Archive for January, 2009
I recently finished reading the new Buffett biographay, Snowball. I’m not going to write a proper review of it as I didn’t enjoy the book much and am not sure if my views on it would be helpful for those who are considering the book. Perhaps it was my own expectation that prevented me from enjoying Alice Schroeder’s book. I was hoping for more insight into Buffett’s investing methodology; instead, I got reams of pages discussing Buffett’s strained relationship with his mother, his absentee relationship with his children and Susie Buffett’s (his first wife) bohemian relationship with the world. But Schroeder promised a biography, not a how-to investing Buffettology, so the fault lays with me.
Despite the minutiae delving into Buffett’s personal life, I did glean some investment insights. I appreciated Buffett’s enthusiastic endorsement of coattailing (piggybacking, whale-watching, copycatting, etc.) and I will discuss that in another post.
Reading the book crystallized my feeling that Berkshire Hathaway (BRK.A) deserves a Buffett discount, not a premium. Obviously, this discount is premised largely on Buffett’s advanced age but also on my impression that Buffett has failed one of the true tests of leadership: developing new leaders.
Buffett has always been credited with finding great managers to run Berkshire’s various enterprises: Ken Chace at the Berkshire textile business, Ajit Jain with insurance, Lou Simpson at GEICO, even Mrs. B. at Nebraska Furniture. The problem is these managers were largely self-formed — one could hardly credit Buffett as being a primary factor in their development.
Contrast that with Buffett’s investing mentor, Benjamin Graham. In fact, Buffett himself has discussed the many oaks which have fallen from the tree of Graham-and-Doddsville. While Graham wasn’t trying to create a new generation of followers to carry his mantle, by all accounts, he was generous with his time and knowledge. Buffett acknowledges that Graham put him on the true path of value investing.
Buffett, despite his fondness for holding an audience, has never been as generous a teacher. His shareholder letters, the Partnership letters, his various speeches and articles through the years are all valuable study guides, hinting at the path to investment success. But these pale in comparison to the work Benjamin Graham left behind in Security Analysis and The Intelligent Investor, which laid the path bare for all who chose to follow it.
As Schroeder portrays in her book, Buffett is given more to “preaching”, which is quite different than teaching/mentoring. Ultimately, Buffett has always been too much of a “taker” to give enough to develop leaders.
Bringing it back to Berkshire, one of Buffett’s most well-known witticisms talks about buying great companies that can be run by a ham sandwich because one of these days, it probably will be run by one. There is a high risk of Berkshire being run counter to Buffett’s core values or competencies. To this day, Buffett keeps his succession plans under wrap; Schroeder implies some combination of ego and mortality prevents Buffett from sharing the spotlight with his chosen successor.
Investors should be wary that there is only one Warren Buffett. As he has never taken the time to mentor another, any combination of successors would likely be far different in approach, temperament and perhaps, ability.
Source: SeekingAlpha
Tags: Steve Wevodau Warren Buffett, Steven Wevodau Warren Buffett, Warren Buffett
It’s no longer a secret that Warren Buffett has been buying Burlington Northern Santa Fe (BNI) with some degree of enthusiasm. In total, Berkshire Hathaway (BRK.A) owns about 22% of the entire company.
A few years ago, in the Wesco letter to shareholders, Charlie Munger gave us some clarity on how the company thinks about entering common stock positions after they ‘lowered the bar’.
Unless, however, we see a very high probability of at least 10% pre-tax returns (which translates to 61/2-7% after corporate tax), we will sit on the sidelines. With short-term money returning less than 1% after-tax, sitting it out is no fun.
Before we get into how Buffett likely came up with his $80 price let’s look at BNSF the business.
Without getting into too much detail, BNSF is one of the best rail companies. It has an advantage of being on the West Coast, is one of the more predictable and stable companies, and lacks the debt that competitors like CSX have. Perhaps the only better managed rail company in North American is CN (Bill Gates holds a large position in CN). In my research, BNSF and CN, briefly attempted to merge in the late 1990’s. Regulators asked for a 15 month review period. The two companies felt this created too much uncertainty for their shareholders and called the merger off.
