Warren Buffett, Chairman and CEO of Berkshire
Hathaway, is perhaps the greatest investor of our time, if not ever. At buffettologist.com, we have been studying, practicing,
and learning from the teachings of the Oracle of Omaha for years. As such, we have created this blog to share our insights
on Mr. Buffett, other Buffett disciples, and value investing.
Tuesday, December 30, 2008
The Year 2008: While Atlas Shrugged, Buffett Bought
8:31 pm est | link
In almost every conversation
I have these days, the topic of Ayn Rand’s epic novel, Atlas Shrugged, seems to rear its head. I happened
to dust it off of my bookshelf early this past summer, and what a time to re-read it, as the parallels to what happened in
2008’s market panic were stunningly ironic.
In my mind at least, the true panic in today’s market started
with the nationalization of the quasi-government entities, Freddie Mac (FRE) and Fannie Mae (FNM), after both had raised preferred
capital over the prior months. These government actions were to be followed by the bankruptcy of Lehman Brothers (LEH),
which sent ripples throughout the credit markets. Just days later American International Group (AIG) was effectively
nationalized, as the firm’s creditors began to demand more and more collateral, and rating agencies downgraded the company,
just when it needed stable ratings most. The government initially charged AIG 8.5% for its loan, and took rights to
a 79.9% ownership stake in the company—effectively saving the company, but wiping out shareholders in the process.
Next was Washington Mutual (WM), as its operations were seized and sold to JP Morgan Chase (JPM), saving depositors and the
FDIC, but leaving debt and equity holders empty handed. Next was the TARP, with its attractive 5% capital, which some
banks used to bolster their balance sheets, while others used it to buy up competitors on the cheap---think PNC’s acquisition
of National City (NCC) and Wells Fargo’s acquisition of Wachovia (WB). This TARP money was so attractive that
everyone and their brother (or auto maker) wanted to become a bank to access this cheap and stable funding. Heck, I
was wondering if I could personally find a way to access this capital. All kidding aside, though, these actions of just
a few short weeks were truly transformational to our market economy.
Were these actions necessary? Probably.
Would I have done something different? Maybe. Is hindsight 20/20, and is a view from the cheap seats unfair?
Absolutely. But I’m also a fan of the First Amendment, so I have some thoughts I’d like to share.
I believe that our leaders were genuinely doing everything in their power to stabilize markets and thwart an economic depression
type scenario. Quick decisions had to be made, long hours had to be put in, and somebody had to stand up and take charge.
And for that type of courage under fire, I am grateful to and for our economic leaders. In the post mortem analysis,
though, could the actions taken have actually exacerbated the market panic, rather than calm it?
investors in a market economy typically make money by investing in new and unproven ideas (the lottery ticket type investments)
or turn around stories (good businesses in need of help). And, to me at least, it appeared as though the latter was
happening, as private investors over the summer were buying both common and preferred equity in many of these companies in
hopes of propping them up until the stormy credit seas had calmed. In return for this capital, these investors expected
a healthy return, given the real probability that existed that some of these companies could have been pushed into bankruptcy
anyway. But even in bankruptcy (which is not a liquidation, by the way), these private investors may have thought they
would have been left with something to help recoup their investment.
Here is where the parallels to Rand’s
novel come into play. In essence, what many of the past months’ actions served to do, was to scare off private
investors from putting additional capital into companies and markets in need of it, given that those investors that had done
so previously had seen their investments wiped out not through bankruptcy, but by fiat. Nobody knew what company
or market would be next to either be in need of funding or to be nationalized, and as a result, these private investors just
held cash and decided to wait it out. This behavior is similar to the continuous theme in Rand’s Atlas Shrugged,
where each fictional capitalist, be it Ellis Wyatt, Ken Dannager, Henry Reardon, or finally Dagny Taggart, left the economic
world to live in Galt’s Gulch and wait for a more rules based approach to economic governance to return. This
“sitting on the sidelines” behavior, in turn, continued to create a more vicious cycle of economic and financial
instability in the novel.
Think about today’s real world markets. There are over $4 trillion dollars
sitting in money market accounts, earning essentially nothing. Almost all investors and financial professionals seem
to be in paralysis mode, scared to do anything for fear of being second-guessed or wiped out. Treasury bills are returning,
in some cases, negative rates of return—i.e. buy one for $1.00 and get $0.98 back. This “sitting on the
sidelines” mentality is choking companies for credit, and further exacerbating an already difficult economic situation.
It makes me wonder, are most people effectively trying to live in their own Galt’s Gulch of today?
irony is that while most folks are, perhaps the greatest capitalist of the last century is doing anything but hiding in a
fictional valley in Colorado. One could argue that Warren Buffett in both his personal account and via Berkshire Hathaway
has never been more fully invested today, than he was at possibly a much much younger age. And remember, he is presently
78 years old.
