Berkshire Hathaway Intrinsic Value Pie Chart [View article]
Honeycutt, don't waste time hoping for a dividend or PE spinoffs. The first will create false value, while the second will produce only a one-time gain. If Berkshire is undervalued then you can buy shares with a margin of safety. A long-term investor will then focus on the company's growth in intrinsic value, not when the margin of safety will be removed.
Paying a dividend simply transfers the burden of compounding from able management to the shareholder. If you think that is wise then you have greater confidence in your abilities than I ever had, particularly after coming current on taxes. You are much wiser to defer the taxes and leave the compounding to Warren and the corporate culture he has nurtured. Then spend your time looking for similar companies: there are a few, not many.
Berkshire Hathaway Intrinsic Value Pie Chart [View article]
Sidneybound: I think what Warren said, as reported to me--I missed this year's meeting--was that each new policy was worth $1,500 and that Geico expected to issue 1 million new policies this year out of a total 1.5 million policies for the entire industry.
dopexile: if you own companies whose managements you don't trust, then some of your points make sense. But I would encourage you to invert and to ask what kind of a company would I really want to own for a long time. That would be an enduring business with a moat, which you can understand. It would also be a company whose management you trust: managers who would instinctively do what you would do if you were in their shoes and had their knowledge of the business. Then you would leave it to them to allocate capital in the most efficient way they can find.
If you accept such a description then spend your time hunting for companies that come closest to living up to the standard you have set. Don't worry, you won't find many, but that makes life easier for you--and likely more profitable than putting constraints on managements because you don't trust them.
Count me as a skeptic. I have seen too many companies that pay a dividend--and increase it when they shouldn't--to through a red herring in the way of unquestioning investors. I have also seen too many companies that don't have a clear discipline in buying back stock. So look to see if a company has discipline.
Dopexile: I would encourage you to read and ponder Ben Graham's allegory on being in business with Mr. Market. And consider also that payment of dividends comes straight out of book value. Most companies shares trade at multiples of book. So why, pray tell, should you be eager to accept $1 when the market is offering you 1.5, 2.0 times that? Why accept the lower price?
The answer, of course, lies in our cognitive biases: we anchor our decisions to some higher price, which might come the day after you sell. A dividend does not confront your cognition in this way. But shouldn't be worth figuring a way around our cognitive shortcomings, rather than accept what is obviously a lower price?
Consider also that the receipt of a dividend is the equivalent of sell a zero-cost-basis lot.
2 Reasons Why Income Investors Should Ignore Warren Buffett's Dividend Argument [View article]
Perhaps one of you fellows could educate me: for the world of me I don't understand why I should accept $1. (BV), which is what a dividend amounts to, when Warren is offering me $1.25 (1.25x BV) and the market is topping him currently at around $1.30. Where am I wrong? They are my shares; my empire, not his. Why should I accept less than current market?
2 Reasons Why Income Investors Should Ignore Warren Buffett's Dividend Argument [View article]
Analytical, Rhianni, Bacon: we agree. One’s investment success will be driven ultimately by the return on marginal capital, whether that return is produced by managers or by the investor. A company can have a terrific return on capital but no reinvestment opportunities; if the cash sits there the marginal return is zero, and one’s compounding is zero. Investors are exposed to four possibilities: 1) management can reinvest in the business (so-called organic growth); 2) it can acquire other companies; 3) it can buy back its shares (invest in itself); or 4) it can pay a dividend. In the first three possibilities management retains the responsibility of compounding (and it is our job to evaluate how well they execute; in the fourth instance, that responsibility is returned to the shareholder. And he or she better know what he is going to do. Here it is also our job to evaluate performance—a difficult task of introspection.
The object of investing ought to be to engage, through the purchase of stock, managers who are smarter than we are. If we fail at this we can only expect mediocre results, or hope that luck will bail us out. It is entirely short sighted to focus on dividends, when we should focus on the skill of managers to allocate capital. In the examples you gave, Analytical, Berkshire and Exxon have superb records (I own both.). HP has been a bumbling idiot, which I owned before it acquired its habit of bumbling. I have no judgment of Supervalu, except that it operates in a dreadfully difficult business, but Costco has figured it out. If we think or hope that a fat dividend will bail us out, we are the patsies.
