CaptainJJack

Berkshire Hathaway Stock Portfolio: At Risk of Resembling an Index Fund?

I own BNI, and I disagree with Berkowitz and the critics of Buffet's deal.

Yes, he paid a lot. But, in my opinion, you get a lot when you become an insider.

But, by far, the overriding dynamic is that railroads are now clear monopolies in most of the areas they operate. Just look at a railroad map of the US, and you find little overlap.

The main competition is trucking, and if you look at the economics of that business, you find it turns on finding and holding on to truck drivers.

Their key constraint is capital: They have to find a way to fund the initial costs of a trucker getting into the business. I haven't seen much on this lately, but I am guessing that banks are reluctant to loan person enough money to buy a rig and finance their first years in operation.

So, I think the railroads will be very profitable in the future, and I am willing to bet rates will rise even if other prices are falling.

What Buffett's Burlington Northern Buy Really Means

I picked up the wrong numbers in calculating Warren's cost basis.

He owned 22,5% ( thought he owned a lot more), before the bid.

So, I am now guessing his basis is in the mid 90/share.

What Buffett's Burlington Northern Buy Really Means

I agree with this analysis. I own BRK, and, fortuitously, I own BNI, as well, so I am biased.

While the deal was valued at $44 Billion, Buffet's cost was less than $100/share. He already owned a substantial block of BNI. I am guessing his cost basis in the mid $80s.

I think this is a bet on the West, including Mexico, more than a bet on the US, and it is clearly a bet on efficiency

I like it when someone with Warren's skill set owns the whole company. He runs his companies for the benefit of the shareholder, and he is especially careful when it comes to capital expenditures, requiring managements to show how they make sense in light of future CASH earnings.

And, he never allows them to take on inordinate debt when times are good.

Is Buffett Backing Away from Stocks?

I have held BRK for years, now, and I will hold it as long as Buffet is there. I read the NY Times article, and as far as I could see, there is nothing new, here.

If there was ever a divergence, it was when Buffet bought the Conoco stock, last year. He almost never buys after a run up like that, and the only explanation I have is that he felt that oil prices were not going to fall much.

I also think the put he sold seems out of character, not so much because he sold a put, but that he sold a put on the general market performance. I think he did it because he got GREAT terms, and there has been no time in the last 100 years where he would have lost anything on his bet.

If there is anything that characterizes Buffet is his unwillingness to part with money. He sat on huge piles of cash a few years ago, and this while virtually all of Berkshire's businesses were generating huge amounts of cash. This was actually causing BRK to under perform as cash was yielding close to zero, after tax.

That he put money to work ,when everybody else was bailing out, is vintage Buffet, and I expect his bets to payoff significantly in the future. It is totally consistent with the concept of "margin of safety".

I also do not see him doing much as long as the market is fully valued. He is not a market timer, but he DOES make bets based on his perceived VALUE of the market (just like Ben Graham did).

That he ends up buying low and selling high makes it look like he is timing the market, when he is not, and he makes no prediction about what the market will do when he makes a decision to buy or sell.

Buffett's Lessons: More Appropriate than Ever

While I've read a lot on Warren Buffet, my all time favorite book on the subject of investing is The Intelligent Investor by Benjamin Graham who, as most people know, was Buffet's teacher, and endorsed this book as "By far the best book on investing ever written".

I cannot tell you how important that book was to me during the crisis of last fall and this spring.

Graham developed the concept of intrinsic value, and he was also the first to point out how difficult it was to obtain. He said that its only real usefulness occurs when there is such a separtion between the market value and the intrinsic value that even allowing for enormous error in your estimate of intrinsic value, you still conclude that the market price is wrong.

He called this the margin of safety.

While I also like and use concepts like ROE and ROIC, I recognize that the market capitalization may be so much higher than the book value, they may have no meaning -- which is just another way of saying that even good companies, with good managements may be poor investments if the price is too high.

Buffett's Recent Portfolio Changes: What's the Message?

As a long time holder of BRK, I have followed Buffet for many years, and he makes a clear distinction between the 20 or so once in lifetime stocks to own, and everything else.

As a necessary condition, he looks for integrity and a focus on the long term shareholder. If a company falters this condition in any way, at any time, it's a goner.

After that, he focuses on the businesses. He likes businesses with strong cash flow, and he LOVES businesses with a history of strong cash flow and relatively low (compared to revenue) ongoing fixed investments. Look at his Coca Cola, American Express, Sees Candies, Wells Fargo, and Proctor and Gamble.

Historically, he has shied away from businesses that require a high fixed investment, especially in intellectual capital such as technology (as far as I know he has never owned a share of Microsoft even though I believe Gates is on his Board and is a good friend) and drug stocks. He claims that he just doesn't understand well enough what makes these businesses run.

This makes his new investments in drug stocks somewhat puzzling, although, at least with J&J, you could make the argument that it is a P&G look alike in the health care space.

