Ravi Nagarajan

Assessing Black Swan Events in the Insurance Industry

With all due respect, you need to refine your marketing "strategy". Rule #1 in the minds of most people is to not insult your target audience.

On Nov 12 12:57 PM STOCKHITMEN wrote:
> Our clients made money, if you were not a donkey you could have the
> Black Jack too, instead you are the monkey reading this crap on SA.

Berkshire Hathaway Posts Q3 Results: Book Value at Record High

> What do you make of the premium he is paying for BNI? Did he need
> to offer this to get the deal done?

This is a good question. I did not follow BNI in much detail prior to Berkshire's announcement last week. After the announcement, I reviewed BNI's 2008 10-K and the latest earnings release. I have not followed railroads in enough depth to comment specifically on BNI's intrinsic value, but if you look at valuations for comparable companies, it would be hard to argue that Berkshire is paying a "bargain price".

At the same time, I've read a number of comments on various boards regarding how Buffett "blew it" by not purchasing BNI in the low 50s back in March. Of course, he could never have pulled this off either through open market purchases of any size or through an offer to BNI's board. He could have likely purchased BNI for less than $100, but not anywhere near $55 or $60.

My take on the decision is that it accomplishes two goals: (1) BNI provides opportunities to profitably deploy cash flow generated by other Berkshire subsidiaries at reasonable rates of return. From this perspective, BNI is like MidAmerican and provides Berkshire with a mechanism to potentially redeploy cash from other businesses. (2) While I don't fully buy into the "This is Buffett's last act" thesis, there is an element of truth to the underlying sentiment given that Buffett will be 80 next year and the probability of him running Berkshire beyond another decade is low. I think Buffett is very confident that he has CEO candidates who can oversee the managers running the operating companies but he may be less sure about having CIO candidates who can deploy cash effectively. By deploying a big chunk of cash in a sensible acquisition, Buffett is removing some risk of poor acquisition choices once he's no longer running the company.

If I could change two thing about the deal, I would make it all cash and avoid the need to use stock or declare a split. I know that the debt required to do an all cash deal would increase Berkshire's overall leverage, but the company can handle it. I am concerned that many of the new Berkshire shareholders (post split) will be buying in for all the wrong reasons. Just a look at twitter streams regarding Berkshire shows that there are many people who will be buying *only* because of the split. That's not good in the long run, although it could create a pop in the shares moving them closer to intrinsic value (there's always a silver lining I suppose...)

Wesco Trades at a Discount, But Is It Better than Berkshire?

On Nov 09 09:12 AM UncleLongHair wrote:

> You forgot to mention what I consider to be the most interesting
> thing about the current situation at WSC, which is their investment
> in Goldman Sachs.

Good point - Wesco did get a piece of that deal and it has helped investment income. However, the positive income of the GS investment appears to have been more than offset by declines in dividend income due to dividend cuts at WFC and US Bancorp as well as lower interest rates in general.

I do agree that there seems little reason for Wesco to trade below book value. Furthermore, at Friday's close, Wesco was not that far above tangible book value (backing out the goodwill).

If I didn't already have significant exposure to Wesco via Berkshire, I would more seriously consider purchasing shares directly if we have further declines, particularly below tangible book.

Berkshire Hathaway Posts Q3 Results: Book Value at Record High

Looks like the "resources" section of the article wasn't posted - here is the link:

www.rationalwalk.com/w...

The other links in resources section can be found at the bottom of my original article on my blog:

www.rationalwalk.com/?...

Ravi


On Nov 08 11:35 PM theta wrote:

> RE: "This file can be found under the resources listed below." (quarterly
> revenue & pre-tax by segment)
>
> Is there a link to the above file? Thnx. Good review.

Berkshire Hathaway Posts Q3 Results: Book Value at Record High

I don't think the split matters much except to potentially lead to S&P 500 inclusion. I wrote about that here:

www.rationalwalk.com/?...


On Nov 08 12:26 PM BullnBear wrote:

> Great article and breakdown of segments within the holdings, any
> thoughts on the potential split of the B shares?

Does Steve Jobs Deserve Fortune's "CEO of the Decade" Award?

On Nov 06 10:56 AM Tony Petroski wrote:

> Jobs deserves the title and his health and other issues are his own
> business.

When you are not only in a position with fiduciary responsibilities to shareholders but also a CEO as associated with the company's brand, many would argue that a higher responsibility to shareholders must trump personal privacy.

