More Buffetology

In times of stress and despair many people turn to spirituality. When investing and losing money get me down, I turn to my religion - Buffetology. Yes, the Oracle of Omaha had Berk's latest annual meeting and I perused the speech for some of his usual wise words to sooth my bruised senses.

There wasn't too much new but I found this funny:

"Investors should be skeptical of history-based models. Constructed by a nerdy-sounding priesthood using esoteric terms such as beta, gamma, sigma and the like, these models tend to look impressive. Too often, though, investors forget to examine the assumptions behind the symbols. Our advice: Beware of geeks bearing formulas."

Also in John Mauldin's newsletter, they had a copy of Paul Volker's speech when he was in Toronto recently. The full speech is worth reading as is Paul McCulley's from PIMCO. Volker's speech is half way down the webpage here: Saving Capitalist Banking and Volker Speech

You might ask how it went on as long as it did. The grading agencies didn't do their job and the banks didn't do their job and the accountants went haywire. I have my own take on this. There were two things that were particularly contributory and very simple. Compensation practices had gotten totally out of hand and spurred financial people to aim for a lot of short-term money without worrying about the eventual consequences. And then there was this obscure financial engineering that none of them understood, but all their mathematical experts were telling them to trust. These two things carried us over the brink.

One of the saddest days of my life was when my grandson – and he's a particularly brilliant grandson – went to college. He was good at mathematics. And after he had been at college for a year or two I asked him what he wanted to do when he grew up. He said, "I want to be a financial engineer." My heart sank. Why was he going to waste his life on this profession?

A year or so ago, my daughter had seen something in the paper, some disparaging remarks I had made about financial engineering. She sent it to my grandson, who normally didn't communicate with me very much. He sent me an email, "Grandpa, don't blame it on us! We were just following the orders we were getting from our bosses." The only thing I could do was send him back an email, "I will not accept the Nuremberg excuse."

I have nothing against financial engineering and I doubt they will become the sole scapegoats of this financial crisis. It seems that with the lack of proper oversight and some immoral behaviour by our leaders within industry and government, that future historians of this era will have plenty of candidates for villains.

McDonald's is a Staple

As millions of people become more impoverished as a direct result of government bungling and corporate banking maleficence, the one staple that is holding up better than anything seems to be Macdonald's Corporation. People need to eat and this is the quintessential low cost food provider. It has held up better than XLP - a consumer staples ETF - and even pays a 3.5% dividend.

The one year chart vs. S&P as well as XLP.


Six month:
3 month chart:


Global sales up 7.1% in January. The stock price has shown some recent weakness.

As far as I can tell, they don't have any financial exposure. No off balance sheet derivatives or CDO's. No financing arm to subsidize sales of Big Macs. Their biggest risk was fought a few years back against the ethical treatment of chickens and cattle that end up as feed stock to Mcdonald's production line. With a severe economic recession, the risks from the humane treatment of animals and environmental concerns are way down the list for most people. The thesis here is straight forward - cheap fast food.

I think MCD has room to move up from its current price of $57.