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: