najdorf

Alternate Business Models that Drive Retail Brand Value

Also remember that its tempting to juice same-store sales by opening for more hours or adding loss-leaders to the menu - lots of companies compensate based on SSS and lots of analysts look at it, but really we should be looking at whether growing same-store sales are leading to sustainable profit growth. What's the cost of turning the lights on and paying employees for another hour compared to the new sales created? What's the cost in management time spent pushing more hours and more products rather than focusing on profitable core business?

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

bottoms-up: It's hard to pump a dump a company by buying 100% of its shares with cash and your own shares. You can be sure that Buffett believes BNI is a good buy - whether he's right or not is of course debatable.

Also bear in mind that RRs transport over 40% of goods in the US, are more efficient than trucking/air, and are a primary mode of transportation in developed areas such as Europe, Japan, and the urban East Coast of the U.S. So we're not exactly talking Dr Quinn Medicine Woman stuff here.

Doug Kass's Killer Shorts - Barron's

About a year later, I'd say Kass's calls look pretty far off the mark. He seems like the kind of guy who's more interested in being contrarian and looking smart than making the maximum amount of money. All of his shorts were atypical calls and few are down more than the SPY (down ~35% since his article) while many have outperformed the SPY significantly.

If one had a short bias as of last May, one could have done much better shorting just about any financial other than BRK/WFC/AXP - look at BAC, C, WM, AIG, FNM, FRE, WB, etc over the year. I know all about hindsight, but if your thesis is that financials are s**t why would you short the strongest and ignore much weaker companies still trading at decent prices? Why not short people who are in the same business as BRK with more leverage and less competence?

Likewise in consumerland: if the consumer is weak, why would you short toothpaste and cereal instead of cars and luxury goods? You could have done much better shorting GM or most clothing retailers. Auto sales can fall a lot faster than cereal sales and GM has been obviously over-levered and unprofitable for years, yet the shares were over 20 a year ago (I was surprised too).

He also totally missed the fact that commodities were in a bubble last spring/summer. Short CHK, FCX, etc.

Overall it seems that Kass overlooked the fact that the best shorts are companies with broken business models, over-exuberant speculative action, or excessive leverage - you want some chance that the stock explodes completely if you're going to take the risk of shorting. While you might make 10-20% shorting companies that will experience moderate but survivable business declines in the worst economic conditions in decades, this is a pretty terrible short list given the shorts that were available last year. It would seriously take you a while to find worse shorts than these - even MCD, WMT, and most utilities are down over 1 year. I didn't make any short calls last year, but I'd like to think that even I would have stumbled across one true disaster in a list of 10 shorts a year ago. None of his picks have even come close to blowing up.

Berkshire Hathaway: Proof That the CDS Market Is Irrational

The idea that anyone can make any real money shorting and distorting heavily-covered large-cap stocks & bonds is the height of foolishness. There are huge pools of capital looking for undervalued investments all the time. If a struggling financial company were actually solvent, somebody would arrive with the refinancing option or new equity capital necessary to ride out short-term fluctuations. They would extract expensive terms and existing holders would be hurt, but there's a lot more money looking to buoy company solvency and lift pricing to accurate levels than there is looking to take apart healthy companies for short-term gain.

Over the past year+, every step downwards in pricing has been accompanied by bottom calls and inflows from value investors (private equity, Buffett's buys, foreign investment in C/MS, equity offering from GE & WFC, etc.). The fact that companies have continued to move downwards each time is due to very real problems in our economy and within these companies. On the back end some companies will survive and rise quickly in price, but more may still fail. At the start of this crisis people were saying things like "Sure WB and WM have problems, but C and BAC can NEVER fail; it's a sure double from current prices (~20 and ~35) if you can hold for 5 years". Does anyone still want to ride that train?

Investors may have become irrationally fearful about some companies (look at current pricing on MSFT/JNJ/T/VZ/etc - not as exciting as the banks but hard to imagine negative returns or returns inferior to treasuries for much longer) - but there are real reasons to be fearful about banks. People were scared to invest in banks long before anyone concieved of CDSs; the US had regular financial crises in any economic downturn for the first 150 years of its history. One of the major causes of this crisis was that we forgot that fear of banks after the success of reforms like FDIC and the relative lack of pain for large US banks in the S&L bailout/early 90s recession.