Recent history suggests that BNSF can do financially well when oil prices go up. Railroads, despite common belief, are still profitable with cheap oil (fuel) prices. In the past 18 years, BNSF has failed to turn a profit in only one (1993). As mentioned in a prior post, trucks are slowly losing any advantage they had to railroads as companies in a competitive environment for transport. Rails are become becoming faster, cheaper, and more reliable, which is important for organizations which operate under ‘lean’ or ‘just in time’ inventory. Throw in locomotives that are more fuel efficient and computerized scheduling, and you quickly realize that paradigms have shifted.
Two huge operating expenses for the company are compensation (unionized) and fuel. Although we didn’t graph it, compensation as a percent of revenue has gone from 36% in 1993 to 21.5% in 2008. Over this same period, revenues have increased from 4.5B to 18B. In part this is because the company can pass along rising fuel prices to customers (who have little alternative but to pay).
Now the company earns a lot of money, but they constantly spend more on capital expenditures than on depreciation. Some of this difference is because of “growth” capital-expenditures, but the majority of the difference is just because of cost inflation. It costs more to resurface track today than it did 6 years ago. Locomotives cost more today than they used to (they are also about 15% more efficient). Because the company spends more on maintenance cap-ex than depreciation, this means that owners’ earnings — the earnings that can be taken out of the business without harming its long term competitive position — are less than stated earnings.
The equity bond
Over the last 15 years, BNSF has been a model of consistency. Buffett and Munger also acknowledge that the company — despite the unions and high capital requirements — has a competitive advantage. This is perfect for how Buffett thinks about about an ‘equity bond’. In order to have a bond that pays a growing coupon you need something predictable with moderate growth opportunities for retained earnings (or, in equity bond terms, the retained portion of the coupon).
Since 1994 BNSF has been consistently profitable and we know the company is fairly predictable as to what it will look like in 10, 20, or even 30 years. Technology is likely to change slowly and benefit the industry as a whole over alternative modes of transport. As the cost advantages of Rail become even more apparent, there is a long runway for the future to earn average returns on capital.
Knowing the business is a model of consistency, Buffett can attempt to value it like a bond. Generally speaking, a bond is pre-tax, so we can add back the income taxes paid to net income to get pre-tax earnings. Now we divide by 10% to get the price one would pay for a 10% bond with this coupon. If we divide that by the number of shares we get the approximation of intrinsic value (see the chart below). This way of valuing BNSF seems to follow the Berkshire logic in the timing and price paid for their shares. It speaks to why $80 was the magic number and not $90.
NFI Note: For a more accurate picture you have to take earnings less the difference between (maintenance cap-ex) and depreciation. This gives you an accurate picture of owners’ earnings. For 2008 the company spent 1,862 on replacement capital and had 1,397 in depreciation. To approximate owners’ earnings we do the following: (2,115 - earnings) plus (taxes - 1,253) less (maintenance cap-ex, which is maintenance cap-ex less depreciation 1862-1397) = 2,903. The new maintenance cap-ex is used because historical depreciation is too low. We’re not including growth cap-ex. Thus we can look at BNSF as a bond that paid a coupon of about $2,900 (in millions, pre-tax) last year. Part of this coupon gets paid to shareholders regularly through dividends and another part of it gets reinvested in the business at about 11%.
What would someone be willing to pay for a bond paying a coupon of 2.9 billion a year that desires a 10% pre-tax return? (2900/.10) = 29B. If we divide that by the number of shares outstanding as of 31-Dec-2008 (339.2 million) we come up with the approximate price of $85.58.
Disclosure: Long BNI.
Tags: P&C Insurance News, Steve Wevodau P&C Insurance News, Steven Wevodau P&C Insurance News
Posted by Steven Wevodau
Auto Insurance Company Launches in the Sooner StateSAN FRANCISCO, Jan. 27 /PRNewswire/ — Esurance, the direct-to-consumer personal auto insurance company, announced the launch of its auto insurance program in Oklahoma. With Oklahoma and the recent addition of Utah, Esurance’s affordable auto insurance is now available to drivers in 30 states, comprising nearly 90% of the U.S. population.
