Warren Buffett’s Take on Rotary….(kind of)


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Since the Four Way Test applies here at RFA, I should start by disclosing that I have no idea if Warren Buffett, probably one of the best known investors in the world, has any opinions about Rotary.  And if he did, I would be the last to know.  Most people know Buffett as a witty, “grandfather figure” who gives us great investment advice as well as being one of the richest men in the world.  They probably don’t know that Buffett is the greatest living disciple of two other investing icons, Benjamin Graham and David Dodd.  Their book, Security Analysis, first published in 1934, gave investors a framework for determining the value of publicly traded companies.  By using discounted cash flows and other financial tools to determine the fair value of a business, investors learned to find stocks that traded so far below their market value that they were considered to have a “margin of safety.” The term “value investor” is applied to investors who insist on evaluating the financial fundamentals of businesses, including profits, sales, cash flow, assets and liabilities, in order to uncover businesses that the average investor, or “Mr. Market,”  has priced incorrectly.  Buffett is the acknowledged master of the value investing game.  When he buys or sells shares the entire investing world pays attention.  He is a one man repudiation of the notion that financial markets are efficiently priced.

So now that you know why Warren Buffett deserves to be the investment icon that he is, let me help you look at Rotary through his eyes.  (Forgive me Warren, but you are a multi-billionaire and I’m just having fun writing a blog post on a Sunday morning before the final round of the Masters.  Cut me a little slack.)  One other note:  We all know that Rotary is not a publicly traded company, AND it isn’t a for profit organization.  It is a service organization full of wonderful people trying to make the world a little better.  So please let me make this analogy without getting your underwear in a bunch.  Not even 2015-16 RI President Ravi wants to take Rotary public.

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Warren Buffett would have a strong buy on Rotary.  He would see our organization as being “mispriced” in terms of our stakeholders expectations for our firm, based on more than one indication that our assets are underutilized.  He would see several catalysts to unlock the value of our shares, and use membership as a proxy for stock price.  He would urge his shareholders, in his famous Berkshire Hathaway annual report, to be patient while “Mr. Market” discovers our brand and our value explodes.  In short, Buffett would be long Rotary and short Polio.  However, he wouldn’t put his shareholder’s money at risk without good reason.  Here’s what Buffett would see if he analyzed Rotary as a value investor.

Product and Productivity:   Rotary is delivering a product of community and global service that is dedicated to the notion of world peace through humanitarian service.  This particular proposition often gets lost with Rotarians who tend to look at community service through the lens of how we have always done things in the past in their particular club.  There is a huge, largely untapped, opportunity for Rotary clubs to reinvent how they actually serve others both locally and globally, where the only barrier to bigger and better service projects is a failure of a Rotary Club’s imagination.  In Buffett’s view this is very bullish and he would make the case that Rotary Club’s are significantly undervalued from the perspective of the potential to increase the productivity of our community service goals.  Interestingly, Rotary “bears” don’t believe that Rotarians can change in this regard.  They would say the organization is so focused on the past that a “turnaround” isn’t possible.  As a value investor Buffett would disagree.  So do I.  Buy this theme.

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The Catalyst:  Value investors like Buffett often look for what’s known as a “catalyst” before they buy.  The issue is that stocks are often underpriced for a reason and buying companies, or organizations, when the stock price is low can often be a “value trap.”  That means the price is low for a good reason and buyers should be cautious that the price could move even lower.  A catalyst is an event that changes the market’s perception about company value.  In Rotary, we have a new potential catalyst in the organization every year. The catalyst is our Rotary club’s new leaders.  EVERY YEAR new club leaders are given the opportunity to make a massive, positive change in their Rotary club and in their community.  Again, this is a bullish development as the value of the current club could be dramatically oversold prior to the arrival of the new club leaders. Imagine, a built in catalyst every year.  Buffett loves it.  You can buy this theme as well!

The other catalyst, in Buffett’s eyes, is Polio Eradication.  He would see the five-year path for the Polio End Game as an amazing opportunity with a clearly defined time horizon.  He would want to own Rotary shares well before the news breaks and Rotary’s stock, in terms of prestige, honors, membership, opportunities for partnerships, and other service opportunities, goes vertical.  Again…buy it.

Our Market:  Baby Boomers are healthy, wealthy, new empty-nesters, who are very aware that many didn’t serve in the armed forces and feel an obligation to serve.  This huge cohort of potential community servants lies almost entirely untapped with no organization laying claim to this particular market share.  In fact, if we consider Rotary’s international membership to be comparable to our stock price, the price has been flat for decades.  Our 1.2 million total members hasn’t changed even though the world’s population, wealth, and need for our services, has increased dramatically.  Rotary is ready for a “breakout” in membership.  Any technical analyst trained in reading stock charts would tell you that any breakout to the upside following such a long period of price (membership) consolidation is extremely important.  (Buffett would throw up at this reference to technical stock analysts but at this point, what the heck?)  This is a case of increasing demand meeting our fixed supply.  Buffett would argue membership, and consequently Rotary’s significance as a force in “doing good in the world,” has huge upside potential.  This is especially true in many communities in the U.S.  Buy it!
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Underutilized Assets:  Buffett would love the amazing infrastructure that Rotary has built around the world of 34,000 Rotary clubs with 1.2 million Rotarians all living by the Four Way Test.   No other organization offers it.  AND I doubt that any other organization can build it from scratch.  In short…we have a monopoly on controlling a 200+ country grid of service providers who have the freedom to direct funds and labor directly to where it is needed almost anywhere in the world.  Bullish.  Buffett would also point out that the Rotary Foundation allows funding decisions to be decentralized around the world so that assets can be deployed extremely efficiently directly to projects overseen by Rotarians. Bullish.  Finally Buffett would love Rotary’s upper management and their increasing recognition that change is necessary to remain a vital and relevant organization in today’s crowded market of service opportunities?  Bullish again.

I am very familiar with the notion that for every buyer there is a seller, and if you want to take the opposite side of this trade you certainly can.  But I wouldn’t recommend anyone trade against Buffett.  His deep value trades have a high percentage chance of paying off if you are patient.  How long it takes for “Mr. Market” to recognize Rotary’s value is anyone’s guess, but I think this monster is about to wake up.  And when we do we are going to cause quite a stir.  Go long Rotary.  Get your friends and associates engaged in what we do.  Try something new in your club.  Make a bigger difference in the world.

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One thought on “Warren Buffett’s Take on Rotary….(kind of)

  1. Benjamin Graham – also known as The Dean of Wall Street – was a scholar and financial analyst who mentored legendary investors such as Warren Buffett, William J. Ruane, Irving Kahn and Walter J. Schloss.

    Warren Buffett once wrote a detailed article explaining how Graham’s record of creating exceptional investors (such as Buffett himself) is unquestionable, and how Graham’s principles are everlasting. The article is called “The Superinvestors of Graham-and-Doddsville”.

    Buffett describes Graham’s book – The Intelligent Investor – as “by far the best book about investing ever written” (in its preface).

    Graham’s first recommended strategy – for casual investors – was to invest in Index stocks.
    For more serious investors, Graham recommended three different categories of stocks – Defensive, Enterprising and NCAV – and 17 qualitative and quantitative rules for identifying them.
    For advanced investors, Graham described various “special situations”.

    The first requires almost no analysis, and is easily accomplished today with a good S&P500 Index fund.
    The last requires more than the average level of experience, intuition and talent. Such stocks are not amenable to impartial algorithmic analysis, and require a case-specific approach.

    But Defensive, Enterprising and NCAV stocks can be reliably detected by today’s data-mining software, and offer a great avenue for accurate automated analysis and profitable investment.

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