Does Steve Jobs Deserve Fortune's "CEO of the Decade" Award?

If so, why the secrecy when it comes to disclosure about his health, which is most certainly a material fact? Don't get me wrong, I think Jobs is a genius and I respect what he has done. However, his fiduciary duty to shareholders extends to questions of corporate governance as well.

On Nov 06 09:22 AM mollytjm wrote:
Jobs has created a company and built
> a staff that is so sound and brilliant, that Apple will survive without
> him.

Buffett's Big Rail Buy: What It Means for Berkshire Shareholders

On Nov 03 10:45 AM Graham and Dodd Investor wrote:

> Clearly, Buffett considers Berkshire Hathaway stock "overvalued"
> relative to Burlington Northern. Whether or not that means it's overvalued
> relative to everything else, that's another question.

Agreed, he must think that what he is paying is worth less than what he is receiving or the deal wouldn't be done.

The big question: What is the intrinsic value of Burlington Northern Santa Fe? I'm sure many Berkshire shareholders (myself among them) are reading BNI's 10K today to come up with an estimate.

Natural Gas Extraction May Be More Expensive Than It Seems

On Nov 03 10:09 AM koolsool wrote:

> Whether natural gas is $3 or $9 does not matter.

Well of course it matters. If the extraction costs for shale deposits are greater than the prevailing price for gas, then the deposits are not economically viable.

Natural Gas Extraction May Be More Expensive Than It Seems

Interesting op-ed in the WSJ this morning on the shale topic:

online.wsj.com/article...

I don't doubt that shale provides real reserves. The question is at what cost natural gas must trade at to make extraction economically viable.

Alternate Business Models that Drive Retail Brand Value

I am more personally familiar with Chick-fil-A than R.C. Willey from a customer perspective, and with the business results of R.C. Willey from my perspective as a Berkshire shareholder. I can say without question that Chick-fil-A does have a loyal following - in many cases, people who would not think of going to another fast food restaurant if they can possibly avoid it. To the extent that people do not eat fast food every day, it is easy enough to shift consumption from Sunday to another day of the week. I've done this myself many times.

Chick-fil-A has the fanatical type of customer base that just screams "moat". Drive by a stand alone location sometime around lunch and look at the drive thru window and compare it to the nearest KFC or MCD location. Name another fast food restaurant that can get customers to camp outside for 12 hours at a store grand opening to get free sandwiches. The only comparable chain is In-N-Out burger on the west coast.

R.C. Willey competes mainly on price but also on service and the integrity of the business practices followed by management. In terms of market share and profitability, they seem to be doing quite a bit well and for some reason, they keep killing the competition (particularly in Utah).

The Sunday closure policy is not the source of the competitive advantage, nor is it even the most important aspect of the business model. But I would argue that it certainly does not hurt either business and could possibly help drive interest and sales for the reasons mentioned above.

Alternate Business Models that Drive Retail Brand Value

All: Just to clarify the headline which may be confusing, R.C. Willey is a subsidiary of Berkshire Hathaway. Of course, Chick-fil-A is a privately held independent company not affiliated with Berkshire Hathaway. Both, however, were good examples of the point of the article which really had more to do with looking carefully at business models that, at first glance, appear sub-optimal but may actually be driving brand value.

-Ravi Nagarjaan

Charlie Munger Speaks Candidly on Investing in BBC Interview

We'll just have to agree to disagree. I've yet to meet anyone who has been able to time the market. I've found it possible to beat the market using value techniques and trying to avoid much trading and I sleep well at night. I'll just have to live with my mediocre results.

Getting Comfortable with Chinese Investments

It's probably just a matter of personality. I've been to Japan and it was just such a foreign experience compared to the US in terms of culture, business, etc. My trips to India were also an exposure to a radically different culture. I think that when evaluating investment opportunities, it is hard to really make solid judgments in the absence of first hand understanding of the society and business climate. I hope to visit China sometime in 2010.

Charlie Munger Speaks Candidly on Investing in BBC Interview

Really?

That's a fascinating take on the history of Berkshire relative to the overall market over the past decade. Chart of BRKA vs. S&P 500:

tinyurl.com/ykjmh9c

As someone I admire used to say, "Facts are stubborn things."


On Oct 28 02:37 PM manuel wrote:

> berkshire results could be considered mediocre, in line with any
> mutual fund you find next door, self indulging with your losses is
> not a good way to react, it is a way of perpetuating your mistakes......,
> again I mean no disrespect......