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 and ValueWalk.
 Posted by at 7:46 pm
Mar 052017


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

(Note: This blog post has been published by ValueWalk and

 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
Feb 272017


  • Buffett on CNBC: Airlines will get into trouble again if they substantially increase supply (more planes and seats)

  • Buffett on CNBC: Stocks are pieces of businesses and businesses will be worth more over time.

  • Buffett on CNBC: Index funds will outperform active managers after fees.

  • Buffett on CNBC: Berkshire will convert its Bank of America Preferred and warrants into its common stock when its dividends are increased

  • Buffett on CNBC: No one should buy a 30-year U.S. Treasury bond (3% coupon)

  • Buffett on CNBC: Sold shares in Wal-Mart because retailing is too tough. Amazon is the major threat. Jeff Bezos is the best businessman

  • Buffett on CNBC: Since Europe has very low interest rates (negative rates) this puts pressure on U.S. to not raise interest rates too far.

  • Buffett on CNBC: 3G are the very best at marketing and product development

  • Buffett on CNBC: Unilever is excellent company that is undervalued. Bid for Unilever was intended to be friendly by BRK and 3G

  • Buffett on CNBC: 10 Year Treasury trading at over 40 times earnings (2.3%) with no opportunity to grow. Stocks far more attractive.

  • Buffett on CNBC: purchased most of Apple shares in first 20 days of 2017 (at average price of $120 per share)

  • Buffett: Combs/Weschler owns shares in American, Buffett owns the other three airlines (Southwest, Delta, United) with stakes less than 10%

  • Buffett on CNBC: Apple bought back 4% of its shares in 2016

  • Warren Buffett on CNBC: Apple now second largest common stock holding for Berkshire after Wells Fargo, Berkshire doubled stake in 2017

  • Warren Buffett on CNBC: Berkshire has $18 billion stake in Apple (92% bought by Buffett, 8% by Combs or Weschler).


 Posted by at 9:09 am
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