The author of this piece unduly focuses on 125% implying that Warren stupidly or thoughtlessly stipulated that 125% was immutable across companies and time. Warren suggests it as a simplification to make a point. Since he was writing primarily with his company in mind 125% does have relevance: it is the base at which Berkshire says it stands ready to repurchase shares. In other words, shareholders can always get 125% of book, so why in god’s name should one settle for only 100%? As you noted, Analytical, Exxon trades at 2.4x. Of course 2.4x is not rock solid. It will fluctuate, and Exxon has a pretty good record of buying its shares opportunistically, just as we should want. (Exxon has now bought back way more shares than all of the shares it issued to buy Mobil and XTO. I would submit that this has been a vastly more profitable use of capital than paying a fatter dividend. I realize that we are dealing with reality that doesn’t offer a control, so this will have to remain as an assertion.) Again, our job as analyst is to determine whether the buy backs are good investments. For Exxon shareholders they have been; not for shareholders of many other companies.
One final clarification: Warren did not explain that as a corporation Berkshire receives a tax exclusion of 70% on dividends received. Thus it pays around 11% tax on dividends received but 35% on capital gains. Put this in the context that Berkshire’s equity investments are largely funded from float—insurance reserves—and the story about why Warren prefers dividends for the company but not for shareholders begins to make sense.
Perhaps, Michael, you should keep your wise counsel in mind when it comes to equating restricted stock with stock options. Just an observation.
Your fixation on five years is impressive for someone who claims his family has owned Exxon for decades. I would encourage you to ponder your assumptions more thoroughly. You have not and cannot demonstrate that paying a higher dividend, versus buying less stock, is in the long-term interests of shareholders who are prepared to think like owners. But you surely think you have, or perhaps don't have to.
Michael, we will probably continue to disagree--but that does not mean we both can be right: we each have to figure that one out.
Conflating stock options and restricted stock might get you to where you want to go. Unfortunately, you are wrong: stock options are options on shares; restricted stock are shares that are restricted in some manner, like when the owner can sell. The holder of options receives no dividend income; the owner of restricted stock does. You are right, as I note below, that both differ from cash in that they carry an interest in the future compounding of the business. Cash compensation does not.
The accounting of the two is also different. Back in the days of rampant (often fraudulent) option accounting, stock options were preferred by managers because the accounting profession, blessed by former Senator Lieberman and others, allowed companies to record the options at zero cost. The cost of a restricted share is its value on issue, and it has always been required to be expensed as compensation expense .
It is true that issuing stock options or restricted stock does transfer existing shareholders' compounding to the recipients. Buying back stock reverses that. So, yes, some of the annual buy backs have simply undone the dilution, but it is inaccurate to imply that these buy backs benefit only management. Besides the dilution, which is miniscule for a company like Exxon, any benefit to restricted shareholders is dollar for dollar a benefit to unrestricted shareholders.
Your judging the effectiveness of a buy back after only a few months is so full of randomness as to make it meaningless. Even five years is too short. What is admirable about Exxon is that they really do appear to have tried to engrain the long-term nature of their business into their culture; by tying a substantial portion of compensation to quite long-term restricted shares helps to imprint a significant focus on running a company profitably for a long time. I admire that.
Finally, your comparison to the usual comparables is also too short term. Since you say your family has owned Exxon, and predecessors, for decades, I would suspect that your compounding over those years is quite enviable. You will surely not agree with me, based upon where you want to go, but I would make a safe wager, if we could make the calculations, that if, over those years, those companies had paid ;ittle or no dividend but had made a reasonably successful practice of opportunistically buying back shares you would be materially better off now. What most investors don't understand is that, in the end, what really makes one better off is what happens to the cash generated from the business annually: it is the marginal return that counts. Is it invested in profitable projects, acquisitions, buying back shares (investing in oneself), or paying a dividend? In the first three uses the responsibility of compounding remains with management; in the last it is transferred to shareholders, and they better know what they are going to do. The whole project of investing ought to be focused on getting smarter people to do the hard work. If you have picked your managers well you should not mind paying them commensurately, whether in cash or shares. You should rightly, however, place a higher cost on a dollar paid in shares than a dollar paid in cash, because of the value of the compounding.
