Apr 162017
 

These are five highlights of Dean Nitin Nohria’s (Harvard Business School) one hour interview of Warren Buffett and Jorge Paulo Lemann (April 2017).

(1) Warren Buffett seeks to invest in companies with businesses he can understand, are within his circle of competence, and will do well 10 to 20 years from now.  They are like a castle protected by a moat.  He likes products that cost 1 cent, sell for 1 dollar, and are habit forming.  Coca-Cola is an example.  Usually, companies that meet these criteria are regulated.

(2) Coca-Cola travels well (sells well in other countries), but Hershey and Cadbury do not.  See’s Candies sells well in California, but not on the East Coast.  If someone wants a Snickers bar they will be willing to pay a higher price than for a similar substitute.

(3) Jorge Paulo Lemann:  3G Capital (Brazil) builds companies to run for the long run.  Beer is not growing in the U.S. and Europe.  But Africa presents a growth opportunity (Anheuser-Busch InBev) with the acquisition of SAB Miller. Africa has a rapidly growing population of young people and has a hot climate — ideal for selling beer.  Africa’s current population of 1 billion is expected to double in 20 years.  3G Capital plans to become an expert in marketing and in developing new products.  There is not much more to be done in the beer market through acquisitions, but there is a lot to be done in the food area.

(4) A student asked whether the largest companies in the U.S. by market capitalization, technology companies (Apple, Google (Alphabet), Amazon, Facebook), are likely to remain the largest in the future.  Buffett noted that these companies have no tangible assets and no receivables and together have a market capitalization of $2 trillion.  This is a very different business model from previous decades.  (Also, the candy business does not require capital.)  But with technology, things change fast.

(5) Buffett mentioned that free trade is extremely important.  It is the market system for the world.  Those who are hurt by it would be helped through an earned income tax credit.

(Note: This blog post has been published by ValueWalk.)

 Posted by at 12:28 am
Apr 122017
 

Berkshire Hathaway announced today that it has sold about 7 million shares of Wells Fargo and it plans to sell another 2 million shares in order to keep its ownership stake below 10% so it would not be classified as a bank holding company.  These sales represent less than 2% of its 500 hundred million share stake.

Berkshire’s press release states:

“We will monitor the outstanding share count of Wells Fargo in the future, and, if necessary sell shares in amounts to keep our ownership interest slightly below 10%.  Berkshire has no present intention to sell Wells Fargo shares in amounts beyond the quantity required to provide a small safety margin below 10%”

 

 

 Posted by at 6:25 pm
Apr 062017
 

Warren Buffett appears courtside at Cleveland Cavaliers game with Dan Gilbert

 Arena cameras focused on a fan holding a sign asking the Cavs to win the game for her 84th birthday. Buffett responded with a sign of his own, telling the fan that at 84, she’d just be old enough to intern at his multinational conglomerate, Berkshire Hathaway.
Warren Buffett
 Posted by at 6:21 pm
Apr 052017
 

Warren Buffett immortalized on Cherry Coke cans in China, while supplies last

warren_buffet_cherry_coke3.jpg

American billionaire and soda addict Warren Buffett is helping his favorite soft drink company gain a larger foothold in China by allowing his own likeness to adorn cans of Cherry Coke in the country.

Cherry Coke was launched on the Chinese mainland back on March 10th. To help build up more buzz for the syrupy sweet beverage, Coke says that special edition “Oracle of Omaha” cans will now be available during a promotional period and while supplies last.

“I can’t think of a better way to launch Cherry Coke than with its best-known fan on the package,” Coca-Cola Chairman and CEO Muhtar Kent said in a release. “It is an honor for us to be able to feature Warren on his favorite drink as it rolls out in one of the world’s most exciting and dynamic consumer markets.”

Thanks to his incredible business success, Buffett enjoys a large following in China. Last year, over 3,000 Chinese investors traveled to Omaha to attend his Berkshire Hathaway annual meeting, the Omaha World Herald reported. In 2015, a Chinese video game developer paid $2.3 million just to have lunch with Buffett.

warren_buffet_cherry_coke2.jpg

Though Chinese investors may want to emulate the 86-year-old billionaire’s financial success, they should probably not try to copy his drinking habits. “I’m one quarter Coca-Cola,” Buffett said in a 2015 interview with Fortune magazine. “If I eat 2700 calories a day, a quarter of that is Coca-Cola. I drink at least five 12-ounce servings. I do it everyday.”

