The Buffett Blog

Bill Miller's 4Q 2006 Commentary

2007-02-15T19:59:00.000-06:00

At the end of 2006, one of the most talked-about streaks in value investing (heck, in any kind of investing) came to an end. Bill Miller's Legg Mason Value Trust failed to outperform the S&P 500 Index for the first calendar year since he took over sole management of the fund in 1990. Rumours about the end of the streak led to a lot of publicity and commentary and only added fuel to the fire when the firm announced in late October that they expected 2Q 2007 net income to come in below analyst estimates.

In the letter, Miller acknowledges the streak right up front. Making use of both a priori and a posteriori probabilities, he demonstrates the odds that one could replicate his success. Needless to say, "there was probably some skill involved". That said, he doesn't allow himself to be satisfied with having done something that most probably could not, and in doing so, demonstrates the kind of character that is difficult to find in an industry where "just getting by" still compensates you pretty darn well.

Active managers are paid to add value over what can be earned at a low cost from passive investing ... We are paid to a do a job and we didn't do it this year, which is what the end of the streak means, and I am not at all happy or relieved about that.

The remainder of the commentary is spent on reviewing Miller's investment principles and singling out a few of the reasons why the streak lasted as long as it did. Two sources of outperformance for those 15 years that he finds applicable to investing in general: valuation and portfolio construction.

On valuation:

Valuation is inherently uncertain, since it involves the future. As I often remind our analysts, 100% of the information you have about a company represents the past, and 100% of the value depends on the future

And on portfolio construction:

We construct our portfolios the way theory says one should, which is different from the way many, if not most construct their portfolios ... We want our clients and shareholders to own a portfolio actively chosen based on long-term value, not based on index concentration.

He touches on other topics that helped the outperformance, such as factor diversification and concentration, and on being willing to take advantage of errors made by others, due to social psychological cognitive errors (read: behavioural finance).

It is trying to invest long-term in a short-term world, and being contrarian when conformity is more comfortable, and being willing to court controversy and be wrong, that has helped us outperform.

Miller's letters are always a treat, but this one serves both as a nice summary of his thoughts on investing to date, as well as an example of the type of humility that true investors always possess, even if their results do have odds of 1 in 2.3 million.

eta: actually putting a link to the letter in the post would probably help. it can be found here [warning: .pdf]

Letters, letters, and more letters

2007-01-26T22:03:00.000-06:00

As we mentioned in our most recent post, the start of the new year is prime time for making New Year's Resolutions. It also happens to be prime time for investment managers' fourth quarter commentaries.

We'll start with Ron Muhlenkamp of Muhlenkamp & Company, whose letter focuses primarily on expecations for the economy and market in 2007. Muhlenkamp is looking for a soft-landing until the spring, when he sees the onset of an economic expansion. Even better than the letter is the attached Q&A from a November investment seminar that goes through what the firm looks for in its holdings; discusses its views for the homebuilding, technology, and pharmaceutical industries; and touches on the hot-button issues of outsourcing and executive compensation.

What I have learned over the years is that if you have good companies at good values, sooner or later, somebody will come along and buy you out ... whatever method buys us out doesn't matter. As long as we've got good companies at cheap prices, sooner or later, someone will bid up the price.

Next, the folks over at Tilson who attribute a good portion of the performance in their Focus Fund to avoiding losses, emphasizing that "It is our nature to focus on playing defense by only investing in situations in which we think the risk of permanent capital loss is very limited". They also touch on their selling philosophy, outlining the four factors that they weigh when deciding to exit a position:

1) If a stock has risen to intrinsic value.
2) If they find a better investment.
3) If the story changes materially in a negative way.
4) To balance their portfolio.

Good ideas to keep in mind, especially since so much of the literature and efforts are often focused on stock picking and buying, without considering that exiting at the right time is just as important, if not more so.

The gents at Tweedy, Browne comment at length on the world's position "awash in a sea of liquidity" which has stimulated demand, driven up asset prices, reduced volatility, and sent risk premiums into the ground. Their opinion? It's not time to buy now - they are remaining cautious.

In general, as value investors, we tend to add the most value when we are being well compensated for the risks we are bearing. This is not one of those times ... bargains still remain scarce.

Backing up Tweedy, Browne's claim is Wally Weitz at Weitz Funds, whose letter starts with thoughts on the "changing changelessness" of human nature, pointing out that regardless of what happens in the world, "short-term thinking leads to alternating bouts of fear and greed". He then goes on to look to buying opportunities going forward which are, in his opinion, not very good.

So, what next? There have only been a few times when stocks were so cheap that good returns seems assured - and those times were so scary that it was not clear that stocks would not fall a lot more before finally doing well. Stocks in general don't seem particularly cheap today.

Oh, those value investors. It's just optimism around every corner with them!

Goodbye 2006, Hello 2007

2007-01-15T21:34:00.000-06:00

Happy new year to all our readers. Where did the time go? Nearly a month into 2007 and no news on our front - apologies all around. Here's our New Year's Resolution - a more frequent posting schedule. Let's see how long we can keep it going.

First up, Warren Buffett wasn't going to let 2006 go off gently into that good night. In late December, Berkshire Hathaway purchased TTI Inc., one of the world's largest distributors of passive and electromechanical components. As usual, the founder and current chairman and CEO, Paul Andrews, will remain in charge. Also as usual, the company's line of business is fascinating stuff - trimmers, wire and cable, electromechanical devices (oh my).

Regarding year-end lists, Buffett managed to secure a position on Forbes' list of the world's billionaires, clocking in at number 2. Of course, we couldn't manage to find a year-end list of "world's most awesomely giant donations to charity". If so, the Oracle would easily take first place, after his well-publicized gift earlier this year.

And last, what better way to start the new year than by revisiting some of the best lessons of the past? In a recent Forbes piece, the magazine sits down for Q&A with Mary Buffett, who was married to Warren's son Peter for 12 years. Mary has written or co-written several books on the Oracle, and the latest, The Tao of Warren Buffett, attempts to collect some of WEB's best advice in 125 quotes. Most of us already have a good number of Buffett-related books on our shelves and may not need another, but the article's worth a look, if only for the slide show of WEB's "Wisdom in Words".

Lewis on sports ... and investing (sort of).

2006-11-15T20:40:00.000-06:00

A few years ago, Michael Lewis, famed author of the classic Liar's Poker, put out another great book, Moneyball, that has since inhabited that odd space where sports, investing, statistics, and leadership collide. Lewis is back at it again, out on the PR stump for his newest book, The Blind Side, that covers undervalued players in football.

From a recent interview with Fortune, a few quotes that are highly applicable to the search for value, whether that comes in the form of a stock that's getting beat up by the Street, a catcher with a great eye for the strike zone that scouts think is past his prime, or a poor kid from the innner city who manages to make it big in the NFL.

On Billy Beane and how he manages to still outperform, even though his "value" approach is common knowledge:

He is still measuring baseball players' value more precisely than other people and buying the ones where the market price was cheaper than their true value ... He has a real ability, like a really gifted trader, to act on his own judgments. This is painful for most people to do, because they face ridicule and ostracism. I think intelligence is overrated as a quality central to this kind of innovation. It's a kind of nerve. It's the ability to take a risk.

And on achievement and creativity:

Nevertheless, the evaluation you do of yourself has to be independent of the world's evaluation of you. The pressure's always going to be to draw you back into doing things the way everybody else does them. Doing things differently is inherently threatening to people because if it works, it's damning of the way they've been doing things.

Sound familiar? It should. Good ideas never go out of style.

"Have the courage of your knowledge and experience. If you have formed a conclusion from the facts and if you know your judgment is sound, act on it - even though others may hesitate or differ". (You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.)
- Benjamin Graham, The Intelligent Investor

Bill Miller's 3Q 2006 Commentary

2006-10-30T10:21:00.000-06:00

Bill Miller's latest commentary came out last week, peppered with the usual references to philosophers from the 19th century and, of course, references to our friends WEB and Charlie Munger.

Fun on price and value:

Since more things can happen than will happen, if we can identify where our expectations differ materially from those embedded in market prices, we can construct portfolios that we believe will earn higher risk-adjusted rates of return over time than could be earned by a passive investment program.

This involves always keeping in mind a basic business principle: only compete where you have a competitive advantage. Warren Buffett refers to staying within your circle of competence.

And on the ways to make money in the markets, with a bonus shout-out to behavioral finance:

In markets, competitive advantages are three: informational, analytical, or behavioral. Informational advantage is when you know something material that someone else doesn't. It is the easiest to exploit and the hardest to find ... Analytical advantages come from taking publicly available information and processing or weighting it differently from the others ...

Behavioral advantages are the most interesting because they are the most durable. The field of behavioral finance is still in its infancy yet has already yielded results that can be incorporated profitably into a sound investment process. The best part is that such results are likely to be systematically exploitable and not able to be arbitraged away as they become more widely known. That is because they represent broad findings about how large groups of people are likely to behave under well-defined circumstances. Until large numbers of people are able to alter their psychology (don't hold your breath), there is money to be made from prospect theory, support theory, cognitive psychology, and neuroscience.

Miller's key point: ask yourself why you think the way you do. Question your assumptions, but also your own mindset and temperament. Examine the glasses through which you see the world - you might be surprised that the glasses, not the world, are what's affecting the view.

Flirting with 100 Grand

2006-10-16T19:39:00.000-05:00

Shares of Berkshire Hathaway have seen a recent runup after emerging unscathed from an mild hurricane season. The stock recently surpassed the $100K mark in intraday trading. As an interesting side note demonstrating the deception of a price-weighted portfolio vs. a value-weighted, the DJIA would look substantially different if it included BRKA. Meanwhile, the S&P 500 is still 10% off its all time high.

WEB recently made a trip to Israel to visit his recent $4B acquisition, ISCAR, a world leader in metal working and metal cutting tools. Berkshire has shown interest in acquiring another large utility and is rumored to be seeking a position in China's Merchants Bank, news of which sent the shares skyrocketing. Berkshire's latest SEC filings reveal that the company has sold or reduced positions in GPS, LXK, HRB, and OSI and has bought shares of JNJ and USG. Also, amid recent scandals at Hewlett-Packard and UnitedHealth, the chairman reminded his top executives of the importance of strong corporate governance practices.

After giving GSB students a ride to Gorat's Steakhouse during our last visit, Mr. Buffett decided to auction off his Lincoln Town Car--the one with the license plate reading "THRIFTY". The winning bid was $73,200 on EBAY. That same week Buffett was involved in a minor fender bender when he was rear ended in his new 2006 Cadillac on his way to pick up fast food at Bronco's Burgers. Also, pro basketball's LeBron James was a recent guest of Buffett's for lunch in Omaha.

And finally as a follow up to last year's best-selling "The Little Book That Beats the Market" is the latest "The Little Book of Value Investing" by Christopher Browne (of Tweedy Browne) with forward by Buffett biographer Roger Lowenstein. The book's 16-point checklist helps investors examine a company's prospects.

Oh, and I almost forgot. Congratulations Warren and Astrid on your recent wedding!

The gift heard round the world

2006-07-23T20:26:00.000-05:00

Though there has been tumbleweed blowin' through these here parts the last few months, rest assured that we are still here, and still trying to keep up with the Oracle and his every move. Of course, dear WEB hasn't made this easy for those of us on summer internships, with his gift heard round the world.

The press coverage on the gift, on Warren, on the implications of this gift for future philanthropic actions, and everything else under the sun has been enormous. Nevermind the catching up to do on WEB's other charity work this spring, any activity at Berkshire, and news on value investing at large. We'll do our best to catalogue it all at some point.

For now, we'll leave you with the Fortune cover story, an interview between WEB and longtime friend, Carol Loomis.

Wesco Annual Meeting

2006-05-14T23:56:00.000-05:00

"The amount of brain power going into money management is a national scandal." - Charles Munger

Selected points mentioned by Charlie Munger at Wesco's Annual Meeting, held on May 11, are listed below.

Complete notes are located here. [PLEASE DO NOT LINK TO THIS FILE. THANKS]

On Diversification:

An introductory text in economics says people makes decisions based on their opportunity cost. There is this company in an emerging market that was presented to Warren. “I don’t feel more comfortable buying that than I do of adding to Wells Fargo.” He was using that as his opportunity cost. No one can tell me – tell me why I shouldn’t buy more Wells Fargo. Warren is scanning world, and trying to get his opportunity cost as high as he can so that his individual decisions better. Why is freshman economics class so inconsistent with what so many experts are doing, and they are charging a fortune. I believe in crazy waves of mental conformity based on social approval. I believe in baptism. I’ve seen it done. The worshipping at the temple of diversification is really crazy. 10 securities can make you rich. Why do you need 300 securities with huge fees to get rich? How can you be so unskeptical about human nature?

