The Digest #8

Published on February 19, 2020

In Today’s Issue:

  • Twenty Years of Owning Berkshire Hathaway
  • Charlie Munger Holds Court at Daily Journal’s Annual Meeting
  • Blue Chip Stamps Annual Letters (1977-1982)
  • Follow-up on Stretch IRA Changes

To read last week’s newsletter regarding Alchemy by Rory Sutherland, predicting the future, the utility of money, and Chick-fil-A’s franchising model, please click here.

Twenty Years of Owning Berkshire Hathaway

Twenty years ago, I made a decision to purchase shares of Berkshire Hathaway. I still hold those shares today along with additional purchases over the years. Since 2009, I have written about the company frequently on the Rational Walk. This week, I published a brief retrospective article regarding my experience as a shareholder.

Berkshire outperformed the S&P 500 over this two decade period but it is fair to point out that many other investments dramatically outperformed Berkshire. However, the benefits of owning Berkshire and following Warren Buffett and Charlie Munger extend beyond the financial returns from owning shares. The intellectual framework of value investing communicated by Buffett and Munger is most likely what allowed me to view the 2008-09 bear market with equanimity. Owning Berkshire is both an investment and an education.

Daily Journal Annual Meeting

Charlie Munger held court for two hours of questions and answers at the Daily Journal annual meeting which took place on Wednesday, February 12. Mr. Munger likes to joke about the “cult-like” nature of these events, but in reality the attention he gets is well deserved given his business track record and the fact that he is now 96 years old.

Although impressions of the Q&A are necessarily subjective, it seems unlikely that many executives half of Charlie Munger’s age would be capable of performing as well as he does under the spotlight. He has shown no signs of decline when it comes to discussing business and countless other topics brought up by the audience.

Most audience questions had nothing to with the Daily Journal itself, but the story of how the company has been transformed is fascinating. I first wrote about Daily Journal in 2011 and posted an update in 2016. Today, Daily Journal is a combination of three distinct operations: (1) a collection of declining specialty newspaper properties; (2) a growing software business; and (3) a large portfolio of marketable securities. 

On May 2, Charlie Munger and Warren Buffett will both take questions for even longer — nearly five hours — at the Berkshire Hathaway annual meeting in Omaha. The meeting is a great experience for shareholders who have never attended one before but it will also be webcast live.

In recent years, CNBC has broadcast the Daily Journal annual meeting which appears below. Watching the meeting is well worth the time.

Blue Chip Stamps Letters (1977-1982)

While on the subject of Charlie Munger, many Berkshire shareholders and reporters misunderstand and underestimate his role in Berkshire’s success over the years. In the early days of the Buffett-Munger partnership, Munger controlled entities that were partially owned by Berkshire but also had outside shareholders. Some of Berkshire’s most famous subsidiaries were originally purchased through these entities. Blue Chip Stamps was one of these Munger controlled entities.

Both See’s Candies and The Buffalo News were originally acquired by Blue Chip Stamps. Max Olson has published a compilation of Charlie Munger’s letters to Blue Chip shareholders from 1977 to 1982. Blue Chip subsequently became a wholly owned Berkshire subsidiary in 1983. 

Berkshire’s ownership of The Buffalo News is coming to an end with the sale of Berkshire’s newspaper properties to Lee Enterprises. These early letters by Charlie Munger provide an outstanding window into the state of the newspaper industry, especially when it comes to the economics of one paper vs. two paper cities. The letters also contain much useful information regarding See’s Candies.

The exhibit below is part of an article I’m working on regarding The Buffalo News. It shows net income for each year from 1977 to 1999. This was anything but an easy acquisition. Eventually it worked out spectacularly well.

Follow-up on Stretch IRA Changes

In the first issue of Rational Reflections, I wrote about important changes to IRAs that became law on January 1. The legislation increases the age when account owners must take required minimum distributions from 70 1/2 to 72. This will defer tax consequences for retirees for a short period of time which is seen by some observers as a positive benefit.

However, the rules related to inherited IRAs have been changed to make it much harder for most heirs to stretch tax consequences over a long period of time. The restrictive rules on inherited IRAs also apply to the 401(k) retirement accounts that have become very common in the private sector.

While the IRA and 401(k) account changes took effect on January 1, just days after the new law was passed, Congress made sure that government employees would not face the same restrictions on stretch IRAs for an additional two years. The Wall Street Journal reports the following:

Q: Are 401(k), 403(b), and 457 retirement accounts treated the same under the new law?

Yes, but 403(b) and 457 plans for government workers and the Thrift Savings Plan for federal employees have two extra years in which to comply with the new law’s Stretch IRA elimination. That means that if you inherit one of these accounts from someone who dies before Jan. 1, 2022, you can take required distributions—and make the associated tax payments—over your lifetime.

I don’t intend to discuss much in the way of politics in the newsletter.  Suffice it to say, however, that Congress has a habit of imposing rules on the American people while exempting themselves (and other government employees) or at least softening the blow. This appears to be one such case that was buried in the IRA changes passed right before year-end. Congress could have extended the same courtesy to the American people, many of whom planned for years based on assuming the regulations in place when they funded their accounts would remain in place in the long run.

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Copyright and Disclosures

Nothing in this newsletter constitutes investment advice and all content is subject to the copyright and disclaimer policy of The Rational Walk LLC. 

The Digest #8