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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.

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Saturday, May 23, 2009

The Opportunity to Begin Anew

Not only do I look forward to May each year for the Berkshire Hathaway (BRK-A) annual meeting, but the month is much more than that too.  Yes, it is the beginning of spring, and yes, the tulips are blooming, but more importantly than that, across the country thousands of students are graduating. Maybe it is all the pomp and circumstance, maybe it is all the speeches, maybe it’s the buzz that fills most schools and campuses, but whichever way it grips you, it makes this particular time of year not like any other.

The reason for this, of course, is that even though graduation is the end of an important chapter in many folks’ lives, it also offers the opportunity to start something new.  For some it may symbolize an unblemished canvas that they can begin painting in any manner they see fit.  Or for others, it may appear to be a road with unending opportunity.  And while this privilege of starting anew is typically reserved for graduates each May, whether they be from college, high school, vocational school, or heck, even pre-school, I’d argue that in 2009, many more folks can, in fact, start thinking like graduates again.

You see, what’s happened over the past year in the economy, the investment world, politics, government, and I’d argue pretty much anything else, has caused such an upheaval, and has shell shocked so many people, that almost everyone has now been forced to reset their path to some extent, and probably more poignantly, reexamine their expectations. 

And I realize that for many, this hasn’t been a pleasant experience.  Businesses have lost customers.  As a result, employees have lost jobs.  Others have lost savings and retirement.  Some have even lost their homes.  And the most natural feeling to have when any of these events—or even others that I didn’t mention—occurs is to feel frightened, and to hearken back to the feeling of an easier and more comfortable time.  That, in my opinion, is human nature.

What this fails to take account of, though, is that when practically everyone is forced to reset, it also has the effect of creating huge amounts of opportunity for those able to recognize it.  Folks who had been unable to make changes, or breakout into something new, because the status quo was so accepted (rightly or wrongly), may now have the opportunity to freely paint their proverbial masterpiece, however they see fit.

For the great majority of people, this means that someone who has lost their job can now think about doing something else that they’ve always wanted to do, but never felt that the timing was right. Or maybe others can retrain themselves to do something that they are more passionate about pursuing.  Or even others, can think about starting a business to try and capture some of the customers that existing firms inadvertently jettisoned as they retrenched.  All of these are enormous opportunities that often only come around once or twice in a lifetime—if you are lucky.

What got me thinking about all this as an investor were comments made by Berkshire Hathaway Vice-Chairman Charlie Munger in Omaha a few weekends ago.  Munger said, and I’m definitely paraphrasing here, that even though the current turmoil is nothing like the 1973-74 retrenchment in the economy and the markets, he knew then that it (73-74) was his time, his only time.  He went on to say that unfortunately he had practically no money at that time, which, in fact, is why those times occur.  Munger then provided some advice for the audience by saying, “If I were you, I wouldn’t wait for 1973 and 1974.  Anytime we get an opportunity to do something that makes sense, we do that.”

And for most folks, be it in their careers, life, or investments, this might, in fact, be their time to do something that in, Munger’s words, “makes sense” for them.  As an investor, maybe this means re-examining one’s financial position, and not reacting out of fear, or doing things now that they should have done two years ago to deal with today’s reality, but instead looking at their current opportunity set, and doing something that makes an enormous amount of sense for them right now.

While it seems so simple, what it also requires, in my opinion, is the emotional temperament to confidently think differently.  It requires the ability to tune out all the naysayers, or the people trying to sell you product, or those trying to make you afraid of something--which, ironically, is often the same people trying to sell you things--and really start thinking again like a graduate, where the slate is clean and the possibilities are abundant. And even better, this might be the time—the only time—where one can match all these possibilities with their accumulated experience and knowledge, to, in effect, seize their day.  After all, Munger’s not such a bad example to follow, as he seized his and became enormously successful. 

It is my hope that you—as well as all of today’s graduates--will be too.

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 Justin@buffettologist.com.