In 2008, while Atlas effectively shrugged, Buffett bought or increased his stake via Berkshire in
Wrigley, Marmon Group, Goldman Sachs (GE), General Electric (GE), Conoco Phillips (COP), Burlington Northern (BNI), United
States Gypsum (USG), and US Bancorp (USB) to name a few. What’s more, Berkshire has made offers for all of Constellation
Energy (CEG), and to also help Dow Chemical (DOW) finance its acquisition of Rohm & Haas (ROH). And upping the stakes
even further, Buffett wrote an Op-Ed (1) piece in the New York Times, telling the world that he was buying U.S. equities in
his personal account. Never, can I remember him being so bullish in both word and action.
It is impossible
to know for certain what the future will hold, but as a rational individual and investor, it seems reasonable--to me at least--to
follow the Oracle of Omaha’s lead into 2009, rather than wasting time listening to the myriad of today’s pundits
and prognosticators continuing to create noise by yelping as loudly as they can. I hope that the end of 2008 finds you
well, and my best wishes to you for a prosperous and safe New Year.
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Copyright © 2008 Buffettologist.com
content contained in this blog represents the opinions of Mr. Fuller. This commentary in no way constitutes investment advice.
It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of
business in any way. This content is intended solely for the entertainment of the reader, and the author.
Wednesday, December 24, 2008
Buffett’s Structural Advantage
10:52 am est | link
Warren Buffett is often lauded as genius, because many consider him to
be the greatest stock-picker of the last century. While I’m typically in the camp that does consider Buffett to
be a “genius”, it’s not for his pure stock-picking, in my book at least. Buffett’s genius, in
my humble opinion, is that he has set himself up in a structure in Berkshire Hathaway, that gives him a natural edge vis-à-vis
others in the investment industry.
Most investment managers, be they mutual fund managers or hedge fund managers,
are evaluated on an annual basis, or perhaps more realistically, a quarterly or even monthly basis. To be able to consistently
pick winners in such a short time frame—and yes one year in the investment world is a short time frame—is an exceedingly
difficult task, especially when herds of other investment managers are trying to do the exact same thing. What’s
more, my experience shows that most companies take more than a couple of years to implement a new strategy or develop a new
product for the benefit of shareholders, and thus it is not surprising that the stock price is likely to take longer than
a year or two to improve in value as well. Yet, even the most well respected long-term investors are chided when their
stocks picks don’t work out in a month, a quarter, or a year.
Buffett, on the other hand, has set himself
up in a structure in an insurance company that basically has an infinite time horizon. As a result, Berkshire can buy
stocks that are generally out of favor, and patiently wait for these stocks to converge to value over a multiple years or
even decades. In fact, Buffett would probably even tell you that many people would agree with his investment thesis
on several companies, and they would also agree with him that within five years or more some of the stocks that he buys would
be appreciably higher. Despite having these similar views, though, many don’t buy these stocks, because they can’t
wait five years or more for the investment thesis to come to fruition. These investors believe that they would look
so stupid for so long, that all their investors would eventually leave them, and they would be forced to sell these stocks
anyway to meet investor redemptions.
One of my favorite illustrations of this scenario is when Berkshire bought
Washington Post (WPO) in the 1970’s. Buffett said that many pundits and investors agreed with him that over the
long haul, Washington Post’s business was undervalued and that the stock price would eventually improve in value.
Yet, despite having a similar investment thesis, these other investors didn’t buy the stock, because they feared that
The Post would post (no pun intended) lower earnings next quarter or next year. Buffett, on the other hand, used these
other investor’s aversion to buying the stock in the short-run as an opportunity, and loaded up on The Post’s
shares for Berkshire. You know the story, this investment proved to be hugely profitable for Berkshire and its shareholders.
The difference was that Berkshire could bury this investment in an insurance company for years, whereas other investors would
have had to face the firing squad on it each and every month, in most cases.
To me, at least, this experience illustrates
an interesting quirk about the investment business. Everyone pays lip service to being a long-term investor, but few
actually have the ability to back it up. I’d postulate that it’s not that most professional investors running
hedge funds or mutual funds don’t have the patience or discipline to be long-term investors, as so many of today’s
pundits would have you believe, but it’s rather the structure they are set-up in that doesn’t allow them to invest
for the long haul.
And to me at least, that is a huge part of Buffett’s genius. While most everyone
is chasing the investment rabbit over months and quarters, Buffett is one of the few who can measure his investment success
over years and decades, thereby giving him a huge advantage versus the competition.
I’d like to end this
post with one final thought. Presently, Buffett is being scorched in the press for his investments in Goldman Sachs
(GS) and General Electric (GE), because the stock prices declined after he made his initial investment. As I’ve
indicated in prior articles, just because a stock declines in the short run doesn’t necessarily indicate an investment
mistake. Rather, I believe that after three of five years, the press should check in with Berkshire’s portfolio
to see the ultimate outcome of these investments. Unless the world ends (and I certainly don’t think it is), I’d
suspect that these stocks could be worth much more in the coming years. And the best part for shareholders, is that
Berkshire is getting paid a 10% dividend over the next three years to wait for these valuations to eventually improve.