The careful reader is encouraged to read Exxon’s latest Executive Compensation Review, as well as the Executive Compensation Tables in its proxy statement.
Exxon does not issue stock options. More than half of annual compensation is granted in the form of restricted shares. The important difference to stock options is that the restricted stock pays a dividend, so the executives do not have an interest in keeping dividends low, while buying back shares, in the hope of increasing their option values. Indeed, the fact that Exxon pays a below-industry dividend suggests that it really is serious about getting executive incentives straight.
Recipients are required to hold these shares for a long time: 50% vest in five years, but the remaining 50% don’t vest until 10 years after the grant or retirement, “whichever is later”. The Review takes pains to show that executive compensation is designed to align executives’ interests with the interests of long-term shareholders. This is particularly important for a company like Exxon, whose investment horizon is very long. Goosing earnings before retirement will accomplish nothing, and speculators need not apply.
Exxon was the first major corporation to buy back its shares. Over the past 30 years they have bought back a huge number of shares. From my observation they have an excellent record of buying back stock opportunistically, that is, when the price is attractive. A long-term shareholder should want to be invested along side managers who have a working understanding of what a company is worth and have excess cash to buy back shares when the price is right.
There are, regrettably, too many companies where management interests seem to come first, while shareholders are an afterthought. Such companies should be avoided: a fat dividend will not make you only a little pregnant. Exxon is not one of those companies.
I have owned Exxon on and off for a number of years and currently do.
Capital Southwest Corporation: A Texas Berkshire Hathaway On Sale [View article]
Philip, you are right to call attention to CSWC. I have owned shares for over 20 years; they have compounded at 12% per year, not stunning, but not bad: about 3 percentage points better than the S&P.
The analogy to Berkshire Hathaway deserves some elaboration. Like Berkshire, CSWC likes to own. Before some Johnny come lately recently put pressure on the company to "share the discount" it held positions that had gone through several acquisitions: they just took the stock of the acquirer and stuffed it in the piggy bank. Very un-modern. Warren also likes to own. And both don't like to overpay. (Some readers might find "sharing the discount" the right thing, but I would caution them to consider how such pressure can be distracting and counter productive--and not in the interest of long-term shareholders. I realize that I am treading on thin ice here, since both Graham and Buffett, in his early years, made a practice of pressuring companies to release cash they were hording. My defense is that CSWC has not horded but has assiduously sought to compound the net worth in their owners' interest. I welcome managements who do that: they are a rare breed.)
But there are differences. The insurance companies offer Berkshire enormous leverage through the insurance float, which is cost free mostly. Capital Southwest doesn't have access to such low-cost leverage. On the other hand, as a closed-end fund, it pays a corporate tax only on retained realized gains, but shareholders receive a credit and pay at their rate. Last year CSWC sold a portion of its Encore Wire holding, which it had held for decades. It paid out the proceeds as a one-time gain to simplify tax accounting. Normally, CSWC retains realized gains.
One final point, if you own CSWC through a deferred-tax account the trustee files for a refund of any tax paid by CSWC. This has sometimes taken up to 18 months (Uncle Sam has discovered float!).
I wouldn't recommend buying CSWC in the hope that the discount will disappear: it generally trades at a sizable discount, so don't fool yourself. Instead, focus on the nature of their operation, its conservative, long-term-owner mindset; and consider the discount a sizable margin of safety. In doing so, you will be acting like Warren. And, as Philip cautioned, don't enter a market order.
Dividend Strategies Underperform In 2012 [View article]
David,
You are prudent to be concerned, but don't you also think that the income-seeking investor ought to be concerned that a 3% dividend, even if growing, would look rather paltry if interest rates rise substantially, as they must eventually, and perhaps overshoot by an unpleasant margin? Then P/Es might shrink rather than expand, as they did in the '70s.
Many investors were not around, or active, in the '70s when both fixed income and equities were decimated. Both eventually became bargains but at much lower prices. In other words, "good for equities" should not be read as "higher prices".
