Jul 242015

On July 24, 2015, AT&T completed its $49 billion acquisition of DirecTV.  Under the terms of the merger, DirecTV shareholders received 1.892 shares of AT&T common stock and $28.50 in cash, per share of DirecTV.   Since Berkshire Hathaway owned 31.4 million shares of DirecTV as of March 31, 2015, that holding converts into 59.4 million shares of AT&T valued at approximately $2 billion at AT&T’s closing price of $34.29 on July 24.  In addition, Berkshire Hathaway receives approximately $900 million in cash.  Each share of DirecTV is, therefore, being valued at $93.38.

In his 2012 letter to shareholders, Warren Buffett said that DirecTV was a combined purchase of Todd Combs and Ted Weschler.  When this deal was announced in May, 2014, Messrs. Combs and Weschler issued a joint statement: “This is a terrific transaction for all involved: Enhanced choice for consumers, coupled with increased value for both AT&T and DirecTV shareholders – a natural.”  The two portfolio managers built Berkshire’s stake in DirecTV beginning in 2011 at an average cost of about $60 per share.

(This blog post has been published by GuruFocus.)



 Posted by at 10:43 pm
Jul 232015

Kiplinger’s has published an article, “6 Best Buffett Stocks To Buy Now” (July 23, 2015).  The six Berkshire Hathaway (BRK.A, BRK.B) stocks that are recommended are (1) Wells Fargo (WFC), (2) Kraft Heinz (KHC), (3) International Business Machines (IBM), (4) American Express (AXP), (5) Visa (V), and (6) Mastercard (MA).  The first four are investments of Warren Buffett, while the last two are those of Todd Combs.  I am quoted in several places in this article:

“Of course, you shouldn’t imagine that you’ll make a fast buck emulating Buffett, says David Kass, a professor of finance at the University of Maryland’s business school, who studies Buffett and is a Berkshire shareholder. Buffett is usually looking for out-of-favor companies that are selling at a discount to their intrinsic value. He expects those bets to pay off in a matter of years—sometimes decades.”
“Still, if you’re willing to get rich slowly, there’s no better mentor than Buffett. Standard & Poor’s 500-stock index has returned a respectable 9.9% annualized since 1965, when Buffett took control of a textile manufacturer called Berkshire Hathaway. But Berkshire’s book value (assets minus liabilities), Buffett’s preferred measure of his company’s performance, has climbed an annualized 19.4%. And Berkshire’s A shares (BRK-A), which go back to 1965, have done even better, soaring from roughly $15 to an astonishing $215,421, for a gain of 21.6% annualized. “Investors with patience could do very well following his lead,” says Kass.”
“However, Kass says these purchases (Visa and Mastercard) were likely not orchestrated by Buffett. Instead, he attributes them to Todd Combs, a 44-year-old former hedge fund manager who is investing a piece of Berkshire’s portfolio. Combs owned MasterCard in Castle Point Capital, a hedge fund that he ran, says Kass. Combs was likely looking for opportunities to get back into the stock when he started managing money for Buffett in 2010. Should the wisdom of these investments be discounted because they weren’t made by Buffett? Not at all, says Kass. “The market may give them less weight, but I don’t,” he says.”
“Combs and Ted Weschler, another former hedge fund manager who is now part of Berkshire’s investment team, outperformed Buffett in both 2012 and 2013, according to Berkshire company statements. Berkshire didn’t reveal the relative performance of its investment managers in 2014, but Kass is convinced the newer team members are doing well. “Buffett has been an exemplary investor for 30 years, but Weschler and Combs are exceptional investors, too.”
The entire article is available at Kiplinger.com.
 Posted by at 8:45 pm
Jul 132015

On July 6, 2015, shares of Kraft Heinz (NASDAQ: KHC) began trading.  This company, representing the merger of Kraft Foods Group and H.J. Heinz, is currently valued at about $100 billion at its closing price of $77.31 on July 10.  Berkshire Hathaway (NYSE:BRK.A, BRK.B) owns about 325 million shares, which represents approximately one quarter of the company, and is valued at $25 billion. Kraft Heinz is now Berkshire’s second largest investment behind only Wells Fargo (NYSE: WFC) with a current market value of $26 billion.  3G Capital also owns about one quarter of the company.

The board of directors of Kraft Heinz consists of 11 members.  Three of the members were selected by Berkshire Hathaway, three by 3G Capital, and the remaining five by Kraft Foods.

Representing Berkshire Hathaway are Warren Buffett (age 84), Greg Abel (age 52), and Tracy Britt Cool (age 30).  Kraft Heinz is the only publicly traded company that Mr. Buffett is a Director, in addition to Berkshire Hathaway where he is Chairman and Chief Executive Officer.  Previously he had been a Director of the Coca-Cola Company and the Washington Post Company.  He also served on the privately held Heinz board of directors from June 2013 until its merger with Kraft Foods.

Both Greg Abel and Tracy Britt Cool have also served on the Heinz board of directors from June 2013.  Mr. Abel has served as Chairman, Director, Chief Executive Officer and President of Berkshire Hathaway Energy, an electric and natural gas service provider with more than 11.5 million customers worldwide, since 2000.  As a result of his managerial experience, he provides the board of directors with strong operational skills.  He is considered by many to be one of the two most likely candidates, along with Ajit Jain, to eventually succeed Warren Buffett as CEO at Berkshire Hathaway.  Ms. Cool has also served on the Heinz board of directors since 2013 and has experience as chairman of several Berkshire Hathaway subsidiaries and has served as Financial Assistant to the Chairman of Berkshire Hathaway since 2009.

The three Kraft Heinz board members from 3G Capital are Jorge Paulo Lemann (age 75), Alexandre Behring (age 48), and Marcel Herrmann Telles (age 65) have all served on the Heinz board of directors since June 2013.  Mr. Lemann is a Founding Partner of 3G Capital (2004-present) and a Director of Anheuser-Busch InBev (2004-present).  Mr. Behring, who is the Chairman of Kraft Heinz board of directors, is also the Managing Partner of 3G Capital (2004-present) and Director and Chairman of Burger King Worldwide Holdings (October 2010-present).  Mr. Telles is a Founding Partner of 3G Capital (2004-present), a Director of Anheuser-Busch InBev (2004-present) and a Director of AmBev (2000-present).

