Warren Buffett’s Annual Letter to Shareholders

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Feb 252012
 

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

 Posted by at 3:17 pm

Berkshire Hathaway Adds $745 Million to its DirecTV Stake

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Feb 152012
 

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

 
 
 
 
 
 
 
 
 
 
 

 

 Posted by at 6:02 pm

Berkshire Hathaway’s $5 Billion Investment in Goldman Sachs in 2008 Has Resulted in a 50% Return

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Feb 012012
 

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

 Posted by at 9:43 am