Buying What You Know

Yesterday my wheels started spinning. I don't know if you had an opportunity to see Liz Claman interview Warren Buffett, chairman and CEO of Berkshire Hathaway, Bill Gates, chairman of Microsoft, Howard Buffet, Warren Buffet's son and the heir to chairman of the board, and Susan Decker, president of Yahoo. But if you didn't, you should! They talked about everything from railroads to technology to energy to NAFTA to their individual companies.

The one point I found so interesting is when Liz engaged Buffett and Gates in a dialogue about the railroads. Liz asked Buffett if rails were still a good investment. Buffett said, "If you go back the last 25 years, the rail, the trackage in the United States has gone down 29% and the gross ton miles have gone up 65%, so the competitive situation and the pricing capabilities and so on in rails have changed dramatically." On a further exchange Liz asked, "How do the high gas prices effect what goes on and does that affect the business investments?” Gates said, "It’s a positive for the rail because they can move more tonnage per amount of energy than trucking can. And that's the main competitive dynamic there." Buffett jumped in and said, "It’s huge, it’s about 3 for 1, depending on exactly the product, but every time diesel moves up it helps the rail versus the truckers."

So why exactly was this exchange the one I highlighted? When Liz asked Gates if he follows or admires Buffett's investment style, Gates politely said yes and spoke highly of Buffett, as you would expect for two people who have been very close friends for 17 years and two of the world’s smartest executives. But it was Buffett who spoke up and said Gates gave him the idea to invest in the rails. He started investing in them four years ago. At which Gates said, “I don't do that kind of thing. My broker makes the investment decisions for me. I let him do the what he knows best and have him advise me on what stocks or companies to invest in.” Between you and me, I'm sure he takes a good look at everything he invests in, as he insinuated when Liz asked about Buffett's purchase of a furniture company without looking at the financials. Gates kindly said, he does that kind of thing and can do it. We do not. We have a team of people who research every company. I took that to mean we don't make acquisitions without reviewing the financials. But that pertained to Microsoft. When he talked about his own investments, he deferred to his financial advisor. 

Why was that so telling? Two reasons: One, Buffett looks to Gates and Gates probably gives Buffett just as many ideas as Buffett gives to Gates. Buffett was the first to point that out. Two, Gates admitted that he has an excellent broker and one whom he trusts investing his money. Now that may come as no surprise given the vast amount of money that Gates has accumulated over the years, but you wonder if two of the smartest people in the world seek out financial advice, should we do the same.

When Marvel Entertainment released its earnings yesterday and blew away Wall Street expectations coming off of a blockbuster weekend for the first fully funded Marvel Studios picture, Iron Man, I couldn't help but think about what Charles Payne always says, "Invest in what you know." Given all the attention this weekend in Omaha, I asked Robert Gray yesterday afternoon to look at Marvel Entertainment and Berkshire Hathaway. Marvel, a company and a product, whether they be comic books, movies, characters or toys, that I know very well versus a company that I don't know as well but which the world watches with a sense of awe and majesty, Berkshire Hathaway (a conglomerate of 76 companies). Here's what Connell McShane sent me this morning.

MVL...+13% YTD, 1 yr. +1%, 5 yr. +170%

BRK...-5.6% YTD, 1 yr. + 22.3%, 5 yr. +91% 

Not bad for a five year run! Buffet when asked at the shareholder meeting how to invest for the long-term, mentioned investing in a Vanguard Mutual Fund. I took a look at Vanguard's numbers. I recently interviewed the founder of Vanguard, John Bogle.  Here's the Vanguard 500 Index Fund vs. the S&P.

YTD: Vanguard 500 -2.19% vs. - 4.1%  S&P

5-year: Vanguard 500 +52.15% vs. +50.8% S&P

Not bad either! So what do we do? I think about this a lot particularly as it relates to my children. Is it in our best interest to invest in diversified mutual funds? Protect ourselves against event risk or a single corporation failing or should we invest in what we know?

When Marvel Entertainment released earnings yesterday and talked about the slate of proposed movies over the next three years from Captain America to the Avengers to the Hulk to a second Iron Man, I thought this is a company that I should buy. We own every Avenger superhero times ten but is that the best decision for my kid's financial future? Should I take a look at how two of the smartest men in the world invest and pursue a financial advisor? Do we all have the money or wherewithal to do that? Or should we do a little bit of both? Buy diversified mutual funds and a handful of stocks that you know and love and that you HOPE, will stand the test of time! 

What do you think? Weigh in.