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emailing me at Justin@buffettologist.com. Merry Christmas!
The content contained in this blog represents the opinions
of Mr. Fuller. This commentary in no way constitutes investment advice. It should never be relied on in making an investment
decision, ever. Nor are these comments meant to be a solicitation of business in any way. This content is intended solely
for the entertainment of the reader, and the author.
Wednesday, December 10, 2008
Berkshire Buys More Burlington
10:40 pm est | link
Berkshire Hathaway recently indicated that it purchased an additional
3.26 million shares of Burlington Northern Santa Fe (BNI) on Monday and Tuesday of this week, and it now controls almost 20%
of the railroad. At a recent Berkshire Hathaway annual meeting, Chairman Warren Buffett (who rarely comments on stock
holdings), indicated that the competitive positioning of railroads was slowly improving vis-à-vis truckers, which he
indicated informed his investment thesis on Burlington. To me, it seems evident that with the single container transportation
system having improved (being able to offload containers right from ships to trains), as well as double-stacked containers
on trains, the payload and efficiency of the railroads has in fact improved. What sets Berkshire apart in being able
to benefit from these improvements is the investment conglomerate’s time horizon, which will allow Berkshire to patiently
wait for these improvements to be eventually reflected in the stock price. After all, as Ben Graham so eloquently put
it decades ago, in the short-run the stock market is a voting machine, but in the long run it is a weighing machine, and perhaps
that will eventually be the case with Burlington.
What is more intriguing, though, is the timing of Berkshire
augmenting its position. Earlier this week, FedEx (FDX) indicated while the company was aided by lower fuel costs and
the withdrawal of competitor DHL, weakening demand for its services had declined over the last few months, causing a reduction
in the firm’s earnings guidance. Not surprisingly, FedEx and other transportation related stocks were down significantly
earlier in the week. Given that Burlington’s business is essentially in the same logistics chain as FedEx, the
market also punished its stock as well, which likely created the opportunity for Berkshire to augment its holdings at lower
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contained in this blog represents the opinions of Mr. Fuller. This commentary in no way constitutes investment advice. It
should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business
in any way. This content is intended solely for the entertainment of the reader, and the author.
Wednesday, December 3, 2008
Berkshire in Fight for Constellation
10:26 am est | link
In September Berkshire Hathaway subsidiary Mid-American Energy struck a deal to
buy Baltimore-based Constellation Energy (CEG) for $4.7 billion, or $26.50 per share. Berkshire was able to strike such
a great deal because Constellation was in dire need of cash. In addition to running a traditional utility business,
Constellation also ran an energy trading book that was facing collateral calls that Constellation couldn’t meet.
Thus, enter Berkshire, which could put a quick $1 billion cash infusion into Constellation, as well as back the firm with
its solid AAA rating.
The uncertainty about this deal was that Constellation was partially owned (9.9%) by Electricite
de France (EdF), a Paris-based nuclear utility, whose body language had indicated that it had been interested in purchasing
either all of Constellation or at least some of its assets. As such, Berkshire put in steep break-up terms, whereby
it would receive a 19.9% equity ownership stake in Constellation as well as $1 billion in senior notes that yield 14% should
the deal fall through. Buffett has always been one to negotiate tough terms, and especially so in this deal.
It may be fortuitous for Berkshire, as this morning EdF indicated that it was willing to pay $6.5 billion for 50% of Constellation’s
nuclear assets, which would value the overall utility at approximately $52 per share. To be sure, Constellation is an
attractive asset for many suitors as it has significant low-cost nuclear assets, which would be difficult to replicate.
Even if a firm could get approval to build a nuclear plant (a very very difficult task), the lead and construction time could
make it prohibitively expensive to do so.
As such, Constellation is very valuable to each party, despite whatever
onerous terms are in the break-up agreement. Given that Berkshire’s cash infusion stabilized Constellation and
probably prevented a bankruptcy filing, it’s likely that Constellation’s board is partial to the Mid-American
offer. However, with EdF, offering such a premium for the assets, and evidently being more than willing to pay Berkshire’s
break-up terms, Constellation’s board could be compelled to accept this offer. I’ll also note that Berkshire
typically doesn’t renegotiate terms for acquisitions, so it will be interesting to see Buffett’s next move in
this ongoing saga.
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email alerts by emailing me at firstname.lastname@example.org.
The content contained in this blog represents the opinions of Mr. Fuller. This commentary
in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these
comments meant to be a solicitation of business in any way. This content is intended solely for the entertainment of
the reader, and the author.
Justin Fuller, CFA provides his market and investment commentary on this website. Justin
has been following and studying Warren Buffett, Berkshire Hathaway, and other leading value investors for years. If
you'd like to be put on his distribution list, or to send him any questions or comments, he can be reached at: email@example.com.
The content contained in this blog
represents the opinions of Mr. Fuller. This commentary in no way constitutes investment advice. It should never be relied
on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way.
This content is intended solely for the entertainment of the reader, and the author.