Feb 252017

Earlier today, Warren Buffett released his annual letter to shareholders.  There were five interesting takeaways from this letter:

(1) He spends the most time criticizing the high fees charged by portfolio managers who generally produce sub-par results.  “When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients.  Both large and small investors should stick with low-cost funds.”

Also, he states: “There are, of course, some skilled individuals who are likely to out-perform the S&P over long stretches.  In my lifetime, though, I’ve identified – early on – only ten or so professionals that I expected would accomplish this feat”.

But later he states: “Moreover, we have paid substantial sums for over-performance to our two in-house investment managers — and we hope to make even larger payments to them in the future.”

Todd Combs and Ted Weschler each manage about $10 billion.  Since the two managers each year are eligible to receive as bonuses 10% of the amount by which their portfolios exceed the return on the S&P 500 (in addition to an annual salary of $1 million), both Combs and Weschler have been among the very few who have outperformed the S&P 500 over the past five years.

(2) Warren Buffett very rarely recommends the purchase of any stock.  But he clearly makes a case that Bank of America is undervalued.  Although Berkshire has until September 2, 2021 to convert its Bank of America Preferred stock with warrants, he states:  “If the dividend rate on Bank of America common stock – now 30 cents annually – should rise above 44 cents before 2021, we should anticipate making a cashless exchange of our preferred into common”.  (When the common stock dividend rises above 44 cents, the annual dividends on the common stock resulting from the conversion of the preferred would exceed the dividends on the preferred stock).

(3) Warren Buffett presents a convincing case for the repurchase of shares by companies whose shares are undervalued (trading below intrinsic value).  This contradicts the perceived wisdom of many that share buybacks are just financial engineering.

(4) Buffett states for the first time: “we have made no commitment that Berkshire will hold any of its marketable securities forever.”  (Previously, he has mentioned that his preferred holding period is forever.)

Buffett may be referring to recent stock sales of almost all of his shares in Wal-Mart. But more importantly, he is probably looking to the future by providing the flexibility to sell long-time holdings such as Coca-Cola or American Express. This statement also prepares shareholders for the future when Todd Combs and Ted Weschler are running Berkshire’s portfolio and grants them the complete freedom to make whatever portfolio changes they wish.

(5) He criticizes CEO’s who omit restructuring charges and stock compensation from expenses.


I am quoted in two articles in the Omaha World-Herald on Warren Buffett’s letter to shareholders.

In one article about no stock is “forever”:

David Kass, a Berkshire shareholder and business professor at the University of Maryland, said Saturday that Buffett may be referring to recent stock sales “but more importantly, looking to the future with providing the flexibility to sell long-time holdings such as Coca-Cola or American Express.”

Tweaking the ownership principle, Kass said, also “prepares shareholders for the future when Todd Combs and Ted Weschler are running Berkshire’s portfolio and grants them the complete freedom to make whatever portfolio changes they wish.”

In a second article about the absence of a discussion of the Presidential election:

“Warren Buffett’s optimism throughout his letter to shareholders communicates indirectly that the future for America remains bright regardless of who is in the White House,” said David Kass, a Berkshire shareholder and business professor at the University of Maryland.

 Posted by at 9:07 pm
Feb 222017

I am quoted in a Smith Brain Trust article (Robert H. Smith School of Business, University of Maryland) on possible takeover targets for Kraft Heinz (NASDAQ: KHC).  After withdrawing its offer for Unilever (NYSE:UL, NYSE: UN) , Kraft Heinz may be considering the acquisition of Mondelez International (NASDAQ: MDLZ) or Colgate Palmolive (NYSE: CL).

Colgate-Palmolive: The New York-based Colgate-Palmolive is smaller global player in household and personal care products and may have plenty to offer Kraft Heinz. 

It doesn’t have as many brands as Proctor & Gamble, but Colgate-Palmolive, with its namesake toothpaste, dish soap and other consumer products has a strong global presence. In fact, most of its business is outside of the U.S. “Colgate is very big in Latin America and that’s a whole new market that’s growing,” Kass says. 


Among its other virtues, Kass says, is its size. Colgate-Palmolive, with its a market capitalization of only about $68 billion, would be “more acquirable.” 

In fact, Colgate-Palmolive’s stock surged Friday morning on news about a potential Kraft Heinz and Unilever deal. Investors were betting that Unilever, perhaps looking to avoid a takeover, might look to merge with Colgate-Palmolive as a white knight, making it more difficult and more costly for Kraft Heinz to make a deal.

And the stock has only added to those gains this week, on news that the Unilever deal wasn’t meant to be. “Colgate,” Kass says, “makes sense.”

An alternative play: Kass says Kraft Heinz might play it safe and stick to its earlier script of acquiring another food company.  If so, Mondelez International, the Illinois-based multinational snacks and beverage brand that was spun off from the current Kraft Foods in 2012, would be a likely candidate, he says

The company, with brands such as Oreo, Chips Ahoy!, Triscuit, Nabisco, Milka, Toblerone, Cadbury, Trident, Dentyne, and Tang powdered drinks, has a presence in about 165 countries, giving Kraft Heinz the geographical reach it needs. Mondelez has a market capitalization of about $68 billion.