On Berkshire's Float, which has grown very quickly over the past few years:

Q: How do you value the float at Berkshire Hathaway? Characteristics of equity, or discount it?

CM: We love having the float at Berkshire. If we didn’t have it, it would be worth than it is. It will grow more slowly in future than the past. Not enough float around in world casualty market [for us to grow faster]. We think it will be big advantage. We don’t think it is a model that will help with other investment opportunities.

The Meeting

2006-05-09T11:40:00.000-05:00

Attendance came in at 24,000 shareholder partners, a new record.

Complete notes are posted here, courtesy of Peter Boodell.

A few quotes that are worth mentioning:

CM: "I think he’s demented", comments Munger, when asked to discuss one of Siegel’s books that argues for high sustained returns on common equities.

WEB: "Envy is the worst sin. With lust and gluttony, at least you get something out of it.", commenting on Wall Street compensation practices.

CM: "We know the edge of our competency better than most people do. It’s not a competency if you don’t know the edge of it."

April is the cruelest month

2006-05-06T10:10:00.000-05:00

Unless, of course, you're into Buffett. Amidst the buildup to "Woodstock for Capitalists", Buffett and Berkshire were heavily featured in the popular press, with admiration and doubt being administered in equal measure.

In early April, in what may have seemed like an out-of-character move, Buffett made a substanial $14B bet on the global stock market by selling long-duration equity index puts. Given that he's referred to derivatives as "financial weapons of mass destruction" in his 2003 Berkshire letter it may seem incongruous that he'd take such a large position. However, the contracts are structured in such a way that,

For Berkshire to lose the $14 billion that the company says is at risk, all four indexes covered by the puts would have to fall to zero, according to Gary Gastineau, managing director of ETF Consultants LLC, a research firm in Summit, New Jersey. That's unlikely given historical trends.

And, let's not forget that Buffett has had success with derivatives in the past. Witness the opposite bet made on the S&P 500 in 2002 that netted $60M, or the bets on the widening U.S. trade deficit that has since brought in $2B in investment gains. Let's face it - what are selling puts, except another form of aggregating float? Collect income now and invest it in the interim. This is a concept with which Buffett is intimately familiar.

And what to do with this cash? Buy a sportswear company, that's what. In mid-April, Russell Corp. agreed to be acquired by Berkshire Hathaway for nearly $600M, adding to Berkshire's existing apparel holdings. And on May 5th, Buffett's entry into the exciting world of metal-working, with his $5B purchase of Israeli firm Iscar (not to be confused with the universally bad idea, Ishtar). The Iscar deal demonstrates another classic Buffett move - buy a family-owned company and then leave them the heck alone.

Different takes on Buffett cropping up post-Letter, pre-Woodstock.

Point: Jon Markman calling for the Oracle of Omaha to be renamed the Natterer of Nebraska, based on recent flat performance by Berkshire.

Surely there was a time when Warren Buffett was a chief executive worth studying, and even investing alongside. But it sure seems like that time is long past...

And the counterpoint? A defense of the Oracle by Jim Jubak, who, in addition to providing a nice summary of the logic behind Buffett's insurance holdings, rightfully points out that

Deciding whether Buffett is the greatest living investor may be an interesting parlor game, but it has nothing to do with whether or not you should own Berkshire Hathaway stock right now.

As always with a stock, it's not how the stock has done in the past that counts but how it's likely to perform in the future. Yes, Berkshire Hathaway's performance in 2004 (a 4.3% return) and 2005 (flat for the year) was pretty lame. But I think you want to own Berkshire Hathaway now precisely because 2004 and 2005 have positioned the shares very nicely for solid profits in 2006.

All of the opinions aside, it's Woodstock down in Omaha this weekend, and the topics on everyone's mind are succession and acquisitions. What's next for Berkshire? What to do with all the cash? Names being tossed into the mix include: Harley-Davidson, Mattel Inc., PG&E, Mercury General Corp., and more.

And last, to prove that Mr. Buffett isn't all business, a few items for fun. First off, Buffett will be involved in a children's animated series entitled "The Secret Millionaires Club" designed to teach the youngsters all about investing. Second, if anyone has a burning desire to buy a Buffett-owned musical instrument, the ability to do so is only a click away. Buffett is auctioning off an autographed ukelele on eBay later this month, with proceeds going to the Omaha Children's Hospital. Click through to the article, folks. The picture alone is worth the price of admission.

Hunt for the Holy Asset Class

2006-04-30T19:48:00.000-05:00

I’ve come across a number of interesting articles lately discussing historical asset class returns. Extrapolating past returns into future performance seems to be getting dangerously close to a new national pastime.

Along those lines, Bill Miller makes a few interesting observations in the most recent letter to investors. With many commodities reaching astronomical levels, pension fund consultants find that now must be the best time to get in. Indeed, J. Sainsbury, the British grocery chain, has decided to increase its allocation to commodities.

From the letter:

Last month, J Sainsbury, the U.K. supermarket chain, said it planned to invest about 5% of its 3.2 billion pound ($5.5 bn, euro 4.6 bn) fund in commodities ...

The article went on to note how this move is being driven by pension consultants armed with data showing how well commodities have performed, how over 50 years they have performed about as well as equities, and how this was part of a move to "find surer ways" to fund long-term obligations than by investing in mainstream equity indices, those surer ways consisting of "alternative assets" such as private equity, hedge funds, commodities, and so on. These alternative assets are judged surer mostly because they have done so well the past five years, just as venture capital was so judged in 1999 and 2000 because of its stellar past returns, leading to a flood of money and a collapse in returns.

It is not an accident that despite the consultants being armed with data going back 50 years about how adding commodities to a portfolio can improve risk-adjusted rates of return, there was zero interest among pension plans and investors generally in owning them until very recently. "Two years ago it would have been hard to find any funds investing in commodities," says Stephen Woodcock, investment consultant.

Last week I came across an article in the NYT where Ben Stein summarized why he wouldn't invest in hedge funds (click here for the article, though you have to pay for it). Poor performance.

Burton Malkiel authored the study that evaluated historical returns for hedge funds. What’s noteworthy is that convertible arbitrage had one of the highest sharpe ratios – and this is at a time when people can’t wait to get out of the asset class.

Another Letter

2006-03-15T13:08:00.000-06:00

Sears Holdings posted its quarterly letter to shareholders today. Make sure to review the discussion of which operating metrics truly matter (hint: it's not same-store-sales). One WEB reference was also made in regards to the efficiency of retiring shares:

During 2005 we announced the intention to repurchase $1 billion of our stock. To put this in context for retail companies, in the last few years Wal-Mart has repurchased over $13 billion of stock, Home Depot has repurchased over $7 billion, Target has repurchased over $2 billion, and JC Penney has repurchased over $4 billion. In addition, each of those companies has paid out significant dividends over the same period of time. We completed almost $600 million of our repurchase program as of the end of the fiscal year and expect to continue to repurchase shares as long as we feel that it is a good use of our capital and that market conditions make it attractive.

While most observers focus on repurchases as a way to return cash to shareholders or to offset the dilution from options, it has other consequences as well. For those shareholders who choose to sell some or all of their shares, repurchases provide liquidity. For those shareholders who choose to hold their shares, their ownership percentage in the company increases. Either decision can be a good or bad one depending on the price paid and the subsequent performance of the company. For example, a shareholder who owns one percent of a company and chooses not to sell as that company repurchases shares will see his ownership percentage increase. Should the price paid for the repurchase be too high or the performance of the company subsequently decline, that shareholder would have a greater participation on the downside than he would have had before. Conversely, if the price paid was reasonable and the company goes on to perform well, participation in the increase in value would be magnified.

Warren Buffett makes clear that his goal is to increase the per-share value of Berkshire Hathaway. Similarly, our goal is to increase the per-share value of Sears Holdings. At the present time, I believe that the most significant lever for creating per-share value is in improving the operations of our core business. To the extent that we also have fewer shares outstanding, the returns to shareholders can be further magnified so long as we pay a reasonable price for the shares repurchased.

The Letter

2006-02-27T20:52:00.000-06:00

Due March 4th, standard 9am EST, per Buffett's newest company news release, here. I assume Carol Loomis is editing now. He'll have to do it earlier in the future, due to new SEC rule about big companies reporting in 60 days, not 75. Thank god for Elliot -- those two weeks were absolutely excruciating. Set your outlook calendars now. See you in Omaha in May.

Random musings

2006-02-26T16:03:00.000-06:00

Institional Shareholder Services is at it again. Patrick McGurn, whose firm, argued that Mr. Buffett had lost his independence as a director at Coke now argues that Berkshire Hathaway ought to increase its analyst coverage. Read for yourselves, here. In the same article, someone (who happens to run an investor relations firm) also argues that Berkshire Hathaway ought to ramp up its own IR department. Independent advice? I’m not so sure.

Interesting article from this weekend’s NY Times on the declining equity risk premium. U of C professor John Heaton is quoted.

Whitney Tilson has updated his Web site. Here are a number of links (here, here, and here) to quotes that ought to be placed on your whiteboard, and referred to before ever making a trade.

I came across a great quote from Phil Fisher which reminds me to read "Common Stocks and Uncommon Profits" again:

Investors have been so oversold on diversification that fear of having too many eggs in one basket has caused them to put far too little into companies they thoroughly know and far too much in others about which they know nothing at all. It never seems to occur to them that buying a company without having sufficient knowledge of it may be even more dangerous than having inadequate diversification.

Weekly letters and BRKA buys another company

2006-02-13T18:59:00.000-06:00

For those that haven't yet followed our links (to the right), here's an excellent excerpt from John Hussman's weekly letter, on how to take a long-term approach to investing:

One of the most difficult requirements of long-term investing is to keep an eye on a reliable “fixed point.” It's fairly easy to get caught up in the day-to-day earnings news and political developments, in a way that makes investors ignore reliable benchmarks of value and probable long-term returns. I've noted before that while valuations have relatively little to do with short-term investment returns, they are a very strong and reliable determinant of long-term returns. So valuations are that “fixed point” at the other end of the wire. Now, you can't ignore the short-term pressures that sway the wire one way or the other, but you'll lose balance if you focus only on those. In the end, the objective is to take account of both the “fixed point” – valuations – and the short-term sway of the wire – market action – and then align each step in a way that's consistent with the condition of those factors at each moment.

And Berkshire Hathaway buys another company - Applied Underwriters.

GMO Letter

2006-02-05T05:48:00.000-06:00

Check out the latest GMO update letter from Jeremy Grantham, one of the best at mean regression, here (login required). Great comments on historical economic context for last 25 year, probable impending volatility, presidential cycles, emerging markets, staying with winners, rebalancing, alternative asset classes, recent endowment outperformance, timber, and Minsky who said "stability is unstable," the anti-tautology.

Students meetings and more deals

2006-01-26T19:48:00.000-06:00

Warren is really hammering out the student meetings this year. Some common themes emerge (some new, some not so new). His admiration for Bill Gates comes though as always; Gates clearly has affected Warren’s thoughts on philanthropy, and Buffett clearly has influenced Microsoft's capital allocation policies (See large special divided, buy backs, expense options, shift from options to restricted stock.) In three of the meetings he mentions his Korea investments, his new go-to anti-efficient market example outside of Washington Post circa 1973. Twice he mentions that we live better than Rockefeller did. His thoughts on philanthropy continue to evolve, methods for doing deals remains the same, and most interestingly - and I would have bet heavily against this - he owns an Ipod. I would love to know what his on his “Top 25 most played” list – next student group in Omaha be sure to ask him. I’m guessing there are a few Jimmy Buffett tunes in there, and perhaps., “Omaha” by the Counting Crows.

And his sense of humor remains well intact…“There once was a Wall Streeter who missed two years of bonuses. To save money, he suggested to his wife that if she learned to make dinner, they could get rid of the cook. She responded, “And if you learn to make love, we can get rid of the gardener.”

First up for meeting notes: UCLA & USC:

If I had $10 million (or $1 million) to invest I would crush the S&P; I’d look to beat it by at least 10% per year; with $10 billion, I will eek by it.