Gary Tolman, Esurance President & CEO, stated, “We are excited to add Oklahoma to the growing list of states where Esurance’s convenient, affordable auto insurance is available. Esurance offers an instant online quote and purchase process that allows consumers to compare rates with other auto insurers and customize coverage to best suit their needs. Oklahoma drivers will quickly discover our competitive auto insurance rates with the ‘Quote. Buy. Print.’ convenience of Esurance’s award-winning, innovative Web site.”
Tolman reminded Oklahoma drivers to make a habit of shopping around for auto insurance, especially with another auto insurance company in the mix. “Consumers should shop for new auto insurance rates at least once a year, but they have the most to gain when a new option becomes available. With the addition of Esurance, the enhanced competition in Oklahoma’s auto insurance marketplace will benefit consumers with lower auto insurance rates.”
Once at www.esurance.com, Oklahoma drivers will find they may be eligible for a variety of discounts. Customers who quote or purchase their policy online are eligible for the Fast 5 Discount, an instant 5% off their first policy term. The Switch & Save Discount, a 5% reduction on their first two policy terms, is available to customers with current auto insurance coverage at the time of purchase. Other auto insurance discounts are available to customers paying in full or insuring more than one car, along with discounts benefiting homeowners, students and drivers who have successfully completed an accident prevention course.
Tolman stated, “Esurance’s auto insurance prices are generally competitive, but an additional 5% discount for purchasing online or for already having coverage makes our auto insurance rates even more affordable. Thousands of drivers switch to Esurance every week, and now Oklahoma drivers can join the hundreds of thousands of Esurance customers in the U.S. who are already enjoying the convenience of 24/7 customer service and claims handling.”
Oklahoma drivers can get auto insurance quotes from Esurance by visiting the company’s Web site, www.esurance.com, or by calling the auto insurance company’s 24/7 service center at 1-800-ESURANCE.
About Esurance®
Esurance, a subsidiary of White Mountains Insurance Group, Ltd. (NYSE: WTM - News), provides personal auto insurance direct to consumers online and through select online agents. Esurance is dedicated to constantly improving the way people shop for, buy, and manage their auto insurance. By combining the best of technology with industry know-how, Esurance is able to offer hassle-free auto insurance coverage with 24/7 customer service and claims handling at competitive rates.
Through Esurance’s Web site, www.esurance.com, customers can get instant auto insurance quotes, view comparison quotes, buy an Esurance policy, and print their proof of insurance card — all in minutes. Esurance also offers policyholders the ability to make policy changes and file claims instantly online, demonstrating its commitment to improving the entire insurance process from quote to claim.
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
The press release may contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements, other than statements of historical facts, included or referenced in this release which address activities, events or developments which we expect or anticipate will or may occur in the future are forward-looking statements. The words “will,” “believe,” “intend,” “expect,” “anticipate,” “project,” “estimate,” “predict” and similar expressions are also intended to identify forward-looking statements. These forward-looking statements include, among others, statements with respect to White Mountains’:
*changes in adjusted book value per share or return on equity;
*business strategy;
*financial and operating targets or plans;
*incurred losses and the adequacy of its loss and loss adjustment
expense reserves and related reinsurance;
*projections of revenues, income (or loss), earnings (or loss) per
share, dividends, market share or other financial forecasts;
*expansion and growth of our business and operations; and
*future capital expenditures.
These statements are based on certain assumptions and analyses made by White Mountains in light of its experience and perception of historical trends, current conditions and expected future developments, as well as other factors believed to be appropriate in the circumstances. However, whether actual results and developments will conform to our expectations and predictions is subject to a number of risks and uncertainties that could cause actual results to differ materially from expectations, including:
*the risks associated with Item 1A of White Mountains' 2007 Annual Report
on Form 10-K;
*claims arising from catastrophic events, such as hurricanes,
earthquakes, floods or terrorist attacks;
*the continued availability of capital and financing;
*general economic, market or business conditions;
*business opportunities (or lack thereof) that may be presented to it
and pursued;
*competitive forces, including the conduct of other property and
casualty insurers and reinsurers;
*changes in domestic or foreign laws or regulations, or their
interpretation, applicable to White Mountains, its competitors or its
clients;
*an economic downturn or other economic conditions adversely affecting
its financial position;
*recorded loss reserves subsequently proving to have been inadequate;
*other factors, most of which are beyond White Mountains' control.
