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Warren Buffett's Portfolios Don't Reward Investors For The Added Risks
I Love your comment:
"I guess I should have defined how risk in measured in the real world of finance. No wonder Warren has such a following. Many people that buy BRK.A don't seem to measure risk like it is taught in finance class. I might have to attend one of the BRK.A meetings to understand how Warren keeps so many people from looking under the hood."
Buffett has made so much money because of people like you who think what you learned in finance class has any bearing on what risk really is. I can only laugh and think of Buffett himself making fun of academic measures of risk in one of his annual letters; mentioning the professor who asked: "Well yeah it works in practice.. BUT does it work in theory???"
Mar 6, 2014. 08:56 PM
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An Opportunity In NL Industries Reminiscent Of Buffett's Sanborn Map Deal
While some similarities do exist, profound differences must also be identified.
The underlying asset mix is the first thing that jumps out. Sanborn had roughly a 50/50 mix of diversified stocks and bonds. NL holds concentrated positions in less than a handful of obscure companies. Sanborn also had an operating business which could be separated from the investment portfolio. There is nothing to separate here. Take away the equity investments and you are left with little to nothing of any interest to the remaining shareholders.
Another major difference is in the shareholder mix itself. Sanborn had a controlling shareholder whom Buffett was able to buy 15% of the business from by making one phone call (the widow of the deceased president of the company). He was able to also buy in the open market, increasing his ownership to 24%. Further there were two other "large block" positions who were unhappy with the situation. The total was around 46% of the shares out. With a few broad strokes Buffett was able to influence the voting of almost half the companies outstanding ownership rights. No such possibility exists here. Harold Simmons' Trust controls the ownership by a wide margin.
The dividend discussed above is stated as, "ensuring payment in excess of risk-free treasuries". This dividend had not been increased recently and is far from being "sure" (of course one can also question the "risk-free" nature of Treasuries given recent events).
Therefore, Sanborn was a business selling well below its underlying value and there was an opportunity (by an astute investor) to unlock that value. This basically created an arbitrage situation for Buffett. While there may well be some unrecognized value underlying this position, there is no way of unlocking that value and delivering it unless Mr Simmons decides so.
This may well be a great opportunity to pick up a "free puff" from a cigar butt. I am simply attempting to illustrate the differences in the landscape. Anyone reading this thinking there may be an opportunity to follow the footsteps of the "Oracle" may very well be on another path completely.
Jan 10, 2013. 02:14 PM
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