May 7th, 2012 by dkass under Uncategorized. No Comments.
At the Berkshire Hathaway annual meeting on May 5, 2012, there were 35,000 shareholders in attendance. A total of 67 questions from shareholders and analysts were answered by Warren Buffett and Charlie Munger. Approximately 1/3 of these questions came from the audience, 1/3 selected by three journalists (Andrew Ross Sorkin, Becky Quick, and Carol Loomis) from the hundreds of questions submitted by e-mail from shareholders, and 1/3 from three insurance industry analysts (Cliff Gallant, Jay Gelb, and Gary Ransom). The question I submitted was selected by Andrew Ross Sorkin (He mentioned my name and that I was from Maryland (University of Maryland)): “One of Berkshire’s largest investments is in Walmart. Have you changed your opinion of this company as a result of the Mexican bribery scandal”? Warren Buffett and Charlie Munger responded that this “was a diversion of management time”…”Walmart’s earning power would not be materially affected”… and there was “nothing fundamentally dishonest about Walmart”.
I was also quoted in a Bloomberg article on Warren Buffett’s comments with respect to U.S. banks:
“The fact that he thinks U.S. banks are in fine shape would be consistent in arguing against further regulation,”said David Kass, a professor at the University of Maryland’s Robert H. Smith School of Business. “However, he has said that it’s not necessary to agree on all issues with everyone you have dealings with.”
The entire article is available at:
http://www.bloomberg.com/news/2012-05-07/buffett-says-u-s-banks-a-class-apart-from-europeans.html
May 2nd, 2012 by dkass under Uncategorized. No Comments.
At the upcoming Berkshire Hathaway annual meeting on Saturday, May 5, approximately 40,000 shareholders are expected to attend. Issues that are likely to be discussed at this meeting include: Warren Buffett’s health (prostate cancer diagnosis), the valuation of Berkshire Hathaway stock, the performance of recently hired portfolio managers Todd Combs and Ted Weschler, and Berkshire’s large investment in IBM.
I was quoted in a Bloomberg article on this topic:
The stock currently trades at 120 percent of book value, in spitting distance of when Berkshire will consider buying back shares, a move that increases the per-share earnings of remaining shares. “For someone who purchases today, the company is saying it will step in and repurchase shares at just 10 percent below its current level,” notes David Kass, who teaches finance at the Robert Smith School of Business at the University of Maryland and closely follows Berkshire.
University of Maryland’s Kass also points out that Buffett has long known what to look for when it he goes shopping. “He bought companies with durable competitive advantages,” says Kass.“That doesn’t disappear overnight.”
The entire article is available at:
http://www.bloomberg.com/news/2012-05-02/buffett-s-biggest-bargain-may-be-berkshire-hathaway.html?cmpid=yhoo
April 17th, 2012 by dkass under Uncategorized. No Comments.
In a news release to the shareholders of Berkshire Hathaway, 81 year old Warren Buffett revealed that he has been diagnosed with stage I prostate cancer. He has been told by his doctors that his condition is “not remotely life-threatening or even debilitating in any meaningful way”. He received his diagnosis last Wednesday. He then had a CAT scan and a bone scan on Thursday, followed by an MRI today. These tests showed no incidence of cancer elsewhere in his body.
“My doctors and I have decided on a two-month treatment of daily radiation to begin in mid-July. This regimen will restrict my travel during that period, but will not otherwise change my daily routine.”
“I feel great — as if I were in my normal excellent health — and my energy level is 100 percent”.
His news release concludes:
“I will let shareholders know immediately should my health situation change. Eventually, of course it will; but I believe that day is a long way off.”
I was interviewed on NPR’s Marketplace on the potential impact of Warren Buffett’s prostate cancer diagnosis on his management of Berkshire Hathaway:
http://www.marketplace.org/topics/business/warren-buffett-battling-cancer-holding-company
March 23rd, 2012 by dkass under Uncategorized. 1 Comment.
In Warren Buffett’s letter to Berkshire Hathaway shareholders released in late February, 2012, Mr. Buffett expressed his skepticism with respect to the investment merits of gold. He stated that gold is a favorite of investors who fear almost all other assets, especially paper money. What motivates most gold purchasers is their belief that the ranks of the fearful will grow. As “bandwagon” investors join any party, they create their own truth — “for a while“. “What the wise man does in the beginning, the fool does in the end.”
At current prices, today’s annual production of gold would be valued at $160 billion. “Buyers – whether jewelry and industrial users, frightened individuals, or speculators – must continually absorb this additional supply to merely maintain an equilibrium at present prices.” The total current value of the world’s gold stock of $9.6 trillion “will compound over the (next) century at a rate inferior to that achieved by (productive assets such as farmland and large U.S. corporations such as Exxon Mobil).”