The five board members selected by Kraft Foods are: John T. Cahill (age 57), L. Kevin Cox (age 51), Jeanne P. Jackson (age 63), Mackey J. McDonald (age 68) and John C. Pope (age 66).  Mr. Cahill is the Vice Chairman of Kraft Heinz and served as the Chairman and Chief Executive Officer of Kraft since December 28, 2014. He was an executive for nine years with PepsiCo, Inc. and currently serves as a director of American Airlines Group and the Colgate-Palmolive Company.  Mr. Cox served on the Kraft board since October 2012, has served as Chief Human Resources Officer of American Express Company since April 2005 and was an executive at PepsiCo, Inc. for 16 years.  Ms. Jackson has also served on the Kraft board since October 2012 and serves as a director of McDonald’s Corporation.  She has held senior positions at NIKE, Inc., Walmart, Gap Inc., Victoria’s Secret, Saks Fifth Avenue, Federated Department Stores, and Walt Disney Company.  Mr. McDonald served on the Kraft board since October 2012 and was Chief Executive Officer at VF Corporation, an apparel manufacturer. Finally, Mr. Pope served on the Kraft board since August 2012 and is Chairman of the Board of R.R. Donnelly and Sons Co.

Kraft Heinz is the only publicly traded company where both Warren Buffett and Jorge Lemann are on its board of directors. Mr. Buffett is considered to be the world’s greatest investor and allocator of capital.  Mr. Lemann and his colleagues at 3G Capital, are among the world’s best operating managers. Over the past two years, 3G Capital has substantially reduced expenses at Heinz while simultaneously growing its business.  Their goal for Kraft Heinz is to cut $1.5 billion in annual costs by the end of 2017 while increasing revenues.  With the unique combination of a board of directors composed of top managers from both Berkshire Hathaway and 3G Capital, along with directors from Kraft, the outlook for Kraft Heinz is extremely bright.

This article has been published by Seeking Alpha, ValueWalkInvesting.com. and GuruFocus

 Posted by at 1:21 am
Jun 222015

This is the University of Maryland’s Robert H.Smith School of Business “12th Annual Top-10 Summer Reading List for Business Leaders” for 2015.  My review of Lawrence A. Cunningham’s Berkshire Beyond Buffett: The Enduring Value of Values is included below (#7).


 1. Pitch Perfect: How to Say It Right the First Time, Every Time
By Bill McGowan with Alisa Bowman
2014Kathryn Bartol, professor of management and organization, says, “McGowan is an award-winning news correspondent turned media/communications coach. He offers sound and engaging advice on how to be ‘pitch-perfect’—i.e., more effective at communicating across a variety of common career-related circumstances. Readers will find many helpful hints aligned with his seven principles of persuasion.”
 2. The Bet: Paul Ehrlich, Julian Simon, and Our Gamble over Earth’s Future
By Paul Sabin
2014“The Bet describes the opposing views of Paul Ehrlich, who focused on the limits of natural resources and economic growth, and Julian Simon, who felt that market forces and innovation would overcome any potential shortages,” says Curt Grimm, professor and Charles A. Taff Chair of Economics and Strategy. “The two agreed to a wager in 1980 regarding whether the prices of a set of natural resources would go up or down over the next decade. Julian, our colleague here at the Smith School from 1983 until his passing in 1998, won the bet. Subsequent innovations such as oil and natural gas fracking continue to support his views.”
 3. Are You Fully Charged?: The 3 Keys to Energizing Your Work and Life
By Tom Rath
2015“Tom Rath, author of numerous bestsellers, including StrengthsFinder 2.0, has done it again,” says Joyce Russell, vice dean. “He has written two books in the past two years that really are excellent if you want to take control of your life and become healthier and have more energy. In his 2015 book, Are You Fully Charged?: The 3 Keys to Energizing Your Work and Life, he describes three aspects (meaning, social interactions and energy) that we all need to enhance, and provides suggestions for how to do that. In 2013, he published Eat, Move, Sleep: How small choices lead to big changes, which describes in practical ways how to track the way you eat, move and sleep in real time in order to enhance your overall health and well-being. Once again, as in his other books, his advice is based on sound research and offers us steps we can take starting tomorrow. The premise of both of these books is that the daily actions you take are what define your health, wellness, energy and engagement. Having meaning in our lives, creating positive interactions with others and bolstering our own physical and mental health are goals we all generally aspire to, so I see both of his books as having value to any audience.”
 4. The Emperor of All Maladies: A Biography of Cancer
By Siddhartha Mukherjee
2011“The Emperor of All Maladies: A Biography of Cancer is fascinating account of the societal and technical evolution a cure for cancer,” says Ritu Agarwal, professor and Dean’s Chair of Information Systems. “The book provides a detailed and rich account of the progress of science and the research enterprise – and how social forces, government policy and pure serendipity affect the search for truth.”
 5. Work Rules!: Insights from Inside Google That Will Transform How You Live and Lead
By Laszlo Bock
2015“Work Rules! by Laszlo Bock, senior vice president of Google’s People Operations, is a must-read business book for any leader who wants to build bring out the best in their employees and build successful high performing organization,” says Mark Wellman, clinical professor of management and organization. “It is an evidence-based practical guide for effective approaches to recruiting, motivating, leading, training, assessing and compensating people. The book should be mandatory reading for every student that desires to be a leader or entrepreneur.”
 6. The Righteous Mind: Why Good People Are Divided by Politics and Religion
By Jonathan Haidt
2013“It is not often that a book changes one’s mind about how to view right and wrong, and why good people disagree about what is right,” says Brent Goldfarb, associate professor of management and organization. “This book is the first reasonable explanation I have found of why the capitalist/progressive right/left dialogue is so acrimonious. Whether you align left, right or somewhere in between, do not read this book if you wish to remain smug in your own positions.”
 7. Berkshire Beyond Buffett: The Enduring Value of Values
By Lawrence A. Cunningham
2014“Many books have been written about Warren Buffett and Berkshire Hathaway, but Berkshire Beyond Buffett is one of the best,” says David Kass, clinical professor of finance. “The central theme of this book is that the culture instilled within Berkshire, along with its outstanding financial performance over the past 50 years under the leadership of Mr. Buffett, should continue long after the octogenarian (age 84) is no longer the CEO. The narrative provided by the author provides a historical perspective of the evolution of Berkshire from a company largely dependent on its insurance businesses and its portfolio of publicly traded securities, to a conglomerate comprised of 80 businesses across numerous industries, the largest of which today are its railroad, energy and manufacturing operations, along with insurance. The unique management structure within Berkshire, providing substantial autonomy to each of its subsidiaries, has resulted in owners of previously privately held businesses remaining in place as managers after they sell their firms to Berkshire. Indeed, with only 25 people in Berkshire’s home office in Omaha, there are very limited resources available to intervene in these companies, which collectively have about 400,000 employees. This book is highly recommended for anyone wishing to gain insight into both the management and investment skills of the world’s greatest investor, Warren Buffett.
 8. The New One Minute Manager
By Ken Blanchard and Johnson Spencer
2015Frank Alt, associate professor of management science and statistics, recommends the The New One Minute Manager, a new edition based on the timeless business classic: “In this rapidly changing world, is an effective manager one who focuses on results or people? A young man’s search for an effective manager finally leads him to one in a nearby town, and the young man discovers the manager’s three very practical secrets: one-minute goals, one-minute praisings and one-minute re-directs. The theme of these secrets is captured in the manager’s screensaver statement: ‘People who feel good about themselves produce good results.’ This book is a must re-read for everyone and the lessons therein are applicable both inside and outside the workplace.”
 9. Social Physics: How Good Ideas Spread-The Lessons from a New Science
by Alex “Sandy” Pentland
2014“Sandy Pentland takes a look at the new world of understanding how we can model social behavior and understand social changes through big data,” says Bill Rand, assistant professor of marketing. “It is these tools that will enable a new wave of predictive analytics that will help businesses to better understand changes in their consumer base. Sandy also discusses in detail both the benefits and potential pitfalls of the big data movement, and calls for a ‘New Deal on Data’ that guarantees to consumers that their data will be used responsibly.”
 10. More Than You Know: Finding Financial Wisdom in Unconventional Places
By Michael J. Mauboussin
2007Susan White, clinical professor of finance, says, “Michael Mauboussin is a financial writer for financial advisers. His book More Than You Know looks at the strategies of super-investors like Warren Buffett, along with the diverse strategies of top poker players, ant colonies and Tupperware salespeople. While aimed at professional investors, the book looks at investing philosophies, the psychology behind investing and how scientific methods can apply to investing. His book is a multidisciplinary approach to finance, bringing in biology, physics, economics and the arts. Mauboussin says that looking at the stock market as a complex adaptive system made him rethink everything he learned about finance in the past. Academics like me tend to focus more narrowly, concentrating on our own specialties. Mauboussin’s goal is to encourage investors to take a new perspective on finance by using the multidisciplinary tools he explains in his series of essays.”