Next Kansas:

My broker at Citigroup told me to look through this Korean version of the Moody’s guide. He said it would look just like 1951. He was right. I began flipping through the pages and found a lot of good companies trading at very low multiples. In 5-6 hours I put together a small portfolio of 20-25 stocks – about $100 million total. One example was DaeHan Flour Mills. It has a 25% market share in wheat flour in South Korea. Book value was 206,000 Won and the company had 201,000 Won in marketable securities and was trading at 2x earnings. The market is clearly not efficient all the time. There are certain opportunities that can make you fabulously rich.

First, you need two piles. You have to segregate businesses you can understand and reasonably predict from those you don’t understand and can’t reasonable predict. An example is chewing gum versus software. You also have to recognize what you can and can not know. Put everything you can’t understand or that is difficult to predict in one pile. That is the too hard pile. Once you know the other pile, then its important to read a lot, learn about the industries, get background information, etc. on the companies in those piles. Read a lot of 10Ks and Qs, etc. Read about the competitors. I don’t want to know the price of the stock prior to my analysis. I want to do the work and estimate a value for the stock and then compare that to the current offering price. If I know the price in advance it may influence my analysis. We’re getting ready to make a $5 billion investment and this was the process I used.

(Walmart? Some rumors out there that it is Lloyds.)

I listen to an iPod while I’m on the treadmill just like you can.

And Harvard:

On the Forest River acquisition: The business earns $100MM pretax. Warren asked the founder what salary he wanted. He told the founder, “You name a salary that makes you feel good.” The founder thought for a minute. He said, “I looked at the proxy and I saw you make a $100K a year. I wouldn’t want to make more than you.”

Shorting is just not a smart game. All of the math is for you on the long side, and all of the math is against you on the short side.

Warren and Charlie will not drop their discount rate below a certain level (based on terribly easy money from the Fed), but will adjust it upward.

They don’t measure buying businesses against a 4.75% long bond, but they are still impacted by the 4.75% long bond.

And University of Nevada…no notes from them yet, but a few more warnings on the trade deficit…

Right now, the rest of the world owns $3 trillion more of us than we own of them," Buffett told business students and faculty Tuesday at the University of Nevada, Reno. "In my view, it will create political turmoil at some point. ... Pretty soon, I think there will be a big adjustment," he said without elaborating.

Fifteen years ago, the U.S. had no trade deficit with China, he said.

"Now it's $200 billion. If we don't change the course, the rest of the world could own $15 trillion of us. That's pretty substantial. That's equal to the value of all American stock," Buffett said.

"That's the big danger. Our national debt does not bother me. Our public debt is not at a crazy level," he said.

One of the legendary Berkshire lieutenants has stepped down. Charles Huggins, after 55 years at See’s, and at the age of 80 has called it a career.

“ It took me 15 seconds to decide to make Chuck CEO and president, and to this day I wonder why it took so long," said Buffett in a statement. "Chuck combines the discipline of a fine analytical mind with intuitive marketing savvy, and a moral sensibility that is rare in the 21st century."

Buffett hand-picked Kinstler as Huggins' successor and has trained him, stressing the importance of quality and company tradition."I will miss all our employees and the legions of loyal customers throughout the world who I have come in contact with," Huggins said. "The stories they tell about their love of See's are always astonishing."”

Finally, the Berkshire deal machine rolls on , picking up the Business Wire for an estimated $400 million.

The deal was done in typical Buffett fashion:

Bussiness Wire president and CEO Cathy Baron Tamraz and executive vice president of marketing and business strategy Michael Lissauer wrote a letter to Buffett on Nov. 21 after reading an article entitled, "Warren Buffett, Unplugged," in The Wall Street Journal's Weekend Edition.

"He called us back the Tuesday or Wednesday after Thanksgiving and asked for financials," Lissauer said in a phone interview. "And by the week of Dec. 12, we had our initial offer."

Making better decisions

2006-01-13T13:13:00.000-06:00

Buffett has done a spectacular job separating emotions from investment decisions. In fact, that’s a trait many outstanding investors possess. Paul Schoemaker, who wrote the books Decision Traps and Winning Decisions quickly summarizes his thoughts on making better decisions. Click here (it’s a video, by the way)

The furniture business is becoming increasingly competitive. But the Nebraska Furniture Mart still does well. An article from the Kansas City Star that discusses the closing of a competitor.

Refreshers of outstanding articles we have posted in the past (I'd suggest saving these files to your hard-drive for future access)

The Superinvestors of Graham and Doddsville. Buffett takes a jab at efficient market theorists.

Charlie Munger’s discussion of building mental models to become a better investor. This one is a must. Click here.

“The Warren Buffett you don’t know” from BusinessWeek

Bono and Buffett

2005-12-20T10:26:00.000-06:00

Maybe they'll do a concert together someday. Cousin Jimmy and Mr. B did once, so there is hope... Bono and Buffett hung out together recently in Omaha after the U2 concert, as Forbes reports here, in an attempt to solve some of the world's problems. Buffett has said that he is paying more attention to philanthropy these days, trying to solve the big problems which don't have a natural constituency. Bono and Susie Buffett were the ones who first hit it off, testimony being that Bono flew in to Omaha for the private funeral last year to sing. There was a lovely tribute to Susie at the Annual Meeting last year -- with a great excerpt from a Charlie Rose interview. Perhaps Buffett wouldn't have made it this far without her.

Looking for reading material? Start here, which contains a variety of gems. Greenwalt's Value Investing, Taleb's Fooled and Cialdini's Influence are my favorites. I call Cialdini my $60k book, since I think I learned more from it than most of business school (no gripes on Chicago, but testimony to the book). The annual letters of course are a must read, as are the Lowenstein on Buffett, Lowe on Charlie, and the Almanack (which is on my xmas reading list, having sat unread since the annual meeting -- what have I been wasting my time on? who knows --)

Happy holidays.

Smart Indexing

2005-12-18T16:39:00.000-06:00

Buffett has famously suggested recently (last annual report/meeting?) that most investors would be better off over time in an index fund. I wonder if he'll endorse some of the smart indexing currently being offered by Powershares and their competitors. If he doesn't, in my opinion he should, because it is smarter. They'll never be able to identify the great business with pricing power that doesn't require capital (think See's Candies -- I myself am surprised by how many professionals don't really get this 'candy conundrum' either, so rare but so desirable -- the anti-tech). A very good summary of what is currently on offer in the smart indexing space is here. I'll continue to go on record about Japan, and recommend the new Japan fund that comes out tomorrow from Powershares. As soon as our stock market turns down the books with silly titles like 'Asian Kings' and 'SuperInnovative Japanese' and 'Hardworking Chinamen' will hit the shelves again, with content as high-minded as the culturally sensitive titles I suggest, just like 1988. I ought to start writing one now...

"Retailers use food to attract males"

2005-12-18T06:22:00.000-06:00

Never say Buffett doesn't understand incentives. Pizza and beer at Borsheim's. Susan Jacques is a lady after my own heart, here. Do you think they cleared this with Charlie first? The answer surely would have been "yes".

The World According to Poor Charlie

2005-12-05T13:27:00.000-06:00

The holidays come early for Charlie Munger fans: Kiplinger sits down with Charlie for a short interview, and as with pretty much everything he writes/says, it is absolute must read material. Some of the highlights:

What are your work styles like?
We have certain things in common. We both hate to have too many forward commitments in our schedules. We both insist on a lot of time being available almost every day to just sit and think. That is very uncommon in American business. We read and think. So Warren and I do more reading and thinking and less doing than most people in business. We do that because we like that kind of a life. But we've turned that quirk into a positive outcome for ourselves.

What would a good investor's portfolio look like? Would it look like the average mutual fund with 2% positions?
Not if they were doing it Munger style. The Berkshire-style investors tend to be less diversified than other people. The academics have done a terrible disservice to intelligent investors by glorifying the idea of diversification. Because I just think the whole concept is literally almost insane. It emphasizes feeling good about not having your investment results depart very much from average investment results. But why would you get on the bandwagon like that if somebody didn't make you with a whip and a gun?

Should people be investing more abroad, particularly in emerging markets?
Different foreign cultures have very different friendliness to the passive shareholder from abroad. Some would be as reliable as the United States to invest in, and others would be way less reliable. Because it's hard to quantify which ones are reliable and why, most people don't think about it at all. That's crazy. It's a very important subject. Assuming China grows like crazy, how much of the proceeds of that growth are going to flow through to the passive foreign owners of Chinese stock? That is a very intelligent question that practically nobody asks.

Ibbotson finds 10% average returns back to 1926, and Jeremy Siegel has found roughly the same back to 1802.
Jeremy Siegel's numbers are total balderdash. When you go back that long ago, you've got a different bunch of companies. You've got a bunch of railroads. It's a different world. I think it's like extrapolating human development by looking at the evolution of life from the worm on up. He's a nut case. There wasn't enough common stock investment for the ordinary person in 1880 to put in your eye.

Great Stuff. I think Charlie and Mr. Burns are the only people who still use the word Balderdash.

For the real Charlie die-hards, a Ben Franklin museum exhibit is beginning to make the rounds.

More is out on the fee-filled Mini-Berkshire shares that Wachovia is creating.

University of Kansas students get ready to pitch businsess to Warren.

Dark Fiber

2005-12-01T14:31:00.000-06:00

Although Mr. Buffett opined to us in May that his friend Bill wanted to "kill" Google, see the following two posts for the most fascinating item I've read on Google in a long time, and the attempt to claim the value chain on the internet.

Like Bill claimed the value in between the keyboard and the CPU where no one else saw it (IBM gave it away), GOOG seems to be doing same in between our finger tips and the internet. What is the internet anyway, a big coffeeshop library? Who is the Starbucks? Msft or GOOG? Articles following argue GOOG. Grab a Bud while you read them, here and here. Don't know how it stacks up against MSFT Live.

Anyone care to opine?

Thoughts on BRKA's valuation...

2005-11-20T20:32:00.000-06:00

A number of interesting speakers spoke at the Value Investing Congress, which was held in New York this past week. Of note is a presentation by Whitney Tilson that tries to estimate Berkshire's intrinsic value. The file is located here.

The argument is a familiar one: Adjusted for cash and marketable securities, the operating businesses sell for 12-13x earnings. As the document makes clear, that's not a bad position to be in once super-cat pricing firms up and more cash builds up.

Finally... an interview with Wally Weitz, whom we visited in May.

Two from the Journal, confirmation on Korea, BUD and BRK still cheap

2005-11-12T20:36:00.000-06:00

A nice front page article on Warren from the WSJ. The article confirms what notes from the Tuck meeting already told us: he has been buying Korean stocks in his personal account:

Last year, Mr. Buffett says, he began buying Korean stocks for his personal brokerage account, investing a total of $100 million in roughly 20 Korean companies. He says that the investments were too small to be appropriate for the Berkshire portfolio. "These were not Berkshire-size remotely," he says.

He picked the stocks, which he declines to name, by leafing through a reference book compiled in Korea and provided by Citigroup to some clients. The book devotes a single page to each listed company. "You look for solid-looking companies at very low multiples of earnings, and sometimes with the added bonus of lots of excess cash," he said. After the shares rose in price, he unloaded some of them, though he still calls them cheap.

If you still think Korea is cheap, there is an ETF out there (up 28% this year).

From the same journal issue a very nice profile of Berkshire's specialist at the NYSE:

Mr. Maguire generally speaks with Mr. Buffett -- who is also 75 -- about once every six weeks, and they exchange jokes as often as they discuss business. Mr. Maguire notes that Mr. Buffett has referred to him as the world's greatest specialist. Mr. Buffett's response to that: "I tell Jimmy that if he keeps the spread at 200 [dollars], then I'll call him the world's greatest specialist," referring to the differential between buying and selling prices on A shares.

A document here which I had never seen before but which has apparently been around for awhile: an email from Buffett to a VP of Microsoft circa 1997. Warren's take on MSFT:

“In effect the company has a royalty on a communication stream that can do nothing but grow. It’s as if you were getting paid for every gallon of water starting in a small stream but with added amounts received as tributaries turned the stream in an Amazon. The toughest question is how hard to push prices and I wrote a note to Bill on that after our December meeting last year. Bell should anticipated Bill and let someone else put in the phone infrastructure while he collected by the minute and distance (and even importance of call if he could have figured a way to monitor it) in perpetuity.”

The fool.com makes the case for Berkshire being cheap. I agree it's cheap, however I would be very surprised if book value grows by 15% over the next 10 years. (Buffett-buddy Carol Loomis has written a great article about just how hard 15% is to do over the long-term titled " The 15% delusion.)