BNI was also puzzling until I figured out how railroads were regulated, and I expect that Buffet will keep this stock as long as they are virtually exempt from antitrust laws even though as a business with high capital costs, they look more like airline stocks than anything Buffet would own.

As for COP, I am guessing he got into this using the standard developed by Graham that suggests for high capital intensive stocks in a rising market, you always want to own the second tier, less efficient companies. When the price of commodities fell, and not expected to rise soon, Buffet had no reason to own Conoco.

As for Buffet's political leanings, I have found him to be pretty middle of the road. He supported Obama this time after seeing eight disastrous years where, in the end, we tripled our debt, created a massive financial crisis, did not add a single job (actually, we will end up losing an enormous number of jobs), saw tax cuts lead to people buying Chinese goods at Walmart , caused a war that cost trillions, saw no increase in the real income in this country in almost a decade, and did nothing to address the long term Medicare crisis except, by adding a dramatically underfunded prescription benefit that made things even worse.

Buffet is no wild eyed Democrat, but it was Obama compared to what? That he still feels this way is more a result of where the Republican party, which has become the party of Rush Limbaugh, is as much as any feelings towards Obama.

Enough with the Buffett Critics

I own BRK, and while I do not idolize Buffet, I find the criticism of Buffet laughable. He is doing today what he has done for the last 30 years.

It was no accident that Goldman sought him out last fall, and they gave BRK a great deal..or...should I say, Buffet demanded a great deal.

Yes he had a lot of cash, but ask yourself why. Ask why Buffet has always been in a great position.

Once you answer to that, you will understand BRK, and once you understand that, you will understand why the critics will always end up wrong.

Berkshire's Downgrade: Rating Agencies Become More Irrelevant

It is pretty clear that Fitch does not want to rate any financial company AAA. They made up a rationale, and they really do not care if you believe them.

In a past life, I was responsible for "managing" the ratings for a company that had ratings from S and P, Moody's and Fitch. I believe there was merit to the rationale's used by Moodys and S and P.

With Fitch, the best way I can describe it is : tunnel vision. They would lock on to one metric, and if you looked good using that metric, you got a good rating, relative to the other two. If not, you got hammered.

The problem was that the metric would change, and it is was often bizarre.

In general, the ratings are valuable because the ratings agencies have every reason to give lower ratings than higher. If there is a default, they look less dumb, and if there isn't, few people even remember the ratings, let alone care.

During the MBS debacle, the ratings agencies clearly were out of their element, and while there was the obvious profit motive, I suspect there was something far more subtle going on:

When I met with them, the analysts were VERY sensitive about how they were viewed by us. They viewed themselves as being financial geniuses that were undervalued (and underpaid) relative to the people they were rating.

So, it was easy for us to play to their ego. We would show them some very sophisticated modeling, and give them "insight" as to how we used the models.

They would often show boredom, but we knew they were following as best they could, and we usually made the sale that we knew what we were doing. They would rarely challenge our conclusions and never challenge our analysis.

In giving us a rating, they often went back to basics; however, over time we established a lot of credibility, and overtime, they deferred to us on some key issues.

None of this was nefarious or underhanded, but I believe it was effective.

Now imagine how they felt sitting in a room with the main Wall Street Financial engineers, that were truly rocket scientists, evaluating models based on Stochastic Differential Equations and options pricing.

Given their own sense of self worth, they were goners.

Buffett Profits Plummet, Predicts Bleak 2009 and Possibly Beyond

I am a Berkshire A and B holder. I read the report, and I absolutely agree with you. I was truly impressed with how well his businesses are doing.

There is only one reason BRK is substantially worse than last year: the derivative bets. You take out the gains from last year and the loss from this year, and the profits are pretty flat.

Anybody that understands the derivative bets he made should feel pretty comfortable with where things will be in a few years. If the market improves AT ALL from here, he's going to be reporting gains again, and the only way that these contracts would not be profitable is if the world economy never recovers.

So, if it sells off tomorrow, I am going to be buying more even though it PAINS me to buy in this market.

As for Obama and Buffet, Warren has been pretty clear that he is looking at things from an investor perspective. He believes that the $3 trillion deficit and the lax regulations of the Bush administration caused this mess, and the only reason he supports more stimulus is that, as he puts it, the patient is in cardiac arrest.

On "Meet the Press" this morning, they put up a running total of total new US obligations JUST since February, 2008. I believe the number is now up to 7 TRILLION, of which Obama owns $787 Billion and the Bush administration spent the rest.

But as Obama himself has said, he is following the advice of the smartest guys he knows, and he now owns the economy. If he does not make significant progress, he will not be re-elected.


On Mar 01 05:12 PM Dave Shafer wrote:

> Did anyone actually read the Berkshire Report?
> Buffett admitted to a couple of mistakes, but overall they did very
> well compared to "the market."
>
> As to the Obama thing, I guess it never surprises me the ability
> of folks to allow ideology to rule their minds. Obama is responsible
> for the movement of the stock market??????? Couldn't have been the
> recession or sub-prime mortgage foreclosures, or profits (lack of)
> now could it????

