Buffett Buffet: Stocks, Bonds, Skinny Dipping

"All men are creative but few are artists."

- Paul Goodman

Ever get so excited your tummy turns upside down? Like when you got married or, better yet, took that first trip to Disneyland?

That's how some react when Warren Buffett's annual report from Berkshire Hathaway arrives. It's so good, you hope it won't end.

Buffett is one of the nation's richest billionaires. (You can have the poor ones.) Fortunately, he can write well, too. His letter to shareholders runs about 20 pages each year. The business press treats it like the unearthing of the Dead Sea Scrolls. Only Buffett's work is more entertaining.

This year, the Berkshire chief executive quoted such authorities as Santyana, Lewis Carroll and Abraham Lincoln. Some CEOs wouldn't know who those guys are.

Buffett, literally a student of the fabled Benjamin Graham, the father of fundamental analysis, turned Berkshire from a sleepy little company into a major conglomerate. Berkshire owns such companies as See's Candies, Kirby Vacuum, World Book Encyclopedia and the Buffalo News. His investments include major shares of the Washington Post, Geico insurance, Coca-Cola, Gillette and Capital Cities/ABC.

In 28 years of Buffett stewardship, Berkshire book value inched up from $19 a share to $7,745 - a rate of 23.6 percent a year. That's long-term investing at its best.

The most quoted passage this year is Buffett's common-sense pronouncement that Berkshire's investment returns in the 1990s will not match those of the 1980s. His comment, with a reference to partner Charles Munger:

"We've long felt that the only value of stock forecasters is to make fortunetellers look good. Even now, Charlie and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from the children and also grown-ups who behave in the market like children."

Talking about acquisitions: "In the search, we adopt the same attitude one might find appropriate in looking for a spouse: It pays to be active, interested and open-minded, but it does not pay to be in a hurry."

Of acquisitions that flounder, Buffett wrote, "In this corporate equivalent of the Head Start program, the CEO receives the education but the stockholders pay the tuition.

"In my early days as a manager, I, too, dated a few toads. They were cheap dates - I've never been much of a sport - but my results matched those of acquirers who courted higher-priced toads. I kissed and they croaked."

A certain trend could stymie further Berkshire growth: "The parent company made one purchase in 1991, buying H.H. Brown, which is run by Frank Rooney, who has eight children. In 1992, our only deal was with Bill Kizer, father of nine. It won't be easy to keep this string going in 1993."

Be wary, Buffett wrote, of managers who forever excuse short-term lack of profits for long-term goals: "Even Alice, after listening to the Queen lecture her about `jam tomorrow,' finally insisted, `It must come sometimes to jam today.' "

Writing about how larger insurance companies, hit by catastrophes, reconsider buying reinsurance: "It's only when the tide goes out that you learn who's been swimming naked."

One client has a $100 million catastrophe policy: "Now you know why I suffer eyestrain: from watching The Weather Channel."

Of the demand for reinsurance he quoted the saying, "A fool and his money are soon invited everywhere."

Looking for a fact? Buffett wrote, of the 10 worst insurance losses, nine occurred in the last six months of the year.

When do you sell a company? "There, our pace of activity resembles that forced upon a traveler who found himself stuck in tiny Podunk's only hotel. With no TV in his room, he faced an evening of boredom. But his spirits soared when he spied a book on the night table entitled, `Things to do in Podunk.' Opening it, he found just a single sentence: `You're doing it.' "

An investment tip: "What counts for most people in investing is not how much they know, but rather how realistically they define what they don't know. An investor needs to do very few things right as long as he or she avoids big mistakes."

On accounting: "Managers thinking about accounting issues should never forget one of Abraham Lincoln's favorite riddles: `How many legs does a dog have if you call his tail a leg?' The answer: `Four, because calling a tail a leg doesn't make it a leg.' It behooves managers to remember that Abe's right even if an auditor is willing to certify that the tail is a leg."

On Buffett's appreciation of long-term employees: "I recall that one woman, upon being asked to describe the perfect spouse, specified an archeologist: `The older I get,' she said, `the more he'll be interested in me.' "

Buffett slapped executives and the Securities and Exchange Commission for the flap over how to value stock options. Executives say it is too hard, and the SEC has been willing to go along: "The business elite risks losing its credibility on issues of significance to society - about which it may have much of value to say - when it advocates the incredible on issues of significance to itself."

Berkshire shares trade for more than $10,000 apiece. Buffett refuses to encourage a stock split: "There is no way that our shareholder group would be upgraded by the new shareholders enticed by a split. Instead we believe that modest degradation would occur."

Hard to believe anything could degrade Berkshire, or Buffett.

Now the bad news. First-quarter stock-picking results are in. Let's not dwell on the negative.

The five professional stock selectors didn't do too miserably. Three portfolios were in plus territory, two slightly minus. For comparison, the Dow Jones industrial average of 30 blue-chip stocks rose 4.1 percent, the Murphey Favre Northwest 50 gained only 1.3 percent.

Mike Kunath of the Kunath Karren Rinne & Atkin money-management firm saw his five stocks rise 4.9 percent. A Pacific Crest Securities team headed by Bill Whitlow was up 4.7 percent. Les Childress of Childress Investment Research stood at plus 1 percent. Donna Jaegers of Seattle Capital Management saw her list slip 2.1 percent. The five picks from Terry Douglas at Piper Jaffray were off 2.1 percent.

The 10 stocks readers selected in December as their favorites were off 9.7 percent at the first-quarter pole. Ten stocks selected randomly by Times staff were up 1 percent.

The race has just begun.

The Dow sank 68.63 points Friday to finish the week at 3,370.81, a 69.17-point drop for the five sessions. A reminder: stock and bond markets will be closed next Friday for the annual Good Friday observance.

The Murphey, 50 stocks weighted by their regional economic impact, fell 38.79 points for the week to close at 2,334.45.

The U.S. Treasury's 30-year bond plunged about $15 per $1,000 to close at $1,008. That was priced to yield 7.06 percent, the highest in weeks.

Treasuries were spooked by the Federal Reserve's decision not to buy into the market last week and by a sudden lack of interest by municipalities in T-bonds, reported Bob McCorkle, Seattle Northwest Securities vice president.

A malaise struck tax-exempts, driving the average bond down about $10 per $1,000, reported Judith Cochrane, Seafirst Bank municipal trader. Heavy refunding of older, higher-rate bonds by cities and other governmental units is fading, Cochrane said.

The short-term outlook for Treasuries and munis is negative, she said. Municipalities' appetite for Treasuries helped drive the Treasury market higher.

On portfolios: Here are percentage gains since the start of the year through Friday for two sets of stocks:

Readers' Portfolio (10 NW stocks preferred by readers) - Egghead -19.0 percent, Boeing -14.0, Costco -25.5, Immunex -16.1, McCaw Cellular +5.2, Microsoft +5.1, Nike -10.7, Nordstrom -23.2, QFC -13.6, Icos -19.7. Average: -13.1 percent. What $1,000 invested in those stocks would be today: $869.

Readers' Non-Portfolio (10 NW stocks picked randomly, excluding the readers' top 10) - Eldec +20.0 percent, John Fluke Mfg. -7.3, Hillhaven -21.9, Idaho Power +6.4, Imre -8.3, Sequent Computer -13.8, Timberline Software -15.2, TJ Int. +31.1, Wash. Mutual SB -4.1, Wash. Water Power +8.2. Average: -0.5 percent. What $1,000 invested in those stocks would be today: $995.

Wall Street Recap appears Sundays in the Business section.