An interesting bearish piece here where the author argues the stock/bond/credit markets are all trading based on institutional macro factors, not individual company valuations, and many people are bullish and using credit derivatives to hedge themselves - like portfolio insurance in '87.

Morningstar tries to figure out exactly what a moat is.

Some video highlights from the Buffett/Gates Nebraska meeting here.

And you may have noticed we think BUD is cheap. Apparently Barron's does too.

Buffett & His Currencies - A Buyer of USD

2005-11-08T19:54:00.000-06:00

Buffett admitted in the quarterly report here that his currency bets have been pulled in a bit, from over $21.5b to $16.5b. Buffett now a slight buyer of USD, as noted by the magazines here and currency markets, and interesting in light of his verbosity on the topic. Munger never agreed with trade, according to Buffett at last annual meeting. Too many variables...

Buffett's Holdings, Pimco & Mauboussin

2005-11-06T19:50:00.000-06:00

Great update on Berkshire holdings here, noting a probable discount to fair value of .73 for the stocks as a whole. Plus throw in the operating businesses…

Here is a link to an academic article for those few who stubbornly believe the Oracle is a coin flipper. The academics prove the absence of luck, risk adjusted.

Best quotes:

1) From 1993 Letter to Shareholders: “The strategy we've adopted precludes our following standard diversification dogma. Many pundits would therefore say the strategy must be riskier than that employed by more conventional investors. We disagree. We believe that a policy of portfolio concentration may well decrease if it raises, as it should, both the intensity with which an investor thinks about a business comfort-level he must feel with its economic characteristics before buying into it. In stating opinion, we define risk, using dictionary terms, as "the possibility of loss or injury."”

2) The authors state: “His philosophy places emphasis squarely on the determinants of value: the estimation of future cash flows and growth rates which is also consistent with his principle of investing in businesses that he understands and is not difficult to predict. “

One of my favorite Buffett quotes: “I invest in the absence of change.”

Like Bill Miller in his recent note here, I’m a buyer of stocks in 4Q. Weitz agrees in his 3Q letter, here, where he was adding to Budweiser, the best recession hedge I know.

If you haven’t considered the market that I think is headed into a 1982 bull market (exiting price instability, 30% of index trading below book value, etc), consider Japan. It is the only place in the world I know of where a bank account trades at a P/E of 200x (price:100, yield/earnings:50cents on 50bps yield), and the market trades at 25x. I think we will read in 10 years time about the pricing ‘mistake’ in Japan, echoing Buffett when he wrote about how US stocks looked so cheap in 1980/81. We’re a couple years into it, but that’s my view.

Finally, if you don’t read Gross at PIMCO and Mauboussin at Legg Mason, do so. Here is Bill’s latest, here, and a great one by Mauboussin is here.

Update on the book and meeting with Gates, Tuck Omaha notes

2005-10-22T19:52:00.000-05:00

If you'll recall from a couple of posts ago Buffett and Gates did a Q&A session for students at the University of Nebraska. Well, Fortune has written up an interview they did with them out there, along with some highlights from the Q&A. (As a side note, the name of my original post on this was "$90 Billion gets together in Nebraska." The title of Fortune's article? "The $91 Billion Conversation". They should have let me do the interview.)

Our friends over at Tuck made their annual Omaha pilgrimage this past week. Notes are here. Great quote: "I love what I do; I'm not even that busy. I got a total of five phone calls all day yesterday and one of them was a wrong number."

More details on the Alice Schroeder biography came out: "The Snowball: How Warren Buffett Collected Friends, Wisdom and Wealth", due out in 2008, and the winning bid was $7 million. Note, the deal is entirely with Schroeder, and Warren doesn't appear to be officially involved. I really don't see how this could end up very different or better than Lowenstein's excellent biography. And the article bizarrely ends with this,"Buffett is known to wear sweat pants and sweat shirts in his spare time. He is a longtime fan of hamburgers, french fries and Cherry Cokes, and enjoys bridge and playing the ukulele." Ok.

A Buffett Group link to Marketing???

2005-10-19T05:48:00.000-05:00

From the GSB website...

"Marketing Fellowships to Provide Mentoring

To attract top students who are interested in marketing, Chicago GSB is establishing 10 fellowships that will provide $50,000 over two years as well as a mentor—a senior marketing executive who can share expertise and insights into the field.
Ready for students in the 2006–07 academic year, the marketing fellowships are underwritten by a challenge grant of $1 million from James Kilts, ’74, founder of the Kilts Center for Marketing at Chicago GSB and chairman, president, and CEO of Gillette. Among the donors who will provide both financial support and one-on-one mentoring are Lee Hillman, ’79, president of Liberation Investment Advisory Group; and David Whalen, ’81,president and CEO of A. T. Cross Company. “Given the Kilts Center’s remarkable faculty and programmatic innovations, we’re well positioned to attract the most talented students,” said dean Edward Snyder.
Kilts, who helped the GSB establish the center in 1999 with the Nabisco Foundation, said he looks forward to the effect the new fellowships will have over time. “Over five years of sustained support, those cohort of students will attract and recruit a new generation of MBA candidates for the field,” he said.

Kilts is chairman of the Council on the Graduate School of Business.

—Patty Houlihan"

Interesting that the CEO of one of Buffett's largest investments is pushing Marketing, rather than Finance. (Despite having taken Fama during his stay at Chicago)

More Buffett Transcripts and John Bogle on "Owner Capitalism"

2005-10-18T16:22:00.000-05:00

I came across a few interesting transcripts the other day. The longest one, from Notre Dame in 1991, is posted here. Another one, from 1998 at the University of Florida, is available here.

Both are very long and require a nice cup of coffee to be truly enjoyed.

Also, if any of you follow the Motley Fool Radio Show, you'll know that John Bogle was on the other day. A great talk about how mutual fund owners don't own, but rather rent their businesses, as the average holding period keeps dropping. The talk is available on npr.org's Podcast Directory. They also interviewed the CEO of the Pampered Chef.

And BUD is still on sale.

Goodbye to a Superinvestor, $90 billions gets together in Nebraska, and a book coming?

2005-10-12T23:01:00.000-05:00

The value investing community lost one of its all time greats, Bill Ruane, earlier this week. When Buffett unwound his partnership in 1969 he recommended his investors do one of two things 1) follow him into Berkshire Hathaway or 2) Invest with Ruane's Sequoia Fund.

In Buffett's classic The Superinvestors of Graham-and-Doddsvile speech (a must read for University of Chicago students trying to wipe their minds clear of any EMT nonsense - or twaddle as Charlie would say) he offers this praise:

Table 4 shows the record of the Sequoia Fund, which is managed by a man whom I met in 1951 in Ben Graham's class, Bill Ruane. After getting out of Harvard Business School, he went to Wall Street. Then he realized that he needed to get a real business education so he came up to take Ben's course at Columbia, where we met in early 1951. Bill's record from 1951 to 1970, working with relatively small sums, was far better than average. When I wound up Buffett Partnership I asked Bill if he would set up a fund to handle all our partners, so he set up the Sequoia Fund. He set it up at a terrible time, just when I was quitting. He went right into the two-tier market and all the difficulties that made for comparative performance for value-oriented investors. I am happy to say that my partners, to an amazing degree, not only stayed with him but added money, with the happy result shown here.

There's no hindsight involved here. Bill was the only person I recommended to my partners, and I said at the time that if he achieved a four-point-per-annum advantage over the Standard & Poor's, that would be solid performance. Bill has achieved well over that, working with progressively larger sums of money. That makes things much more difficult. Size is the anchor of performance. There is no question about it. It doesn't mean you can't do better than average when you get larger, but the margin shrinks. And if you ever get so you're managing two trillion dollars, and that happens to be the amount of the total equity valuation in the economy, don't think that you'll do better than average!

Note Ruane continued to crush the market for years after this article was written.

A quick look at Leucadia National here. They have been called a "little Berkshire" more than one time, and some of it is justified. From the end of 1978 through the end of 2004, Leucadia's stock soared an annualized 33% (compared with 27% for Berkshire's A shares). I never quite understood the huge bet they made on WilTel though.

An interesting piece here from The New Yorker on "Last Best Chance" the Buffett backed film made to stimulate public support and political pressure on the Bush Administration and Congress to do something serious about the danger of nuclear terrorism.

1,800 very lucky University of Nebraska students joined Warren and Bill Gates for a Q&A session. Apparently, Gates won't be running Berkshire when the time comes to pick a successor. "It won't be me," Gates said of who would take over for Buffett, 75. "Berkshire's got a lot of great people who understand their system. If you have a fool.com subcription, a nice summary is written up here:

"Both Buffett and Gates said they wouldn't mind bearing a heavier tax burden when a student asked them their thoughts on adopting a flat tax rate. Buffett elaborated by saying that the current tax system needs to be more progressive. He got a round of applause after pointing out that many soldiers fighting in Iraq pay higher tax rates than he does.
'I frankly think it's very unfair..' -Buffett"

Finally, and I'm not fully sure if I believe this one. Cnnfn.com is reporting that "Investment guru Warren Buffett is planning to cooperate on a financial advice book that has prompted a bidding war among publishers eager to land the title, according to a newspaper report Wednesday."

We already knew Alice Schroeder was planning on writing a book about Berkshire - in fact she quit her job covering them as a research analyst to write it. And in the past Warren has indicated that he wanted to write a book, but said recently that he really didn't have time to do it. I also believe I heard him indicate that he would only do it with Carol Loomis. My guess is that Warren writes a forward and has a blurb on the back at most.

And BUD keeps getting cheaper.

Buffett Partnership Letters, Clipper, Ridgewood, and Gabelli, Warren Goes after the Taxman

2005-10-01T12:07:00.000-05:00

The original Buffett Partnership Letters have appeared here - don't take too long to read them. I believe Warren in the past has requested that they not be posted, so I'm guessing they will be gone soon. The Graham-Newman letters are up there too.

Berkshire is going after the IRS for $16.3 million, accusing the IRS of denying it $16.3 in tax deductions, and alleging that they made an "erroneous, wrongful, and illegal" interpretation of the tax code. Sweet.

In the mutual fund world, deep-value managers James Gibson and his crew are leaving the Clipper Fund. I never quite understand their undying bullishness on Freddy/Fannie, but they do write some interesting shareholder letters, which are linked over there on the right. Speaking of shareholder letters, apparently the Kaushal Majmudar of The Ridgewood Group writes a pretty decent, value oriented on e. They also just started a blog, the first post of which makes a case for Berkshire being cheap - A view I've been hearing a lot of lately.

Finally, Mario Gabelli and his board are taking heat "for looting the assets of the company, breaching their fiduciary duties to its shareholders and oppressing its minority shareholders." Note Mario made $55 million last year. Which is about 500 times more than Warren got paid. I'll take the guy with the "THRIFTY" license plate.

Katrina, Carol Loomis, Rating Agencies, and Sequoia

2005-09-20T11:53:00.000-05:00

In the news, Berkshire expects to take down 3-5% of Katrina's damage.

A great article by Carol Loomis, one of the best business journalists out there and Buffett's annual report editor, about her 51 years at Fortune. She writes specifically about her relationship with Warren here.

Interesting piece from BusinessWeek on the rating agencies. I don't think Moody's moat is going away anytime soon.

And finally, a must read for value investors, the transcript of Sequoia's annual meeting. Includes some extensive Berkshire discussion...a quick summary of the case for the compounding machine:

"I think one of the interesting things about evaluating Berkshire is just considering
that you’ve got the smartest investor of all time, as far as I know — Keynes or somebody might
give me an argument on that — but you have Warren carrying a portfolio of $105 billion that
yields less than 3% after taxes. And here’s a person who historically has averaged a total
return of about 21% after taxes. When we tell you Sequoia’s total return is 16%, that’s before
taxes. Warren will not make a 21% return in the future. But if you ask me, is he capable and
healthy enough, etcetera, to make a return of 10% or 12% over the next ten years — and I think the insurance tables might lead you to think that he could live that long — well, I am making a bet that he will. And then you take the difference between the 3% and the 10%, and
you come up with a fairly large number that is potential earning power just sitting there
waiting for the right opportunity."

The Onion on BRK's Gillette

2005-09-19T05:24:00.000-05:00

Many of us know that the Onion is way ahead of it's time. Here is yet another example, with BRK's Gillette holding as an example.

Feb 04
http://www.theonion.com/content/node/33930

Sep 05
http://news.yahoo.com/s/nm/20050914/bs_nm/manufacturing_gillette_dc

Buyer of BRK and Bud

2005-09-17T05:13:00.000-05:00

May I go on record to say that, if you haven't ponied up yet, now is a promising time to buy BRK and BUD. If you are an ex-student with a bulging credit card, try www.sharebuilder.com.