Justin

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


10:27 am edt | link 

Monday, May 18, 2009

Berkshire Hathaway Re-Allocates Capital

At the Berkshire Hathaway (BRK-A) annual meeting a couple of weeks ago, Chairman Warren Buffett was very enthusiastic about investing in well run banks, and even said, and I paraphrase here, that if there was one stock right now that he would put the bulk of his net worth in, it was Wells Fargo (WFC).  And not surprisingly, now with Berkshire releasing its first quarter From-13F, Buffett has evidently been putting his money where his mouth is, as the conglomerate re-allocated some of its equity portfolio, and upped it’s stake in Wells, among others.

Given the continued tumult in markets during the first quarter, which created some potentially bargain prices in businesses that rarely become bargains, it appears as though Berkshire became relatively opportunistic, and added to its holdings in a number of good businesses.  To pay for these added stakes, Berkshire sold some of its position in a few other businesses, two of which we have already known that Berkshire was in the process of reducing.

It is also worth noting—and as I had mentioned above—that it appears as though Berkshire has indeed re-allocated some capital among the securities it owns rather than only using new money in its portfolio.  This is likely a consequence of Berkshire having a number of other cash commitments, one of which was putting capital into Swiss Re, and then also helping Dow Chemical (Dow) finance its acquisition of Rohm & Haas on April 1.  In addition, Buffett’s desire to have gobs of cash on hand for insurance regulatory purposes, and to also take advantage of potentially new investment or acquisition opportunities, is likely behind some of the efforts to re-allocate the portfolio.

Increased Stakes

During the first quarter, Berkshire upped its stake in two banks that it already owned, the aforementioned Wells Fargo as well as US Bancorp (USB), both of which, in my opinion, are high on the quality scale as far as how banks are run.  Berkshire also added to its stake in Johnson & Johnson (JNJ), which it had sold some of last fall to help pay for its preferred shares in General Electric (GE) and Goldman Sachs (GS).  In fact, Buffett also recently said that he didn’t want to sell part of Berkshire’s J&J position, but that he wanted to have some additional cash on hand at the holding company when he made those two large preferred stock deals.  Given that during the first quarter J&J’s share price declined to levels that it hadn’t seen in at least five years, it isn’t surprising, to me at least, that Berkshire bought back in.

Berkshire also continues to accumulate shares in railroads, having continued to up its position in Burlington Northern (BNI) and Union Pacific (UNP).  As for the former, Berkshire owns over 20% of the firm, and over the last year has aggressively added to its position, and also wrote some put options on it, which was effectively going long the businesses.  On the latter, Berkshire owns a little bit more than 2% of the business based on this most recent filing.  As I’ve written about previously, it appears as though the competitive positioning of railroads vis-à-vis truckers has slowly improved, after decades of brutal competition.  What is more, it appears, in my opinion, that railroads have also become somewhat more efficient with double-decker trains and being able to load containers from ships right onto rail cars.  This may, or may not, have factored into Berkshire’s decision, but with the decline in economic activity over the past years, the price for railroads—and most other transportation or shipping stocks--has also declined, which may have continued to make the price for the railroads somewhat attractive to a long-term buyer like Berkshire.

Finally, Berkshire increased its stake in Nalco Holdings (NLC), which is a business that Berkshire had established a position in last quarter.  Nalco is a business that provides water treatment services to its customers.

Here is a summary of the businesses that Berkshire increased its position in last quarter:

•    Wells Fargo
•    US Bancorp
•    Burlington Northern
•    Union Pacific
•    Nalco Holdings

Decreased Stakes

During the first quarter Berkshire continued to reduce its position in Constellation Energy (CEG).  This was not unexpected, as Berkshire’s Mid-American subsidiary attempted to purchase all of Constellation last fall, when the Baltimore utility ran into problems in its energy-trading book, and was in desperate need of a cash infusion to meet collateral calls.  Ultimately Mid-American lost out on purchasing Constellation to a deal from a French utility, but as a break-up fee, Berkshire received both cash and shares in Constellation as consideration.  Since then, Berkshire has been continuously selling its stake in the utility.