Consequently, all of the forward-looking statements made in this press release are qualified by these cautionary statements, and there can be no assurance that the actual results or developments anticipated by White Mountains will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, White Mountains or its business or operations. White Mountains assumes no obligation to update publicly any such forward-looking statements, whether as a result of new information, future events or otherwise.
Source: Esurance, Inc.
Tags: Esurance Inc., Steve Wevodau Esurance Inc., Steven Wevodau Esurance Inc.
By Ieva M. Augstums, AP Business Writer
Travelers posts 25 percent drop in 4th-quarter profit on lower investment income
CHARLOTTE, N.C. (AP) — Commercial and personal property insurer Travelers Cos. said Tuesday that lower investment income drove fourth-quarter profit down 25 percent.The St. Paul, Minn.-based company said net income tumbled to $801 million, or $1.35 per share, from $1.06 billion, or $1.64 per share, a year ago.
Excluding items, operating profit totaled $1.58 cents per share — beating analysts’ average estimate of $1.46 per share, according to Thomson Reuters.
The lower profit reflected a 37 percent drop in investment income during the quarter to $438 million, from $696 million, a year ago. The company’s non-fixed income portfolio, mainly comprised of private-equity funds, real-estate partnerships and hedge funds, recorded an investment loss of $164 million.
However, earnings did get a boost from $189 million in reserves that Travelers was able to release because claims for prior-year periods were lower than expected.
Net premiums increased slightly to $5.39 billion during the quarter from $5.37 billion a year ago, and net earned premiums remained unchanged at $5.43 billion.
The company’s combined ratio for the quarter rose 2.5 points to 85.9 percent. Combined ratio measures the amount of money insurers pay out in claims and expenses compared with how much they receive from writing new business. A ratio above 100 means the insurer pays out more in claims and expenses than it takes in from writing new premiums.
The insurer also projected 2009 earnings well below analysts’ estimates, seeing profit excluding investment losses of $4.50 to $4.90 per share. Analysts estimate $5.59 per share.
For the year, Travelers earned $2.92 billion, or $4.82 per share, down from $4.6 billion, or $6.86 per share, a year ago. Excluding items, operating profit totaled $5.27 per share.
Shares of Travelers closed at $37.58 on Monday.
Tags: Steve Wevodau The Travelers Companies Inc., Steven Wevodau The Travelers Companies Inc., The Travelers Companies Inc.
Paperless Program Pays Off in More Ways Than One
MAYFIELD VILLAGE, Ohio–(BUSINESS WIRE)–U.S. National Forests damaged by wildfires, insects and disease will be getting some much needed help thanks to Progressive car insurance customers who have chosen to receive their policy documents electronically. Not only are those customers saving trees by saving paper, they’re also getting trees planted in their honor. Progressive began offering to plant trees in 2007 to help raise awareness of its paperless program. Since then, more than 1 million customers have signed up.“Our customers rose to the challenge and now we’re following through on our commitment,” said Christine Johnson, Progressive’s customer experience general manager. “When we began the tree planting campaign we had no idea where it would end up, but we’re pleased it has led to such a significant result.”
Progressive will provide funding for the 1 million trees to the Arbor Day Foundation, the country’s leading nonprofit, conservation and education organization dedicated to planting trees. The U.S. Forest Service has identified a backlog of more than 1 million acres that need to be replanted. Since 1990, the Arbor Day Foundation has helped to replant more than 13 million trees.
“Encouraging customers to go paperless is a great way for companies to help the environment, and we applaud Progressive for doing it. Progressive’s generous donation to plant 1 million trees is truly a significant gift to the environment,” said John Rosenow, chief executive of the Arbor Day Foundation. “By planting trees in our nation’s forests, Progressive is making a positive impact for generations to come.”