Humbly yours in the faith,

Jimmy's set list from the Wrigley Show

2005-09-05T13:45:00.000-05:00

Headed down to Wrigley Field, for the Labor Day weekend show... Well, actually, I spent it unsuccessfully apartment hunting in New York, but here's the set list from Cousin Jimmy's show in Chicago. #20 and #27 are both of interest...

National Anthem/Hot Hot Hot

1. Piece of Work
2. Ragtop Day
3. Hey Good Lookin'
4. I Will Play For Gumbo
5. Changes in Latitudes
6. Come Monday
7. Last Mango in Paris
8. Woman Going Crazy on Caroline Street
9. License to Chill
10. Son of a Son of a Sailor
11. Cheeseburger in Paradise
12. Volcano
13. Brown Eyed Girl

Intermission

14. Why Don't We Get Drunk
15. La Vie Dansante
16. Banana Republics (dedicated to Steve Goodman)
17. Southern Cross
18. School Boy Heart
19. A Pirate Looks at Forty
20. Take Me Out to the Ballgame
21. The City (w/ Mac)
22 It's 5 O'Clock Somewhere
23. One Particular Harbor
24. Margaritaville

First Encore

25. Fins
26. Scarlet Begonias

Final Encore

27. City of New Orleans (played from bleachers)

Beta vs. Buffett: Round 2

2005-08-09T10:24:00.000-05:00

An old equity research piece from CSFB analyzes the usefulness of Beta vs. Margin of Safety. The conclusion they reach is not all that earth shattering: beta is a useful measure of riskiness over the short term, and probably is not over the longer term. I think Buffett would agree with that, and may even have said as much.

What is interesting is that they run the numbers on Buffett's go-to Washington Post example (ie. Washington Post stock got hammered, the beta went up (suggesting the stock was more risky) the actual value of the company remained the same, so the stock was actually less risky). They find that Washinton Post's beta actually decreased during that time period. Doesn't really change the usefulness or validity of Buffett's argument, but interesting read nonetheless.

The pot starts to simmer

2005-08-07T15:44:00.000-05:00

Things getting a little steamier over in Omaha with Mr. Buffett's subsidiaries now getting the fine-tooth comb on the finite insurance problem. Q: How to spend a lot of time not creating shareholder value? A: Endless meetings with regulators. He must be getting tired of it. Story here.

2Q numbers out on Friday, here. Of note, his foreign currency contracts, on which he says the following:
Gains and losses from foreign currency contracts arise as the value of the U.S. dollar changes against certain foreign currencies. Small changes in certain foreign currency exchange rates can produce material changes in the fair value of these contracts given the large net notional value of Berkshire’s open contracts ($21.5 billion as of June 30, 2005) and consequently, may produce exceptional volatility in reported earnings in a given period. Berkshire’s open contracts at June 30, 2005 reflect a net pre-tax loss of $71 million. During the first six months of 2005, the value of most foreign currencies decreased relative to the U.S. dollar. Thus, forward contracts produced pre-tax losses of $619 million for the second quarter and $926 million for the first six months. Berkshire first began “shorting” the U.S. dollar in 2002 and since inception in 2002 through June 30, 2005, has recognized pre-tax gains of $2.03 billion from forward currency forward contracts and has received $2.10 billion from counterparties in cash.

Shareholders would have lost less money if the positions weren't on in the last 6 months, but the currency market rumors of closeouts were spurious. I suspect he's going to be getting a few more tbills under ISDA netting from his counterparties over the next 6 months.

Buffett & Charlie Rose, and Munger

2005-08-03T19:53:00.000-05:00

If you are keen for the Buffett interview with Charlie Rose, here it is.

A great note on Munger and his new book by fan Whitney Tilson, here, including a link to his economics speech at UCSB which is fascinating, here, and should be required reading at every MBA econ class (hint hint Professor Rayo).

Another burial of a normal American, and millions are left to an educational institution as a result of holding Berkshire. Gotta love compounding. Buffett must love reading these, here.

Google, More Shareholder Letters, and Payday Lending...

2005-08-01T21:17:00.000-05:00

I try to shy away from most Google discussions. Yes, it's a good service. And the company may even stick around for a while. But anyone that tries to persuade me that declaring a stock split will drive value for owners, is mistaken. Now I can at least point to an article on it. It's available here.

Also, for those of you that enjoy Warren's letters, here's a link to Leucadia National's Shareholder Letters.... and Marty Whitman at Third Avenue Funds recently made the second quarter letter available.

Finally, a good article on Wells Fargo, it's CEO, and on the highly profitable payday-lending business.

What are the greats doing?

2005-07-31T19:04:00.000-05:00

Good story from Mstar on what the great managers are doing, along with links to their recent letters, here. Bookmark those... They make for good reading. No real surprises, but includes a list of stocks common across the portfolios, including Tyco, Comcast, Yum, Brkb, Liberty Media, MBIA, TDS, TWX. An interesting one is TWX, for the AOL unlocking... But YUM with Kentucky Fried Chicken in China is pretty good too. All of them, great cashflows and potential for spin-offs. Steve Mandel's recent shareholder letter (Lone Pine), the cubs tell me, defends his largest shareholding which he is still quite bullish on: GOOG.

Walmart - The Value Pick, and odds and ends

2005-07-31T13:20:00.000-05:00

Coming on the heals of Buffett's comments below about Costco, see this link on Wal-mart, and who owns it now. Bloodied and battered, the value boys and girls like it. Personally, I have recently shopped at the big three (Costco, Wmt and Target along same stretch near Norwalk CT) and Costco and Target were beyond pleasant, and Walmart was exceptionally unpleasant. WMT reminded me of the Sears store located near me on the South Side of Chicago while growing up. Out of stock of a number of items (where is that computerized stocking system...?), unhelpful staff, difficult to find items... You name it. Still, it's cheap.

My favorite stock that I have been recommending to my non-investment friends who need a good long term runner -- Navteq (NVT). Pricey, but you tell me when the asset they spent 17 years building (digital turn-by-turn map of USA, powering mapquest, google, you name it) becomes obselete... And my phone will soon be giving me directions. Our cars already do.

Click here for a good reading list for summer vacations for investment types out there. I have been plugging two of those for a while now, and it is nice to see others on the drumbeat: two must reads, Greenwald's On Value Investing and Cialdini's Persuasion. Another list of books recommended by the Berkie duo, here.

Good note on anchoring, and where to start when valuing a stock. Ie, don't look at the price.

When asked what he stays away from when valuing a company, Buffett replied, "I don't want to know the price of a stock as I value it. Knowing the price anchors your thoughts."

Here is a nice comment on holding periods and, in particular, why it might have made sense for Buffett to sit on his hands while KO traded at 65x. Read here about Buffett and utility stocks, and why Rich Bernstein still keeps his day job at ML.

I've recently joined the bull side of the aisle, joining Bill Miller and a few others. (Though I haven't been brave enough to buy Google yet, though my brother did...) For anyone looking for a reason, note cash levels at mutual funds are at a historic high -- a historically reliable indicator. Or maybe I've been watching Asia too closely. The Post reports on it here.

Buffett now owns an RV maker with 1.3bil in sales last year, here. I note the propensity for Indiana firms of late (e.g. dental insurance).

Anyone looking for a good insurance stock to put in the portfolio? How about WTM or MRH (note here on MRH). I wouldn't bet against Jack Byrne -- have you seen his new e-surance ads? Better than the Gecko, that's for sure. And for a recent comment on the manufactured home industry, here, on why Clayton is still looking good, but a couple industry peers are starting to show better numbers. I expect Clayton to be doing the same.

If you thought rugs weren't cool, Mary & Kate Ashley have a new line linked with Shaw Brothers. Maybe they'll come to the next Annual Meeting?!? Buffett embraces wind power, here, and plans to spend $5b capex on PacificCorp if the merger goes through.

Cousin Jimmy is making a movie, here. Hopefully it will be on sale next year in Omaha too.

Buffett Posting on Fool.com

2005-07-29T10:34:00.000-05:00

A very interesting set of Q&A from a recent trip to Omaha, worth reading in its entirety, here. Of particular note, for the recent MBAs and others;

Q: Do you expect the stock market premium to continue to be 6.5% over bonds?

I don't think that the stock market will return 6.5% over bonds in the future. Stocks usually yield a little more, but that isn't ordained. Every once in a while, stocks will get very cheap, but it isn't ordained in scripture that this is so. Risk premiums are mostly nonsense. The world isn't calculating risk premiums.

Another gem:

Be careful that when you buy something for a sound reason, make sure that the reason stays sound. If you buy GM, you need to write the price and the respective market valuation. Then write down why you are buying the business. If you can't, then you have no business doing it. Quote from Ben Graham: "You can get in more trouble with a sound premise than an unsound premise because you'll just throw out the unsound premise".

Other odds and ends:
Don't worry about mistakes. You'll make mistakes. Get over it. At the same time, it's important to learn from someone else's mistakes. You don't want to make too many mistakes.

Side note: Warren once asked Bill Gates, "If you could only hire from one place, where would it be?" Gate's reply was Indian Institute of Technology.

Q: When did you know you were rich?

I really knew I was rich when I had $10,000. I knew along time ago that I was going to be doing something I loved doing with people that I loved doing it with. In 1958, I had my dad take me out of the will, as I knew I would be rich anyway. I let my two sisters have all the estate.

[On Kmart & Sears:]
We would rather look for easier things to do. The Buffett grocery stores started in Omaha in 1869 and lasted for 100 years. There were two competitors. In 1950, one competitor went out of business. In 1960 the other closed. We had the whole town to ourselves and still didn't make any money.

How many retailers have really sunk, and then come back? Not many. I can't think of any. Don't bet against the best. Costco is working on a 10-11% gross margin that is better than the Wal-Mart's and Sams'. In comparison, department stores have 35% gross margins. It's tough to compete against the best deal for customers. Department stores will keep their old customers that have a habit of shopping there, but they won't pick up new ones. Wal-Mart is also a tough competitor because others can't compete at their margins. It's very efficient.

[On Estate taxes and welfare -- a gem]
If you take away the estate tax, that money will have to come from somewhere else. If not from estate taxes then you inherently get it from poorer citizens. Less than 2% of estates will pay the estate tax. They would still have $50 million left over on average. I think those that get the lucky tickets should pay the most to the common causes of society. I believe in a big redistribution. Wealth is a bunch of claim checks that I can turn in for houses, etc. To pass those claim checks down to the next generation is the wrong approach. But for those that think I am perpetuating the welfare state, consider if you are born to a rich parent. You get a whole bunch of stocks right at the beginning of your life, and thus you are sort of on a welfare state of support from your rich parents from the beginning. What's the difference?

[On demographics:]
Q: What kind of impact will the demographic shift (i.e. baby boomers) have on the United States?

We aren't big on demographic trends. It's difficult to translate that information into profitable decisions. It is hard to figure out what businesses will prosper in the future, based on macro trends. See's candy is for anyone and Fruit of the Loom is for people who need underwear today. We want to be right on something that will work right now, not something that might work in the future. I doubt that Wal-Mart spends a lot of time on demographics. They instead focus on where to put the store and what to put on the shelves. I've never found those kinds of stats useful.

Q: What effect does large institutional ownership have on stock price volatility?

Never has so much been managed by so few that care so much about what happens tomorrow. So much of the world of investing is people who are trying to beat indexes, and they have a willingness and eagerness to make decisions in the next 24 hours. This condition didn't exist years ago. It has created a "hair trigger" effect. An example of this hair trigger effect was Black Monday in '87. The cause was program trading and stop loss orders.

Q: How do you feel about the current real estate environment?

If you are buying to own a home, that is fine. Otherwise, it seems to be getting into bubble territory. We're not excited about real estate because generally there is not enough return at current prices.

[Read the whole commentary here.]

