Remarks from the 2001 Spring Conference

You can tell from the title of my remarks that you are not going to hear any macroeconomic razzmatazz from me tonight. I left economics in Mr. Corrigan's able hands. I will also spare you the terror of statistics, news or slides. My remarks are brief and from the heart.

Two stories:

• During WWII a young Jewish chemist from Poland by the name of Leo Sternbach escapes to Switzerland where he goes to work for the Roche Co., (now known as Hoffmann La Roche). Eventually he ends up in the company's New Jersey research facilities where he works on some intermediate compounds. One day in the late 1950s, he drops a beaker with a chemical on the lab floor. Somebody cleans it up and Leo goes to lunch, only to discover, on his return, that the rats someone had stored in his lab temporarily, had gone to sleep. He puts two and two together and the world discovers Diazepan. We know it as Valium. Billions of dollars in profit for Roche. Now, did the company just rest on its laurels? No. It went on to invest and to discover more in the old fashioned way.
  
• Our next hero is Chester Carlson. Even as a young boy, printing fascinated him. He goes to CalTech and studies Physics. In 1938, working alone, he discovers the first process for drytone printing. He takes his invention around looking for sponsors. No one seemed interested. Then in 1947, a very small family outfit named Haloid Company buys his process. In 1949, Haloid is renamed the Xerox Corporation. It introduced the first Xerox copier in 1968 to a thundering success. Yet, despite being a darling of Wall Street for so long, the Xerox corporation took its profits and squandered them in futile and stupid ventures. Today it is teetering at the verge of bankruptcy.

The history of business and money is replete with stories like these. It tells us that some luck and hard work often pay off. But business history also speaks loudly of the need to view the financial process with some humility. For unless you inherit it or win the lottery, creating great wealth is quite difficult and, keeping it, is substantially harder.

These are only two of the many stories of people and companies who made the most or the least of a lucky break. But since we can't count on lady luck, what are we to do with our savings?

There is a story about three men who stood at a sidewalk of a very busy street, all desirous to walk across. There was a lot of traffic and no pedestrian crossing. For one of them, the risks of getting hit by a car seemed quite high. He opted not to cross. He opted for the disadvantageous, albeit relatively safe existing position. The second fellow reasoned that the traffic was a random matter, which no one could control, and that if he wanted the adventure of the other side he would have to take his chances. He bolted forward only to be hit by an oncoming bus halfway across. The third fellow reasoned that, with sufficient observation, he could make a judgment as to the speed, direction and density of traffic so as to find an opportune moment for his crossing. He did, and he made it.

All three of these men had the same desire. They all saw the same risks. Yet they came to entirely disparate conclusions as to their perception of such risk and the "value that the other side held for them" against the risk of loss.

And with that I want to ask a question that a recent article in the WSJ asked so eloquently: "How can so many who are paid so much have blown it so spectacularly for their investor customers? How did so many get it so wrong?"

The answer is the words 'humility' and 'judgment'. These are both traits they don't teach in Business School. They are impossible to identify or quantify.

Wishing to make a lot of money via the investment process is a normal human desire. But so is the one of not wishing to be hit by a bus. But you can't have the possibility of the first without the risk of the second. This is also true in flying. We appreciate the speed and comfort of an aircraft but dread the possibility of something going wrong. Do we take our chances then? Fly the odds? Humility and Judgment are also crucially important in the business of flying airplanes. A little arrogance, over-confidence or lack of judgment results in disaster. It is the same with money, except that you don't die.

A pilot learns, from the very beginning, that when things get really itchy, uncertain, difficult, or start going wrong, there is only one thing to do. He's been told this over and over. "Fly the airplane." Meaning, keep the wings level, go back to basics, find the nearest airport and land. Think.

Before each take-off, no matter how many flawless take-offs and landings have taken place before, a pilot needs to know:

(a) About himself - his limitations, levels of comfort and his skills relative to what is to be expected;
(b) About his aircraft: the design limitations, the operating envelope, every system and every instrument; and finally
(c) Everything there is to know or as much as he possibly can about his flight plan, the weather to be encountered, the terrain, the navigation problems, the airport he is to land, the regulations governing such flight, etc.

To someone who is not familiar with all these, flying is a risky proposition that is best avoided. So, why is it that when it comes to the financial markets, there are so many equally as ignorant but so very eager to play, if not with their lives, with their savings?