On Buffett-Back Riding

Artful Dodger: You're simply wrong about Buffett's stock selections. First of all, he was nothing but a stockpicker in his early days when he achieved returns in the high 20% range. Secondly, take a look at the table on page 15 of www.berkshirehathaway..... I realize that it's not up to date, but I think it pretty effectively makes the point that Buffett has done very well with some stock selections: Washington Post, Coke, and AXP/WFC if they ever come back (doing better than other financials anyhow - we'll see). He made a great medium-term trade in PetroChina a few years back. He started in GEICO as a stock investor, although he eventually made it a fully-owned BRK company. He played FNM/FRE very intelligently and got out at the right time. Of course everything he's bought in the last couple years is down, when every stock is down, but that doesn't mean stock picks haven't been effective. Think about the investments that 20 years of Coke dividends have funded.

More importantly, I can't think of a major Buffett stock holding that has totally blown up. He has achieved the returns without taking big risks. Anybody can buy a basket of pharmaceuticals with drugs in testing or trade tech startups during the bubble and possibly get lucky - but they're going to also lose big chunks of money at times. Buffett hasn't picked positions that lost big sums of money.

Berkshire's Puts: Not Such a Great Idea

Alex: As has been discussed many times, they're European-style puts, exercisable only as expiration. The whole point of the investment was that the length of the option prevented any short-term market risks. BRK has sold someone an insurance policy against long-term stock market depreciation. As always, the company continues to operate as a moderately bullish long-term stock-market investor that attempts to take short-term volatiiity or risk in order for long-term profits in excess of what it will have to pay out in insurance.

Of course BRK could have made more money selling puts today, but their invested capital/collateral is zero, meaning as long as stocks don't stay low for 20 years whatever profit they make will equal an infinite ROIC.

Buffett Serving Free Lunch?

The "real money"/"cash prices" that you refer to do not come from BRK, which, as you know and even state, has recieved only cash and registered only paper losses on this deal. It's possible that traders who bought puts have now sold their own puts at today's higher prices, or otherwise netted a profit - but they didn't sell to BRK. They sold to scared investors who think the right to sell the S&P at 750 or 850 far in the future has real value. The cash comes out of their pockets, not BRK's.

When stock markets rebound at some point in the next ten-twenty years we'll all say "Oh, who could have known that this would happen?" If stock markets don't rebound in the next ten-twenty years, show me an investing strategy that would have worked better without exposing one to huge risks (e.g. being short only).

Also, you're not the only offender, but I'm a bit tired of the endless Buffett/Berkshire confusion. Warren Buffett is not Berkshire Hathaway - he is its leader and a large shareholder, but there are many other shareholders and a few other people who work at the company, such as Charlie Munger and all the insurance subsidiary guys who consult on investments.

Buffett's Gamble: $40 Billion Bet on Volatility

Comparing stock levels in the period from now to 2020+ to stock prices in the period from 1929 to 1954 is one of the most insane hobby horses to ride around on. 1929-1954 included the worst depression in our history and the worst war in our history. It also was a time when companies paid much higher dividends and had lower levels of retained earnings/buybacks, lowering stock prices. American had little or no inflation until after WWII, also holding down stock prices (you might have noticed that this has changed). Finally, 1929 was like 1999-2000 for bubbleish peak prices. We've gone sideways for 10 years, which means that if anything we should be comparing today to 1939.

If stocks aren't higher when BRK's puts expire, what alternate strategies would you retrospectively recommend? Investing in Treasuries at negative real yields and widening credit risk? Buying stocks that go nowhere? Sitting in cash and continuing to pray BRK doesn't get hit with any big insurance claims? A company like BRK has to take stock market risk - that's the whole point of the company! Out of all stock market risks available, the one Buffett chose by selling these puts was a pretty good one. Accounting earnings don't matter to this company, although if they do take the big cash hit all those years down the line it might kill them. It's a cost of doing business - if it wasn't difficult and risky everyone would be doing it.

Will Berkshire Lose Its Triple-A?