 Posted by at 4:32 pm
Feb 202017

A premature leak of the Kraft Heinz bid for Unilever has resulted in the offer being withdrawn.  The takeover proposal by 3G Capital (Brazil), with the likely financial backing of Berkshire Hathaway and Warren Buffett, was being pursued as a friendly offer.  Both 3G Capital and Mr. Buffett avoid hostile takeovers.

There are many attempts at negotiated deals that fail and are never revealed to the public.  For example, Warren Buffett previously mentioned that about three years ago Berkshire Hathaway came close to negotiating a large, friendly acquisition.  Berkshire, however, was unable to conclude that deal.  Apparently, this was an effort by Mr. Buffett to “unload his elephant gun” (for a $20 billion transaction).  The name of the friendly takeover target was not revealed.


 Posted by at 7:43 am
Feb 172017

I am quoted in the Wall Street Journal on the Kraft Heinz bid for Unilever.

As 3G’s global ambitions have grown, the Brazilian firm has given Mr. Buffett access to new markets and deals he normally wouldn’t do on his own. Unlike Berkshire, which is molded in the image of its folksy chief executive and has a reputation for hands-off ownership, 3G is known for aggressively cutting costs and jobs.

“On the surface, it’s inconsistent,” said David Kass, a professor at the University of Maryland’s Robert H. Smith School of Business and a Berkshire shareholder. “But I think from Buffett’s point of view…it’s not Berkshire making these operating decisions.”

 Posted by at 7:33 pm
Feb 142017

In an SEC 13F filing after the market closed today, Berkshire Hathaway reported that it substantially added to its stakes in airlines (American Airlines, Delta Airlines, Southwest Airlines, and United Continental) and Apple, took new positions in Monsanto and Sirius XM Holdings, and sold Deere and Kinder Morgan, and almost all of its stakes in Verizon, and Wal-Mart during the fourth quarter of 2016.

 Posted by at 5:37 pm
Feb 012017

I am quoted in a Yahoo Finance article:  “Berkshire Hathaway has made about $358 million on Apple“.

Back in November, Buffett was asked at an event for undergraduate and graduate students in Omaha why he doesn’t invest in technology companies.

The “Oracle of Omaha” hinted that his investment deputies— Ted Weschler and Todd Combs— are responsible for buying Apple, according to notes posted by Dr. David Kass, a professor of finance at the University of Maryland’s Robert H. Smith School of Business:

“Ted (Weschler) and Todd (Combs) each have about $9 billion to invest. One or more invested in Apple. With Apple, people get hooked on things that they like.  [Buffett] has a competitive edge within his circle of competence (which does not include tech companies).  His circle grows wider over time but outside of his circle tech people know better than he does.  [Buffett] mentioned that he did not invest in Microsoft even though it had no cost of goods sold and was earning a ‘royalty on the world’ since the world needed its operating system.”

 Posted by at 11:50 am
Jan 312017

Warren Buffett and Bill Gates were interviewed on the Charlie Rose Show on January 27, 2017.

During this interview, Warren Buffett revealed:

(1) “We’ve, net, bought $12 billion of common stocks since the election”.  This represents a substantial increase in the pace of purchases by Buffett.  During the first nine months of 2016, Berkshire Hathaway bought only $5.2 billion (and sold or redeemed about $20 billion) of stocks.  In all of 2015, Berkshire bought only $10 billion of equity securities.  Warren Buffett will likely reveal which stocks he invested in during the fourth quarter of 2016 when Berkshire releases its SEC 13F filing on February 14.

(2) Buffett also mentioned that Berkshire’s investment in the shares of American Airlines, Delta Air Lines, Southwest Airlines, and United Continental Holdings during the third quarter was “in large part” his decision.



 Posted by at 1:17 pm
Jan 312017

These are 10 highlights of “Becoming Warren Buffett” which was broadcast on HBO on January 30, 2017 from 10:00 p.m. – 11:30 p.m. EST.

(1) Warren Buffett considers himself to be very lucky by winning the “ovarian lottery” with 40:1 odds against being born in the United States (August 30, 1930), and 80:1 odds against being born in the U.S and being male (“sky is the limit”career opportunities).

(2) He was also very lucky to marry Susan Buffett (major “turning point” in his life.)

(3) “Compounding” is the 8th Wonder of the World.  By waiting until late in life (2006 at age 76) to begin donating over 99% of his wealth, compounding has resulted in a substantially larger amount to give back to society.  As of 2016, Warren Buffett has already contributed $24 billion to charities (primarily to the Bill and Melinda Gates Foundation) and his remaining wealth to be contributed to charities in the future is valued at over $63 billion.