While Progressive’s tree planting campaign is wrapping up, it will continue to offer discounts where available to customers who choose to go paperless.
About Progressive
The Progressive Group of Insurance Companies, in business since 1937, is one of the country’s largest auto insurance groups, the largest seller of motorcycle and personal watercraft policies, and a market leader in commercial auto insurance based on premiums written.
Progressive is committed to becoming consumers’ #1 choice for auto insurance by providing competitive rates and innovative products and services that meet drivers’ needs throughout their lifetimes, including superior online and in-person customer service, and best-in-class, 24-hour claims service, such as its concierge level of claims service available at service centers located in major metropolitan areas throughout the United States.
Progressive companies offer consumers choices in how to shop for, buy and manage their auto insurance policies. Progressive offers its products, including personal and commercial auto, motorcycle, boat and recreational vehicle insurance, through more than 30,000 independent insurance agencies throughout the U.S. and online and by phone directly from the Company. Private passenger auto products and prices are different when purchased directly from Progressive or through independent agencies. To find an agent or to get a quote, go to http://www.progressive.com.
The Common Shares of The Progressive Corporation, the Mayfield Village, Ohio-based holding company, are publicly traded at (NYSE:PGR - News).
About The Arbor Day Foundation
The Arbor Day Foundation is a nonprofit, conservation and education organization of nearly 1 million members, with a mission to inspire people to plant, nurture, and celebrate trees. More information on the Foundation and its programs can be found at www.arborday.org.
Contact:
Progressive PR
Leah Knapp, 440-395-0898
Source: Progressive
Tags: Progressive Insurance, Steve Wevodau Progressive Insurance, Steven Wevodau Progressive Insurance
Posted by Steven Wevodau
LONDON–(BUSINESS WIRE)–ACE Europe (ACE) has today announced the launch of
ACE Evolve, a co-ordinated insurance and risk management solution for mid-sized companies with overseas subsidiaries or assets.
ACE Evolve will assist regional UK and Ireland companies trading internationally to manage their insurance coverage and compliance requirements across multiple jurisdictions.
ACE Evolve is available through all 11 of the company’s offices in order to support brokers in the regions who have mid-sized clients with operations outside the UK and Ireland, a service insurers usually only offer to large, London based multinational clients. By streamlining the insurance purchasing process,
ACE Evolve enables them to buy the right level of cover and meet all the necessary local regulations and obligations effectively and efficiently.
ACE Evolve provides a gateway to ACE experts in over 50 countries with local facilities in place for policy issuance, proof of cover, claims handling and risk management services. In addition, ACE is licensed to conduct business in over 140 countries.
Phil Sharpe, Director of Casualty and Major Risks for ACE UK & Ireland, comments: “Despite the current economic downturn, we are in an era of increasing globalisation – our own research indicates that more than 800 companies in the UK, with a turnover of less than £100 million, have an overseas subsidiary. In addition, the current worldwide credit crisis is likely to herald a stringent and even more complex regulatory environment and we want to make sure our brokers and clients are equipped to deal with these challenges.
“The scale of the international regulatory environment creates complex insurance issues. For example, areas such as ‘non admitted cover’, where insurance provided under a policy in one territory covers exposures in another territory, can be a legal minefield for businesses without a Risk Manager or the specialist knowledge to comply with international insurance regulations.”
Alongside ACE’s global servicing capabilities, brokers can access comprehensive information on coverage requirements, regulatory and tax issues, claims handling and risk management matters. ACE Evolve enables cover to be available globally on an ‘admitted’ basis – which means that all polices issued meet the requirements of local legislation – or on a Freedom of Services (FOS) basis within the European Union where appropriate.
As an additional service for brokers without an international partner network, ACE can facilitate introductions though its database of preferred broking partners around the world.