Having said that, I would rather own equities than fixed income in the coming shake out. I don't think equities will be unscathed, however.
Dividend Strategies Underperform In 2012 [View article]
David, I wonder if the market isn't beginning, ever so slowly, to be sure, to anticipate the eventual end of the bond bubble, which might eventually take the Notbob's of the world by surprise. What happens when the velocity of money picks up with all of the base money in the system? Are yields on 10- and 30-year Treasuries going to sit idly by? They are likely going to a more normal 5+% and quite possibly a lot higher. Dividend yields could go to 4, 5, 6% (and RLLH will get his wish with perverse comfort, I'm sure); stock prices and total returns will suffer along with fixed-income prices across the board.
I like the idea of analogies: a model I have used is growing orchids, which I once did to excess. I like companies that are like orchids: admired but too exotic to own and, therefore, shunned and available at reasonable prices. Orchids take care of themselves and don't make a fuss if they don't get attention. Of course, that analogy is less useful today: you can go to almost any big-box store and buy an orchid cheap and throw it out when it has finished flowering--why waste time holding it over for a new season. But, for the patient orchid grower, a well-kept orchid will produce clones (divisions), which in due course become an established plant. The distinction here is between vegetative and sexual reproduction.
There is a difference between apples and orchids as analogies. Both can reproduce both vegetative and sexually. We enjoy both the flower and the fruit, but whether we do or not, they die and rot unless the apple is consumed. Few of us grow orchids or apples from seed; we can productively allow an orchid to divide, but we wouldn't want apple saplings sprouting under a well-pruned apple tree. So, I would liken your apple analogy to a bond with an annual coupon with an odd feature: you either take it or leave it and lose it. The orchid will just go on dividing, allowing you to sell off a division without consuming the parent stock. And if you don't sell the division right away, it will also divide. In short, the orchid analogy captures the wonder of compounding, while the orchard leaves the compounding to you, and, at some point, you do have to replace the apple trees.
Sal's Dad, you raise some important facts. What headed me in the Gates direction was a press release three years ago followed by a TV interview with Buffett, Munger, AND Gates. The press release was a statement by Bill Gates, surely with Warren's implicit support, saying that BRK was a "life-long" interest of his. The interview was most interesting: here was Buffett, the smartest and second richest; Munger, the oldest and wisest; and Gates, the youngest and richest. But why was Gates there? Bill seemed to want to show in his comments that he had intimate knowledge of BRK. That's when it hit me that Gates, through the foundation was being positioned as the attenuating control anchor for some years to come.
Sally, you are right to think about governance. As shareholders we are absentee owners. Our first task, therefore, is to assess whether management can be trusted to work competently for us, as we would want, if we were in their shoes with their knowledge of the business. This is not easy, but over time management leaves enough of a track to enable one to make a pretty good judgment. The process is much like picking a spouse or a friend: you look for signs and over time build a judgment of whether you are right to commit to this person the energy needed to nurture a durable partnership, a partnership that, among other things, might protect you from doing dumb things.
I recommend to you “Dictator’s Handbook” ( http://amzn.to/Tn2g4f ). It is about governance, all the way from autocrats to CEOs to democratically elected heads of state. Of primary interest is the authors’ analysis of what a leader does to stay in power.
As you note, most attention regarding succession at BRK has focused on who follows him as CEO. But consider for a moment the freedom Warren has had since 1965 to mold BRK as he saw fit. This freedom came significantly from his controlling interest. Neither his son, Howard, as chairman nor whoever succeeds him as CEO would inherit this control. This is the stability that Warren has assured through his decision to leave the bulk of his BRK shares to the Gates Foundation. It is stability that won’t last forever, however.
A controlling interest, I hasten to add, does not assure good governance. We could both come up with examples where such control has left non-control shareholders holding an empty bag. But in BRK’s case control combined with Warren and Charlie’s rational intelligence and judgment, and integrity becomes a powerful force.
There is much talk about insuring more democratic corporate governance. I fear our loss might be the possibility of benevolent dictators like Warren and Charlie.