You're both wrong: GS/GE are Berkshire investments and they can erode the book value (we won't know officially until the next Q, of course). Preferred shares have to be marked-to-market and in this case we would have to calculate a market value by comparing the cashflow and risks to other similar products, such as other forms of GS/GE equity or debt. Given that prices have declined sharply for both and the warrants are now way out of the money, one could see justification for discounting BRK's book value. Furthermore, erosions in WFC/AXP/etc. will clearly and directly reduce book value.

Not saying I think BRK is going down, just pointing out that all investments at a company like BRK should be marked to market and that the value of future cash flows from an investment should be based on credit risk/cost of capital for the company in which one invests.

Money Managers and the Berkshire Hurdle

To say that BRK is in the financial sector is to over-simplify. First of all there's a distinction between insurance companies and banking companies. Secondly, a huge portion of BRK's book value comes from Buffett's stock picks, which of course include picks like KO (along with some big financial positions like WFC and AXP).

Secondly, you can't really blame Buffett for the low share price of any given moment. He can't control what investors are willing to pay for the company or for its stock holdings. He can only create value, which the price will reflect in the long run. He's the quintessential buy-and-hold investor, and if you don't fit into that profile then you shouldn't be a BRK shareholder. It's not the same as holding a mutual fund with 300% turnover, where you should blame the manager if he underperforms the relevant indices.

Money Managers and the Berkshire Hurdle

The other thing about comparing BRK to a fund is that a lot of funds would be easier to get your initial investment out of if the manager retired or died. This might not be true of a hedge fund, but for a regular mutual fund, if your investment thesis is driven by managerial skill, you can sell out at NAV at the end of any day. If Warren Buffett leaves BRK, you can't sell out based on the value of the KO, WFC, AXP, etc. shares the company holds - you can only sell based on what other investors will pay you for a non-Buffett-managed BRK.

Following Buffett's Railroad Tracks

Dave: That's the least true characterization of Buffett that I've ever heard. He's talked endlessly about valuing companies based on earnings/cash flow/book value rather than looking at the stock price all the time. Stock prices follow earnings quite closely in the long term, and he has said that his ideal holding time is forever. He tries to purchase companies at a discount to value, and CNI offered a great opportunity for such earlier this year. Now it's up a bit, but it's probably still pretty good at today's prices.

Interesting recommendation on TRN - I will examine further, but I wasn't aware of the company and like the sound of it.

Buying Berkshire

The Buffett age risk is relevant. You have to try to figure out whether those who follow him will be well chosen. He seems to have an eye for good management given his investing history, but it's hard to be sure.

The risk of Gates selling is irrelevant to a long-term investor. If the company remains highly profitable and continues to grow, large blocks of shares on the market will create buying opportunities. Stock price follows earnings: it just takes a while and so in the short-term trading determines prices. This is especially so for a company like BRK that isn't going to issue new equity or buy any other companies with stock (as long as they listen to Buffett's advice, that is) - the managers can almost entirely ignore the stock price and focus on long-term earnings.

Buying Dow for a Better Deal than Warren Buffett Got

Dow common may or may not be a good investment, but you're ignoring the advantages of Buffett's preferred investment that are not available to the average investor. First, an 8.5% dividend from a large, stable company is really, really good in today's climate. You can get that from financial companies, but you're taking on a big default risk. And you might say there's not much difference between 5.25% and 8.5%, but the difference is enormous. You could have gotten the 5.25% on a long treasury or CD last year. 8.5 may well be better than the total return of the stock market for quite a while.

Also, Buffett is in no way "underwater" based on any future common share price. The preferred is perpetual and is convertible entirely at his discretion. It's just an option on the common stock for him - the real point is the yield, since 8.5% is about all he expects to make in today's climate. He can collect 8.5% indefinitely (barring Dow bankruptcy or extreme crisis) while he waits for the share price to appreciate. You can collect 5.25% for as long as they feel like and are able to pay you (the company doesn't guarantee the regular dividend in the same way that they guarantee the preferred) while you hope for the share price to appreciate enough to make your investment better than his. Advantage: Buffett. Famous investors with 3 billion cash in a liquidity-starved environment get better terms than amateurs.