Highlights of Warren Buffett’s CNBC Interview on March 4, 2013

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Mar 062013
 

On March 4, 2013, Warren Buffett was interviewed from 6 a.m. – 9 a.m. EST.  These are the highlights of that interview in the order they were discussed:

 

(1) The rate of change in the book value of Berkshire Hathaway (BRK), which is Buffett’s proxy for intrinsic value, is likely to underperform the S&P 500 in a rising stock market because BRK invests only 1/3 of its assets in stocks (vs. 100% in the S&P 500) and BRK pays a 35% corporate tax rate.

(2) BRK purchased Heinz (HNZ) in parnership with 3G Capital.  Buffett likes the business, his partner, and the price.  His partner, Jorge Paulo Lemann, will do the work (managerial oversight).  BRK will own HNZ 100 years from now.  If 3G Capital sells some HNZ shares in the future, Buffett will buy them.  BRK received a 9% preferred stock (HNZ) which can be called at a premium.  The preferred stock minimizes debt leverage.   Buffett also received warrants to purchase an additional 5% of HNZ stock.  Jorge is the best manager in the world.  3G is the managing partner, BRK is the financing partner.  BRK would not have purchased HNZ at this price without Paulo as a partner.  There was insider trading in HNZ call options the day before the deal was announced.  Many people knew about this deal, including four investment banking firms, lawyers, and other parties.

(3) Buffett would buy BRK shares at prices up to 120% of book value.  He purchased shares at that price in December from a $1.2 billion estate.  Buffett stated: “Whether BRK is worth 135% or 138% of book value, no one knows.”  (Note:  At BRK’s closing price of $154,425 on March 5, it is at 135% of BRK’s book value of $114,214 on December 31, 2012.  This is also BRK’s all-time closing high.)

(4) “Lots of people will get out of assets (e.g., stocks, bonds, etc) when the Federal Reserve begins to disgorge (sell the bonds that it is buying).”  Stock prices are higher today because of zero interest rates which also contributes to mergers and acquisitions since firms can borrow at rates close to zero.

(5) Buffett never considers the macroeconomic environment when deciding when to buy or sell a stock.

(6) Buffett is looking for the “right business at the right price”.

(7) Bank of America (BAC) is cleaning up its balance sheet and has a low cost deposit base.

(8) Apple (AAPL) should ignore Einhorn (return cash to shareholders) and focus on running the company for the next five years.

(9) BRK’s largest common stock holding is in Wells Fargo (WFC).  Buffett added to his WFC holding this year.  (Note: This is the only stock that BRK has added to in every year since 2005.)   Buffett has not bought or sold any shares in 20 years in his second largest holding, Coca-Cola (KO).  “WFC is cheaper.”

(10) Buffett will give $1 billion more to both Todd Combs and Ted Weschler to invest at the end of March. They will then each have $6 billion to invest.  Todd and Ted each made $120 million last year.  If they were running a hedge fund earning 2/20 they could earn $400 million.  But they will be at BRK for another 20 years.  They each run concentrated portfolios of 5 stocks and 11 stocks. respectively.  (Note: I believe that Ted’s portfolio has 5 stocks and Todd’s has 11 stocks.)  They are both very smart and each has DirecTV (DTV) in his portfolio.  DTV is their first investment listed in Buffett’s letter with a value of over $1 billion.  DaVita (Ted Weschler) also exceeds $1 billion, but part of it is in BRK pension funds.  BRK owns over 13% of DVA (which is a kidney dialysis company).

(11) BRK’s derivatives would have a profit if they settled today.  They cannot be settled before 2018 -2026.  He sold puts on four major international stock indexes.  BRK received $4.2 billion in premiums for these contracts and did not have to put up collateral.  Since collateral is required today, BRK would not sell any more similar contracts.  If there was a once in a century event (stock market crash of 1987, nuclear, chemical, or biological attack) the collateral could be required on 24 hour notice.

(12) “Geico is shooting the lights out.”  They are adding 165,000 – 170,000 new auto policies annually.  Superstorm Sandy cost Geico three times as much as Hurricane Katrina since Geico is number one by market share in the New York metropolitan area.

(13) Local community newspapers are a good business which is declining.  (BRK has been purchasing several of these recently.)  He is buying these newspapers at low prices.

(14) Buffett’s “job is to beat the S&P 500 over time”.  He is always optimistic on the economy.

