Archive for the 'Buffett' Category

My Thoughts on the 2011 Berkshire Letter to Shareholders

Posted on February 25, 2012, 12:46 pm. Closed

This morning, Warren Buffett’s annual letter to Berkshire shareholders was posted. Here are some of my thoughts on the letter.

Although Buffett has always sought to educate shareholders in his annual letters, this was the most pedagogical letter yet. In this year’s letter, Buffett pointed out the high points and low points for the year like he always does and then proceeds to educate readers in two main areas: (1) how to find the intrinsic value of Berkshire and (2) the basic choices available to investors and why Buffett prefers productive assets.

So why has Buffett gone to greater lengths this year to educate shareholders? I think there are several reasons. The first I think is attributable to the recent share repurchase program and Buffett’s desire to ensure that all shareholders have a firm understanding of the value of the company so they can get a fair deal if they choose to sell. A second reason might simply be that Buffett is trying to address the frustration some might feel due to Berkshire’s share price not keeping up with the market’s return in the past several years. Thus, perhaps Buffett is trying to assure—or perhaps convince—shareholders that the value of Berkshire is much higher than current prices suggest. Finally, we think this letter is evidence that Buffett is increasingly thinking about his own mortality. The annual letter to shareholders is an easy way for Buffett to make an impact upon people through education and imparting his decades of wisdom and experience.

Another aspect of the letter that interested me was an apparent contradiction. At the bottom of page six Buffett talks about buying stock in a company that is repurchasing its shares and thus hopes the stock price of languishes. Buffett then says that “talking our book” about a stock Berkshire owns—were it to be effective—would actually be harmful. Although I have the greatest respect for Buffett, I see a contradiction here because Buffett is doing exactly what he has cautioned against by spending the majority of the letter “talking his book” on a company in the midst of a repurchase program: Berkshire Hathaway!

One final point is that housing is a problem that continues to affect the U.S. economy. Buffett admits he was wrong on his timing of a recovery and explains that Berkshire’s four housing-related companies have depressed earnings. However, I thought it was very positive to see that a company like Nebraska Furniture Mart—a company that Buffett did not label as housing-related, but in my mind is very much housing-related—had record earnings last year. Furthermore, virtually every other business aside from housing have made full recoveries since 2008. This is very positive news.

Bank of America and the Power of Buffett

Posted on August 25, 2011, 8:45 am. Closed

Since the beginning of the year, Bank of America’s (BAC) stock price has declined in concurrence with multiple negative events. There have been humongous losses, large settlements, and multiple lawsuits. The public perception of BAC got so bad, that several weeks ago, Bruce Berkowitz of the Fairholme fund, held a conference call with Brian Moynihan and several other BAC execs to answer the “toughest questions” from Fairholme and BAC shareholders. The performance of Berkowitz’s fund has been horrible so far this year, and I feel like Berkowitz was forced into this conference call to qualm fears and help stanch the outflow of money from his fund. You can download the transcript of the conference call here.

Even more recently, some financial analysts have journalists (namely Blodget, who I think made some utterly ridiculous claims) have suggested the need for BAC to raise more capital. Some have pointed out that another capital raise was imminent just by looking at the stock price.

Throughout this mess, I held no strong opinion about BAC. I felt that was and still is the weakest and most poorly run of the remaining big banks, but I have not felt that it needs another capital raise. I also felt that this pessimism was reaching an apex, and somehow there would be some event that make the shortsellers and naysayers reverse course.

And lo and behold, we have news today of Warren Buffett’s $5 billion investment in newly-issued BAC preferred shares. BAC stock is up about 18% as I write.

This brings me to the power of Buffett. It never ceases to amaze me the power Buffett can have over the stock price of a single company just by making an investment. There is little doubt this investment will work out great for Buffett. The terms of the investment are not as great as the Goldman Sachs and GE investments, but that is understandable. Those investments were made during a time of real financial crisis and when an investment from Buffett probably helped save those companies. The situation at BAC is not as dire, and thus the terms for Buffett’s investment are somewhat relaxed. Kudos to Buffett for another opportunistic investment.