Berkshire Hathaway's (Warren Buffett) Portfolio Update: Q4 2008

As someone who owns BRK, my biggest concern had been that BRK's ROE was falling, and it was getting to a level, at around 12%, that as an investment, even Warren Buffet would not want to own it.

The problem had been the enormous cash balance; often it was $50 billion or more, and it was earning much less than 5%, after tax. Worse businesses in BRK tend to generate a lot of cash -- so the problem seemed to be getting worse.

Even though BRK has not performed well, recently, I believe that the moves he is making well set up BRK VERY well in the future.

As for the sales of PG and JNJ, it would not surprise me to find out later, he looked at his ability to get such great deals in the bond/preferred space caused him to lighten up on stocks -- especially stocks that have similar risk characteristics to his new bonds; that is, lower downside risk but lower upside.

Of course, I am speculating like everyone else, but I see NOTHING in these latest moves to cause me to think, like Kass Berkowiz (sp?) and Cramer, that Buffet is losing his touch.

Finally, I have to believe that a company with a balance sheet like BRK is a great stock to own over the next few years, especially if things do not improve soon, as I fear.

On Buffett-Back Riding

I have owned BRK for years, and while I did not follow Buffet into GE and GS, I would have done the deals, and I still think they will work.

What I look for is high ROE with low P/E's; i.e. good stocks at cheap prices.

I believe the ROE is the single biggest test of competitive advantage, and if the ROE is consistently high for long periods of time, there is a reason for it. I think GE and GS would fit that bill today, as would GE.

However, there are three things that are SIGNIFICANTLY different from the eras where Buffet made great picks:

1. The credit system is not functioning, and even strong companies can get killed if they cannot get financing. This is a system that may be permanently damaged, and it threatens GE, GS, WFC, USB, and AMEX.

2. The crisis is global, and it is occurring across all asset classes. It is the most serious crisis in my lifetime, and it will last for as long as it takes to get in the financial system leverage down.

3. The role of government has gone from a passive, referee to an active investor with objectives that include a lot more than getting a good return.

We are in uncharted waters, and Buffet is basically making the bet that things will work out. He has the staying power to make that bet work, but it is certainly not without significant risk.

Berkshire Hathaway: Failing Business Model Points to a 35% Decline

Buffet has often said that he looks at the Underwriting gains separately from the investment income gains. As an actuary in a prior life, I think you are ascribing A LOT more emphasis on the investment income gains on the business BRK writes than the business requires.

The key to the business BRK writes is how they handle the retrocessions; i.e. how the deal with the risk. I've seen nothing to suggest that anything much has changed here.

So, I agree that 2009 will be a challenging year, but I disagree that the insurance business model is somehow fatally flawed.

There may well be currency fluctuations, but given where the US budget deficits are heading, you can hardly argue that the dollar's strength will continue longer term.

Warren Buffett's 'Secret' Investment Formula

I think Buffet's strategy is even simpler than you indicate: he buys companies with consistently high ROEs. If a company shows a solid history of high ROEs, it almost has to have a strong competitive advantage. The only other issue then is "how much to pay?".

As an owner of BRK shares, my biggest concern had been that BRK's ROE has not been close to 15% over the past few years.

The biggest problem has been that BRK both generates so much cash flow and that Buffet sits on the cash if he doesn't see anything that meets his 15% ROE standard. He refuses to consider a dividend, and he has said he believes that ultimately he will find appropriate investments.

Recently, he has opened up his pocketbook and has been putting A LOT of cash to work. He's buying BNI and COP, and both are trading at exceptional values.

So, I can almost guarantee that BRK will under perform when markets have been high for a while, but I expect his buying great companies at good prices will payoff -- in fact, I am counting on it.

Finally, I expect that like Jeremy Grantham, the markets will go a lot lower before they get better, on the logic that markets tend to over correct, and with the S&P earnings projected to be in the $55/share range in 2009, the current S&P P/E multiple indicates the overall market is no screaming buy.

Burlington Northern Santa Fe: What's Buffett's Strategy?

I own both BRK.A and BNI. BNI is not a company Buffet would normally buy because it is so capital intensive. Buffet likes companies that have low capital and low R&D because he measures success of an investment against what he, as an owner has to put into it --i.e. he looks at ROE.

So, why BNI? I think he sees that the monopoly margins that are now built into the division of the country's rail infrastructure into five railroads means that BNI can more than cover its capital costs.

Further, there is more to the rail story than just energy efficiency. Look at the side of any long haul truck on the highway, and you see advertisements for owner operators.

The trucking industry is not able to keep enough truckers, and there has been a big labor shortage developing. This is more than just finding someone to drive a truck; they want someone who will drive HIS OWN truck for them.