Steven Wevodau Berkshire Hathaway
Billionaire Warren Buffett says US government is taking the right steps to help economy
- Josh Funk, AP Business Writer
- On Saturday May 2, 2009, 12:27 pm EDT
OMAHA, Nebraska (AP) — Billionaire Warren Buffett said Saturday the U.S. government is generally taking the right actions to help the economy recover, and it should be given some benefit of the doubt because officials have been reacting in the middle of a crisis.
The state of the economy was one of the first things addressed at Saturday’s daylong Berkshire Hathaway Inc. shareholders meeting. Roughly 35,000 people packed an arena and overflow rooms to listen to Buffett and Berkshire vice chairman Charlie Munger answer questions for hours.
“Overall, I commend the actions that were taken,” Buffett said. But he said no one should expect perfection because the economy experienced a “financial hurricane.”
But Buffett said he can’t predict how quickly the economy and the markets will improve. He said last fall that the U.S. was facing an “economic Pearl Harbor.”
To illustrate the challenges the U.S. faced last year, Buffett showed a sales receipt for $5 million in U.S. Treasury bonds that Berkshire sold in December for $90.07 more than face value, ensuring a negative return for the buyer. Buffett said he does not think most investors will see negative returns on U.S. bonds again in their lifetimes.
“It’s been a very extraordinary year,” he said.
In the exhibit hall Saturday morning, Buffett was mobbed like a movie star by shareholders seeking photos of the CEO as he walked between exhibits for subsidiaries Justin Boots and Dairy Queen.
The meeting began as usual with a humorous movie, but instead of the traditional comical cartoon, Berkshire offered a reassuring message from animated versions of its products.
An animated Mrs. See of See’s Candy told the crowd that it didn’t seem right to have a humorous cartoon when so many things in the world don’t seem sweet. And a talking Dairy Queen ice cream treat said the security of the company’s balance sheet would help it withstand any blizzard.
The economy, succession at the top of Berkshire and the state of the company, which last year had its worst year since Buffett took over in 1965, were on the minds of many shareholders.
Berkshire’s Class A stock lost 32 percent in 2008, and Berkshire’s book value — assets minus liabilities — declined 9.6 percent, to $70,530 per share. That was the biggest drop in book value under Buffett and only the second time its book value has declined.
But despite Berkshire’s rough year — which was depressed by unrealized multibillion-dollar derivative losses — the company still outpaced the market index Buffett uses as a measuring stick. The S&P 500 fell 37 percent in 2008.
Berkshire reported a 2008 profit of $4.99 billion, or $3,224 per Class A share. That was down 62 percent from the previous year, but better than many companies.
Retired shareholder Paul Gallmeyer of the Chicago area said he wasn’t especially worried about who will replace the 78-year-old Buffett as Berkshire’s chairman and CEO. He said all of Berkshire’s more than 60 subsidiaries are run by people who will keep the company going after Buffett is gone.
“I truly don’t see that as much of an issue as other people make it,” Gallmeyer said.
But some shareholders, like Dennis Hospodarsky of Waterloo, Iowa, were a little worried about the succession issue.
“I hope he’s as good at picking a successor as he is at stocks,” Hospodarsky said.
Buffett offered a few new clues about who will replace him at the helm of Berkshire Hathaway, but Buffett still refused to name the people who will become Berkshire’s next chief executive or its next chief investment officer. Buffett received several succession questions.
Three of Berkshire’s internal managers are candidates to be CEO. And the board has a list of four internal and external investment managers who could manage Berkshire’s $49 billion stock portfolio and investing its $24.3 billion cash.
Buffett says none of the investment managers likely beat the S&P 500 last year, but over the past 10 years they all beat the average performance at least modestly if not significantly.
Buffett said he doesn’t see any value in choosing a CEO successor now to follow him around Berkshire’s 19-person headquarters because all the candidates are already running businesses now. Plus the other two might leave Berkshire if a successor was named.
“It’d be a waste of talent,” Buffett said. “I don’t really see any advantages in having some crown prince around.”
Buffett has said his son Howard will take over as chairman to ensure Berkshire’s culture is preserved. Howard Buffett already serves on the board.
Berkshire Hathaway Inc.: http://www.berkshirehathaway.com/
Tags: Steven Wevodau Berkshire Hathaway
Constellation repays MidAmerican $1B plus $5M interest for loan made during failed takeover
- Wednesday January 14, 2009, 10:05 pm EST
BALTIMORE (AP) — Constellation Energy Inc. has repaid MidAmerican Energy Holdings Co. $1 billion plus about $5 million in interest as part of its unwinding of an aborted takeover by the Warren Buffett unit, according to a filing with the federal Securities and Exchange Commission.