I can think of many instances when, as a pilot, I chose to remain on the ground, even as someone else launched to my own destination. But I can also think of times when I went on as someone else chose to stay behind. Flying airplanes is not a race or a hobby. It is serious business. And so is investing money.

Let me be very frank with you. If you don't know the relationship between an attitude indicator and a vertical speed indicator you don't belong in the cockpit. Similarly, if you can't read a balance sheet, you have no business in the stock market or any other market. You will end up deciding on a 'hunch' a 'gut feeling' or a neighbor's hot stock tip. You will listen to the crowd from Wall Street that is just as lost or self-serving. You can't fly an airplane on a hunch and neither can you invest money.

I have been accused as being too bearish for too long. I ask you, 'Can a pilot be bearish or bullish?' 'Does he really care where all the other pilots are going?' Nonsense. He is only concerned with the safety of his passengers and his aircraft. Do you disagree with the pilot's judgment? Do you want him to change his opinion to accommodate you because you are in a hurry or have read in the paper that the weather is great?

There is a saying in aviation that goes: 'It is better to be down here wishing you were up there than to be up there wishing you were down here."

You are getting my point, right?

To the extent that you demand that an investment adviser play this game of musical chairs, you are both being dishonest. You may make a lot of money or lose a lot of money, but at the end it would have been a game of chance. And chance is not something pilots can rely on. Luck, yes. Chance, never!

So, now, if a pilot must deal with self, machine and the elements, what is our investor analogy? Well, it is exactly the same.

(a) We must know ourselves, our limitations, our skills, our needs, our tolerance for risk, our needs for security, income, etc.
(b) We must know as much as possible about every type of investment instrument in our reach and how they are related to each other and
(c) We must be aware of the weather, and our route. The great debates in the social, economic and political framework of our world must be of significance.

We must learn to recognize trends that have may have an impact on our capital. We must be eager to listen and make a distinction between what is useful and meaningful and what is just.. noise.

In flying airplanes, the greatest and most embarrassing sin, is, perhaps, to run out of fuel. Or, to land with the gear 'up.' These are avoidable disasters. Would you believe that pilots every day still do so? It is like buying shares in Yahoo! at $200 per share because some guru on CNBC said that it is going to $400. You don't need hindsight. You need humility and judgment to say, "Bull!"

Another embarrassing sin for a pilot is to end up at the wrong airport. You laugh? Even professional pilots occasionally manage to do just that. You fly from Houston to New York City. You have a constant northerly wind. You end up in Virginia. To avoid this, you make corrections along the way. Your destination as a pilot and as an investor must be absolute, not relative to the winds or the S&P 500.

Finally, a smart pilot learns by studying other pilots' misfortunes and errors in judgment. Why shouldn't we? I mean, read the obituaries? There is much to learn.

To those with questions as to our stance relative to shares in companies selling at lower prices than they once sported, let me assure you we have no itching not to miss something. To summarize, our equities checklist has not changed much at all despite the calamitous equities environment.

We look for investments in companies:

(a) We can understand;
(b) Which are in a business with barriers to entry;
(c) That have clean accounting practices and financial statements;
(d) That offer good - and realistic - prospects for increasing profits
(e) That are run by people who respect their shareholders; and
(f) Whose shares sell at a price that would make sense to buy the whole company.

For some of you, what we own is relatively boring. Let's see, we own shares in companies involved in fruit growing and processing, fertilizers, salt mining, grain handling, fishing, energy, gold and precious metals, forestry, steel, oil tanker shipping, refining, movies and other such very boring endeavours. Our portfolios are augmented by income producing securities, inflation adjusted US government bonds, Swiss government bonds and good old-fashioned cash in the neighborhood of 45% of total assets. I expect this to be another great year despite the fact the skies are likely to get a bit more turbulent and dark.

There are many, who are looking for a 'bottom,' I have yet to meet anyone who can forecast these things consistently. No one comes out with a trumpet announcing it. There is far too much money and optimism in my view for that.

I can assure you of one thing: I want to make certain this pilot stays proficient, current, humble and makes careful judgments as God gives him the light to make such judgments. In the event of trouble, I promise to remind him to just "Fly the airplane." You can't ask for any more.

So, who needs Alan Greenspan?

Thank you.