(4) Using a baseball analogy from Ted Williams, Warren Buffett will swing at a pitch (invest in a stock/company) only if it is in his “sweet spot” (high probability of success).  Even though Berkshire Hathaway is highly liquid ($85 billion in cash), Buffett is very patient.  Berkshire Hathaway’s shareholders are long-term investors who generally plan to hold their shares “for a lifetime”.

(5) Buffett has simple tastes and is living in the same house since 1958.  “Money is a scorecard.”  Investing is a level playing field where everyone else can read the same thing that he reads.  Buffett spends 5 – 6 hours a day reading and is very competitive.

(6) Both Warren Buffett and Bill Gates (Microsoft) attribute the same word to their success … “focus”.

(7) Before meeting Charlie Munger, Warren Buffett invested in “fair companies at wonderful prices”.  Munger taught Buffett to invest in “wonderful companies at fair prices.”

(8) Ben Graham (Columbia University) taught Warren Buffett:  “Rule 1 – Never Lose Money”, and “Rule 2 – Never Forget Rule 1”.

(9) In 1991, Warren Buffett saved Salomon Brothers from bankruptcy after a Treasury Bond trading scandal by making the case to Treasury Secretary Nick Brady that not only would 8,000 jobs be lost at Salomon, but its failure could “take Wall Street with it”.

(10) Warren Buffett’s ambition in life is to be a teacher.  The right job for each person is the one you would pick if you did not need a job.


 Posted by at 12:30 am
Jan 272017

I am quoted in a Kiplinger’s article: “3 Reasons (Other Than Warren Buffett) to Buy Berkshire Stock”

Conditions are ripe for Berkshire’s so-called Powerhouse Six non-insurance businesses to perform well in 2017, says David Kass, a professor at the University of Maryland’s Robert H. Smith School of Business who studies Buffett and is a Berkshire shareholder.

“The ‘Powerhouse Six,’ which consists of its BNSF railroad [Burlington Northern Santa Fe], Berkshire Hathaway Energy, Marmon, Lubrizol, IMC and Precision Castparts, represent the bulk of its non-insurance earnings,” Kass says. “BNSF results should improve in 2017 with increasing rail volumes. Manufacturing operations should also improve along with the energy sector and the improving economy in 2017.”


 Posted by at 9:45 am
Jan 192017

I am quoted in a University of Maryland Smith Brain Trust article, “In Era of Trump, Investors Grapple with Tweet Risk”:

When President-elect Donald Trump took to Twitter to criticize Lockheed Martin for the price tag on the F-35 fighter jet, he sent the defense contractor’s shares into a minor tailspin. A similar thing happened weeks earlier, when he tweeted a rebuke of Boeing for the price of the new Air Force One.

With the Oval Office soon to be occupied by a Tweet-prolific commander-in-chief, investors are grappling with a new market force: Tweet risk. It’s what happens when Trump unleashes a seemingly out-of-the-blue Twitter takedown and investors react.

The initial impact looks dire and swift – a sudden 2 or 3 percent drop in a company’s share price. For a company the size of Lockheed Martin or Boeing, the drop amounts to billions in market value.

But the impact observed thus far largely has been fleeting, says David Kass, clinical professor of finance at the University of Maryland’s Robert H. Smith School of Business. “Within a relatively short period of time, a week or two, these stocks have recovered and actually moved higher,” he says.

There are plenty of examples. In addition to Boeing and Lockheed Martin, there was tweet-to-market fallout for General Motors, Toyota and Carrier parent United Technologies.

Seldom have U.S. presidents called out individual companies, as Trump has done since the election. John F. Kennedy memorably chastised U.S. Steel and the broader steel industry in April 1962 for dramatically raising prices, Kass recalls. Shares in the steel giant slumped for days, and dragged down much of the stock market. 

“Given Donald Trump’s track record of singling out companies, which hasn’t been done to this extent by any other president, companies should be a little more circumspect. They should be thinking about what their policies are, what their pricing practices are,” Kass says. “This certainly is highly unusual.”

Kass also recommends that companies make bigger, splashier announcements out of routine news that’s likely to earn Trump’s praise on Twitter. For example, U.S. hiring plans, expansions of U.S.-based factories or other U.S.-based investments. Some companies are already doing this, Kass says, citing Amazon’s recent announcement of its plan to create 100,000 new jobs in the U.S. in 2017, and Lockheed Martin’s announcement last week on Twitter, that it would add 1,800 new jobs in the U.S.

Most, if not all, of the publicly traded companies that have been singled out in Trump’s tweets have seen their shares fall, snap back and ultimately move higher. And that trend brings an opportunity for traders. 

“If I were a trader, I would wait for the 2 or 3 percent drop and buy at that bottom and wait for the stock to recover,”  Kass says. 

“Investors in general should have a long-term horizon, similar to Warren Buffett, of at least five to 10 years,” says Kass, who has closely followed Buffett’s investment philosophy for more than 35 years. “If you have a long-term horizon of at least five to 10 years, then none of these tweets should bother you. It’s just noise.”


 Posted by at 2:14 pm