Baltimore-based Constellation said in the filing Tuesday that the payment was made Monday to MidAmerican, which offered $4.7 billion in September for the energy wholesaler.
Constellation was struggling with liquidity concerns at the time, but shareholders later complained about price, including Electricite de France SA, which eventually increased its holdings by buying half of Constellation’s lucrative nuclear energy business, scuttling the deal with Des Moines, Iowa-based MidAmerican.
MidAmerican is a unit of Buffett’s Omaha, Neb.-based Berkshire Hathaway Inc.
Considering the repayment, Constellation said its estimated liquidity on Dec. 31 was about $2.4 billion.
Tags: Berkshire Hathaway, Constellation Energy Inc., MidAmerican Energy Holdings, Steve Wevodau Berkshire Hathaway, Steve Wevodau MidAmerican Energy Holdings, Steven Wevodau Berkshire Hathaway, Steven Wevodau MidAmerican Energy Holdings
Dear Mr. Buffett
What an Investor Learns 1,269 Miles from Wall Street
by Janet Tavakoli
Wiley 2009 $24.95 (list) Hardcover
Chicago derivatives consultant Janet Tavakoli is a rare jewel in the financial markets. Arguably best known for weighty textbooks with such alluring titles as ‘Structured Finance & Collateralized Debt Obligations,’ she has a nice sideline in delivering uniquely pungent commentary on credit-related conundra in venues including her own website, US Securities and Exchange Commission comment filings, and on-the-record in the allegedly grown-up media where “people familiar with the matter” usually lurk.
Most remarkably, she deserves as much acclaim as anybody, and much more than most claimants, for calling both the cliff-edge and the depth of the ravine into which global capital markets have tumbled.
But another Buffett hagiography? Is anything left to be said about Avuncular of Omaha, the genial great white with a penchant for apparently ignoring his own epithets (especially that one about “financial weapons of mass destruction”)? Just in the last few months we’ve had ‘The Snowball,’ Alice Schroeder’s near 1000-page authorized doorstop; Roger Lowenstein’s ‘Buffett: The Making of an American Capitalist;’ and ‘Pilgrimage to Warren Buffett’s Omaha,’ Jeff Matthews’ dispatches from the Berkshire Hathaway (BRK.A) annual meeting. Among plenty of others.
But this book is much more than mere make-weight for Barnes & Noble’s Buffettophilia section. It is just as much the first of what will doubtless be dozens of books telling the story behind the global dodgy asset securitization scam, which Tavakoli, noting the first breathless Madoff Meltdown headlines, recently characterized as the real “largest Ponzi scheme in the history of the capital markets.”
It’s great to have an open mind,
but don’t leave it so
open that your brains fall out.
A long-time Buffett fan and Berkshire Hathaway shareholder, Tavakoli builds her plot around a fitful correspondence that turned into an afternoon in Omaha where her low expectations — “If Warren had simply avoided overt rudeness, it would have been an upgrade from most finance professionals” she had dealt with — were dashed on the rocks of mutual respect and a shared thesis, in the dog days of late summer 2005, that the world had strapped itself into a handbasket headed straight to financial hell.
The narrative lives up to the book’s title as Tavakoli holds her personal portfolio decisions to Buffett’s standards, contrasting his philosophy and behavior with those of a long roll-call of Icaruses on such topics as transparency, complexity (or relative lack thereof), risk comprehension (and tolerance), leverage (in both its overt and covert forms) and that little something that mostly comes across as, for want of a better word, honesty.
She even indulges a little Buffett-like do-as-I-say, not-as-I-do: “I run a hedge fund. My strategy? It’s proprietary…but you are not entitled to that much information,” setting up familiar arguments about the impact of fees, liquidity, the fragility of genius and various other demerits of the ‘asset class’ now well down the road toward a well-deserved bout with humility.
So far, so Buffett. But the book’s real strength is the sub-plot that emerges as Tavakoli tugs vigorously at the seemingly disparate threads of the current financial crisis, naming names, citing cases and leaving no schmuck — whether investment bank, credit rating agency, monoline insurer, mortgage brokers, regulators and their ilk — unspared. Based on more than 20 years in the derivatives arena, and having served time at Salomon Bros, Bear Stearns and Goldman Sachs, she knows that of what and whom she speaks.