More Notes from Omaha

2005-07-26T16:47:00.000-05:00

Two more groups make the trek to Omaha to meet with Warren - Kansas and Texas A&M. My favorite question from the Kansas meeting (and one I had meant to ask):

Question: According to a business week report published in 1999, you were
quoted as saying “it's a huge structural advantage not to have a lot of money. I
think I could make you 50% a year on $1 million. No, I know I could. I guarantee
that.” First, would you say the same thing today? Second, since that statement
infers that you would invest in smaller companies, other than investing in
small-caps, what else would you do differently?
Answer: Yes, I would still say the same thing today. In fact, we are still earning those types of returns on some of our smaller investments. The best decade was the 1950s; I was earning 50% plus returns with small amounts of capital. I could do the same thing today with smaller amounts. It would perhaps even be easier to make that much money in today's environment because information is easier to access.You have to turn over a lot of rocks to find those little anomalies. You have to find the companies that are off the map - way off the map. You may find local companies that have nothing wrong with them at all. A company that I found, Western Insurance Securities, was trading for $3/share when it was earning $20/share!! I tried to buy up as much of it as possible. No one will tell you about these businesses.

Start turning over some rocks. Let me know if you find anything.

Also, value guru Ron Muhlenkamp of Muhlenkamp Funds recently hosted a Q&A with some of his clients, and as usual he presents a slightly unconventional view of the world. He still likes homebuilders, despite expecting the real estate bubble to burst, enjoys buying Buicks at Chevy prices (Buicks? time to update your metaphor Ron), and argues that France and Germany are so interested in maintaining the status quo that they are killing themselves.

Bill Gross's Latest Doom and Gloom

2005-07-07T14:21:00.000-05:00

Of note this week, Bill Gross' latest missive, that starts with a Billy Joel quote just to keep things interesting. I'd say this is a must read for those investors who like to consider economic theory as icing to a practitioner's cake. He argues that the asset-backed economic expansion will shortly run out of gas due to the floor of real rates at zero, with the likelihood for deflation growing. Any sane observer of housing prices could only consider that the probability for a down move as better than 50/50, but every magazine still says there is a bubble, so I figure the housing bull still has legs. Even so, I am a renter.

And, if you didn't see it, a great article about the latest trends in indexation, towards accounting based index compilation techniques (rather than market cap). Since 'beta' exposure has gotten so cheap (10bps at FIDO to retail punters!) and alpha is all the rage (hedge funds at every corner), then we need a new and improved 'beta' or average. Here is the new & improved model. The NY Times had a good article about it too, here.

Empire Building

2005-07-07T12:42:00.000-05:00

Tom Brown of bankstocks.com absolutely blasts Bank of America CEO Ken Lewis for doing the MBNA deal here and here. Very entertaining stuff. And something that should be said more often:

"The individual running your company, Kenneth D. Lewis, is an egomaniac set on enriching himself entirely at your expense, by using your equity (and, employees, by putting your jobs at risk) to cobble together as large a company as he can get away with. Ken doesn’t care how unwieldy your company is. Or what businesses it’s in. Or how fast it grows, or how profitable. He only cares that it be big. For in Lewisland, big makes for lots of CEO goodies, like corporate jets, fat options deals, and multi-million dollar “appreciation awards.” Big provides the cover to screw your shareholders in broad daylight—which, come to think of it, is exactly what I believe Kenny boy has been doing since he became CEO of BofA in 2001. Guess what? It’s only going to get worse."

Reminded me of a bit from Berkshire's 1981 annual report:

We suspect three motivations - usually unspoken -
to be, singly or in combination, the important ones in most high-
premium takeovers:

(1) Leaders, business or otherwise, seldom are deficient in
animal spirits and often relish increased activity and
challenge. At Berkshire, the corporate pulse never
beats faster than when an acquisition is in prospect.

(2) Most organizations, business or otherwise, measure
themselves, are measured by others, and compensate their
managers far more by the yardstick of size than by any
other yardstick. (Ask a Fortune 500 manager where his
corporation stands on that famous list and, invariably,
the number responded will be from the list ranked by
size of sales; he may well not even know where his
corporation places on the list Fortune just as
faithfully compiles ranking the same 500 corporations by
profitability.)

(3) Many managements apparently were overexposed in
impressionable childhood years to the story in which the
imprisoned handsome prince is released from a toad’s
body by a kiss from a beautiful princess. Consequently,
they are certain their managerial kiss will do wonders
for the profitability of Company T(arget).

The price of a good lunch

2005-07-01T08:38:00.000-05:00

http://money.cnn.com/2005/06/30/news/newsmakers/buffett_lunch/index.htm

"Thursday evening, one lucky bidder put in the winning bid of $351,100 for lunch with the Oracle of Omaha, beating the next highest bid by only $100. "

Not too shabby. :-)

Multimedia Potpourri

2005-06-23T21:53:00.000-05:00

Warren on the phone and Julian on the screen....

Mr. Buffett talks to CNBC about the markets, energy prices, GenRe, trade with China and the Glide charity auction.

On GenRe "It is costing us money, and it will cost us more money as the investigation is pursued."

Check out Glide here.

Julian Robertson is quite bearish in another CNBC interview. "I am more disturbed than I have ever been in my investment life about what lies ahead..." (Fortunately, no sign of Boodell getting coffee in the background....)

In A Lather Over the Gillette Deal

2005-06-16T19:33:00.000-05:00

Business Week reports that Massachusetts Secretary of the Commonwealth William F. Galvin is turning up the heat in his investigation of the Goldman Sachs fairness opinion used to justify the G / PG deal. Sounds like somone is jealous of Spitzer getting all the attention. Although his concern about the inherent conflicts in investment banks issuing fairness opinions for their clients is warranted, he picked a funny deal to single out. (See the overvalued stock deals done with internet currency circa 1999.) If Buffett is on your side of the table, you can bet your getting a fair deal. On the other hand, $450 million for the Gillette execs does seem a tad excessive...

http://www.businessweek.com/bwdaily/dnflash/jun2005/nf20050616_1121_db016.htm

Bono Meets Warren, Julius Baer Rumors Floating Around, More on the Dollar

2005-06-16T15:37:00.000-05:00

Notes from our meeting with Warren coming soon….really. Onto the news….More bidding on EBAY for lunch with Warren – Join the GSB Buffett Group and you may just get it for free. (Or the cost of a plane ticket to Omaha). From thestreet.com, another shoddy article on the Berkshire dollar short position. (Why is it that journalists seem to think that Berkshire is only holding euros – when we know that he has significant Australia and New Zealand exposure, and probably the Pound as well?) And Bloomberg News offers this quote “Berkshire Hathaway is probably the riskiest company in America today because it's one heartbeat away from a substantial diminution in value." Right. Bono meets with Warren and gets great advice, 'Don't appeal to the conscience of America, appeal to its greatness, and I think you'll get the job done'. Julius Baer acquisition rumors floating around too, although conflicts of interest seem to make it an unlikely candidate.

Cost of lunch with Buffett: $250,000. Stock tips: priceless

Globe and Mail, Canada
An annual auction of lunch with billionaire investor Warren Buffett will begin next week on eBay Inc.'s website, with proceeds going to a San Francisco church ...

How Buffett Tripped Over the Dollar

TheStreet.com
... spendthrift US as a safe haven for financial assets in a tumultuous world, investors worldwide -- led by noted Nebraska sourpuss Warren Buffett -- heaped scorn .

Bono talks of US crusade
Guardian Unlimited, UK
... win American hearts and minds around to his crusade on Africa came from an altogether less expected source: the legendary stock market investor Warren Buffett. ...

Probe shrinks Buffett premium
Pittsburgh Tribune-Review, PA
... Buffett himself, consulting with Vice Chairman Charlie Munger, 81, makes most decisions on Berkshire's capital investments, according to Berkshire's latest ...

Talk Links Berkshire Hathaway To Julius Baer
New Ratings
Speculation floating around London trading floors is that Berkshire Hathaway (BRKA) is taking a gander at Julius Baer. The private ...

Chicago Goes to Omaha, BRKB Valuation, Berkshire Hathaway Bank, etc

2005-05-30T22:26:00.000-05:00

So I am biased and point out headline #1 below, about last week's trip to Omaha. It was a great trip, and we will make a few posts about the trip over the next few weeks as we compile our notes. The Motley Fool article (#2) about figuring Buffett's worth is a good back of the envelope valuation estimate of Berkshire. The bogey I think is valuing the float, and there is the growing argument about whether the value goes down slightly as it gets bigger and more difficult to deploy. Here are some links about float, if interested, here, here, here, here. The third article link below is from the previous Motley Fool article, by a long time annual meeting attender wondering if Buffett's popularity is leading to the scarcity of opportunity. Perhaps in part... The Invisible Empire article is a great one on MidAmerican's real estate brokerage role up strategy, and provides a nice case study in the value of national vs. local brands. Next, BRK finally cuts off Ron Ferguson, ex-CEO of Gen Re, after he decided to follow Greenberg's lead and plead the 5th. A few comments on the MTM losses Buffett is feeling on his currency bet. A bunch of articles on the Pacific Corp deal -- a good note on Geico's strategy and on the blues in media stocks, losing competitive advantage and readers. Finally, RC Wiley, the furniture sales shop, is starting a bank. Berkshire Hathaway Bank. I wonder if Mr. B has larger plans for it, as a competitive lender for other retail enterprises within the now sprawling conglomerate.

Buffett Group Meets its Namesake
Chicago Business Online (subscription) - Chicago,IL,USA
Warren Buffett, Chairman of the Board of Berkshire Hathaway and the second-wealthiest person in the world, met with 80 GSB students in an event organized by ...

Figuring Buffett's Worth
Motley Fool - USA
Spring is a wonderful time of year: Birds sing and flowers bloom -- and Warren Buffett, Chairman and CEO of Berkshire Hathaway (NYSE: BRKa)(NYSE: BRKb ...

Interesting albeit slightly main street commentary with some historical perspective on annual meetings and Buffett

Warren Buffett's Invisible Empire
BusinessWeek - USA
For years, Warren E. Buffett has been selling us everything from Dairy Queen sundaes and Fruit of the Loom briefs to Benjamin Moore paint and skillets from The ...

AIG/Gen RE

Berkshire Hathaway Cuts Ties With Ex-Exec
Forbes - USA
Berkshire Hathaway Inc. has severed ... chief executive. Officials at Berkshire Hathaway were not immediately available for comment Friday.

A Finger on the Pulse of Berkshire Hathaway and Warren Buffett
Throughout the spring, the snowballing financial scandal at insurance giant American International Group has put the spotlight on the firm's partner in the improper deal, General Re Corp. Could the damage extend to Gen Re's owner, Berkshire Hathaway Inc. and its legendary chief, Warren Buffett? The questions about Gen Re come on top of another that gets larger every year: Can Berkshire continue to deliver outsized returns to shareholders after 74-year-old Buffett, who has run the company for four decades, passes from the scene?

Currency

Buffett's Big Bet
Forbes: The Oracle of Omaha bet on a falling dollar, but it's starting to rise.

Warren Buffett Says He's a `Bull' on British Pound (Update3)
Bloomberg – USA

Pacific Corp Deal

Five Days Buffett Steps Up; Another Step Down for GM
New York Times - New York,NY,USA
... POWER PLAY After a long hiatus from deal making, Warren E. Buffett jumped back in, using some of the $44 billion in cash accumulated by his Berkshire Hathaway ...

Shark bait?
Sunday Herald - Glasgow,Scotland,UK
... to the world in a surprise deal announced on Tuesday why ScottishPower had decided to sell PacifiCorp to Buffett's Berkshire Hathaway investment business. ...

Business: Buffett Pays $5.1 Billion for Utility and Promises More Deals NYT By HEATHER TIMMONS and JAD MOUAWAD Warren E. Buffett bought the electric utility PacifiCorp from Scottish Power, promising to buy similar assets in the future.

Business: Buffett Steps Up; Another Step Down for G.M.
By MARK A. STEIN
GOOD news abounded this week. Americans were all a bit wealthier, at least if they own homes; the economy grew faster, rebounding from a bit of a slowdown early in the year; and markets rose.

Other

Buffett's AAA Discount
Motley Fool - USA
I'd never attended before, so it was a tremendous thrill to meet Warren Buffett and Charlie Munger and let their wisdom massage my inner contrarian in person. ...

GEICO's Lean, Green Machine
Motley Fool - USA
... As Warren Buffett explains in his most recent letter to shareholders, "a company (in a commodity-type business) holding a low cost advantage must pursue an ...

Big Media Blues
Motley Fool - USA
... During the press conference at the recent Berkshire Hathaway (NYSE: BRKA)(NYSE: BRKB) shareholders meeting in Omaha, Nebraska, Warren Buffett and Charlie ...

Proposed Bank Would Handle RC Willey Loans
KSL-TV - Salt Lake City,UT,USA
SALT LAKE CITY (AP) -- Billionaire investor Warren Buffett's Berkshire Hathaway company plans to operate a Utah industrial bank to handle consumer loans for ...