Bonus Books by Smith School Faculty


The Washington Post published these book reviews on June 28, 2015.

 Posted by at 9:20 pm
Jun 102015

Berkshire Hathaway Annual Meeting

May 2, 2015


(Notes taken by Professor David Kass, Department of Finance, Robert H. Smith School of Business,                                                                                                                 University of Maryland)
A one hour humorous film was shown in which the highlight was Warren Buffett (“The Berkshire Bomber”) challenging World Welterweight champion Floyd Mayweather to a boxing match to be held at  the MGM Grand Hotel in Las Vegas.  Charlie Rose on CBS News breaks in with a bulletin announcing this challenge.  Warren Buffett shows up at Floyd Mayweather’s training facility and is being held back by his daughter and others while he yells at Mayweather (apparently curse words that are bleeped out).  While Mayweather is hitting a punching bag in his gym, Buffett is working out at home on an exercise bicycle while reading the Wall Street Journal.  Steve Wynn announces that he is betting $10,000 on Buffett.  On the night of the championship fight, the MGM Grand is sold out, with Jack Nicholson seated in the first row.   Seated in his corner, Mayweather has his handlers give him a mouth guard and a sip of water.  Buffett, in his corner, is dressed with a T-shirt and still wearing his glasses.  He drinks Coca-Cola and is given See’s Candies as his mouth guard.  Both fighters then stand in the middle of the ring glaring at each other and separated by a referee.  (The movie ends at this point.)   (Note:  Several hours after the Berkshire annual meeting, Floyd Mayweather defeated Manny Pacquiao for the World Welterweight title at the MGM Grand Hotel in Las Vegas.)

Warren Buffett (age 84) and Charlie Munger (age 91) then walk on the stage and sit down.  The format for asking questions was similar to the last six annual meetings.  One-third of the questions were selected by three business journalists:  Andrew Ross Sorkin (CNBC and the New York Times), Becky Quick (CNBC), and Carol Loomis (Fortune).   Shareholders had e-mailed over 2,000 questions to the journalists, who then selected 18 questions relating to Berkshire and its operations.  The journalists who were seated on the stage, alternated with analysts Gregg Warren (Morningstar), Jonathan Brandt (Ruane, Cunniff, and Goldfarb), and Gary Ransom (Dowling & Partners), and with shareholders in the audience in the asking of questions.

Approximately 45,000 – 50,000 were in attendance (celebrating Warren Buffett’s 50 years at Berkshire Hathaway).  This compared to previous records of 40,000 in 2014, 36,000 – 38,000 in 2010-2013, and 35,000 in 2009, 31,000 in 2008, 27,000 in 2007, and 24,000 in 2006.)  The CenturyLink Center (18,000 capacity) and all of the overflow rooms were filled for the first time.

Buffett initially commented on Berkshire’s 2015 first quarter earnings and mentioned that Burlington Northern’s results were improving.

Questions were asked in the following order:

(1) Loomis:  The Seattle Times recently published an article alleging predatory lending practices by Clayton Homes.  Also, Berkshire’s partnership with 3G Capital has led to massive layoffs.  Is Berkshire being ethical?

Buffett:  There were many errors in the Seattle Times article.  We have no interest in selling a mortgage and having a default.  Clayton keeps 100% of the mortgages.  Only 3% of Clayton mortgages default.  The customers are mostly people with low monthly incomes.  Our money is at risk.  The average cost of a manufactured home plus land is $95,000. The Seattle Times article alleged that Clayton was making a 20% profit.  They don’t know the difference between gross margin and net profit.  Our gross margin equals 20%, but our net margin is only 2%.  I have not received any complaints about Clayton’s lending practices and we are regulated.