(15) In terms of possible future purchases of large companies in consumer products, there is nothing that he is now interested in.  He does like those businesses.  He is currently exploring a large acquisition in another industry and thinks there is a 5% – 10% chance that it will work out.

(16) Buffett “advertised” in his annual letter for a “bear” on BRK to ask questions and liven up the next annual meeting.  He announced the selection of Doug Kass (no relation) to be the Berkshire Bear.  (Note:  He runs the hedge fund, Seabreeze Partners, which usually has a net short position.  He currently has a short position in BRK).

(17) Stocks are undervalued in relation to other assets such as bonds and farmland.  If interest rates go up, all assets will go down.  The dumbest investment now is a long term government bond.

This blog post has been published by Investing.com:

http://www.investing.com/analysis/highlights-of-warren-buffett%E2%80%99s-cnbc-interview-on-march-4,-2013-158030?preview_fp_admin_1234=this_is_1234

 

 Posted by at 12:50 pm

Highlights of Warren Buffett’s 2012 Letter to Shareholders

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Mar 022013
 

After the financial markets closed on March 1, Warren Buffett released his much anticipated Letter to Shareholders.

These are some of the highlights:

Warren Buffett was disappointed with Berkshire Hathaway’s (BRK) performance in 2012 for two reasons.  First, BRK’s book value per share rose at only 14.4% compared to the 16.0% achieved by the S&P 500 with dividends included.  This is the third time in the last four years that BRK has underperformed the S&P 500.  Second, BRK was unable to make a large acquisition (more than $10 billion).  (However, in February 2013, BRK was successful in investing $12 billion for a 50% ownership stake in Heinz.  3G Capital purchased the other 50% of Heinz in partnership with BRK.)

But, there was also a lot of good news in 2012.  The five most profitable non-insurance companies owned by BRK (BNSF, Iscar, Lubrizol, Marmon Group, and MidAmerican Energy) did extremely well.  In addition, BRK’s insurance operations, led by GEICO, had an outstanding year.  Insurance is BRK’s core operation and it is “the engine that has propelled our expansion over the years.”

BRK’s new investment managers, Todd Combs and Ted Weschler, each outperformed the S&P 500 by double-digit margins.  Warren Buffett stated:  ‘They left me in the dust as well”.  Combs and Weschler are now each managing about $5 billion.  Warren Buffett’s letter lists 15  BRK common stock investments that at year end 2012 had a market value of more than $1 billion.  One of these stocks, DIRECTV, is the first stock to be selected by Combs or Weschler to meet this threshold.  It is being held in the portfolios of both Combs and Weschler.

In 2012, BRK increased its ownership interest in its “Big Four” investments (Wells Fargo, Coca-Cola, IBM, and American Express).

Warren Buffett remains very optimistic.  Both American business and stocks will do fine over time.  “The risks of being out of the game are huge compared to the risks of being in it.”

Warren Buffett discussed his views on dividend policy.  Since BRK has had excellent opportunities to reinvest its retained earnings over its 48 year life, it has never paid a dividend.  Companies should be consistent with respect to dividend policy.  Either they should pay dividends every year, or they should not pay dividends at all.  They should not be paying dividends in some years and not in others.  An inconsistent dividend policy would confuse investors.

With respect to share buybacks, value is destroyed when purchases are made above intrinsic value.  Warren Buffett considers the book value of BRK to be a “significantly understated proxy” for its intrinsic value.

I am quoted in a Bloomberg article on the release of Warren Buffett’s Letter to Shareholders and BRK’s annual report:

Buffett, 82, uses index put options to speculate on long- term gains in stock-market indexes in the U.S., Europe and Japan. Those bets added $2 billion to profit in the fourth quarter before taxes as Japan’s Nikkei 225 (NKY) Stock Average rallied.

“The probability of Berkshire ever having to take a loss on these contracts is very low” because they won’t be settled for years, said David Kass, a professor at the University of Maryland’s Robert H. Smith School of Business, who has taken groups of students to visit Buffett in Omaha.

The entire article is available at:

http://www.bloomberg.com/news/2013-03-01/berkshire-profit-advances-49-on-buffett-s-derivatives.html

This blog post has been published by Investing.com (formerly Forexpros and Forex.com):

http://www.investing.com/analysis/highlights-of-warren-buffett%E2%80%99s-2012-letter-to-shareholders-157400

 

 

 Posted by at 8:43 pm