Even though gold currently sells for over $1600 per ounce, up from a peak of $1421 per ounce in 2010, its recent price history has been extremely volatile. From price data that I have examined, gold reached a peak of $850 per ounce in 1980, and subsequently sold for as low as $264 in 2000. It did not exceed its 1980 peak price until 2008, 28 years later.
I was quoted in an article on this topic (March 20, 2012) as follows:
“The “Greater Fool Theory” is an investing idea that means people will buy something not because it’s worth a given price but because they feel that they will be able to sell it later at a higher price. People who buy gold and silver expecting to sell it at a higher price, Kass said, are perfect examples of the theory.
Investing in gold and silver is purely speculative, he said.
From my perspective, I think it’s risky,” Kass said. “There’s no guarantee that it’s going to go up, and if it does you don’t know what your rate of return will be.”
The entire article is available at:
http://www.carrollcountytimes.com/news/local/rothschild-suggests-investing-county-money-in-gold-silver/article_8100f410-5924-57ff-8625-86f93195c355.htm
This article has also been published in Forexpros:
http://www.forexpros.com/analysis/warren-buffett-and-investing-in-gold-118055
March 9th, 2012 by dkass under Uncategorized. No Comments.
On Friday, March 2, 2012, Tom Gayner, the President and Chief Financial Officer of Markel, met with a group of University of Maryland undergraduate finance majors at his company’s offices in Glen Allen, Virginia. (Markel is a property and casualty insurance company. On average, 80% of Markel’s premiums cover insurance claims, 15% cover administrative costs, and 5% are profits. Insurance companies invest “the float”, which are the premiums they collect prior to their claims being paid.) Tom responded to student questions throughout our 1 1/2 hour meeting.
Tom mentioned that since his father was a CPA, and frequent conversations at home focused on businesses, Tom developed an early interest in this area. His first job was as an accountant. He shortly thereafter changed positions and became a portfolio manager at Markel.
Tom stated that there are four characteristics that he seeks when investing in common stocks :
(1) Companies with a proven track record of profitability over 5 – 10 years. These companies should have a high return on capital and low leverage. He drew an analogy between debt and aspirins. Small quantities can be helpful, but too much can be fatal. He does not follow Silicon Valley stocks.
(2) Companies with talented management teams with integrity. Management teams receiving excessive compensation raise issues of integrity.
(3) Companies with reinvestment opportunities. They should generate much of the capital that they require.
(4) Companies selling at a reasonable price per share.
In response to other student questions, Mr. Gayner stated the following:
– He spends most of his day reading newspapers and magazines. He sometimes calls investor relations departments at various companies to ask questions. It is important to have a network of smart friends who as allies will help each other with investment decisions.
–After getting a job, it is very important to be trustworthy. Clients (or your employer) would then give you money to invest. Tom is a continuous learner. He likes to read how successful coaches (sports) and generals make their decisions.
–Sometimes Tom has invested in a stock that he thinks should be selling for twice its current price. However, it may take as long as five years for him to be proven right. One must keep clients and supervisors aboard during this period, especially, if the initial investment declines to 1/2 of its initial price. If a mistake has been made, it is important to admit it. Tom quoted Winston Churchill: “When I make a mistake, I change my mind. What do you do?”
–All businesses are hard. General Motors went bankrupt. There is more international competition now than ever before. Caterpillar derives the bulk of its business outside of the U.S. Honda receives a majority of its revenues inside the U.S. The S&P 500 derives over 50% of its revenues outside of the U.S. Markel receives 40% of its revenues outside of the U.S.
–In Berkshire Hathaway’s (Markel’s largest investment) 1990 annual report, Warren Buffett’s letter to shareholders mentioned that Berkshire was “topping out”. Its stock price then was $5,750 per share. (Today, those shares sell for approximately $120,000.)
–Tom relies on behavioral finance and does not look at beta to estimate the cost of capital. In an example, his current estimate of 10% for the cost of capital of a firm reflected his estimate of the risk faced by the firm and low interest rates.
–Markel’s largest 20 stocks represents 80% of the value of its portfolio and are the stocks that Tom has the most confidence in. The remaining 20% of Markel’s portfolio are relatively small positions that Mr. Gayner follows closely in order to learn more about them.
–He admires Bill Gates who once a year relocates to a remotely located cabin for a “think week”. Gates is completely cutoff from all communication during this week.
February 25th, 2012 by dkass under Uncategorized. No Comments.
Warren Buffett’s letter is very upbeat with respect to Berkshire’s accomplishments in 2011. Despite the slow economic recovery, each of its five largest non-insurance companies (BNSF, Iscar, Lubrizol, Marmon Group, and Mid-American Energy) delivered record earnings. Buffett also has an optimistic outlook for the stock market, stating that the S&P 500 may well be in the process of establishing a five year winning streak.