Munger:  Clayton has a 50% market share of manufactured housing.

Buffett:  With respect to 3G Capital, we have never said that there should be more people running the business than needed.  After 3G reduced the number of employees, they have done extremely well.  There were more than 1.6 million people working for railroads in 1945.  Now there are less than 200,000.  Trains now carry more freight, over longer distances and with very high safety standards.  Capitalism requires efficiency over time.

(2) Brandt: Will Van Tuyl (car dealerships) need to adapt to new modes of selling such as one price and no negotiations?

Buffett:  I do not know the answer.  People say they do not like negotiations, but then they do it.  Van Tuyl will adapt to whatever the customer wants.  I wouldn’t be surprised that in 5  –  10 years the buying system will still be the same.   Van Tuyl will be very profitable in relation to the capital we invest in it.

(3) Audience:  What five characteristics do you use to predict earnings of companies  5 –  10 years from now?

Munger: There is no one size fits all system. We keep learning.  We can’t give you a formula.

Buffett:  There are a lot of things that we look at such as what the business will look like.  We evaluate if we want to be in partnership with this person or management and count on them to behave well into the future.  That stops a fair number of deals.

(4) Quick:  Charlie, did you try to talk Warren out of IBM?

Munger:  I did not.  IBM is very adaptable.  They were undergoing a temporary reversal and we bought at a reasonable price.

Buffett:  It was a 2 – 0 vote on IBM.  The company will be buying back its stock in the future and we would like the price to be lower.

Munger:  If people weren’t so often wrong, we wouldn’t be rich.

(5) Ransom:  Do you agree with Charlie in his annual letter that Berkshire could not repeat its success if entering the insurance business today?

Buffett:  There were three historical pieces of good luck that were involved in our entry into the insurance business: (1)My meeting with Lorimar Davidson at Geico in 1950 and the education he provided about the insurance business, (2) Buying National Indemnity in 1967, and (3) The arrival of Ajit Jain in the mid-80’s. The odds of repeating this today would be very low.

(6) Audience:  Can Berkshire’s culture endure after you leave?

Buffett:  Berkshire’s culture runs deep and is clearly defined.  I expect it to continue and become even stronger.  An example is 97% of shareholders voting that they do not want a dividend.

(7) Sorkin: With the negative impact that sugar is having on consumers’ health, have we reached an inflection point?  Is Coke’s moat narrowing?

Buffett:  Twenty years from now more Coke will be consumed than today.  I estimate that a quarter of all calories I consume come from Coke. I am not sure which quarter.  If I ate broccoli and Brussels sprouts I would not have lived as long.

Munger: Sugar is enormously helpful.  It prevents the premature softening of the arteries.

Buffett:  I don’t see smiles on people’s faces at Whole Foods.

(8)Gregg Warren:  A question about buying more auto dealerships.

Buffett:  There are no large economies of scale, but running them well is important. Berkshire will not be financing the auto loans. Banks such as Wells Fargo are the lenders with a low cost of capital. We will keep the dealerships local.

(9) Audience: Question about Berkshire’s culture.

Buffett:  Culture comes from the top and has to be consistent and part of written communications.  It should be rewarded when followed and punished when not.

(10) Loomis: Question on the general level of the market within the context of two metrics that Buffett has used before:  (1) Market cap to GDP now at 125% (same as 1999), and (2) Corporate profits at 10.5% of GDP vs. 4% long term average.

Buffett: The high corporate profits percentage of GDP means that American businesses are doing well.  Market cap to GDP is high because of low interest rates.   If interest rates return to normal levels, then stocks look high.  But if interest rates remain low, stocks are cheap.  Any company with an economist has one employee too many.

(11) Brandt:  Question about railroad safety and how new rules regarding oil tankers would impact BNSF and Union Tank Car (Marmon).

Buffett:  BNSF and Berkshire Energy have the best safety records in their industry.  We will not be buying new railroad cars, but will be retrofitting.

(12) Audience:  How can students who have not gone to the best business schools develop a network?

Munger:  You should just try hard.  Play the hand you are dealt.  I don’t have any business school training, why should you?

Buffett:  Business schools taught efficient markets.  I’m glad I avoided it.  What about law schools?

Munger: Law schools are like pie eating contests. If you win, you get to eat more pie.

(13) Quick: How would a BP-type railroad accident affect Berkshire?

Buffett:  Our reinsurance unit offers high limits up to $5 billion. You run trains slower in urban areas, down to 35 mph.  We would offer insurance, but the railroad industry did not like our rates and did not buy it.

(14) Ransom: Question about moving capital around within the insurance business.

Buffett:  We have moved cash from subsidiaries to parent company. It’s easier when you have one big pocket such as National Indemnity.

(15) Audience: Question on Asian Infrastructure Investment Bank (AIIB) and if the US should join. Also, will the dollar still be the reserve currency in the future?

Buffett: I know nothing about AIIB.

Munger: I know less than you.

Buffett: The probability that the dollar will be the reserve currency 50 years from now is very high.

Munger: I am nervous about printing a lot of money and spending.  I  prefer it be spent on infrastructure rather than spreading it around from a helicopter.

(16) Sorkin: Question about rebranding Berkshire companies and using the Berkshire Hathaway name.

Munger:  Brands like See’s are enormously valuable.

(17) Gregg Warren: Question on Renewable Energy.

Buffett: There are more opportunities in wind and solar.  Facilities are being developed using tax credits. This enables Berkshire Energy to invest more money, as it is part of the consolidated tax return of Berkshire. Most utilities do not pay that much income tax so they cannot invest as much.

Greg Abel:  58% of energy provided in Iowa is from wind.

(18) Audience:  What was the biggest mistake you have made?

Buffett:  Dexter Shoe was by far the biggest mistake.  We paid $400 million for Dexter in Berkshire stock which is now worth $6 – $7 billion.  Dexter went bankrupt.  We do not like issuing shares.

(19) Loomis: You warned in 2008 about the possibility of inflation.  Are you still concerned about it?