Concludes Phil: “The sheer scale and extent of regulation and legislation on a worldwide basis poses a real challenge to growing businesses. We believe ACE Evolve will help brokers with medium sized multinational clients provide an efficient and responsive service to meet the challenging needs of this important group of clients”
ACE
Part of the ACE Group of Companies, ACE European Group comprises the operations of ACE Europe, ACE Global Markets and ACE Tempest Re Group. ACE Europe provides a range of tailored Property and Casualty, Accident and Health and Personal Lines solutions for a diverse range of clients. ACE Global Markets (AGM) is ACE’s specialty international business, underwriting through ACE’s Lloyd’s Syndicate 2488 and ACE European Group Limited. Specialty lines include excess and surplus lines business, Marine, Aviation, Energy and Political Risk as well as Property, Financial Lines and Accident and Health. Additional information on ACE European Group can be found at www.aceeuropeangroup.com
The ACE Group of Companies is a global leader in insurance and reinsurance serving a diverse group of clients. Headed by ACE Limited (NYSE: ACE - News), the ACE Group conducts its business on a worldwide basis with operating subsidiaries in more than 50 countries. Additional information can be found at: www.acelimited.com
Contact:
Katie Weeks
Communications Manager
+ 44 (0) 20 7173 7585
katie.weeks@acegroup.com
Source: ACE Europe
Tags: ACE Europe, Steve Wevodau ACE Europe, Steven Wevodau ACE Europe
Warren Buffett took the opportunity last Friday to lend his considerable intellectual weight to the debate about buy backs, saying, “I think if your stock is undervalued, significantly undervalued, management should look at that as an alternative to every other activity.”
We’ve been banging the drum for buy backs quite a bit recently. We wrote on Friday that they represent the lowest risk investment for any company with undervalued stock and we’ve written on a number of other occasions about their positive effect on per share value in companies with undervalued stock.
In a Nightly Business Report interview with Susie Gharib, Buffett discussed his view on stock buy backs:
Susie Gharib: What about Berkshire Hathaway (BRK.A) stock? Were you surprised that it took such a hit last year, given that Berkshire shareholders are such buy and hold investors?
Warren Buffett: Well most of them are. But in the end our price is figured relative to everything else so the whole stock market goes down 50 percent we ought to go down a lot because you can buy other things cheaper. I’ve had three times in my lifetime since I took over Berkshire when Berkshire stock’s gone down 50 percent. In 1974 it went from $90 to $40. Did I feel badly? No, I loved it! I bought more stock. So I don’t judge how Berkshire is doing by its market price, I judge it by how our businesses are doing.
SG: Is there a price at which you would buy back shares of Berkshire? $85,000? $80,000?
WB: I wouldn’t name a number. If I ever name a number I’ll name it publicly. I mean if we ever get to the point where we’re contemplating doing it, I would make a public announcement.
SG: But would you ever be interested in buying back shares?
WB: I think if your stock is undervalued, significantly undervalued, management should look at that as an alternative to every other activity. That used to be the way people bought back stocks, but in recent years, companies have bought back stocks at high prices. They’ve done it because they like supporting the stock…
SG: What are your feelings with Berkshire? The stock is down a lot. It was up to $147,000 last year. Would you ever be opposed to buying back stock?
WB: I’m not opposed to buying back stock.
You can see the interview with Buffett here (via New York Times’ Dealbook article Buffett Hints at Buyback of Berkshire Shares
Source: SeekingAlpha
Tags: Berkshire Hathaway, Steve Wevodau Warren Buffett, Steven Wevodau Warren Buffett, Warren Buffett
Posted by Steven Wevodau
As one of the most successful investors ever, Warren Buffett’s methods are widely studied and many attempt to replicate them. Mr. Buffett has frequently discussed his investing criteria and the influence Ben Graham had on him in the early days. And he has repeatedly said over the decades that value investing is simple, but not easy.
So just how simple is Buffett’s investing methodology? There are many stories out there that Buffett does not use a computer (other than to play bridge online), hence he does not use the ubiquitous Wall Street crutch, the spreadsheet financial model. Buffett also doesn’t use a calculator. Maybe it’s that Buffett is just so darn sharp that his brain is the only calculator he needs.
There is no doubt Buffett is super sharp, and able to see what matters and quickly and efficiently evaluate it. But, I think that is just a bonus for Buffett - not a requirement to practice his investing style. He would agree, I think, since he has frequently stated that investing success only requires an average IQ. Certainly we are now very familiar with the damage done by those who supposedly have superior IQ’s.