‘Dear Mr Buffett’ is, like its author, strongly, often harshly, and, more than rarely, tartly, opinionated. The attitude is, however, well-supported by the facts; should anyone ever display the slightest interest in criminalizing the criminals who led us down this path, a prosecutor could do worse than ordering up copies for the grand jury.
One thing the world is not going to run out of any time soon is books on subprime credit-turned-global financial meltdown. But it’s doubtful that many, or any, will so closely match the ripping yarn of financial upset with concepts that any — and perhaps every — investor can apply to their own financial security. This book was already at the printer when the Madoff Maelstrom broke, but it’s highly doubtful that anybody who absorbs the message of ‘Dear Mr Buffett’ will ever need confront that kind of mayhem.
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The Australian
BILLIONAIRE Warren Buffett’s Berkshire Hathaway slumped 32 per cent last year, the worst performance in more than three decades.
Most of the stock decline happened in the last three months, as Berkshire posted a fourth straight profit drop amid sagging insurance results, with the US recession forcing down the value of the firm’s equity holdings and derivative bets.
The company still beat the 38 per cent tumble of the Standard & Poor’s 500 Index, the 14th year in 20 that Buffett outperformed the benchmark. Just six of 1591 US stock mutual funds with at least $US250 million ($351 million) in assets made money for investors last year.
“In 2008, there was nowhere to hide,” says Guy Spier, chief investment officer at Aquamarine Capital Management, which holds shares in the Omaha, Nebraska-based company. “Berkshire can’t escape the general fate of American businesses. What Buffett tries to do is ensure that Berkshire Hathaway does less badly than other companies.”
Buffett, 78, poured money into stocks as prices fell and increased Berkshire’s pace of deals as the contraction in credit markets hobbled buyout firms. Buffett spent about $US3.9 billion on equities in the third quarter, making Berkshire the biggest shareholder in ConocoPhillips, the second-largest US refiner.
Berkshire announced 12 acquisitions in 2008, compared with eight in 2007, and also agreed to buy $US8 billion in preferred shares from Goldman Sachs and General Electric.
“Buffett has the opportunity to do what he does best, which is acquire new companies at prices that have him licking his lips,” says Frank Betz, a partner at Carret Zane Capital Management, which holds Berkshire shares. “I don’t think Mr Buffett is bummed out at all.”
Most of the top holdings in Berkshire’s stock portfolio, valued at $US76 billion at September 30, fell at least 15 per cent in the past three months of 2008. ConocoPhillips plunged 29 per cent in the fourth quarter. Coca-Cola, Berkshire’s top holding, dropped 14 per cent, and its No2, Wells Fargo plummeted 21 per cent.
Declines in the value of derivatives also pressured Berkshire shares. Buyers of the contracts would be entitled to billions of dollars from Berkshire if four stock indexes drop below agreed-upon levels on dates beginning in 2019. Buffett says the liability on the contracts was $US6.73 billion at the end of the third quarter.
Berkshire has collected $US4.85 billion on the contracts and can profit from investing the funds, the firm says.
All four indexes, including the S&P500, would have to fall to zero for Berkshire to be liable for the entire $US35.5 billion that is at risk.
Acknowledging investor concern, Buffett has says he’d provide more information on how he calculates losses on the contracts. The firm’s annual report for 2008 will disclose “all aspects of valuation” and cover “deficiencies in the formula” for pricing the derivatives, “which we nevertheless use,” Buffett said in an email in November.
Berkshire, which gets about half its revenue from insurance, says third-quarter profit from underwriting fell 83 per cent on catastrophes including Hurricane Ike.
“A year ago, insurance prices were declining, people had capital and everyone felt good,” says David Carr, who helps manage about $US400 million, including Berkshire shares, as chairman of Oak Value Capital Management. “Today, it is the opposite, and with a lot of insurers’ balance sheets troubled, one could argue the future for Berkshire looks brighter.”
Berkshire closed at $US96,600 on December 31, compared with the $US141,600 close in 2007, when the stock advanced 29 per cent for the year. Berkshire’s 2008 slide is the worst since at least 1976, according to Los Angeles-based Global Financial Data. The company gained $US3390, or 3.5 per cent, to $US99,990 in New York on Friday.
The stock plunge “doesn’t make any difference,” Buffett told Fox Business Network November 21. “It’s happened to me three other times. It happened when it went from $US90 to $US40 back in 1974, and it happened in 1987. It went down 50 per cent in 1998-to-2000. I mean, I hope I live long enough so it happens a couple more times.”
