Warren Buffett Chooses Defense Over Offense

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Oct 272010
 

I am quoted in this Bloomberg article on Warren Buffett, October 27, 2010:

Buffett Picking Combs Means Defense Beats Offense at Berkshire

By Saijel Kishan

Oct. 27 (Bloomberg) — Warren Buffett’s selection of little-known hedge-fund manager Todd Combs to help oversee investments at Berkshire Hathaway Inc. shows how the billionaire values limiting losses when markets decline.

Work Ethic

Combs received an undergraduate degree from Florida State University and a master’s of business administration from Columbia University, where Buffett studied.

Buffett, chairman and chief executive officer of Berkshire, is seeking candidates to take over his duties when he steps away. He said in 2006 that hedge funds, which he described as “hyper-helpers,” overcharge investors.

“Particularly expensive is the recent pandemic of profit arrangements under which Helpers receive large portions of the winnings when they are smart or lucky,” he said in an annual letter.

“He’s not tarring every hedge fund manager with the same brush,” said David Kass, finance professor at the University of Maryland. “Warren has said that he hires people who he likes, those that share his same work ethic and value system. They love their work more than the money.”

October 27, 2010 00:01 EDT

The entire article is available at: 

http://www.bloomberg.com/news/2010-10-27/berkshire-picking-hedge-fund-manager-combs-shows-buffett-prefers-defense.html

 

 

 Posted by at 8:10 am

Warren Buffett Hires New Investment Manager

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Oct 252010
 

Berkshire Hathaway has announced that Todd Combs, 39, the portfolio manager of the hedge fund Castle Point Capital, will soon be joining Berkshire as an investment manager.  

Warren Buffett stated: “For three years Charlie Munger and I have been looking for someone of Todd’s caliber to handle a significant portion of Berkshire’s portfolio.  We are delighted that Todd will be joining us.” 

At the May 5, 2007 Berkshire Hathaway Annual Meeting, Buffett responded to a shareholder question on this subject as follows:

                Berkshire has received 600-700 applications.  One or more investment officers will be hired.  The successful candidate(s) should be able to scale up from $100 million to $100 billion and perform “mildly better” than the S&P 500 while managing $100 billion under the unprecedented conditions of the future. Many smart people have gone broke even though they were right  99% of the time.  We are looking for someone who can judge and avoid high risk situations.  Berkshire may initially hire 3 – 4 people with each being given $3 – $5 billion to manage.  Then one or more will get the job.  In 1969, when Warren Buffett ended his investment partnership, he referred his investors to Charlie Munger, David Gottesman, or Bill Ruane (Sequoia Fund).  In 1979, Warren Buffett hired Lou Simpson as the chief investment officer for GEICO. Since Warren Buffett was able to identify these superior money managers in the past, he expects to do likewise in his current search.  (Note:  In late August 2010, Lou Simpson announced that he planned to retire at the end of 2010.)

From Castle Point Capital’s latest SEC Form 13F filing, as of June 30, 2010 its ten largest holdings, primarily shares of  financial services companies, were:

                                    Market Value           Percentage of Portfolio

(1) U.S. Bancorp ($22.8 million)                             8%

(2) Mastercard  ($20.4 million)                               7%     

(3) State Street  ($19.0 million)                               7%      

(4) Western Union  ($18.3 million)                         7%

(5) CME Group  ($14.4 million)                                 5%

(6) Renaissance Re  ($14.3 million)                         5%

(7) Pennymac   ($13.0 million)                                  5%

(8) Chubb ($12.8 million)                                             5%

(9) Starwood Property Trust ($12.5 million)        4%                                                         

 (10) Annaly Capital ($12.2 million)                        4%

The top ten holdings comprise 57% of the fund’s total long positions of $279.7 million.

 Posted by at 7:11 pm

Warren Buffett Plans to Invest More in Israel

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Oct 182010
 

In a video interview screened on October 12, 2010 in Israel, Warren Buffett stated: “We are always interested in more investments in Israel.  We will be happy to acquire a large and independent company in Israel, or some small companies … and I think we will do both.”

 More than four years ago, Berkshire Hathaway acquired 80% of the Israeli company Iscar Ltd. for $4 billion.  Buffett later said that purchasing Iscar, an industry leader in the metal cutting tools business, was a “dream investment”. 

 Buffett added that he believes that Israel has a sustainable advantage in the global competitive marketplace.  “If you are looking for brains – stop in Israel, there is no need to go further.  In my opinion, Israel as a state has proven that it has an exceptional amount of brains and energy and in my eyes it works.”

 One additional attraction of Israel is its projected growth rate.  Israel’s economy is forecast to grow at least 4 percent in both 2010 and 2011.

 (Source:  IsraelNationalNews.com October 14, 2010)

http://www.israelnationalnews.com/News/News.aspx/140071

 Posted by at 6:49 pm
Oct 012010
 

Recently both Warren Buffett and Charlie Munger of Berkshire Hathaway, along with highly regarded economists Nouriel Roubini, Robert Shiller, and Martin Feldstein have expressed their concern about the slow pace of the ongoing economic recovery from the most severe recession, in both length of time and depth of decline, since the 1930’s.  They have also mentioned the risk of a “double-dip” recession.

However, Warren Buffett on many occasions has stated that his outlook for the economy does not indicate what direction the stock market is likely to follow.  As a “bottoms up” investor, Mr. Buffett focuses on identifying undervalued investments, and not on the timing of those purchases.  Despite the outlook for relatively weak economic growth in the near future, the performance of the stock market in 2011 may outperform the current expectations of many based on historical precedent – namely, the “Presidential Cycle”.

A table on page 2 of the 2009 Berkshire Hathaway Annual Report displays a series of annual returns to the S&P 500 (including dividends).  Over the 45 year period from 1965 – 2009 shown on this table, the compounded annual return to the S&P 500 has equaled 9.3%.  However, in the 8 instances over this time period, in the third year of a president’s first term, the average annual total return to the S&P 500 has equaled 27.5%, with a range from 18.2% in 1979 to 37.6% in 1995.  In the three cases of  a Democrat in the White House (Johnson 1967, Carter 1979, and Clinton 1995) the average gain for the third year of their presidency was 28.9%.  With Republicans in the White House (Nixon 1971, Ford 1975, Reagan 1983, George H.W. Bush 1991, and George W. Bush 2003) the average gain was 26.7%.

Is this observation just a statistical oddity, or is there a good explanation?  One possible explanation of the “third year effect of a presidential cycle” is the desire of the incumbent to be re-elected.  Since the state of the economy on election day is a major determinant of whether an incumbent president keeps his job, a stimulative fiscal policy (and sometimes an accompanying stimulative monetary policy) can be expected.  Since the stock market forecasts future economic conditions, it would not be too surprising to see it rise in the year before the President seeks re-election.  If this trend is to continue, in 2011, which is the third year in President Obama’s term, the stock market may do very well.

 Posted by at 3:37 pm