Alice Schroeder recently released “The Snowball”, the most complete account of The Man to date (and next on my reading list - if I only had any time to read books). Ms. Schroeder had unprecedented access, spending years in Buffett’s office going through his old files. How did she gain Buffett’s approval? Through her work as an insurance analyst a decade ago for Paine Webber and Morgan Stanley. Her reports from that era on Berkshire (BRK.A) are the only coherent analyst reports on Buffett’s empire that I have ever read. And her valuation model for Berkshire was the best I’ve seen. I still use my own version of it. I think she won the Buffett lottery because she was the only one who “got” Berkshire on Wall Street.
Schroeder recently gave a keynote at the Darden Value Investing Conference. In it she clearly laid out Buffett’s “secret” investment methodology. But first she also made it clear that Buffett is a unique animal. At age 7 he asked for a book titled “Bond Salesmanship” for Xmas and read it cover to cover. She describes him as someone who is always thinking “what more can I do”, especially to get an edge on the other guy. And, he is a learning machine with a cumulative mental file cabinet. And he always thinks like a horse handicapper, he’s always thinking about probabilities.
So what is Buffett’s secret method? Here it is step by step:
- Look at the risk of loss. What is the probabilty that I will permanently lose money here, and what could happen that would result in total loss? If there is ANYTHING that could reasonably result in a total loss, stop right there. Buffett never tries to talk himself into any investment. He says that much of his success is from immediately passing on things due to realistic appraisal of catastrophic risk.
- Look at historical financial data. Look at the historical quarterly sales, expenses and profits (and cash flow of course) for each line of business or operating unit. DO NOT build a model or try to predict the future. Schroeder says there was not one model of any kind in Buffett’s files - just simple hand-written tables with historical financial data.
- Once he’s happy with the first two critieria, he sets his price. He “only” requires that he receive a day one return of 15%, with a good likelihood that his return will compound from there. Although Schroeder is not clear on this, I assume he looks at cash earnings or the so-called “owner’s earnings” for his 15% return. Essentially this is cash from operation, less one-time and options benefits, minus maintenance or essential capital expenditures. So you could say he is looking to buy in at 6.67 (or less) x today’s cash flow - something that’s been nearly impossible up until September.
There you have it, Buffett’s secret. Extreme simplicity that requires extreme discipline to execute. Buffett has the advantage of not having to answer to anyone. He says he gets up and looks in the mirror, then everyone has had their say for the day. Furthermore, he believes that 90% of being successful in business is guts: you must only answer to yourself. He can wait indefinitely for a good opportunity. This is in direct contrast to the typical money manager, who has to answer to clients, employers, media, and on and on. Hence Buffett’s is largely an IMPOSSIBLE strategy to execute on Wall Street. However, as an individual investor you only have to wrestle with your own psyche, and that will be the hardest part of investing like Buffett.
What about future predictions?? Everyone knows the stock market is always looking 6 months ahead, always anticipating the future. Buffett says that the whole purpose of investing with Graham’s infamous “margin of safety” is to render forecasting unnecessary. And margin of safety is ALWAYS a function of price paid - hence Buffet’s 15% day one return requirement. Imagine if everyone invested this way. Even more Wall Streeters would be out of jobs: analysts, strategists, economists - worthless (not that they have any value now - they’re just paid as if they do).
I plan on presenting a series of stock ideas over time in the premium blog that I think fit Buffett’s “secret” method. There has been no better time in my 12 year investing career to look for such bargains. Sure it’s tough out there, and anything you buy today will likely go down tomorrow. Buffett was recently interviewed by Tom Brokaw, and had this to say about how to deal with today’s market, and how investors can steel themselves against the rampant fear and panic:
If you own a farm nobody tells you when it’s gone down 50 percent ’cause you don’t get a quote every day. But you really look to the farm and what it produces to determine whether you made a good investment. Now if people look to the newspaper every day at the price of a stock to determine whether they made a good investment they’re making a mistake.