Additional reporting: Pierre Paulden, Nick Baker
Bloomberg
Tags: Berkshire Hathaway, Steve Wevodau Berkshire Hathaway, Steven Wevodau Berkshire Hathaway, Warren Buffett
By ELLIOTT CARR
December 29, 2008
First of two parts:
Our economy might best be compared with a roller coaster that climbed far higher than it should have, and now plummets farther and faster each day. After a year of placebo-like headlines illustrating the American fantasy that we can overcome any obstacle, December housing starts, consumer prices, payrolls and other economic indicators are suddenly taking their worst falls in many years.
We now know that this isn’t just business as usual or another economic cycle.
The economy is in horrible shape, including the worst job market of my lengthening life. It now appears possible the country will plow through all the rinky-dink intervening recessions, making the Great Depression of the 1930s the next measuring stick. That one lasted from 1929 to 1942, during which the stock market dropped 89 percent, GNP fell 35 percent, and unemployment reached 25 percent. How close will we come to those records?
Americans don’t like to anticipate the dark side. But as a lifetime contrarian, I assure you if one assumes the worst, almost all news becomes good.
Clearly the economic problems have reached Cape Cod. The Cape’s many real estate-related industries, once fueled by off-Cape money, become more moribund each day. Our retirement industry, based on rapid life cycle turnover, will become more stagnant as people can’t sell their homes. Recreation represents the only possible positive note; will Cape Cod benefit as the cheap vacation?
Three forms of fuel pumped the roller coaster to its perilous height, all literally paper — financial paper — encouraging increased consumption, and building no lasting economic value.
First, to increase spending (retail sales) and stimulate the economy, we told all Americans that they didn’t have to earn it to spend it: just charge it on your credit card. Who benefited most from this strategy?
Second, as credit card debt became a problem, instead of discouraging use, we encouraged consumers to add credit card debt to their mortgage loans. Indeed, we went further, encouraging consumers to increase mortgages until they couldn’t afford to pay them back either. Who benefited most?
“From Bad to Worse,” by Alan Abelson, summarized these two trends in Barrons magazine on Dec. 8. “The best part of those decadent decades was that even when you spent the last penny of your income and your piggy bank was empty, you could still get plenty of eats, baubles and that giant screen TV with all the whistles and bells, with a swipe of your magical credit card or by leveraging the eternally rising value of your dear old homestead.”
Finally, worst of all, we polluted investment markets with totally unregulated “derivatives,” promising that you too can earn 15 percent annually on your investments, even though the economy grows at a far slower pace. Many probably don’t yet understand what a derivative is — there are thousands of varieties. If you want to know more, read Michael Lewis’ “The End,” in the December issue of Conde Nast Portfolio. Who benefited most?
It’s not that the public wasn’t warned. Warren Buffett noted in his 2002 Berkshire Hathaway Annual Report, “We view them (derivatives) as time bombs, both for the parties that deal in them and the economic system,” after winding down billions of dollars of derivative contracts in the subsidiary of an insurance company he purchased.
Despite these warnings, Wall Street somehow suckered this nation’s best and brightest into the derivatives market, even vaunted Harvard University’s endowment, which paid Wall Street-like bonuses to its investment managers. I wondered, “Where are the Economics Department and Business School faculties in their investment process?”
In fairness to Harvard and other parties, if they received 15 percent for three or four years, they made more than the 40 percent they reportedly lost when the market collapsed. But they obviously failed to plan for the ups and downs. I wonder if Harvard got the bonuses back from the managers.
All three of these trends share the intrinsic feature of widespread self-delusion, acceptance on faith of something too good to be true — that home values or stock prices will always go up — despite ample evidence that bubbles don’t last forever.
Who benefited most from all these bubbles? Well-compensated commission salesmen who sold the products; large financial conglomerates and specialized lending companies (which prostituted the word ‘bank’); China, which made all the goods consumers bought; and, most of all, the highly paid corporate officers and Wall Street executives who hijacked the stock market for their own short-term interests and got bonuses for doing so.
As John Bogle, founder of Vanguard Funds and creator of indexed mutual funds commented in his prophetic book, “The Battle for the Soul of Capitalism,” “owners’ capitalism” got replaced by “managers of capitalism.”
Elliott Carr is the former president of Cape Cod Five Cents Savings Bank, where he continues to work.
Tags: Berkshire Hathaway, Steve Wevodau Berkshire Hathaway, Steven Wevodau Berkshire Hathaway, Warren Buffett
One big reason the Berkshire Hathaway annual meeting attracts 30,000-plus shareholders and fans is that anyone who stands in line has a shot at asking the master investor a question. Want to know why Buffett has never purchased shares of his good friend Bill Gates’ company? Go ahead and ask him. Want to know what he thinks of the presidential candidates? He’ll answer.