In Berkshire’s most recent annual report, it also indicated that it had been selling some of its position in ConocoPhillips (COP), as the purchase price of some of the lots was so high from last year, that those lots were deemed to be permanently impaired by accounting tests.  As such, Berkshire sold some of its stake in Conoco, which also created substantial tax losses, which should help to shield some of Berkshire’s future gains from taxes.

The two decreases that were not disclosed until the filing of this most recent Form 13-F were Berkshire’s position in used car retailer Carmax (KMX), as well as its stake in managed care company, UnitedHealth Group (UNH).  In my opinion, Carmax is a business that recently has struggled with declining inventory values of used cars as well as the effective closing of some securitization markets.  That said, Carmax could also benefit from the recent large automaker dealer closings, which longer-term, could allow Carmax gain share in the used car market.  As of the first quarter filing, Berkshire still had a substantial stake in Carmax, but this is the second quarter in a row where Berkshire has trimmed its position in the business.

As for UnitedHealth, the managed care company continues to struggle with declining enrollments thanks to higher unemployment, and will likely continues to be caught in the cross-hairs, as the government seeks to restructure the health care industry.  Similar to Carmax, this is the second quarter in a row that Berkshire has reduced its position in UnitedHealth.

Here is a summary of the businesses that Berkshire decreased its position in last quarter:

•    Constellation Energy
•    ConocoPhillips
•    Carmax
•    UnitedHealth Group

Unchanged Positions

Despite the activity above, the bulk of Berkshire’s equity portfolio was unchanged from last quarter, and I’ve listed below those positions that Berkshire continues to own based on its most recent Form 13-F.

•    American Express (AXP)
•    Bank of America (BAC)
•    Coca-Cola (KO)
•    Comcast (CMCSA)
•    Comdisco (CDCO)
•    Costco (COST)
•    Eaton (ETN)
•    Gannett (GCI)
•    General Electric (GE)
•    GlaxoSmithKline (GSK)
•    Home Depot (HD)
•    Ingersoll-Rand (IR)
•    Iron Mountain (IRM)
•    Kraft (KFT)
•    Lowes (LOW)
•    M&T Bank (MTB)
•    Moodys (MCO)
•    Nike (NKE)
•    Norfolk Southern (NSC)
•    NRG Energy (NRG)
•    Procter & Gamble (PG)
•    Sanofi-Aventis (SNY)
•    SunTrust Bank (STI)
•    Torchmark (TMK)
•    United States Gypsum (USG)
•    UPS (UPS)
•    Wabco Holdings (WBC)
•    Wal-Mart (WMT)
•    Washington Post (WPO)
•    Wellpoint (WLP)
•    Wesco Financial (WSC)

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 Justin@buffettologist.com.

Justin

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

8:59 pm edt | link 

Monday, May 11, 2009

Berkshire Hathaway First Quarter Earnings

On Friday, Berkshire Hathaway (BRK-A) reported first quarter earnings, which, not unexpectedly, were somewhat weak, given the current global economic downturn.  In aggregate, Berkshire posted its first quarterly loss since 2001, and while I think the near term could remain challenging for many of the company’s businesses, longer-term Berkshire should emerge even stronger, given the current opportunities for Chairman Warren Buffett to put more capital to work, as well as the potential for some of the conglomerate’s businesses to gain market share.

Overall, Berkshire posted a net loss of almost $1.5 billion in the first quarter.  This was primarily driven by write-downs on the conglomerate’s equity holdings of Conoco Philips (COP), as well as declines in some of its derivative positions.  The latter are, for the most part, accounting, and not cash, losses, though Berkshire has begun to pay out losses approximating $675 million during the first quarter on some of its high yield credit default swaps (CDS).  Since the end of the quarter, Berkshire paid another $450 million of losses on these contracts.  As for Conoco, while the writedown is never a good thing, the losses should also allow Berkshire to shield some of its potential future gains from taxes.