Buffett:  So far I’ve been wrong.  I would not have predicted that you could have five years of zero interest rates and negative rates in Europe without more inflation.  The U.S. can sustain 2-2.5% deficit (GDP) and not increase the debt/GDP ratio.  If there is economic turbulence we are prepared ($60 billion cash).  Most others are not.

(20) Brandt:  Question about the discrepancy between cash taxes and reported taxes ($37 billion) and if the deferred tax liability is similar to float.  Will the deferred taxes ever have to be paid?

Buffett:  He does not look at deferred taxes as a hidden form of equity. Float from insurance is a terrific asset.  Deferred taxes are a plus but not an asset.

(21) Audience:  Question about Henry Singleton’s Teledyne.

Munger:  Henry was a lot smarter than Warren or me.  He had very clever incentives for all of his executives.  But they went too far leading to scandals.

(22) Quick: Is Berkshire too big to fail?

Buffett:  The definition of a SIFI is at least 85% of revenues come from financial related businesses.  Berkshire’s revenue from finance is only around 20%.

(23) Ransom: Question relating to Workers Compensation.

Buffett:  We are experimenting with Workers Compensation.  We’ll see if customers want to buy it.

(24) Sorkin: If 3G ran Berkshire would there be layoffs and emphasis on short term profits?

Buffett:  Geico is run as efficiently as 3G. Berkshire’s home office has only 25 people.

(25) Gregg Warren:  Question on 3G efficiency and private labels vs. brand names.

Buffett:  Private labels have been around for a long time.  Lots of people tried other cola brands. Wilkinson came up with stainless steel blades, but Gillette has 70% of the market.  If you have a good brand and you invest in it, it is a great asset.

(26) Audience: Can value investing be applied in all markets?

Buffett:  Value investing principles apply everywhere.  I would look at stocks the same way as you would look at a farm or an apartment.

(27) Loomis:  How does the threat of chemical, nuclear, biological, and cyber terrorism affect the outlook for Berkshire?

Buffett:  This country has a wonderful future but can be nullified by mad men, rogue states, and sociopaths who wish to have access to weapons of mass destruction. We need to be extremely vigilant with the security of the U.S.  The luckiest person in the world today is the baby being born in the U.S.

(28) Brandt: Question about CEO vs. CIO at Berkshire

Buffett:  I would not want someone whose sole experience is in investments to run Berkshire. I’ve had experience with both running businesses and investments.

Munger: Marketable securities are becoming less important at Berkshire.

(29) Audience: Question about Ted Weschler and Todd Combs.

Buffett: Ted Weschler and Todd Combs are very smart about businesses and investments.  They understand the reality of business operations.  They have qualities of character that are important to Charlie and me.  We want people that you want to be around and hand responsibility to.  Ted worked on this acquisition in Germany (motorcycle accessory firm). He’s smart, has good sense, and knows how to deal with people.  We run into more dysfunctional people with IQ’s of 160 or more.  We’ve seen a group of brilliant people who self-destructed to make money they did not need.  Some people have difficulty functioning day to day even though they have moments of brilliance.

Munger:  Trustworthiness is more important than brains.  We wouldn’t hire anyone if we didn’t trust him or her.


Warren Buffett updated the results of his charity bet:  S&P 500 Index Fund vs. hedge funds (fund of funds):  From 2008 -2014 — cumulative:  S&P 500 up 63.5% vs. hedge fund up 19.6%

Buffett:  Hedge fund managers have done well, but not their investors.

Lunch Break


(30) Quick:  Which types of businesses are best to own during periods of high inflation?

Buffett:  Businesses that do not require reinvestment of capital are good.  Real estate and brands do well in periods of inflation. In capital intensive industries, depreciation charges are inadequate in inflationary periods.

Munger:  If inflation goes out of control, there is big trouble.  If not for the Weimar Republic inflation, we may not have had Hitler. Think of the price the world paid for that.  We don’t want inflation because it is good for See’s Candies.

(31) Ransom:  Is the Berkshire Specialty Insurance business doing well enough that you don’t have to make an acquisition?

Buffett: Berkshire Specialty could be a very big operation 5 – 10 years from now.  We don’t need to buy.

(32) Audience: What advice would you give to build a business with an enduring culture?

Munger:  You get your reputation over a long period of time.

Buffett:  The reputation companies get over time is the one they deserve.

(33) Sorkin: Many insurance companies cite global warming as a risk that impacts their business and pricing.  How does it affect Berkshire?

Buffett:  We price our insurance one year at a time. I see nothing on the global warming front that causes me to change the price.  That doesn’t mean that global warming is not important.  But if I was writing a 50 year wind farm policy in Florida, I would think hard about the effect of global warming.

(34) Gregg Warren:  Question about Berkshire’s investments in ConocoPhillips (COP), Exxon Mobil (XOM) and Berkshire Energy

Munger: XOM wasn’t a bad cash substitute.  The dividend yield was high at the price we paid.

Buffett: But Berkshire Energy is different. There is nothing we like better than backing Greg Abel in buying energy companies. We look for strong management, strong growth prospects, and constructive regulatory jurisdiction as key attributes for an acquisition.

(35) Audience:  Question about the U.S. tax code

Buffett: The share of corporate profits to GDP is at record levels.  But corporate taxes decreased as a percentage of GDP.  It used to be around 4% of GDP 40 years ago and is now around 2%. The tax code can be made more rational but I don’t shed any tears for American businesses over the tax code. American businesses are earning around 15% on tangible equity.

(36) Loomis:  Adam Smith wrote the Wealth of Nations in 1776.  How did it shape your philosophy?

Buffett:  The Wealth of Nations did not shape my investment approach, but I learned economics from it.  If you read Keynes, Adam Smith, Ricardo and “Where are the Customers’ Yachts” (by Fred Schwed), you will learn a lot.  I have used an idea from Adam Smith, division of labor, to let other people do what they are best at and work in the field that they are most productive – such as having the Gates Foundation manage my philanthropic activities.

(37) Brandt: Have you found that management from the public companies you acquire have a harder time making long-term decisions than private companies?

Buffett:  This is not an issue for us. Our managers know how to run Berkshire businesses for the long-term.

(38) Audience: What are the differences between corporate cultures in Germany and the U.S.?