They have to look to the business, the asset itself. If you own an apartment house you wouldn’t get a quote on it every day. You’d just look at– what the rent rolls were, and your taxes were and expenses were. And if they all came in with–in line with what you expected when you bought it, you’d feel you’d made a satisfactory investment, and you’d never get a quote on it. So I don’t look at quotes. I can’t tell you what Berkshire Hathaway is selling for today.”
Tags: Steve Wevodau Warren Buffett, Steven Wevodau Warren Buffett, Warren Buffett
Implementing Risk Mitigating Strategies Will Help Auto Dealers Protect Their Businesses
- Saturday January 24, 2009, 8:30 am EST
HARTFORD, Conn.–(BUSINESS WIRE)–Responding to the economic challenges facing franchised auto and truck dealers, Travelers (NYSE: TRV) is providing risk analysis to new customers and ongoing risk management tools to its existing customers to help them better protect their businesses. In these uncertain times, Travelers and its network of independent agents are reminding auto dealers why risk mitigating strategies and the right insurance program are imperative to the success of their dealership.
“During this period of economic turmoil, it’s more important than ever that auto dealers have the right coverage and implement the appropriate risk management techniques to protect their businesses,” said Dave Stevenson, head of Travelers Auto Dealers Industry Segment. “Travelers independent agents can also help customers to ensure that their current coverage is in-synch with their changing needs.”
Auto dealerships have numerous exposures to financial loss. In today’s economic climate, it is imperative that auto dealers take the extra precautions to mitigate risk, including:
- Increasing awareness of the recently issued Red Flags Rule – a new FTC regulation regarding the management of confidential customer data and theft prevention programs;
- Enhancing security controls to prevent the theft of high value vehicles and components, such as catalytic converters - targeted for their rare metals;
- Observing new regulations when servicing vehicles powered by alternative fuel sources.
Travelers IndustryEdge® product for Franchised Auto and Truck dealers, including TravSourcesSM for Auto Dealerships, a collection of more than 100 technical safety bulletins, guides, checklists and training materials, will help customers be better positioned to handle the challenges that come with managing an auto dealership. In addition, Travelers auto dealer customers have access to Travelers Claim department, consisting of more than 13,000 skilled professionals devoted to managing claims.
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Tags: Steve Wevodau Travelers Companies, Steven Wevodau Travelers Companies, Travelers Companies
Posted by Steven Wevodau
By Kate Burgess and Andrea Felsted
Published: January 23 2009 23:16 | Last updated: January 23 2009 23:16
Some leading shareholders in Prudential are becoming increasingly nervous about the UK life assurer acquiring large chunks of American International Group.
The Pru is among the insurers expected to receive limited sales information on a minority stake in American International Assurance, AIG’s Asian life assurance business.
Some institutional investors are worried about how the Pru would fund a $20bn (£14.5bn) deal.
The Pru has been talking to outside investors about funding a deal and has found serious interest. But some investors fear a rights issue.
“It is pretty much an open secret that the Pru wants to do a deal. And some of the AIG assets are very attractive. They could do a rights issue to fund it,” one investor said.
“We know the Pru is interested in the AIG business but we dread the call,” said another.
A third investor said it was unlikely that shareholders would back a rights issue, but “the shares might be re-rated if it sold the UK business”.
An alternative that some shareholders might find more palatable would be for the Pru to offload the UK policies on its books to Clive Cowdery, the insurance entrepreneur. However, this would be a multibillion-pound deal and some question whether Mr Cowdery’s Resolution would have the capacity.
Prudential declined to comment.
But people familiar with the situation said the Pru had not received any expressions of concerns from shareholders, nor had it been sounding them out.
It was premature to talk about funding given the early stages of the auction, they said.
Last month Tidjane Thiam, finance director, told the Financial Times the Pru would do a deal only if it could be funded. The company would not do anything that would be harmful to shareholders, he said.
Copyright The Financial Times Limited 2009
Tags: AIG, Prudential, Steve Wevodau AIG, Steve Wevodau Prudential, Steven Wevodau AIG, Steven Wevodau Prudential