Most of Berkshire’s operating business had fairly steep revenue declines during the quarter, and profits fell even more.  This isn’t surprising given that many of these businesses are tied to the consumer.  The declines were broad based for the most part, though McLane’s revenues held-up, and were relatively flat on the quarter.  NetJets probably had the sharpest decline, posting a net loss of $96 million on the quarter, thanks, in part, to $55 million of writedowns of aircraft.

Despite these challenges, not all of Berkshire’s businesses were weak.  The insurance businesses produced fairly good results, primarily led by auto-insurer Geico.  As consumers have retrenched and examined their expenditures, many have turned to Geico to try and reduce their auto-insurance costs.  As such, Geico’s policies-in-force increased at a healthy 10.4% clip on the quarter to 430,000, as the company continues to gain share.  In addition, premiums in the Berkshire Hathaway Reinsurance Group increased thanks to a retroactive reinsurance contract with Swiss Re, as well as the continued premium inflows from an already existing pro-rata reinsurance contract with Swiss Re.  These contracts have helped push Berkshire’s float—insurance premiums collected but not yet paid as claims—to $60 billion.  The utility businesses also produced good results.

On the investing side of the house, and as I’ve written about previously, Berkshire invested 3 billion Swiss Francs in Swiss Re during the quarter, which likely helped to bolster Swiss Re’s ratings during a time of stress for the company.  In addition, on April 1, after the first quarter closed, Berkshire invested $3 billion in convertible preferred stock in Dow Chemical (DOW), which helped Dow close its acquisition of Rohm & Haas.  Taking account of the Dow deal, Berkshire now has around $20 billion of cash on hand for insurance regulatory purposes and additional investments.

Not surprisingly, Berkshire’s equity holdings, in aggregate, declined during the quarter, given the continued tumult in markets. This, along with the net loss, helped push Berkshire’s book value per share down by approximately 6% during the quarter to about $66,330 per each class-A share.

You might also be interested to know that this newsletter was mentioned in the following Associated Press article, which I have 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 Justin@buffettologist.com.

Justin

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.

9:08 am edt | link 

Monday, May 4, 2009

2009ís Woodstock for Capitalists: Recap

I just recently returned from Omaha and the Berkshire Hathaway (BRK-A) Annual Meeting, and as a person that has attended several of these meetings, this one was different on several fronts, in my opinion.

Mood

To begin, the mood of shareholders at the meeting was a bit more somber given what has occurred in the markets and world over the last year.  To be sure, some folks have been shell-shocked from what has happened, and they were likely looking to Chairman Warren Buffett, and his partner, Charlie Munger for guidance on how to navigate today’s choppy waters.  And by and large Buffett and Munger were very optimistic on the long-term future of the US economy and the opportunity of our economic system to create an even better economic future.  What’s more, Buffett also seemed to indicate that there are huge opportunities in the world today, and he hopes to take advantage of a few of them for Berkshire.  That said, they also said to not to expect any quick recoveries, and this is significant given the wide ranging number of businesses that Berkshire owns, and as such, the amount of “economic data” Buffett sees from Berkshire’s subsidiaries.

New Q&A Structure


Second, this year’s meeting featured a new question and answer session, where shareholders emailed questions ahead of time to a trio of journalists who selected questions for Buffett and Munger.  This was alternated with the usual questions at the microphone from members of the audience.  Overwhelmingly, the questions were much better and more germane to Berkshire than they have been in years past.  For example, Buffett received several poignant questions about Berkshire’s holdings of Washington Post (WPO), Moodys (MCO), Wells Fargo (WFC), and some of its other private businesses. 