Munger:  Germans are good at technology.  They work hard and produce more.

Buffett:  I predict we will buy at least one (German) company in the next five years.  Berkshire is on their radar screen now.  Prices there are more attractive than in the U.S.

(39) Quick:  Why is my (78 year old shareholder) Geico policy not priced lower than the competition?

Buffett:  Geico has lower prices 40% of the time.  Our competition has different underwriting weightings but on average Geico will be lower.  It’s definitely worth 15 minutes to call Geico.

(40) Ransom:  Question about changes in the reinsurance business.

Buffett:  The reinsurance business is not as good as it was.  It has become a fashionable asset class for funds looking for uncorrelated assets.  This has led to less attractive prices.  But there are certain things in the reinsurance market that only Berkshire can do.

Munger: We are in reinsurance for the long haul.

(41) Audience:  Question from a very young shareholder: How do you make friends and get people to like you?

Munger: I was obnoxious when I was young. So I figured the only way to get people to like me was to get rich and generous quickly.

Buffett: I was obnoxious too but I tried and changed my behavior as I aged.  You should get smarter about human behavior over time. Try to change your behavior to match the attributes you like in others.

Munger: In marriage it is better to change your behavior than your spouse’s.  Look for someone with low expectations.

(42) Sorkin:  Was buying NetJets a mistake?

Buffett:  It’s a good business. We resell planes to owners. We have no anti-union sentiments. The pilots earn $145,000 per year and have 7 days on and 7 days off.  We pay for transportation costs to get to work.  We give pilots more training than anyone else. The labor dispute will get settled.

(43) Gregg Warren:  Since the Duracell business is in decline, would you have done this deal with Procter & Gamble without the tax considerations?

Buffett:  Both Berkshire and Procter & Gamble had tax advantages of doing the deal this way.  We probably would not have done the deal without the tax advantages.  It is similar to a real estate exchange agreement.  Although the battery business will decline it will be around for a long time.  The deal will be completed in the fourth quarter of 2015.

(44) Audience: Question about philanthropy.

Buffett:  I’ve promised to give 99% to charity.  There’s no Forbes 400 in the graveyard. I have everything I need.  But wealth has so much more utility for someone else.

(45) Loomis:  Would you consider returning capital to Berkshire shareholders using assets such as Coca-Cola and American Express in a tax efficient transaction similar to Yahoo’s distribution of Alibaba stock to its shareholders?

Buffett: There is no way to distribute assets to shareholders without paying taxes.   With large gains in marketable securities, I do not see how they get that money to their shareholders without paying taxes.

(46) Brandt: Household formation is low even with low unemployment.  Is this cyclical?

Buffett:  It always turns down in a recession.  You could argue we are still in one.  I suspect young people would want to own homes.

Munger: I have grandchildren who I wish would marry somebody suitable soon.  They should quit looking for the pie in the sky.

(47) Audience: Question on corporate philanthropy.

Buffett: I am a big believer in individual philanthropy rather than corporate philanthropy.  Shareholders should be choosing their own charities.  I do not believe that corporate funds are my money.  We used to have a good shareholder contribution system but we had to change (Note:  Shareholders were able to designate which charities they wanted Berkshire to contribute to on a per share basis for the shares they owned.)

Munger:  My desire to give away somebody else’s money is also very restrained.

(48) Quick:  Question on the Euro and Eurozone.

Munger:  The Euro had a noble motivation and has done a lot of good.  There are countries in the EU that should not be there.  They created something that is unwise. You cannot get into a business partnership with your frivolous, drunken brother-in-law.

Buffett:  The Euro is a good idea that needs some work.  There are flaws that can be corrected.

Munger: The Euro has investment banker aided fraud, not exactly novel.

(49) Ransom: Are there synergies between Van Tuyl (automobile dealerships) and Geico?

Buffett:  I do not think so.  Historically, it has not been effective.

Munger: I agree. It’s a dumb idea. We are not going to do it.

(50) Audience:  Question on the silver market.

Buffett:  I have not paid attention to the silver market in a long time.  The silver market is very small.  It is the byproduct of copper mining.

(51) Sorkin:  If Buffett is going to give away all of his shares, how would Berkshire defend itself from activists?  Would it be a failure if Berkshire is broken up?

Buffett:  There are a lot of benefits to the way Berkshire is structured and there is nothing to be gained by splitting it up.  I think it is unlikely in any long or medium term that the value of the parts will exceed the value of the whole.  The best defense against activism is performance.  The market value of Berkshire will keep rising and I think that will prevent any meaningful activism.

Munger: It is not a constructive activity for activists to indiscriminately urge more share repurchases because they are acquiring shares that trade above intrinsic value.

Buffett: It is a very simple decision.  Can you purchase shares below intrinsic value?  The history of share repurchases shows that it falls off a cliff when prices are low and peaks when stock prices are high.  Berkshire will repurchase shares when they sell for less than 120% of book value, but not at 200% of book value.

Munger:  I can’t think of any activists I want to marry into my family.

(52) Gregg Warren:  How does American Express defend its moat?

Buffett:  Ken Chenault has done a good job of anticipating changes. There is a lot of loyalty to American Express.  I believe that propriety cards are better than co-branded cards.

Munger: I would prefer if they had a little less competition, but that is life.

Buffett:  American Express has an incredible history of adapting. They started as an express company involved in transportation of goods and they were replaced by railroads. They then got into traveler’s checks and Diner’s Club came along with their credit cards.  American Express then started their credit card business and priced it at $5 and built a premium brand.  They are very nimble and very smart.  I am happy we own 15% of the company.

(53) Audience: How do you teach children about finance and money?

Buffett: Encourage good habits (saving) early on. The chains of habit are too light to be felt until they are too heavy to be broken.

(54) Audience: Question about closing out or unwinding Berkshire’s equity put options and deleveraging Berkshire.

Buffett: I would like to close out the equity puts but it is unlikely we can agree on the price.  I think it is unlikely that they just run out over time.  We have very little debt so there is not much to de-lever.  Logically, we should take on more debt at these rates.  We could use debt if a large deal came about.

(55) Audience:  Is the rate of return higher in China on auto dealerships?