The Washington Post estimates that from soda alone, each day Buffett consumes roughly 8 times the World Health Organization’s recommended daily sugar intake.

While Buffett’s body may be 25% Coke, he owns just a 9.3% stake in the company itself.

 Posted by at 8:54 am
Apr 042017
 

NICKED BY RIVALS, GILLETTE SHAVES PRICES

 
Apr 04, 2017

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SMITH BRAIN TRUST — Gillette is shaving its prices by as much as 20 percent and focusing on its less-expensive products to compete with cheaper rivals, such as Dollar Shave Club. And the move is rattling investors, according to The Wall Street Journal.

But Clinical Professor of Finance David Kass at the University of Maryland’s Robert H. Smith School of Business foreshadowed the razor giant’s move, calling price sensitivity for personal products “the new normal” in this October 2015 piece, “Consumer Goods Behemoth Faces Pressure.”

For years, Gillette owner Procter & Gamble had thrived by charging a premium price for premium brands, Kass said. Then, things changed. More and more people began treating consumer goods like interchangeable commodities. P&G, Kass says, has been slow to adjust.

“It’s basic economics that manufacturers like Procter & Gamble could raise their prices when their goods were relatively inexpensive,” Kass said.

That’s because, up to a certain price point, people don’t pay much attention to price increases of a dime or two. At those levels, the demand for things like razors and detergent is inelastic, to use the economic terminology. People will buy what they want despite small price moves. However, Kass added, “Procter & Gamble has raised its prices to the point where demand is becoming elastic.”

Kass noted in 2015, “exorbitant” prices for Gillette razors were leading people to seek out lower-cost substitutes, such as generic razors or the low-cost Dollar Shave Club, which was acquired by Unilever. Executives might be inclined to say price sensitivity is a temporary blip, caused by the recent recession. But with the economy steadily improving, it appears that price sensitivity is the new normal.

To bring prices into line with those of its competitors, Kass said, P&G will have to make its manufacturing processes significantly more efficient or reduce its profit margins on razors.

 Posted by at 6:54 pm
Mar 292017
 

I am quoted in a Kiplinger’s article: “6 Stocks That Stand To Gain From Higher Interest Rates” (March 29, 2017).

Berkshire Hathaway

iStock

Symbol: BRK.B

Share price: $174.98

Market cap: $431.6 billion

Dividend yield: 0%

As an owner of insurance companies and an investor in big banks, Warren Buffett’s Berkshire Hathaway will profit from rising interest rates in a number of ways, 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.

”Since Berkshire currently has about $85 billion in cash invested primarily in short-term Treasuries, a [one percentage point] increase in short-term interest rates results in an additional income of $850 million per year for Berkshire,” Kass says. “Furthermore, Wells Fargo, one of Berkshire’s largest equity investments, will benefit from an increase in earnings as interest rates rise. Their corresponding share prices should then also increase.” Berkshire owns about half a billion shares of Wells Fargo (WFC) alone.

The bottom line is that Berkshire’s businesses, which comprise 81% of its assets, and its portfolio of stocks, which account for 19%, will become increasingly valuable as rates rise, says Kass.

 Posted by at 8:09 am
Mar 152017
 

I am quoted in a Kiplinger’s article: “Why Warren Buffett Loves Fed Rate Hikes”.

I am expecting a slow, gradual increase in interest rates over the next two years. After the Federal Reserve raised short term rates (Federal Funds rate) by 1/4% today, and I believe they will again three more times later this year, then interest rates will be 1% higher a year from now.  Federal Funds were at 1/2 – 3/4% (near historically low levels) before today’s rate increase.  Since Berkshire currently has about $85 billion in cash invested primarily in short term Treasuries, a 1% increase in short term interest rates results in an additional income of $850 million per year for Berkshire.  Furthermore, Wells Fargo and Bank of America, two of Berkshire’s largest equity investments, will benefit from an increase in earnings as interest rates rise.  Their corresponding share prices should then also increase.
In a meeting with University of Maryland students on November 18, 2016, Warren Buffett said: “Stocks are cheap if long term rates are at 4%, four to five years from now.”  Currently, the 10 year Treasury is yielding only 2.50%.  In today’s environment, both Berkshire’s businesses (81% of assets) and its equity portfolio (19% of assets) should continue to do fine if interest rates rise gradually as most economists, including myself, are expecting.
This blog post has been published by Investing.com and ValueWalk.
 Posted by at 7:46 pm
Mar 052017
 

Summary

As recently as 1994, Berkshire Hathaway’s equity securities equaled 76% of total assets.