Trip to Omaha by the Buffett Group, May 25, 2005

2005-05-30T20:57:00.000-05:00

Hard to top two hours with Warren followed by a free lunch. Some pay $210,000, others pay group rates on Southwest to Omaha. Oh yeah, plus the cost of the Chicago MBA.

One of my favorite takeaways:
"If you had one silver bullet with the opportunity to kill one competitor, who would it be?"
"Progressive Insurance. And then I would shoot them again just to make sure they were dead."
[Laughter ensues around lunch table]
"That said, if you really want to get to know the business economics of an industry, that is one of the best questions there is, coupled with another, being 'If you had to choose only one competitor to compete against, whom would it be?' I did that once, going around to ten CEOs in the coal industry, and by the time I was done, I knew the industry economics."

2005-05-19T09:55:00.000-05:00

Courtesy of group member Jayson Noland -- you'll need a little background in Fama French here (HML - high book to market ratios minus low book to market ratios -- e.g. long value short growth, SMB, long small cap short big cap): Peter Lynch was not a value investor based on his t-stat on the HML loading that was calculated in class (only 0.5073 t-stat, not different from zero). Lynch had a very high loading on SMB (a 9.75 t-stat) and a high loading on the momentum factor (3.86 t-stat). Therefore, he was more a small-cap momentum investor than a value investor.

As Warren E. Buffett was named in the article along with the value investing imposter P. Lynch (and with an upcoming trip to Omaha), we decided to make certain the Buffett Clubs namesake is what he claims. With Berkshire monthly returns from October 1976 through November 2004 and data from the Frenchs site, we ran excess Berkshire returns against excess market and a 3-factor model. The CAPM results show a highly significant, monthly alpha of about 1.5 (note to readers: MONTHLY alpha over ~30 yrs!) Enticed by the 0.74 beta, we ran excess Berkshire against FF finding a significant, monthly alpha of about 1% and a big, positive, significant loading on HML. We also see a negative SMB beta suggesting that WEB is a large-cap value investor. Nice to know our $175 tickets on Southwest to Omaha and back will be money well spent.

We ran a few other regressions (not shown) to see how WEB has fared over the years. Berkshire's alpha does fall a bit as we advance in 10-year blocks to the present. Of course, Berkshire didn't fare incredibly well during the most recent 10-year period as the technology boom had an impact, though we still find a positive (insignificant) alpha. The graph in post below shows Berkshire returns less the market on a monthly basis. Not to shabby for a Nebraskan in a bad suit.

2005-05-19T09:49:00.001-05:00

Berkshire minus market returns, Monthly.

Gross on 10yr Yields and Buffett on Non-Proliferation

2005-05-18T23:50:00.000-05:00

Damn interesting day I would say. First Bill Gross pulls a Kirk Kerkorian and reminds the electronic herd and the news media (and myself), who all thought rates had only one way to go, that they don't. 3-4.5% predicted near term for the Ten Year US Bond. Go figure.

If we had to forecast (and we do), we believe a range of 3 - 4½% for 10-year nominal Treasuries will prevail during most of our secular timeframe and that yields on Euroland bonds will be slightly lower due to their structural unemployment problems, disinflationary incorporation of new Central and Eastern European countries into their existing family of nations, and more growth-inhibiting demographics.

Maybe Sam Zell is right on Monday night at Gleacher Center when he said he didn't think there was necessarily a property bubble. There is just too much damn money swishing around. One thing though I know is that most of that money isn't brave, isn't sticky, and is already a bit nervous. Read Gross's comments here. Then, Buffett and Koppel do nightline and Buffett suggests that a nuke in America is a virtual certainty over next 60 years. He supports NTI, an advocacy organization run by Sam Nunn working to stop nuclear proliferation. They have made a movie that Buffett recommended seeing at the Annual Meeting. You can get a free copy here. Buffett called it the "most important issue facing mankind". Then, his summation comment, a classic, went something like this:

"Paying whatever sum to stop the proliferation of nuclear weapons would be the deal that makes it look like we overpaid for the Louisiana purchase."

Annual Meetings Revisited, Budweiser in Omaha

2005-05-18T09:39:00.000-05:00

Good set of notes from Morningstar's Dreyfus Neenan with links summing up BRK and WSC meetings from earlier this month. Comment on hurricane season. While losses may come through, would be good for pricing environment long term. Motley Fool on Budweiser, Fortune on finite insurance, Business Week on SEC investigation (never get regulatory bodies competing over you for headlines -- ouch!), a pretty funny article about old crotchety men upending the young hedge fund upstarts on Wall Street (Kirk, Carl, Warren, etc), and at end a good article on the growth of Clayton Homes -- a compelling story for any business facing difficult lending conditions but with opportunities for growth. An address in Omaha might make a good corporate headquarters. GSB Buffett Club heads to Omaha next Wednesday to meet with the Oracle. Last year he served Coke. This year, Budweiser? A true value investor can only hope of sharing a Bud with the Oracle...

Roundup of the Berkshire Hathaway Meetings
by Dreyfus Neenan | 05-18-05 | 06:00 AM
You can often learn a lot simply by watching. So at the 2005 Berkshire Hathaway BRK.A BRK.B annual meetings--the shareholder meeting in Omaha, the subsequent analyst/news briefing (which is not open to the public or shareholders) and at Wesco Financial's WSC annual meeting in Pasadena, Calif.--we watched. And listened. We've parsed our notes and selected what we think were chairman Warren Buffett and vice chairman Charles Munger's most salient insights for investors.

Atlantic Ocean Hurricane Season May Yield Nine Storms, Five of Them Major The Atlantic Ocean hurricane season this year will be more active than normal, with as many as five major hurricanes, following last year's historic season when four of the storms hit Florida, U.S. government forecasters said.

The King Is...Slipping
Motley Fool - USA
... Keep in mind, however, that Buffett said, "I would not expect the earnings to do much for some time, but that's fine for us." Buffett's time horizon is ...

Berkshire: 2 insurance workers put on leave
BusinessWeek - USA
... placed on paid leave effective Monday as federal officials conduct probes into insurance practices, billionaire investor Warren Buffett's Berkshire Hathaway Inc ...

Oh, The Games Insurance Companies Love To Play (subscription)
By Andy Serwer

Old Money
The geezer billionaires who are upending Wall Street.
By Daniel Gross

Competitive Edge - Technology, Berkshire Hathaway resources drive ...
Maryville Daily Times - Maryville,TN,USA
... Following the 2003 merger with Warren Buffett's Berkshire Hathaway, the company gained unprecedented access to capital, which put its loan packages ...

Wesco Annual Meeting Notes

2005-05-13T09:35:00.000-05:00

Great set of notes from Wesco Annual Meeting, courtesy of 'teabone'. Nothing dramatic here, but interesting comments about China ('we won't have many opportunties there'), nukes ('there will be one in US in next 60 years'), Cort Furniture ('the Enterprise Rent-a-Car of the furniture rental business'), mental models ('you need more than one'), WalMart ('fabulous enterprise'), GM ('never short a company doing $160b of business'), AIG ('Greenberg gilded the lily, but it's no Enron'), and mutual funds ('we have closet indexers, in which case you are being played for a sucker').

Buy Berkshire, it's cheap?

2005-05-12T16:21:00.000-05:00

Interesting comments from the Fool discussion boards, plus an article. Of note, article one about undervaluation. The Day 1,2,3 are hilarious photojournalism. Too much detail…

Berkshire Undervalued… see commentary about intrinsic valuation (IV) made at Berkshire Press Conference. Interesting that I haven’t seen this written anywhere else…

Day 1 -- Arrival in Omaha

Day 2 -- The Annual Meeting

Day 2 -- After the Meeting

BUFFETT'S MONEY NO GOOD ANYMORE?
With so much capital chasing any equity with a pulse, prices are too high for Buffett and many other value investors.

More General Re Mess, Motley Fool on DCF, and Gates on Tech Valuation

2005-05-12T16:15:00.000-05:00

Buffett once remarked that surprises in the insurance business are never pleasant. General Re continues to fit the bill. It’ll die down soon as the blood drains down into the gutters and the press finds new caged animals to pursue. Until then, a few more heads may roll at Gen Re and even TIAA-CREF (CFO is ex-Gen Re). Motley Fool posts some good articles about valuation and guesses about Buffett’s style/methodology (headlines 2 & 3), funny article about the Annual Meeting from the eyes of the Sunday Times in Britain, comments by Gates about tech valuation, Santulli in NYT about NetJets and new jet taxis (notice they are not yet called a competitive threat to NetJets – wonder why they aren’t called the southwest airlines of business jets?), plus Cousin Jimmy’s expanding entertainment conglomerate. Finally, at end, good summary article on Buffett for the new members in the audience…

SEC May Pursue More General Re Officials, Person Says (Update2)

Buffett by Numbers
Motley Fool - USA
Want to invest like Buffett? We derive the method Buffett uses to analyze the quantitative worth of a company. By Jim Schoettler. ...

Risky Business?
Motley Fool - USA
... Markowitz may have won a Nobel Prize, but Warren Buffett has beaten the market soundly for 50 years running. The handful of other ...

Buffett turns into prophet of doom
The Sunday Times - UK
... This crowd was more soberly attired. Shivering on an unseasonably cold morning, they were here to see Warren Buffett, the world's most successful investor. ...

Gates' Non-Storm Stirs Tech Contrarians
TheStreet.com - USA
... valuations. His response: Well, I think any statement about stock prices is always suspect unless it's made by Warren Buffett. [But ...

On the Road: Business Jets Are Back, if They Ever Went Away,
By JOE SHARKEY Published: May 10, 2005
Oil, schmoil, many users of business jets appear to be saying. According to Richard T. Santulli, many business-jet users are simply looking at the added cost of fuel "relative to the cost of the trip or the charter itself" and saying: "Hey, what's another 500 bucks?"

Buffett Takes Radio Margaritaville To The Sky
Billboard Radio Monitor - New York,NY,USA
Singer, songwriter, best selling author and former Billboard reporter Jimmy Buffett and Sirius have announced that Buffett's Radio Margaritaville, which has ...

Be Like Buffett, Motley Fool

Quarterly Results, SEC Charges, Bill Miller and Jeremy Grantham

2005-05-12T16:13:00.000-05:00

Headlines: 1Q results, insurance purchase from GE mentioned at Annual Meeting (Medical Protective, a 106yr old company that owns the dentist malpractice market and based in Fort Wayne IN — right up Buffett’s alley), dividend discussion, etc. Also, attached are two other greats commenting on 1Q results, Bill Miller and Jeremy Grantham. Bill queries the current Oil Bug and remains bullish on US equities, and Jeremy says sell your overvalued roof. Plus, one of my favorite quotes from Annual meeting, paraphrased: “Selling financial assets during a panic is a bit like leaving a burning theater during a fire, only you can’t leave your seat until you can convince someone else to take it.”

Berkshire Hathaway 1Q Profit Falls
Washington Post - Washington,DC,USA
NEW YORK -- Berkshire Hathaway Inc., the insurance giant run by billionaire Warren Buffett, on Friday said its profit fell 12 percent in the first quarter ...

Buffett to pay $825M for GE insurer
CNN - USA
NEW YORK (Reuters) - A unit of Warren Buffett's Berkshire Hathaway Inc. agreed to buy General Electric Co.'s Medical Protective Corp. ...

An Executive at Berkshire Faces Charge From S.E.C.
By TIMOTHY L. O'BRIEN Published: May 7, 2005
Berkshire Hathaway, the company controlled by Warren E. Buffett, disclosed late yesterday that the Securities and Exchange Commission plans to file a civil securities fraud complaint against a senior vice president of the General Re Corporation, a Berkshire insurance unit mired in a number of investigations for possible financial manipulation.

Buffett's Berkshire Says SEC May Sue Executive at General Re
May 7 (Bloomberg) -- Warren Buffett's Berkshire Hathaway Inc. said an unidentified executive at its General Re unit may be sued by the Securities and Exchange Commission as the regulator investigates reinsurance accounting.

Buffett's Talk of Dividend Sends Daunting Message: Chet Currier
Bloomberg - USA

Berkshire Profit Falls 12% on Buffett's Currency Bet (Update3)
Bloomberg - USA

Annual Meeting Notes, Commentary, Investigations, and Long Lost Cousin Jimmy -- Front Page News!

