Owen

Is Berkshire a Long Run Buy?

Thank you for quoting me, Larry! I still stand behind my March 4th comments on Investment U's article from the same day.

Like other Berkshire shareholders, I too am worried about the company after Buffett is gone. Warren has a unique ability to close a multi-billion dollar deal with a handshake after a 30 minute chat, and the talent to write annual reports that are both clear and fun to read.

But as to his investment acumen, there are two or three people at Berkshire who will do as good a job as him in managing the company's ever growing investment portfolio. One is Ajit Jain, and another is Lou Simpson--who may very well be an even greater investor than Warren, albeit not much younger than him. Neither of these gentlemen possess Warren's folksy charm, but the company will be in good hands with either of them at the helm.

The company doesn't need a "manager" at the top. Each of the 80 or so individual businesses essentially manage themselves. The sole job of the 18 people working at headquarters is to allocate capital. But remember, this is an operating business, not a mutual fund. Berkshire will do reasonably well even if all excess funds are invested in the S&P-500 index. Perhaps not as well as they've done so far, but well enough to justify paying more than book value for their shares.

Buffett often says, "Buy a business that even an idiot can run, because sooner or later an idiot will run it." I don't think that's likely to happen any time soon with Berkshire Hathaway, and if the stock does fall on news of Warren's retirement or death, I'll use that opportunity to buy more shares.

Berkshire's Huge Exposure? Nonsense

For those wondering about the counterparty to those index put contracts, one possibility is Index-Linked Notes.

Many financial institutions are now selling investment instruments that offer the market return if the index goes up, but guarantee your principal in case it goes down. They make their profit by collecting the dividends on the portfolio (or the interest, if they use futures contracts), and by capping the return if the market goes up beyond a certain level (which allows them to write covered calls on the portfolio).

However, to retain their credit rating, they must fully hedge their exposure in case the market goes down. They do so by buying long term put contracts on the index. If priced correctly, they can ensure a fixed, predictable profit for themselves, without exposing themselves or their customers to any risk--beyond the counterparty risk on the puts. That's why they'd choose Berkshire, the most trusted insurer around.

Buffett's Financial Bets

Berkshire's report is one of the most honest and forthcoming in the industry. When Buffett screws up, he is the first to admit it and ask for shareholder forgiveness.

Buffett does better with companies he owns outright than with shares of publicly traded companies. The reason for that is that while he is a great investor, he is an even better leader and mentor. People working for him are trying much harder to do a good job than those reporting to a short-sighted, disinterested board of directors.

Where's the Smartest Money Investing?

Retail mutual fund holders have a history of pulling out their money at the worst possible times. The last record for equity mutual fund redemptions (as percentage) was in 1988. As we know, that was followed by the biggest bull market in history, with over 400% return to those who stayed in.

The biggest inflows into equity mutual funds was in 1999 and early 2000, just before the tech bubble burst.

When you see mutual fund holders running, your best bet is to run the other way.

Does Warren Buffett Think Goldman Is More Creditworthy Than GE?

Crony? Connected Fat Cat? What the hell are you talking about?

Anyone who can write a cheque for $3 billion dollars on the spot can get the same terms as Buffett. But of course, for people like you, anyone more successful than you must be a conspirator and connected crony, right?


On Oct 01 03:53 PM debtacid wrote:

> Looks like Crony Capitalism is alive and well. With the stroke of
> pen, the common stock is diluted, and it’s value is transferred from
> the small investor to the politically connected Fat Cat.

Does Warren Buffett Think Goldman Is More Creditworthy Than GE?

If it were not callable, at a risk-free discounting rate of 4.5%, the preferred would be worth $6.67B. However, being callable, and since GE usually has no trouble raising such amounts, the figure is closer to $3.15B, considering GE is likely to call them within a year or so.


On Oct 01 03:50 PM nym wrote:

> What's the present value of $3G at 10% in perpetuity? Will GE have
> cash to call it?

Does Warren Buffett Think Goldman Is More Creditworthy Than GE?

No, it isn't possible. His warrants become worthless if the common share price falls. The best outcome for him now is if GE fully recovers, and his warrants are deep in the money. The preferred will likely be called once alternate financing is secured, for a quick and easy 10% return for Buffett. He only bought the preffereds to get the warrants.


If you think GE preferreds are a good deal, why not buy some yourself? You don't have to be a member of royalty to buy them.


On Oct 01 03:31 PM Michael D. wrote:

> He is buying preferreds. The result may be that he milks the cash
> cows for all they are worth and then leaves the empty husk for the
> common stock holders (you and me). Is this possible?

Does Warren Buffett Think Goldman Is More Creditworthy Than GE?

The deal is a combination of debt and equity. Buffett doesn't see GS as more creditworthy than GE, but he sees GS stock as trading at a bigger discount to intrinsic value than GE stock. Such an assessment will be supported by both P/E and P/B analysis.

Buffett: I Was Wrong on Anheuser-Busch

Buffett doesn't believe in hostile takeovers. Capable, cooperative existing management is worth a large premium, as far as he is concerned. When faced with a hostile suitor, otherwise well-run companies often take rash, unexpected actions. We've seen this before. If, in an attempt to thwart InBev, BUD leveraged itself to buy, say, Sapporo Breweries, the result for shareholders could have been disastrous. Ego is a large liability, and when management uses it in lieu of rational business logic, the right place for investors to be is nowhere near.

At $63 a share, Buffett got most of the takeover premium, without taking any of the proxy battle risk. Being humble, he calls it a mistake, but faced with the same situation again, he would do exactly the same, and rightly so.

Warren Buffett Accumulates NRG Energy, Ingersoll-Rand and Union Pacific

Rong,

The price of Berkshire stock carries a substantial premium over the price of the stock portfolio it holds. This premium may or may not be justified; Buffett himself prefers buying shares of IR and NRG to buying back shares of BRK, and for a good reason too: he doesn't consider the price of BRK shares to be a bargain, unlike that of IR and NRG.

Berkshire is not a mutual fund or an ETF. If the primary insurance and reinsurance businesses of Berkshire falter, an investor may do much better by holding KO, PG, WFC, AXP and the other stocks in the portfolio than by owning shares of BRK.

Share Buybacks: The Anti-Buffett

Oops--make that _Buffett_, of course. Damn spell-checker!

Share Buybacks: The Anti-Buffett

Actually, Warren Buffet has no problem with share buybacks--at the right price. In March 2000 he said he would consider having Berkshire buy back its shares if the price dropped under $42,000. At the time, the shares were trading around $45,000, and his comments alone were probably enough to give the stock price a boost, although that certainly was not his intention. Buffet would have been happy to see the stock plummet further, giving him a convenient opportunity for a buyback.

Buffet sees nothing inherently wrong with share buybacks. He considers it an investment in a company he likes with management he trusts. As for any investment, Buffet expects to get at least as much intrinsic value as he pays. Since Berkshire stock usually trades well above what Buffet considers its intrinsic value, there haven't been many opportunities for profitable buybacks.