Berkshire Hathaway Intrinsic Value Pie Chart [View article]
Paying a dividend simply transfers the burden of compounding from able management to the shareholder. If you think that is wise then you have greater confidence in your abilities than I ever had, particularly after coming current on taxes. You are much wiser to defer the taxes and leave the compounding to Warren and the corporate culture he has nurtured. Then spend your time looking for similar companies: there are a few, not many.
Berkshire Hathaway Intrinsic Value Pie Chart [View article]
Dividends add no value [View instapost]
If you accept such a description then spend your time hunting for companies that come closest to living up to the standard you have set. Don't worry, you won't find many, but that makes life easier for you--and likely more profitable than putting constraints on managements because you don't trust them.
Count me as a skeptic. I have seen too many companies that pay a dividend--and increase it when they shouldn't--to through a red herring in the way of unquestioning investors. I have also seen too many companies that don't have a clear discipline in buying back stock. So look to see if a company has discipline.
Dividends add no value [View instapost]
The answer, of course, lies in our cognitive biases: we anchor our decisions to some higher price, which might come the day after you sell. A dividend does not confront your cognition in this way. But shouldn't be worth figuring a way around our cognitive shortcomings, rather than accept what is obviously a lower price?
Consider also that the receipt of a dividend is the equivalent of sell a zero-cost-basis lot.
2 Reasons Why Income Investors Should Ignore Warren Buffett's Dividend Argument [View article]
2 Reasons Why Income Investors Should Ignore Warren Buffett's Dividend Argument [View article]
The object of investing ought to be to engage, through the purchase of stock, managers who are smarter than we are. If we fail at this we can only expect mediocre results, or hope that luck will bail us out. It is entirely short sighted to focus on dividends, when we should focus on the skill of managers to allocate capital. In the examples you gave, Analytical, Berkshire and Exxon have superb records (I own both.). HP has been a bumbling idiot, which I owned before it acquired its habit of bumbling. I have no judgment of Supervalu, except that it operates in a dreadfully difficult business, but Costco has figured it out. If we think or hope that a fat dividend will bail us out, we are the patsies.
The author of this piece unduly focuses on 125% implying that Warren stupidly or thoughtlessly stipulated that 125% was immutable across companies and time. Warren suggests it as a simplification to make a point. Since he was writing primarily with his company in mind 125% does have relevance: it is the base at which Berkshire says it stands ready to repurchase shares. In other words, shareholders can always get 125% of book, so why in god’s name should one settle for only 100%? As you noted, Analytical, Exxon trades at 2.4x. Of course 2.4x is not rock solid. It will fluctuate, and Exxon has a pretty good record of buying its shares opportunistically, just as we should want. (Exxon has now bought back way more shares than all of the shares it issued to buy Mobil and XTO. I would submit that this has been a vastly more profitable use of capital than paying a fatter dividend. I realize that we are dealing with reality that doesn’t offer a control, so this will have to remain as an assertion.) Again, our job as analyst is to determine whether the buy backs are good investments. For Exxon shareholders they have been; not for shareholders of many other companies.
One final clarification: Warren did not explain that as a corporation Berkshire receives a tax exclusion of 70% on dividends received. Thus it pays around 11% tax on dividends received but 35% on capital gains. Put this in the context that Berkshire’s equity investments are largely funded from float—insurance reserves—and the story about why Warren prefers dividends for the company but not for shareholders begins to make sense.
Exxon Mobil: Buyback Heavy, Dividend Light [View article]
Your fixation on five years is impressive for someone who claims his family has owned Exxon for decades. I would encourage you to ponder your assumptions more thoroughly. You have not and cannot demonstrate that paying a higher dividend, versus buying less stock, is in the long-term interests of shareholders who are prepared to think like owners. But you surely think you have, or perhaps don't have to.
Exxon Mobil: Buyback Heavy, Dividend Light [View article]
Conflating stock options and restricted stock might get you to where you want to go. Unfortunately, you are wrong: stock options are options on shares; restricted stock are shares that are restricted in some manner, like when the owner can sell. The holder of options receives no dividend income; the owner of restricted stock does. You are right, as I note below, that both differ from cash in that they carry an interest in the future compounding of the business. Cash compensation does not.
