or unbooked and indexed “pension debt”, should be viewed with skepticism by shareholders. A 12 percent return from an enterprise that is debt-free is far superior to the same return achieved by a business hocked to its eyeballs.”

9. W.R. Berkley Corporation (WRB) – They like everything about the company, except for their compensation practices. They feel the company undeservedly over-compensated their employees with stock options and excessive dilution. Yet, they still may keep the company, or even buy more. Yet, they mentioned they might sell as well.

10. They discussed their investment in IDEXX Laboratories, Inc. (IDXX). They explained their thesis is that “pets are the new kids.” Owners will pamper and spend money on pets. I find that comment to be totally absurd. Yet, I am probably looking more into it than need be.

Really a fantastic meeting as always.

Here are some of my notes from past meetings.
Friday May 15, 2009 Sequoia Fund Meeting (SEQUX) Link

I will keep these notes fairly vague and brief. In the past, Sequoia has asked that the meeting should not be blogged, since they will produce a transcript in the not to far future. They didn’t mention that this time (or I didn’t hear it), and here are some notes, which do not go into too much detail. Once the transcript comes out, I think it will be a very valuable read. I also wanted to mention, that I met what appeared to be a very knowledgeable and nice guy. We had an excellent discussion, and if by the long shot chance you are reading this, it was a genuine pleasure to speak with you. – You can find old reports and look for 2009 meeting transcript at some point.

Robert Goldfarb and company seem incredibly genuine, generous and competent, with and about their work.

They discussed how it is difficult if not impossible, to ascertain normalized earnings power for companies right now. There is no macro or micro clarity to determine what businesses will generate in earnings, growth or such. Robert Goldfarb said, “I can’t remember a time when visibility was this low. It would be like a pilot flying through dense fog without instruments.” “There are signs of life in the USA, but they are on a ventilator, yet we need to get off the ventilator.” During the meeting, he seemed to genuinely believe that the US will once again prosper. He thinks there is future strength in many areas of manufacturing. Yet, great over-capacity in Detroit.

Again, watch for the transcript. Here are older transcripts.

May 18, 2005 Link

1. “Meeting is off the record. The intent is honesty and to say what is on our mind.”

2. Recommended Charlie Munger’s book, “Poor Charlies Almanack”

3. You don’t have to be making an investment all the time. You don’t always have to do something. Prudence might tell you to sit and wait.

4. Compared Walmart and Costco. They described that they like both companies. They mentioned that Walmart is more shareholder friendly. They described that Walmart is managed in a way that they look at shareholder return. I checked insider ownership of both companies. Walmart is over 40% owned by insiders, whereas Costco is owned less than 1% by insiders.