Simple question, important lesson
This year, the most interesting Q&A concerned Berkshire’s big purchase of PetroChina a while back. According to an article in Forbes, Buffett bought the shares after minimal due diligence. And I mean minimal. In fact, it was reported that all he did was read a couple of annual reports.
A shareholder stood to ask him — and I’m paraphrasing here – ”Dude! What’s the deal with that? How could you make such a large purchase with only the annual reports, without seeing the operations or meeting management?”
That’s a fair question. How could Buffett, a man who has spoken at length many times about the vital importance of good management, buy a major chunk of this Chinese national company, sight unseen?
Stories are simple when the price is right
Buffett replied that the oil business is “not that hard to understand.” So, once he came to the conclusion that PetroChina was worth about $100 billion but was selling for only $35 billion, the decision pretty much made itself without the need for details. It would have been a lot different, he said, if he thought it was worth $35 billion but was selling for $40 billion.
He explained that he’s looking for precisely these kinds of investments all the time. “It should hit you between the eyes,” he said, adding that if your investment thesis requires you to carry an analysis out to three decimal places, it’s not a good idea.
Back to basics
Buffett was referring to the “margin of safety.” Most commonly, it describes a percentage difference between what a company is selling for on the market and what you think it’s actually worth. If you’re buying stocks that look only moderately underpriced, say 5%-10%, then you have to be very, very certain that your numbers are correct. You also need to know a lot about management, competition, and whether the company HQ sits in an asteroid’s path.
Unfortunately, no matter how diligent you are, you will never know it all, and you’ll inevitably make mistakes. That’s why the margin of safety is so important, and the fatter that margin of safety is, the less you need to worry about getting the details precisely right or wrong. That’s not the case at many of the high-fliers that were Wall Street darlings only two years back. Investors who thought they were getting the deal of a century after the first drop in famous financials like Barclays (NYSE: BCS), UBS (NYSE: UBS), Wachovia (NYSE: WB), or Lehman Brothers (RIP) learned a brutal lesson to the contrary. There was simply no way for any of them to know enough about their balance sheets (loaded with inscrutable junk), let alone management, and future prospects.
That’s why Buffett likes the simpler stories, and you should too.
One way Buffett ensures that he’s got a good margin of safety on a simple story is to concentrate on industries in which some players have big competitive advantages. Protected national champions like Aluminum Corp. of China (NYSE: ACH) or China Mobile (NYSE: CHL) fit that bill. So do strong brand names with deep moats. His big score with Coca-Cola came at a time when the entire world thought “New Coke” had killed the brand, but he knew consumers would come back to what they’d trusted for years.
Foolish final thought
How did PetroChina work out for Buffett? Pretty well, but let’s not do that math. Let’s forget the winnings of the super-investors for a second and look at what it did for simple, nonbillionaire nongeniuses like you and me.
I came to a similar conclusion on PetroChina a while after Buffett did, and I got my shares for about $90 each. A year and a half later, they were selling for nearly $250, a lot more than I figured the company was worth. I sold, pocketing a 180% gain, and looked elsewhere for simple stories with similar margins of safety. I wasn’t aiming to emulate Buffett, but I’m pretty sure remembering this lesson will make me a better investor.
Finding margins of safety like these is the primary goal of my colleagues at Motley Fool Inside Value. Like Buffett, advisor Philip Durell isn’t afraid to wade into the panicky market and hold businesses. In fact, Inside Value recently tapped construction materials provider Vulcan Materials (NYSE: VMC), a fairly simple business, and one that is likely to take lumps during the coming economic slump, but that was priced for far worse. And it has returned an unusual (but welcome) 20% since then — beating the S&P 500 handily.
To take a look at all the Inside Value picks, and to see what Philip learned at this year’s Berkshire meeting and how it informs his investing decisions, a free trial of Inside Value is just a click away.
This article was first published May 13, 2008. It has been updated.
At the time of publication, Seth Jayson had shares of Berkshire Hathaway but no position in any other company mentioned here. Berkshire, Vulcan Materials, and Coca-Cola are Inside Value recommendations. Berkshire is also a Stock Advisor selection and Motley Fool holding. The Fool has a disclosure policy.
Copyright 2008 Motley Fool
Tags: Berkshire Hathaway, Steve Wevodau Berkshire Hathaway, Steven Wevodau Berkshire Hathaway, Warren Buffet