The accounting of the two is also different. Back in the days of rampant (often fraudulent) option accounting, stock options were preferred by managers because the accounting profession, blessed by former Senator Lieberman and others, allowed companies to record the options at zero cost. The cost of a restricted share is its value on issue, and it has always been required to be expensed as compensation expense .
It is true that issuing stock options or restricted stock does transfer existing shareholders' compounding to the recipients. Buying back stock reverses that. So, yes, some of the annual buy backs have simply undone the dilution, but it is inaccurate to imply that these buy backs benefit only management. Besides the dilution, which is miniscule for a company like Exxon, any benefit to restricted shareholders is dollar for dollar a benefit to unrestricted shareholders.
Your judging the effectiveness of a buy back after only a few months is so full of randomness as to make it meaningless. Even five years is too short. What is admirable about Exxon is that they really do appear to have tried to engrain the long-term nature of their business into their culture; by tying a substantial portion of compensation to quite long-term restricted shares helps to imprint a significant focus on running a company profitably for a long time. I admire that.
Finally, your comparison to the usual comparables is also too short term. Since you say your family has owned Exxon, and predecessors, for decades, I would suspect that your compounding over those years is quite enviable. You will surely not agree with me, based upon where you want to go, but I would make a safe wager, if we could make the calculations, that if, over those years, those companies had paid ;ittle or no dividend but had made a reasonably successful practice of opportunistically buying back shares you would be materially better off now. What most investors don't understand is that, in the end, what really makes one better off is what happens to the cash generated from the business annually: it is the marginal return that counts. Is it invested in profitable projects, acquisitions, buying back shares (investing in oneself), or paying a dividend? In the first three uses the responsibility of compounding remains with management; in the last it is transferred to shareholders, and they better know what they are going to do. The whole project of investing ought to be focused on getting smarter people to do the hard work. If you have picked your managers well you should not mind paying them commensurately, whether in cash or shares. You should rightly, however, place a higher cost on a dollar paid in shares than a dollar paid in cash, because of the value of the compounding.
Exxon Mobil: Buyback Heavy, Dividend Light [View article]
Exxon does not issue stock options. More than half of annual compensation is granted in the form of restricted shares. The important difference to stock options is that the restricted stock pays a dividend, so the executives do not have an interest in keeping dividends low, while buying back shares, in the hope of increasing their option values. Indeed, the fact that Exxon pays a below-industry dividend suggests that it really is serious about getting executive incentives straight.
Recipients are required to hold these shares for a long time: 50% vest in five years, but the remaining 50% don’t vest until 10 years after the grant or retirement, “whichever is later”. The Review takes pains to show that executive compensation is designed to align executives’ interests with the interests of long-term shareholders. This is particularly important for a company like Exxon, whose investment horizon is very long. Goosing earnings before retirement will accomplish nothing, and speculators need not apply.
Exxon was the first major corporation to buy back its shares. Over the past 30 years they have bought back a huge number of shares. From my observation they have an excellent record of buying back stock opportunistically, that is, when the price is attractive. A long-term shareholder should want to be invested along side managers who have a working understanding of what a company is worth and have excess cash to buy back shares when the price is right.
There are, regrettably, too many companies where management interests seem to come first, while shareholders are an afterthought. Such companies should be avoided: a fat dividend will not make you only a little pregnant. Exxon is not one of those companies.
I have owned Exxon on and off for a number of years and currently do.
Capital Southwest Corporation: A Texas Berkshire Hathaway On Sale [View article]
The analogy to Berkshire Hathaway deserves some elaboration. Like Berkshire, CSWC likes to own. Before some Johnny come lately recently put pressure on the company to "share the discount" it held positions that had gone through several acquisitions: they just took the stock of the acquirer and stuffed it in the piggy bank. Very un-modern. Warren also likes to own. And both don't like to overpay. (Some readers might find "sharing the discount" the right thing, but I would caution them to consider how such pressure can be distracting and counter productive--and not in the interest of long-term shareholders. I realize that I am treading on thin ice here, since both Graham and Buffett, in his early years, made a practice of pressuring companies to release cash they were hording. My defense is that CSWC has not horded but has assiduously sought to compound the net worth in their owners' interest. I welcome managements who do that: they are a rare breed.)