Buffett: I don’t think we will get benefits of scale as we buy more auto dealerships.  I do not know the situation in China.  There are 17,000 dealerships in the US and we own 81, so there is room to grow. But the problem is price. We will be using the Van Tuyl price as the yardstick. If anything, we will buy for a price that is a little less.  We would rather buy at 10x or 12x earnings in a bad year than 8x in a good year.

(56) Audience: What is your secret for staying so young and energetic?  Do you use the Internet a lot?

Buffett: If I would have to give up my plane which costs about $1 million a year or give up the Internet which costs about $100, I would give up the plane.   Where else, on a cold, snowy evening, can you get three of your friends together for a game of bridge?

Munger:  Younger people are more likely to use it than we are.

Buffett:  It has changed Geico’s business dramatically.

(57) Audience (Whitney Tilson):  How concerned are you about income inequality?  Do you think raising the minimum wage is a good idea? What impact might this have on the profitability of corporate America?

Buffett:  Since I was born in 1930, the average GDP per capita of the U.S. has gone up by 6 times.  I have nothing against raising the minimum wage, but to raise it to a level sufficient to really change things very much would cost a whole lot of jobs.  I am much more a believer in reforming and enlarging the earned income tax credit, which rewards people who work, but also takes care of people whose skills do not fit well into the market system.

Munger: Well you have just heard a Democrat speaking.  Here is a Republican who agrees with him.  I think if we raise the minimum wage a lot, it would be massively stupid and hurt the poor.  I think it would help the poor to make the earned income tax credit bigger.

(58) Audience: With business schools costing $60,000, how will the average family be able to pay for college tuition?

Munger:  The average American gets education by going to cheaper schools.  Most people are paying less and getting subsidies.  It is a big problem.  Education keeps getting more expensive.  Maybe college students do better because they started better.

Buffett:  College education may be worth more because people going to college earn more.

Munger:  There is a big tendency to raise prices because they can collect it. A lot is happening in education.  In the Great Recession, all universities were overstaffed and they laid off a lot of people.  They worked better.  Rightsizing is not bad.  It is a real problem to look at those sticker shocks.  Pick out the best option and live with it.

(59) Audience: Question on the Chinese economy.

Munger: I’m a big fan of what’s happening in China. They are smart in copying Lee Kuan Yew (Singapore).  LKY drove out corruption.  He paid civil servants better and recruited better. He created a better system and China is essentially copying his system.  China has come so far so fast .  It has never happened in the history of the world that a country of this size has come so far so fast.  That is what Berkshire does, copy bright people.

(60) Audience: How did you figure out operational metrics in new industries/businesses you were evaluating when you started out 50 years ago?

Buffett:  We try to get a feel for what the company would look like 5 – 10 years from now. We kept reading and thinking.  These were easier decisions then than now.  We lean towards things where we are certain to get a decent result vs. getting a brilliant result from something we are not sure of.

Munger: We made some of our luck be being curious and seeking wisdom. But there is nothing like getting your nose whacked to obtain wisdom.  Everyone who has followed the Graham-Newman path has done well.  Our good family backgrounds helped us identify good people.

(61) Audience:  How did you persuade your early investors to invest with you?

Munger:  We didn’t do well until we had a winning record.

Buffett:  I started selling stocks when I was 20 years old. I looked 16 and behaved like I was 12.  I used to walk around town and called on people.  My early investors had faith in me. Ben Graham was winding up his partnership, and he recommended me.

(62) Audience: What matters to you most and why?

Munger:  I was better at figuring things out and I knew I was never going to be good at anything else.  A man’s duty is to become as rational as he can possibly be.

Buffett: What matters most to me is that Berkshire does well.  I get to work with people that I like. We hate losing someone else’s money.  That would keep me up at night.

(63) Audience: What were the most important factors contributing to your early success?

Buffett:  I had a great teacher, exceptional focus, right emotional qualities and enjoyed the game.  Ben Graham’s philosophy made total sense.

Munger: It is an easy game if someone’s got the temperament for it and keeps at it.

(64) Audience: Question on the Wall Street Journal and its moat and advantages

Buffett:  Dow Jones basically owned the financial field and the news ticker in the 60’s and there was incredible growth in the industry for the next 30-40 years.   They missed what was going to happen when Michael Bloomberg comes along and takes away financial information.  They could have pursued other areas and made the company billions of dollars.  They started with a good position, trusted name, and were in every brokerage firm in the country.  Then they let the world pass them by.

Meeting Adjourned

David I. Kass, Ph.D.
Clinical Professor
Department of Finance
4412 Van Munching Hall
Robert H. Smith School of Business
University of Maryland
College Park, MD 20742




ValueWalk published these notes on June 10, 2015

 Posted by at 11:37 am
May 182015

After the market closed on May 15, 2015, Berkshire Hathaway (NYSE: BRK.A, BRK.B) reported its equity holdings of U.S. based companies in its SEC 13F filing for the quarter ending March 31, 2015.  This report revealed numerous changes to Berkshire’s portfolio.  The largest were:

(1) Warren Buffett added about $400 million (3%) to his holding in International Business Machines (NYSE:IBM) ($13.8 billion)

(2) Warren Buffett added about $350 million (1.5%) to his holding in Wells Fargo (NYSE: WFC) ($26 billion).

(3) Todd Combs added about $300 million (50%) to his position in Precision Castparts (NYSE: PCP) ($900 million)

(4) Todd Combs sold about $200 million (60%) of his holding in National Oilwell Varco (NYSE: NOV) ($100 million).

(5) Warren Buffett added about $150 million (5%) to his holding in US Bancorp (NYSE: USB) ($3.7 billion)

So how did these stocks perform on their first day of trading (May 18, 2015) after release of Berkshire’s 13F filing?

(1) IBM declined by 0.12% ($173.06 – $0.20).  (Warren Buffett had previously mentioned this increased investment during an interview on CNBC on May 4.  IBM rose 0.2% on May 4.)

(2) WFC rose by 0.41% ($55.75 +$0.23).

(3) PCP rose by 1.64% ($219.02 +$3.53).

(4) NOV declined by 0.18% ($51.18 – $0.09).

(5) USB rose by 0.61% ($44.20 + $0.27).

These price changes occurred in a slightly positive market on May 18, with the S&P 500 rising 0.30% and the Dow Jones Industrial Average closing higher by 0.14%.