There were three points that I found most interesting:
(1) As a large shareholder in IBM, Buffett hopes that IBM’s shares languish over the next few years so IBM’s ongoing stock buyback program can result in the purchasing of more shares for the amount invested.
(2) He was “late” in investing in Coca-Cola in 1988, BNSF in 2006, and IBM in 2011 because it took awhile for his thoughts to crystallize. Buffett quotes Thoreau: “It’s not what you look at that matters, it’s what you see.”
(3) Buffett has set up a very interesting incentive structure with respect to his two new portfolio managers, Todd Combs and Ted Weschler. Each will earn 80% of his performance compensation from his own results, and 20% from his partner’s. This should encourage cooperation and the sharing of investment ideas between Combs and Weschler.
I am quoted in this Wall Street Journal article on Warren Buffett’s letter to shareholders:
http://www.bloomberg.com/news/2012-02-25/berkshire-profit-declines-30-as-gains-narrow-on-derivatives.html?cmpid=yhoo
February 15th, 2012 by dkass under Uncategorized. No Comments.
During the fourth quarter of 2011, Berkshire Hathaway added $745 million to its stake in DirecTV (DTV). It purchased an additional 16.1 million shares of DTV. Its total position is now 20.35 million shares, which are valued at $945 million at DTV’s closing price of $46.30 on February 15, 2012. Since Ted Weschler joined Berkshire Hathaway as a portfolio manager a few weeks ago, and DTV was one of the largest holdings in his Peninsula Capital hedge fund, it appears that this investment in late 2011 was based on his recommendation. Mr Weschler terminated his fund at the end of 2011.
Other additions to Berkshire’s portfolio in the fourth quarter included Liberty Media Corp. and DaVita Inc., both of which were prominent holdings in Mr. Weschler’s Peninsula Capital fund.
Berkshire also reported an increased investment of about $675 million in the shares of Wells Fargo, for a total stake of $11.6 billion at today’s closing price. Wells Fargo has been in Warren Buffett’s Berkshire portfolio for over 20 years.
Offsetting these additions was the sale of 8.4 million shares of Johnson & Johnson, or $545 million, representing about 23% of Berkshire’s stake in the company.
This information was derived from Berkshire’s 13F filing with the SEC after the market closed on February 14.
I was quoted in two Bloomberg News articles on this subject:
http://www.bloomberg.com/news/2012-02-15/berkshire-takes-stakes-in-liberty-media-davita-as-weschler-joins-buffett.html
http://www.bloomberg.com/news/2012-02-14/berkshire-adds-directtv-liberty-media-stakes.html
February 1st, 2012 by dkass under Uncategorized. No Comments.
On September 24, 2008, Berkshire Hathaway (BRK.A), (BRK.B) and Goldman Sachs (GS) entered into an agreement in which Berkshire Hathaway purchased $5 billion of Goldman’s preferred shares paying a 10% dividend. Berkshire also received warrants granting it the right to buy $5 billion of Goldman Sachs common stock at $115 per share (or 43.5 million shares) through October 1, 2013.
Goldman Sachs called the preferred stock for redemption on April 18, 2011 at a premium of 10% over par value, plus accrued and unpaid dividends. As a result, Berkshire Hathaway earned approximately $1.75 billion ($1.25 billion in dividends plus a redemption premium of $500 million) in 2½ years on its investment of $5 billion. This represents a return of 35% over this time period from the preferred stock alone.
At Goldman Sachs’s closing price of $109.73 per share on January 30, 2012, what are its warrants worth? Although these warrants are currently “out of the money” since the underlying common shares are selling below the strike price of $115, they have considerable value which can be estimated using a Black Scholes calculator.
When applying a strike price of $115, stock price of $109.73, time remaining of 605 days, historical volatility of 38.8% (source: TD Ameritrade), and a risk free interest rate of 0.2% (2-Year U.S. Treasury), each warrant is valued at $19.76. Therefore, Berkshire’s 43.5 million warrants have a total current value of $860 million.
When adding the current value of $860 million from its Goldman Sachs warrants to its return of $1.75 billion from Goldman’s preferred stock, Berkshire’s total return can be valued at approximately $2.6 billion, or more than 50% of its $5 billion investment.
This provides further evidence of how Warren Buffett has recently created shareholder value for Berkshire Hathaway. Furthermore, his willingness to invest $5 billion in Goldman Sachs at the peak of the financial crisis in September 2008, and his previously stated intention of not exercising Berkshire’s warrants in Goldman Sachs until their expiration on October 1, 2013, are providing an indication of Mr. Buffett’s confidence in the outlook for Goldman’s common stock. Since shares of both Berkshire Hathaway and Goldman Sachs are currently selling at reasonable valuations, investors might wish to consider investing in them.