But there are differences. The insurance companies offer Berkshire enormous leverage through the insurance float, which is cost free mostly. Capital Southwest doesn't have access to such low-cost leverage. On the other hand, as a closed-end fund, it pays a corporate tax only on retained realized gains, but shareholders receive a credit and pay at their rate. Last year CSWC sold a portion of its Encore Wire holding, which it had held for decades. It paid out the proceeds as a one-time gain to simplify tax accounting. Normally, CSWC retains realized gains.
One final point, if you own CSWC through a deferred-tax account the trustee files for a refund of any tax paid by CSWC. This has sometimes taken up to 18 months (Uncle Sam has discovered float!).
I wouldn't recommend buying CSWC in the hope that the discount will disappear: it generally trades at a sizable discount, so don't fool yourself. Instead, focus on the nature of their operation, its conservative, long-term-owner mindset; and consider the discount a sizable margin of safety. In doing so, you will be acting like Warren. And, as Philip cautioned, don't enter a market order.
Dividend Strategies Underperform In 2012 [View article]
You are prudent to be concerned, but don't you also think that the income-seeking investor ought to be concerned that a 3% dividend, even if growing, would look rather paltry if interest rates rise substantially, as they must eventually, and perhaps overshoot by an unpleasant margin? Then P/Es might shrink rather than expand, as they did in the '70s.
Many investors were not around, or active, in the '70s when both fixed income and equities were decimated. Both eventually became bargains but at much lower prices. In other words, "good for equities" should not be read as "higher prices".
Having said that, I would rather own equities than fixed income in the coming shake out. I don't think equities will be unscathed, however.
Dividend Strategies Underperform In 2012 [View article]
The Real False God Of Dividends [View article]
I like the idea of analogies: a model I have used is growing orchids, which I once did to excess. I like companies that are like orchids: admired but too exotic to own and, therefore, shunned and available at reasonable prices. Orchids take care of themselves and don't make a fuss if they don't get attention. Of course, that analogy is less useful today: you can go to almost any big-box store and buy an orchid cheap and throw it out when it has finished flowering--why waste time holding it over for a new season. But, for the patient orchid grower, a well-kept orchid will produce clones (divisions), which in due course become an established plant. The distinction here is between vegetative and sexual reproduction.
There is a difference between apples and orchids as analogies. Both can reproduce both vegetative and sexually. We enjoy both the flower and the fruit, but whether we do or not, they die and rot unless the apple is consumed. Few of us grow orchids or apples from seed; we can productively allow an orchid to divide, but we wouldn't want apple saplings sprouting under a well-pruned apple tree. So, I would liken your apple analogy to a bond with an annual coupon with an odd feature: you either take it or leave it and lose it. The orchid will just go on dividing, allowing you to sell off a division without consuming the parent stock. And if you don't sell the division right away, it will also divide. In short, the orchid analogy captures the wonder of compounding, while the orchard leaves the compounding to you, and, at some point, you do have to replace the apple trees.
Berkshire's Weird Buyback [View article]
Berkshire's Weird Buyback [View article]
I recommend to you “Dictator’s Handbook” ( http://amzn.to/Tn2g4f ). It is about governance, all the way from autocrats to CEOs to democratically elected heads of state. Of primary interest is the authors’ analysis of what a leader does to stay in power.
As you note, most attention regarding succession at BRK has focused on who follows him as CEO. But consider for a moment the freedom Warren has had since 1965 to mold BRK as he saw fit. This freedom came significantly from his controlling interest. Neither his son, Howard, as chairman nor whoever succeeds him as CEO would inherit this control. This is the stability that Warren has assured through his decision to leave the bulk of his BRK shares to the Gates Foundation. It is stability that won’t last forever, however.
A controlling interest, I hasten to add, does not assure good governance. We could both come up with examples where such control has left non-control shareholders holding an empty bag. But in BRK’s case control combined with Warren and Charlie’s rational intelligence and judgment, and integrity becomes a powerful force.
There is much talk about insuring more democratic corporate governance. I fear our loss might be the possibility of benevolent dictators like Warren and Charlie.