From Buffett to Borealis

THAT ‘RECORD’ STOCK MARKET

Carol Vinzant: ‘Forget euros, check out how the Dow compares in real dollars. What cost $11,722.98 in 2000 (the Dow peak) would cost $13,018.82 in 2005 (that’s as far as the online calculator I was using would go). [So, in real terms, the Dow, let alone the S&P or NASDAQ, is not yet back to where it was six years ago.]’

A MEMO FROM WARREN BUFFETT

Something to show your kids as well?

To: Berkshire Hathaway Managers (‘The All-Stars’)

From: Warren E. Buffett

Date: September 27, 2006

The five most dangerous words in business may be ‘Everybody else is doing it.’ A lot of banks and insurance companies have suffered earnings disasters after relying on that rationale.

Even worse have been the consequences from using that phrase to justify the morality of proposed actions. More than 100 companies so far have been drawn into the stock option backdating scandal and the number is sure to go higher. My guess is that a great many of the people involved would not have behaved in the manner they did except for the fact that they felt others were doing so as well. The same goes for all of the accounting gimmicks to manipulate earnings – and deceive investors – that has taken place in recent years.

You would have been happy to have as an executor of your will or your son-in-law most of the people who engaged in these ill-conceived activities. But somewhere along the line they picked up the notion – perhaps suggested to them by their auditor or consultant – that a number of well-respected managers were engaging in such practices and therefore it must be OK to do so. It’s a seductive argument.

But it couldn’t be more wrong. In fact, every time you hear the phrase ‘Everybody else is doing it’ it should raise a huge red flag. Why would somebody offer such a rationale for an act if there were a good reason available? Clearly the advocate harbors at least a small doubt about the act if he utilizes this verbal crutch.

So, at Berkshire, let’s start with what is legal, but always go on to what we would feel comfortable about being printed on the front page of our local paper, and never proceed forward simply on the basis of the fact that other people are doing it.

A final note: Somebody is doing something today at Berkshire that you and I would be unhappy about if we knew of it. That’s inevitable: We now employ well over 200,000 people and the chances of that number getting through the day without any bad behavior occurring is nil. But we can have a huge effect in minimizing such activities by jumping on anything immediately when there is the slightest odor of impropriety. Your attitude on such matters, expressed by behavior as well as words, will be the most important factor in how the culture of your business develops. And culture, more than rule books, determines how an organization behaves.

Thanks for your help on this. Berkshire’s reputation is in your hands.

BOREALIS

Greg Forrester: ‘I originally invested in Borealis because a friend of mine shared one of your earliest articles on the company. I have been very pleased with the return, although it is only on paper. I have since become involved as a consultant with the group, attempting to market WheelTug™ to major US and International air lines. Rodney and Isaiah Cox are fun to work with. I think some big things are going to happen. What are your thoughts?”

☞ Well, first let’s hear Del’s thoughts:

Del Rickel: “I have been buried in Borealis for about 10 years now. I never cease to be amazed at what the Cox’s are able to do when they gain a sliver of notice. The Boeing WheelTug™ demo was, I am sure, due to the contacts that Bob Carman, now departed from Borealis, had maintained during his years at Boeing. The demo provided an awesome example of the power density available thru an implementation of the Chorus motor technology. But as a retired aerospace, system engineer, I am quite confident that there will never be a WheelTug™ installation on currently existing commercial aircraft. The reason is pretty obvious. The landing gear is one of the most critical flight systems on an airplane. As such, the certification of airworthiness that any civil aviation regulatory body would require would be a Herculean engineering effort. As a minimum such an embodiment would require a comprehensive technical data package for each configuration of aircraft to be retrofitted. Such a package would require detailed installation and operating parameters as well as thousands of hours of full up airframe testing, on each aircraft type. This is an exercise that would cost more to complete than the market cap of Borealis. It is an undertaking that no one in the user community would even consider and the OEM’s have little incentive to undertake such a mod on delivered aircraft. It’s a neat idea, but no one can or will pay for it. The only hope of delivering a WheelTug™ product would be if the OEM’s were somehow enticed to qualify the hardware as part of a new airframe design. Given the problems that Airbus is having, and the state of development of the new Boeing plane, this is an idea whose time has not come. It is folly or disingenuous for the Borealis management to string their shareholders along with these gibberish statements about talking to airlines. Airlines cannot just go out and reconfigure their airplanes without extensively validated engineering and test of any hardware modifications. This is another example of Borealis BS that underscores why they are their own worst enemies. Especially if they are wasting time on this without getting good counsel on what is required. The motor is amazing. They should focus on selling it on the ground.”

☞ So, here’s what I think: who knows? The company is valued at $50 million (5 million shares selling for under $10 each, no debt) and has two potential multi-billion-dollar bonanzas: one, a portfolio of promising technologies whose commercialization is always just around the corner (I keep waiting for the spray that I can use to make myself invisible); the other, a reportedly humongous, advantageously located iron ore deposit that Mr. Cox has been patiently stewarding for 41 years (you read that right), which may now be on the verge of exploitation.

To me this continues to be a bizarre, wildly unconventional, yet attractive bet. There is a real chance that nothing will ever materialize and we will ultimately lose every penny. Which is why the shares must be bought only with money you can truly afford to lose. But there is also a chance, I think, that those of us who paid $3 or $4 a share a few years ago could ultimately see a twenty- or perhaps even a fifty-fold gain. Which is why I patiently (okay, impatiently) hold on.