With the exception of IBM (with news of Berkshire’s additional investment being released on May 4), each of the largest additional investments outperformed the market on May 18, while the one major reduction in Berkshire’s portfolio resulted in a decline of that stock.  PCP produced the largest outperformance with a gain of 1.64%.

Thus, the “Berkshire Hathaway Effect” of investors closely following Berkshire’s transactions appears to be taking place. It is important to note that one of Mr. Buffett’s portfolio managers, Todd Combs, is believed to have purchased the additional shares in PCP, and to have sold the shares in NOV.

 Posted by at 6:48 pm
May 172015

After the market closed on May 15, 2015, Berkshire Hathaway (NYSE: BRK.A, BRK.B) reported its equity holdings of U.S. based companies in its SEC 13F filing for the quarter ending March 31, 2015.  This report revealed numerous changes to Berkshire’s portfolio.  The largest were:

(1) Warren Buffett added about $400 million (3%) to his holding in International Business Machines (NYSE:IBM) ($13.8 billion)

(2) Warren Buffett added about $350 million (1.5%) to his holding in Wells Fargo (NYSE: WFC) ($26 billion).

(3) Todd Combs added about $300 million (50%) to his position in Precision Castparts (NYSE: PCP) ($900 million)

(4) Todd Combs sold about $200 million (60%) of his holding in National Oilwell Varco (NYSE: NOV) ($100 million).

(5) Warren Buffett added about $150 million (5%) to his holding in US Bancorp (NYSE: USB) ($3.7 billion)

Berkshire also had minor additions to stakes in Deere (NYSE: DE), Phillips 66 (NYSE: PSX), and Twenty First Century Fox (NASDAQ: FOXA).

There were also minor reductions in Bank of New York Mellon (NYSE: BK), Charter Communications (NYSE: CHTR), Liberty Global (NASDAQ: LBTYA), MasterCard (NYSE: MA), Viacom (NASDAQ: VIAB), Visa (NYSE: V), and Wabco (NYSE: WBC)

There were no positions that were either initiated or eliminated.

Berkshire’s 13F filing for the first quarter of 2015 is available at:




 Posted by at 10:17 am
May 042015

Warren Buffett (WB)was interviewed for three hours on CNBC today from 6 a.m. – 9 a.m.   The highlights of this interview are:

(1) WB strongly endorsed Berkshire’s investment in IBM, which is one of its (BRK) four largest holdings. Berkshire is IBM’s largest shareholder and owns almost 80 million shares or about 8% of its shares, currently valued at over $13 billion.  WB added to his position during the first quarter of 2015.  IBM has reduced its shares outstanding from 1.6 billion 10 years ago to about 985 million today through stock buybacks.  It has also reduced its employee stock options from 250 million shares 10 years ago to just a few million today.  IBM is buying back stock at prices below what the stock is worth and therefore adding to shareholder value.  Wells Fargo and American Express are large customers of IBM as is Geico (Watson data analytics).  IBM is trusted and innovative.  Although its share of the cloud is small, it will do well in the future since this is not a winner take all business as is search.  Since IBM has no net tangible equity it is earning infinite returns.  (At the BRK annual meeting on May 2, both WB and Vice Chairman Charlie Munger (CM) endorsed their investment in IBM — CM said they “voted 2 – 0″ to invest in IBM.)  IBM CEO Ginni Rometty said IBM’s data analytics business grew 7% last year and at 12% during the first quarter.  IBM has been returning $10 – $11 billion to shareholders per year through stock buybacks and dividends.

(2) Stocks are cheap relative to bonds.  If interest rates rose to normal levels, then stock prices would be high (but not excessively high).  If interest rates stay low for 10 years, then stocks are greatly undervalued.

(3) WB vigorously defended Clayton Homes against charges made in the Seattle Times about predatory pricing.

(4) In response to NetJets pilots picketing the annual meeting on Saturday, WB mentioned that they are paid an average of $145,000 per year which is higher than their competitors and they are also treated better with 7 days on duty and 7 days off.  NetJets pilots are not leaving BRK to go to its competitors.  On the contrary, pilots from its competitors are lining up to join NetJets.  The NetJets pilots union is objecting to Berkshire’s plan to have the pilots contribute to the cost of their health insurance.

(5) WB deflected criticism about its partnership with 3G Capital leading to large layoffs at Heinz (HNZ).  WB stated that HNZ was inefficient with too many employees.  Also plants that were shut down were losing money. 3G Capital turns inefficient firms into efficient firms.  Both BRK and 3G Capital are long term investors and plan to grow the company (HNZ) and not sell it after a few years as is typically done by private equity firms.

(6) BRK is not too big too fail.  Regulators have not contacted BRK about being possibly designated  a Systemically Important Financial Institution (SIFI) which would require additional regulations and capital requirements.

(7) Both WB and CM agreed that earned income tax credits are a far better solution to income inequality than raising the minimum wage.

(8) WB is concerned about the Federal Reserve raising interest rates when European and other countries are lowering them.

(9) WB is not concerned about the amount of sugar in Coca-Cola and Heinz Ketchup.  These products have had  sales increase for over 100 years and will continue to do so.  WB said that 1/4 of his calories comes from Coca-Cola and he has never felt better.  (At the annual meeting WB said that if he had to eat broccoli he would not live as long since he would not be happy.  “People who shop at Whole Foods do not look happy”.)

(10) WB thinks the European Union will evolve and change over time.

 Posted by at 11:34 am
Apr 302015

I am quoted in this Wall Street Journal article (April 30, 2015) on Berkshire after Buffett:

Shareholders also say it is reassuring that some younger Berkshire executives are taking on additional responsibilities on Mr. Buffett’s watch. David Kass, a Berkshire shareholder and professor of finance at the University of Maryland, saidTed Weschler and Todd Combs, the two stock pickers Mr. Buffett hired a few years ago as part of his succession plan, have performed well for most of their time at Berkshire. The two also “have negotiated on behalf of Berkshire a lot of tax-advantaged transactions, and they are on the same page as Buffett,” he said. Mr. Combs, for instance, handled the complex deal last year involving the swapping of Procter & Gamble Co. shares owned by Berkshire for battery maker Duracell.

The entire article is available at:


 Posted by at 4:05 pm