Comments on Holdings

On Post, Buffett said that despite the newspaper business essentially dying, Berkshire intends to hold its Post stake.  He was somewhat positive on Post’s cable TV and educational (Kaplan) business, but didn’t seem to think this would offset the decline of the newspaper business.  As for Moodys, he said they had also drank the kool aid of ever rising home prices, which, in my opinion, has dramatically hurt the credibility of their business.  Buffett did say, however, that he thinks it still is a good business, despite both he and Munger’s comments, indicated that neither use ratings when evaluating securities.  With Wells Fargo, both Buffett and Munger defended Wells’ businesses model and said it was one of the strongest banks in the industry.  This is significant, because it is one of Berkshire’s largest holdings, and through their comments Buffett and Munger were essentially defending their position in the stock, especially considering the government’s “bank stress tests” are due out sometime soon.  It is noteworthy, though, that they remained somewhat silent about another large holding, American Express (AXP).

As for Berkshire’s private businesses, Buffett spoke in depth about auto-insurer Geico, and his belief that as a low-cost leader in the industry, Geico has several advantages, and that he expects it to grow even more.  In fact, Geico has been one of the few of Berkshire’s subsidiaries that has been growing, as consumers seek to reduce their auto insurance costs.  He also spoke favorably about Berkshire’s utility businesses, and indicated that he expects Berkshire to do more in this field.  The majority of Berkshire’s other businesses, though are experiencing significant weaknesses in the current economic state, which isn’t surprising given that many are tied directly to the consumer.  On balance, I’d postulate that some of the questions, were, in fact, better than the answers that were given, which is a marked contrast from prior years, and what I think is an endorsement of the current Q&A model, as it has appeared to more deeply engage Berkshire’s shareholders.

Expectations For Berkshire


For Berkshire, both Buffett and Munger said that the days of 20% growth in the firm are long gone, primarily due to Berkshire’s massive size.  They now target growth for the firm of a few percentage points better than the S&P, on average, each year.  Buffett also indicated that Berkshire’s most enduring competitive advantages are its culture, business model, and shareholder base.  This is very important, as culture is one of the most important characteristics of any business, yet the hardest to value and quantify.  Buffett also indicated that his succession plan for an eventual CEO and one, or more, CIO’s hasn’t changed.  They didn’t explicitly address succession at the subsidiary level during the meeting.

Market Commentary

Buffett said that the 1974 period was the best for buying stocks.  He said that valuations weren’t as cheap then, but interest rates were also much higher then.  He also said that the country was in much better shape then, than it is now.  Munger further commented that if stocks decline by 40% on average, they are closer to an attractive price than they have been before. 

Both Munger and Buffett also warned that targeting inflation can be a slippery slope and that dollars will most likely purchase less in 10 years than they purchase today.  What is more, Buffett also rightly pointed out that it is China—and not the US taxpayer—that is essentially funding the bulk of the current government debt, and Munger was very complimentary of what China has done economically, and also advocated that the US and China should be very friendly because they are joined at the hip. 

Earnings

In the afternoon, Buffett gave a brief preview of Berkshire’s first quarter earnings, and indicated that book value was down around 6%.  He indicated that Geico and the utilities businesses have done well, while most others have seen weakness in their businesses.  Check back at the end of this week, for my analysis of Berkshire’s first quarter earnings, which are due to be released on Friday.

You might also be interested to know that this newsletter was mentioned in the following Associated Press article, which I have linked here, a Marketwatch article, which I have linked here, and a Bloomberg video, which I have 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 Justin@buffettologist.com.

Justin

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.


10:13 am edt | link 

Saturday, May 2, 2009

Greetings from Omaha!

Good morning from Omaha.  Shareholders are just filling into the Qwest Center, and this year appears to be again setting record attendance at the meeting.  Despite what has been a tough year for Berkshire—and most everyone else for that matter--I’m looking forward to a great day of questions for Chairman Warren Buffett and Vice-Chairman Charlie Munger.  Be sure to check back this evening for my analysis and thoughts on 2009’s “Woodstock for Capitalists.”

Justin


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.



8:55 am edt | link 


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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:  justin@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 in any way.  This content is intended solely for the entertainment of the reader, and the author.