At year-end 2016, Berkshire Hathaway’s equity securities equaled 19% of total assets.

Berkshire’s focus on acquiring businesses has resulted in a conglomerate of 80 companies.

Warren Buffett acquired Berkshire Hathaway (NYSE:BRK.A), a textile manufacturer, in 1965. In 1967, Berkshire paid $8.6 million to buy National Indemnity Company, a small but profitable Omaha-based insurer. In 1985, Buffett shut down the textile business, but retained its corporate name. The property casualty branch of the insurance industry has been the engine that has propelled Berkshire’s expansion since 1967. Since premiums were paid in advance of claims, Berkshire used this “float” along with underwriting profits to grow the company through investments and acquisitions. Subsequent acquisitions of GEICO in 1995 and entry into the reinsurance business, through the purchase of General Re in 1998, substantially added to Berkshire’s stake and float in this industry.

As of December 31, 2016, Berkshire Hathaway had acquired approximately 80 companies within its four major sectors of operations: (1) Insurance, (2) Regulated, Capital Intensive Businesses, (3) Manufacturing, Service and Retailing Operations, and (4) Finance and Financial Products. Berkshire’s largest acquisitions were BNSF (Burlington Northern Santa Fe Railroad) in 2010, Precision Castparts in 2016, Berkshire Hathaway Energy in 1999, Marmon (manufacturer of transportation equipment including rail cars) in 2007, Lubrizol (lubricants) in 2011 and IMC (formerly Iscar – machine tool manufacturer) in 2006.

As these acquisitions were being made, the relative importance of Berkshire’s equity securities as a percentage of total assets has declined substantially. As recently as 1994, Berkshire’s equity securities equaled 76% of total assets. As of year-end 2016, it comprised only 19% of total assets. This ratio dropped sharply in 1998 to 33% from 65% the year before with the acquisition of General Re. Since 2001, Berkshire’s portfolio of equity securities has averaged about 20% of total assets. As of December 31, 2016, Berkshire’s largest equity holdings consisted of: Wells Fargo (NYSE:WFC) valued at $28 billion, Coca-Cola (NYSE:KO) ($17 billion), and International Business Machines (NYSE:IBM) ($13 billion).

From Berkshire Hathaway’s annual reports 1994 – 2016:
(dollars in millions)

Year EndEquity SecuritiesTotal Assets% Equity Securities
1994$16,260$21,33876.20%
199521,10828,71173.2
199627,75143,41063.9
199736,24856,11164.6
199839,761122,23732.5
199939,508131,41630.1
200037,619135,79227.7
200128,675162,75217.6
200228,363169,75216.7
200335,287180,55919.5
200437,717188,87420
200546,721214,36821.8
200661,533248,43724.8
200774,999273,16027.5
200849,073267,39918.4
200956,562297,11919
201059,819372,22916.1
201176,063392,64719.4
201286,467427,45220.2
2013115,464484,13123.8
2014115,529526,18622
2015110,212552,25720
2016120,471620,85419.4

(Note: This blog post has been published by ValueWalk and Investing.com.)

 Posted by at 11:02 pm
Mar 022017
 

At Berkshire Hathaway’s closing price of $266,013 per class A share on March 1, 2017, its price to book value ratio equals 1.55 which approximates its 30 year average of 1.58.   Berkshire’s book value at year end 2016 was $172,108 per class A share.  (Berkshire’s class A shares rose $8,913 per share or 3.47% on March 1.)

Warren Buffett has stated that he would buy back shares at prices below 120% of book value, which currently would equal prices below $206,530 per class A share.

Berkshire’s intrinsic value continues to increase relative to its book value as the percentage of total assets represented by its common stock portfolio declines.  At year end 2016, Berkshire’s investment in equity securities ($120 billion) represented only 19% of its total assets ($620 billion).  By contrast, in Berkshire’s early years, its common stock portfolio represented the overwhelming majority of its assets.

 Posted by at 7:42 am