Quantifying the Effect of the Possible Inclusion of Berkshire in the S&P 500 Index

Posted on December 8, 2009, 10:22 pm. Closed

I estimate there is a total $290.59 billion of assets invested in mutual funds and the two of largest ETFs that track the S&P 500 index. If Berkshire were to be included, it would take up about 1.65% of the index. This means roughly $4.8 billion of index fund assets would be chasing the soon-to-be-split B shares. Now, how do you quantify the effect of this upon the price of the B shares?

In an average trading day for B shares, roughly35,00 to 40,000 shares are exchanged. With a share price of $3,300, the total value of shares exchanged in a day ranges from $120 to $130 million.

Now try to imagine 40 times that average daily value chasing down Berkshire shares. Also consider the fact that there is an extremely low turnover rate among Berkshire owners. Undoubtedly, inclusion in the S&P 500 will have a serious and most likely immediate effect upon B shares.

Lets assume that for each $100 million of index fund money that is required to purchase B shares, the B shares will go up by .25%. Multiply 40 by .25 and and we get 10 percentage points as a possibility of the amount the B shares will go up due to index fund purchasing. I think 10% is an easy base case scenario.

I have convinced myself that Berkshire will get a sizable pop due to index fund buying. By how much, I really have no idea. If anyone has a better way to estimate how much Berkshire B shares will increase due to index fund buying, please let me know!

Living in a Fairy Tale and Diamond Prices Post-Crash

Posted on September 15, 2009, 10:15 pm. Closed

Via Bloomberg – “Diamonds Post-Lehman Have No Aura as Buffett Can’t See Recover“:

Jon Bridge, whose family has sold jewelry in Seattle for 97 years, said he grew so accustomed to rising sales that he faced more crises on the boards of charities. That changed in October, as the co-chief executive officer of Ben Bridge Jeweler choked down dinner in his home office and pored over reports showing a 20 percent decrease in sales, the most he had seen.

“This wasn’t just a bubble, this was a balloon, a hot-air- balloon explosion,” said Bridge, a great-grandson of the founder of the 75-store chain, owned since 2000 by Warren Buffett’sBerkshire Hathaway Inc.

Bridge blamed easy credit and inflated incomes for exacerbating the bust.

“We were living a fairy tale for the last 10 years or so, and you can’t do that,” Bridge said.

The chain has closed three stores in the past year. Buffett’s other jewelry-store company, North Kansas City, Missouri-based Helzberg Diamonds Shops Inc., has shut 19 stores this year, reducing its total to 233.

Buffett, 79, told Bridge employees not to expect a quick recovery. The billionaire investor, who receives a mailed copy of Ben Bridge’s weekly sales, met Bridge and other executives for lunch in May at Chandler’s Crabhouse on Lake Union, north of downtown Seattle.

“We are deeply in this — in a recession — and it’s going to take a long time to get out of it,” Buffett said over his usual meal of steak and a cherry-flavored Coke, according to Bridge. Buffett didn’t respond to e-mailed questions.

When we’ve been living in a fairy tale for the past decade, where consumer spending has been funded entirely by debt, this statement by Jon Bridge is an indication of the serious troubles still ahead of us.

Bank Nationalization Hysteria

Posted on February 25, 2009, 11:53 am. Closed

Here is a burn-down analysis of Wells Fargo. The author notes that the stock now trades for 1.5 times estimated 2009 pre-prevision pretax income (PPTI) and that Buffett was happy to purchase Berkshire’s shares for 3 times pretax earnings back in the early 90s.

Remember, be greedy when others are fearful.

MarketWatch’s Mutual Fund Manager of the Year is a Buffett Follower

Posted on February 5, 2009, 8:33 am. Closed

MarkertWatch’s Mutual Fund Manager of the Year is a Buffett follower:

Deysher, manager of Pinnacle Value Fund, trolls the same ponds where Buffett is fishing, but he focuses on shares of small-cap and microcap companies with the cheap valuations and solid business characteristics that hook bargain-hunters.

And so no one misses the connection, Pinnacle Value’s Web site links to Berkshire Hathaway Inc.’s Internet home page and Buffett’s folksy-but-frank shareholder letters.

…

Deysher’s eye for the little details has kept Pinnacle Value at the top of its small-cap value category most of the time since its April 2003 launch. That made a big difference in 2008, when the average small-cap value fund tumbled 32%. Pinnacle lost ground last year too, but its 16.9% decline left shareholders — including Deysher — with almost twice as much money in their accounts as they would have had in many rival funds.