This article has been published by Seeking Alpha and GuruFocus:
http://seekingalpha.com/article/331582-berkshire-hathaway-s-5-billion-investment-in-goldman-sachs-in-2008-has-resulted-in-a-50-return?source=yahoo
http://www.gurufocus.com/news/159860/berkshire-hathaways-5-billion-investment-in-goldman-sachs-in-2008-has-resulted-in-a-50-return
This article has also been published by FOREX PROS and Business Insider:
http://www.forexpros.com/analysis/berkshire-hathaway%E2%80%99s-investment-in-goldman-sachs-has-resulted-in-a-50-return-112849
http://www.businessinsider.com/berkshire-hathaways-5-billion-investment-in-goldman-sachs-in-2008-has-resulted-in-a-50-return-2012-2
January 13th, 2012 by dkass under Uncategorized. No Comments.
On August 25, 2011, Bank of America announced the sale of $5 billion of 6% Cumulative Perpetual Preferred Stock to Berkshire Hathaway. The preferred stock is redeemable by Bank of America at any time at a 5 percent premium.
In conjunction with this agreement, Berkshire also received warrants to purchase 700,000,000 shares of Bank of America common stock at an exercise price of $7.14 per share. The warrants may be exercised in whole or in part at any time, and from time to time, during their 10-year life.
At Bank of America’s closing price of $6.87 per share on January 11, 2012, what are these warrants worth? Although these warrants are currently “out of the money” since the underlying common shares are selling below the strike price of $7.14, they have considerable value which can be estimated using a Black-Scholes calculator.
When applying a strike price of $7.14, stock price of $6.87, time remaining of 3520 days, historical volatility of 59% (source: TD Ameritrade), and a risk free interest rate of 2% (10-year U.S. Treasury), each warrant is valued at $4.59. Therefore, Berkshire’s 700,000,000 warrants have a total current value of approximately $3.2 billion.
Warren Buffett’s $5 billion investment in Bank of America’s 6% preferred stock is not only earning $300 million per year in dividends, but has also added $3.2 billion in shareholder value from the 700 million warrants that it has acquired.
It is interesting to note, that in The Government Employees Insurance Company’s third quarter 2011 filing with the National Association of Insurance Commissioners, this Berkshire subsidiary showed that it had acquired 229.6 million Bank of America warrants at a cost of $328.0 million, or $1.43 per warrant on September 1, 2011. Using Bank of America’s closing price of $7.89 on September 1, each warrant would have had a value at that time of $5.52. Therefore, it appears that Berkshire had used very conservative accounting and assigned a total value to its Bank of America warrants of $1.0 billion.
Many discussions of Berkshire’s $5 billion investment in Bank of America omit a valuation of the warrants since they are currently out of the money. However, these warrants have added considerable value to Berkshire Hathaway.
This article has been published by Seeking Alpha and GuruFocus:
http://seekingalpha.com/article/319303-bank-of-america-warrants-add-considerable-value-to-berkshire-hathaway
http://www.gurufocus.com/news/158531/bank-of-america-warrants-add-considerable-value-to-berkshire-hathaway
It has also been published by Business Insider and FOREXPROS:
http://www.businessinsider.com/berkshires-700-million-bac-warrants-have-been-ignored-by-many-but-theyre-currently-worth-32-billion-2012-1
http://www.forexpros.com/analysis/bank-of-america-warrants-add-considerable-value-to-berkshire-hathaway-111946
January 10th, 2012 by dkass under Uncategorized. 1 Comment.
During 2011, Todd Combs’ portfolio of seven stocks outperformed the S&P 500. Six of the seven stocks purchased by Todd Combs during the first nine months of 2011 finished the year higher than his purchase price, with an average gain of 15%. By contrast, the S&P 500 was virtually unchanged in 2011. This was Todd Combs’ first year at Berkshire Hathaway. Data are not yet available on any additions that were made to his portfolio during the fourth quarter of 2011.
Todd Combs’ best performing stocks in 2011 were Mastercard (+40%) and Dollar General (+20%). His other winners were CVS Caremark (+14%), Intel (+15%), Visa (+18%), and General Dynamics (+6%). His only declining stock was DirecTV (-6%).
It is worthwhile noting that DirecTV has also been one of Ted Weschler’s largest holdings in his Peninsula Capital hedge fund over the past two years. Ted Weschler will be joining Berkshire Hathaway early in 2012 as Warren Buffett’s second portfolio manager, in addition to Todd Combs.
I was interviewed on Bloomberg TV today where I discussed this topic. The link to that interview is:
http://www.bloomberg.com/video/83973550/
I was also quoted in a Bloomberg News article today on Todd Combs:
http://www.bloomberg.com/news/2012-01-10/berkshire-s-combs-hands-gain-to-buffett-by-increasing-bets-when-picks-slip.html?cmpid=yhoo
