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.
Wednesday, April 22, 2009
Berkshire Hathaway Annual Meeting: Preview
11:49 am edt | link
In now less than a fortnight, throngs of investors will descend
on Omaha for the Berkshire Hathaway (BRK-A) Annual Meeting. In my opinion, this meeting has the potential to be incredibly
insightful, given what has occurred in the world and markets over the last year. At this forum, Chairman Warren Buffett
and his partner Charlie Munger routinely offer their views on the markets, investing, and life--and boy, do they have a lot
to comment on this year.
And at this year’s meeting, in particular, we should be greeted with several good
questions for Buffett and Munger, given Berkshire’s decision to have shareholders submit questions to a few journalists
ahead of time, which will allow these reporters to select questions that are germane to the audience. This is critical,
because in the past, several groups have used the forum to push their own agendas, which were often very political in nature.
This was unfortunate, because it reduced the learning opportunity that the meeting presents for the majority of attendees.
This year, though, should be different, and here’s what I’ll be listening for, and hoping to learn.
begin, this is the best forum to learn more about Berkshire. I’ll be curious to hear how the businesses Berkshire
owns, in aggregate, are performing, given the weakness in the economy, and their exposure to the consumer sector. In
addition, it has been a tumultuous time for most in the insurance industry, and it will be interesting to learn about the
opportunities for Berkshire, given that its financial strength--while impacted--is still, in my opinion, one of the strongest
in the industry. In fact, I would argue that insurance is also Berkshire’s most important business, as it provides
Buffett with float—insurance premiums collected but not paid out as claims—to invest in other businesses.
And on the investing front—which is frankly what most shareholders go to hear about—it will be interesting
to see where Berkshire has been putting its money. Last year, we heard about mortgages and auction rate securities,
and given the continuous dislocations in markets, it is likely Berkshire has continued to be active.
I am also curious to hear about Berkshire’s prospects for additional
acquisitions. In the annual letter, Berkshire indicated it is interested in doing more in the utilities space, which
isn’t surprising given that utility acquisitions have the potential to soak up a ton of capital, and offer a regulated,
fixed-income like, return. More than that, though, given the problems several private equity firms are having these days,
its likely that an all-cash buyer like Berkshire can have its pick of the litter, now that company valuations are much lower
than they have been in prior years. Each of these opportunities is vitally important, as it has the potential to move
the needle on Berkshire’s long-term valuation.
I also expect several shareholders to ask about succession.
While I think that succession at the holding company has been addressed, the bigger question in my mind, at least, is about
succession at the subsidiary level. Buffett has said in the past that he has Berkshire’s managers submit to him
the name of one individual who would take over each of the businesses each year, and that sometimes he agrees with this choice,
while other times he disagrees. While I think this approach is prudent, subsidiary-level succession has the potential
to be a bigger issue going forward, given that many of the entrepreneurs that sold businesses to Berkshire are, in fact, getting
up in age themselves. As such, I’d like to hear a little more about this aspect of succession planning.
Shareholders will also probably have several questions
about Berkshire’s derivative positions, because--as I have alluded to previously--these positions do add some shades
of gray to Berkshire’s balance sheet. As such, I think that Berkshire will eventually disclose as much about these
positions as it can, all without compromising these contracts profit potential. To be sure, this is a delicate balance.
My favorite aspects of the meeting, though, are when Buffett and Munger are asked very general questions about investing
and life. Their insights, in my mind, are simple and timeless, and provide of sense of grounding to the attendees.
Munger has said in past years that folks come out of Omaha each year to “get religion”, and this year they may
be more in need of it, than in year’s past.
Given both Buffett and Munger’s vast experience and voracity for reading, I will be particularly interested
to see what parallels in the annals of history and capitalism they use to illuminate what happened in today’s world
and markets. It’s usually the comments about the softer aspects, such as peoples psychology or behavior, that
is so enlightening, and hopefully there will be a couple of nuggets in this year’s meeting too.
I will also be making the pilgrimage out to Omaha for the meeting, so be sure to check back at buffettologist.com the first
weekend of May for my commentary and analysis of 2009’s “Woodstock for Capitalists”.
dialogue with my readers, so please send me any questions and comments you have. Also, if you haven’t already
done so, please be sure to sign-up for my free email alerts from buffettologist.com by emailing me at Justin@buffettologist.com.
Copyright © 2009 Buffettologist.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. This content is intended solely for
the entertainment of the reader, and the author.
Monday, April 13, 2009
9:29 am edt | link
In the last few weeks, Berkshire Hathaway (BRK-A) has been downgraded
from its triple-A rating, with Moody’s being the most recent firm to strip Berkshire of its prized position. While
it is never a good thing for a company to lose its triple-A status, I don’t think these moves will have an overly material
effect on Berkshire, or the perception of its financial strength in the marketplace.
Over the last year, several
companies, such as AIG, and securities, including a bevy of mortgage related investments, that had been rated very highly
have been proven out over the past year to have not deserved their previously lofty status. As such, several firms that
had bestowed these ratings, now appear to have egg on their face, and as a result, are reviewing their ratings on almost all
other companies and securities. In my opinion, this type of review is generally a good idea, and something that should
be done constantly, but I also think that current market circumstances are causing some of these firms to now be overly conservative.
And this, in a nutshell, is what I think has happened to Berkshire’s rating. By all appearances, Berkshire
still seems—to me, at least—to be a bastion of financial strength. The conglomerate has more than $20 billion
of cash on its balance sheet. In addition, it has tens of billions of both equity and fixed income securities that it
could sell in the marketplace if it needed to raise capital. Several of its subsidiaries are still sending cash to Omaha
for Chairman Warren Buffett to invest, though probably less than last year. And finally, the company has little debt,
other than in its utilities and manufactured housing subsidiaries, whose debt does not appear to have recourse to the assets
of the holding company.
While I think that all of the elements I just described help to illustrate the soundness
of Berkshire’s financial health, there are some things to watch too. Berkshire’s bigger foray into the derivatives
market—especially after warning about their risks for years--certainly adds some complexity to the conglomerate’s
balance sheet. And even though I think the profit potential of these contracts is good, in an era where simple is now
better, Berkshire’s derivative positions do add a couple shades of gray to its financial position. It is important
to remember, though, that Berkshire has minimal collateral posting requirements on its derivatives in the event of any sort
of downgrade. This is critical, because, if you’ll remember, collateral postings on derivative positions are what
led to the downfall of AIG. The other things to watch are not new. Chief among these is succession planning, which
has been acknowledged, and, in my opinion, addressed.
It seems that at some point, there will not be any--or maybe
just a few--triple-A rated companies left. What that essentially means then, is that double-A will be, in effect, the
new triple-A. And if this eventuates, the scale will have just slid down, and Berkshire—even with its recent downgrade—will
still have some of the best ratings around.
You might also be interested to know that buffettologist.com
was recently mentioned in a Bloomberg article, which I’ve linked here, as well as an Associated Press article, which I’ve linked here.
I welcome dialogue with my readers, so please send me any questions and comments you have. Also, if you
haven’t already done so, please be sure to sign-up for my free email alerts from buffettologist.com by emailing me at
Copyright © 2009 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. 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.