2005-05-12T15:01:00.000-05:00

So I and a few other hearty Buffett Club members attended the annual meeting last weekend, greeting the morning chill along with thousands of other devotees in Omaha to kiss the ring. Habemus Oraculus. There were a wide range of investors in attendance, see link. Charlie Munger was on fire this year. Very few of his typical, ‘nothing more to add’, and instead he offered an incisive commentary on most issues. It was fun. They started with the quote below. My perspective: in 1999 (my last meeting) the median question asked was about internet and tech stocks, from a mildly I told you so sort of perspective. Repeat, 2005. Replace “Tech” with “Property” and “Real Estate”. See Buffett’s comments on per acre land prices in Laguna beach. Bubblelicious. After the quote below follows a motley assortment of articles and news, ranging from three must reads detailing an unusually thorough set of notes from the meeting (first link is best), a few articles on is a note from Pesek at Bloomberg about Asia’s argument about who is right about the dollar – Warren or Alan, good note on the Budweiser purchase (I think he is still buying), more commentary on meeting, on HIH scandal from NZ perspective, NetJets pilots picketing (they don’t have many good outside options…),then a Robert Miles commentary on what guides Buffett’s decisions. Penultimate, a front page WSJ article about Cousin Jimmy (subsctiption only). You heard it here first folks. Sister Doris even wants DNA testing… Then, notes from Morningstar on the Annual Meeting.

“I’M WARREN. He’s Charlie. We work together. We really don’t have any choice, because he can hear and I can see.” Thus Warren Buffett and his vice-chairman, Charles Munger, to some 19,000 shareholders assembled in Omaha, Nebraska, for the annual general meeting of Berkshire Hathaway, a publicly-quoted investment holding company that has wiped the floor with the S&P 500 in all but six of the past 40 years. The average age of the two gurus is 78, but in a fine display of stamina and humour they tossed questions back and forth for six hours on everything from the end of civilisation as we know it to selling furniture. (Economist Online)

Must Reads:

Notes From The 2005 "Woodstock of Capitalists"

The oracle speaks: Warren Buffett and Charles Munger warn of real estate 'bubble,' the risk of terrorist nukes.
CNN: Text from annual meeting…

From The Economist Global Agenda
Economist - UK
But Warren Buffett has survived such spots before. ... Mr Buffett says that he is "comfortable" with both German and British companies and owns a bit of both. ...

Other of Interest:

Greenspan or Buffett? Asia Mulls Who's Right: William Pesek Jr.

Welcome to Miller Time, Loser. The great American beer crisis. By Daniel Gross

Reporters' Notebook: Follow the Acme Brick Road

By KAREN RICHARDSON of The Wall Street Journal and ALISTAIR BARR of MarketWatch
Munger-isms, grumble-isms

World's two richest men help guide Berkshire
Seattle Post Intelligencer - Seattle,WA,USA
... Warren Buffett and Bill ... Buffett has said he would never retire as chairman and chief executive officer of Berkshire, short of physical or mental incapacity. ...

In Buffett they trust as they buy and hold
Houston Chronicle - Houston,TX,USA
... and hold" investing. It's the strategy of Warren Buffett, one of the world's richest men and its foremost investor. Last weekend ...

General Re has been troubled acquisition for Buffett
Investor's Business Daily (subscription) - USA
SAN FRANCISCO (MarketWatch) -- In a 2002 letter to shareholders Berkshire Hathaway Chairman Warren Buffett summed up his experience with General Re, a big ...

4 tough questions for Warren Buffett
MSN Money - USA
... Among other highlights, attendees sample the wares of many Berkshire (BRK.A, news, msgs) subsidiaries (including DQ and See's Candies) and watch a company ...

Buffett can expect bumpy ride ahead
Stuff.co.nz - Wellington,New Zealand
... Andrew Main writes. Investment legend Warren Buffett will shortly confront one of the most difficult dilemmas of his career. He will ...

Can newspapers escape Warren Buffett's gloomy prediction?
Yeald - USA
Warren Buffet is a longstanding director and shareholder of The Washington Post. Yet, he isn't exactly touting his newspaper investment. ...

NetJets Pilots to Picket Meeting of Berkshire Hathaway ...
Business Wire (press release) - San Francisco,CA,USA
... April 28, 2005--On Saturday, April 30, pilots employed by fractional-ownership airline NetJets will picket outside the Berkshire Hathaway shareholders' meeting ...

"It's class warfare, my class is winning, but they shouldn't be. .."

2005-05-04T19:05:00.000-05:00

Warren does a post Annual Meeting sit down with Lou Dobbs. (The video is here.) The usual topics came up: nukes, twin deficits, import certificates, weakening dollar, overvalued markets, social security vs. the current deficit, estate tax, AIG, etc. Mostly sobering thoughts, but we did end on this happy note:

"I think it's a terrific country...You never want to go short on America...Our children, our grandchildren are going to live better than we do in this country. No question about it in my mind."

And lest you be concerned about Warren being able to survive on his $100,000 salary, he revealed that he is pulling down $1700-$1900 monthly in social security.

2005-05-03T08:05:00.000-05:00

The Buffett Group take in the sights and sounds at the annual meeting. There were a lot of Columbia students, but we had better signage.

2005-05-03T07:59:00.000-05:00

In Omaha on Saturday at the Annual Meeting... At dawn the temperature was just above freezing, when just beside the growing line you could find Mr. Reppenhagen, proud Buffett Club member, and Boodell pose with another proud Berkshire shareholder, and her keeper in the hat. Nice horns...

Thoughts from Omaha

2005-05-02T22:58:00.000-05:00

A number of students from Chicago GSB attended BRKA's Annual Shareholder meeting on Saturday. Warren and Charlie were straigh-talking, witty, and showed few signs of aging.

Warren elected not to comment on the AIG investigation, but did say that AIG was still a great company with a deep bench of managers. He also mentioned that a small (sub-1 bn) acquisition would hopefully be announced in the next few weeks.

Bankstocks.com has a fairly complete set of notes from the Q&A session. Click here to see them.

Budweiser, Monopoly and Ben Graham -- and NY Property Prices...

2005-04-24T23:09:00.000-05:00

It was with unusual pleasure that we noted Berkshire’s purchase of BUD this week. What a complementary consumption alternative to Coke, all while increasing shareholder value. And BUD sports 50% of the beer market (talk about scale…) and quite carbonated recent ROE numbers. Munger talks about the benefits of scale here, but more in a subscription only OID article which is the best summary of strategic advantage I have ever read, here (subscription only). In the headlines you’ll note Monopoly is now available with Berkshire Hathaway properties – my British friends would describe this as OTT (over the top). If you really are keen, look here for the bobble heads. Finally, last headline -- is Cousin Jimmy a reverse indicator on NY property? I recently heard of a 750sqf 1 bedroom in Nolita for $1.3m, almost $2k/sqf. Reminds me of my days in HK, where soon after I left the average property price was down more than 50% (I’ve seen reports of 65%, and this I note, is average!!!). I believe the average price of luxury prices in HK (on the Peak) was (HK11,000) psf, or USD$1400 (adjust this for relative GDP and the HK heights are just over USD2k psf). Gives me pause… Especially since Nolita is far from the height of luxury. It’s nice, but it ain’t Central Park South. Anyone see the news on the China Peg? No surprise here, but if it goes through, it may encourage obstructionist tariff seekers – never a good thing.

Jimmy for Pope, Google's Backdoor Pass -- Plus: Annual Meeting Next Saturday...

2005-04-21T00:28:00.000-05:00

Newsy days, and it will only get busier when the annual meeting convenes next week. I’ve got my plane ticket, do you?

Headlines: Fitch reviewing Berkshire’s triple AAA rating, which is about the biggest joke I’ve seen in a while. $40b in cash not enough? Unless they know something about earthquake risk in CA, it seems they are a tad late. Pay attention to AIG and GM instead. Executive Jet keeps selling airplanes, though I wonder if anyone at NetJets is watching the developments at Eclipse? Then a few articles on Cousin Jimmy, playing here in Chicago for Labor Day at Cubs Park, nominations of “Jimmy for Pope”, and then Jimmy’s upcoming movie filming this summer. Dare I suggest a cameo by cousin Warren? Then, some investing tidbits: beware the oil rush, getting paid for liquidity in the flea market that is the pink sheets, and finally, a great summation of the new business model that Google has created (software based on advertising revenue rather than licensing revenue – software sold like magazines), and how it worries Uncle Bill. Last but not least, Jeremy Grantham’s market summary which always makes for great reading.

BH as Fort Knox and 'Repapering'

2005-04-10T00:28:00.000-05:00

Three articles of note out there this week, one in NY Times, one in Barrons (subscription) and a mildly interesting Morningstar piece on tuning out the noise. Barrons writes a complimentary piece, feeling secure about BH as Fort Knox in wake of scandals. NYT paints slightly more lurid picture of Gen Re’s role in notorious insurance transaction, including ‘repapering’ the trade on Gen Re’s side. Perhaps industry standard, but sounds sketchy. Munger’s law firm has known since January, but no one yet has been fired. Perhaps NYT seeing fire where there is just smoke? Who knows… Buffett interview on Monday and Greenberg on Tuesday next week. May make for bland news as stories are retold to accompany the photographs.

The Relentless Rules of Humble Arithmetic

2005-04-07T00:27:00.000-05:00

John Bogle, the father of indexing, on that topic at the 60^th Anniversary Conference of the Financial Analysts Journal.

That message is simple: Gross return in the financial markets, minus the costs of financial intermediation, equals the net return actually delivered to investors. While truly staggering amounts of investment literature have been devoted to the EMH—the Efficient Market Hypothesis—precious little has devoted to the CMH—the Cost Matters Hypothesis. However, to explain the dire odds that investors face in their quest to beat the market we don't need the EMH. We need only the CMH. Whether markets are efficient or inefficient, investors as a group must fall short of the market return by precisely the amount of the aggregate costs they incur. It is the central fact of investing.

Note that Buffett in the past has acknowledged the usefulness of indexing. From the 1993 Annual...

Another situation requiring wide diversification occurs when an investor who does not understand the economics of specific businesses nevertheless believes it in his interest to be a long-term owner of American industry. That investor should both own a large number of equities and space out his purchases. By periodically investing in an index fund, for example, the know-nothing investor can actually out-perform most investment professionals. Paradoxically, when "dumb" money acknowledges its limitations, it ceases to be dumb.

Managerial Heroin

2005-04-06T00:25:00.000-05:00

Good article in the NY Times, with an interview with Michael Jensen from HBS. Our Kevin Murphy also gets a brief mention.

Q. After you proposed this in the Harvard Business Review, the use of stock options grew rapidly. But then you soured on the idea. Why?

A. Compensation committees wrongly looked at options as free, and awarded too many to too many people. It diluted the stock. And most stock option programs still rewarded management for building the empire, not the actual value. There was no penalty for investing in projects that did not return the cost of capital. When those projects pumped up the stock, management got a big win - but the shareholders would have still done better if the money had been paid out in dividends.

Q. Lots of companies are switching away from stock options to outright grants of restricted stock. Does that solve the problem?

A. No. Say I offer you $1 million in restricted stock - even if you think the stock will go down 10 percent, you're still getting $900,000, and you're happy as a clam. I'd be handing over a large amount of wealth, yet penalizing executives only slightly for the decline in the value of the stock.

Q. So the maximum stock price is the holy grail?

A. Absolutely not. Warren Buffett says he worries as much when one of his companies becomes overvalued as undervalued. I agree. Overvalued equity is managerial heroin - it feels really great when you start out; you're feted on television; investment bankers vie to float new issues.

But it doesn't take long before the elation and ecstasy turn into enormous pain. The market starts demanding increased earnings and revenues, and the managers begin to say: "Holy Moley! How are we going to generate the returns?" They look for legal loopholes in the accounting, and when those don't work, even basically honest people move around the corner to outright fraud.

If they hold a lot of stock or options themselves, it is like pouring gasoline on a fire. They fudge the numbers and hope they can sell the stock or exercise the options before anything hits the fan.

Wal-Mart at 16x 2005?

2005-04-05T00:20:00.000-05:00

A Morningstar article speculates that Buffett is acquiring shares of Wal-Mart. At the 2004 annual, he spoke about making an "error of omission" after being scared away from the stock after a small price move. The big box retailer currently trades at 20x 2004 EPS and 16x projected 2005 EPS, and is below 2000 highs - it certainly looks relatively cheap.

Berkshire Hathaway on the Prowl

2005-04-05T00:13:00.000-05:00

Our own Steve Kaplan on Berkshire Hathaway in an ABC News article...