Feb 282020
 

I am quoted in the Baltimore Sun on the coronavirus and the stock market.

“There is a lot of uncertainty,” said David I. Kass, a clinical professor of finance at the University of Maryland’s Robert H. Smith School of Business. “No one knows the degree that Americans or any company will be affected. … There’s concern over, ‘How bad will this get?’ and ‘When will it end?’ 
 

Kass said he believed the market sell-off to be an overreaction.

“Most stock investors, I recommend, be long term,” he said. “Short-term traders and speculators I can see being concerned. I believe the coronavirus probably will be resolved for the most part in a year,” after more medical interventions are developed and available. “The economy will start recovering and so would the stock market.”

Kass said Maryland companies’ stock sell-offs, in line with the broader market, show “the market believes that they’re not any more vulnerable to the coronavirus than the rest of the economy on average.” 

 

 

 Posted by at 11:13 pm
Feb 242020
 

Warren Buffett was interviewed on CNBC from 6:00 a.m. – 9:00 a.m.

These are 30 highlights:

(1) Buying stocks is the equivalent of buying businesses.

(2) Stocks grow in value because of companies investing retained earnings.

(3) Stocks are cheaper than bonds. The 30 year U.S. Treasury is yielding 2% and, therefore, selling for 50 times earnings.

(4) Berkshire is a net buyer of stocks.

(5) Businesses will be worth a lot more in 20 years and 30 years from now. He cannot predict the stock market 6 months or a year from now.

(6) Retail is moving to online.

(7) 3 of 4 Berkshire airline positions are Buffett’s investments. The other is the position of one of his portfolio managers. Berkshire is not interested in buying an airline.

(8) Berkshire is selling Wells Fargo gradually over time.

(9) We have never seen such low interest rates. This hurts insurance companies paying 3% annuities while investing at 1%. This is good for the U.S. budget and borrowers.

(10) It’s better to adjust your consumption to your income rather than try to adjust your income to accommodate your consumption.

(11) He likes to buy stocks on 3% declines. He is not selling today.

(12) Berkshire allocates capital among its companies.

13) Coronavirus likely to last past summer and could affect Berkshire annual meeting.

(14) Barron’s recommended breakup of Berkshire would be tax inefficient.

(15) Berkshire shareholders are long-term holders.

(16) Wells Fargo did not attack their problem immediately.

(17) Geico is Buffett’s first love. Todd Combs’ role at Geico is not long term. He hopes Todd will return to Omaha soon. Progressive doing better job on pricing insurance.

18) Berkshire will outperform market in down markets and slightly outperform S&P 500 over time. It is comprised of 80% equities (stocks and businesses) and 20% cash.

(19) Reluctant to endorse Sanders even though he is a Democrat. He would vote for Bloomberg. Opposes giving employees 20% of stock and board seats (Sanders proposal).

(20) If Bloomberg was elected, Buffett would not buy his company.

(21) He has retired his flip phone and now uses a smart phone, but uses it only as a phone. Buffett said he’s been given several smart phones, including one from Apple’s Tim Cook.

(22) It makes no sense to buy Treasuries paying 1.4% (taxable) with government policy producing 2% inflation.

(23) “I don’t think of Apple as a stock. I think it’s our third largest business. It’s an incredible company and I should have appreciated it earlier”

(24) Directors are not independent when they are compensated $350,000 per year.

(25) Cryptocurrency has no value.

(26) Kroger’s investment made by one of his portfolio managers.

(27) Kraft Heinz can reduce its debt and pay its dividend. It is a good business but we paid too much.

(28) Ajit Jain and Greg Abel will sit near the front at the annual meeting so they can be available to answer questions.

(29) He is buying businesses every day without regard to coronavirus

(30) Major league baseball will recover from the Houston Astros sign stealing scandal.

 

 

 Posted by at 9:29 am
Feb 222020
 

Ten highlights of Warren Buffett’s Letter to Shareholders:

(1) Berkshire’s Class A shares closed Friday at $343,499, up 1.1% for the year. In contrast, the S&P 500 is up 3.3% this year.  Berkshire’s stock rose 11% in 2019 compared with a 31.5% total return in the S&P 500, including dividends—Berkshire’s biggest underperformance since 2009.  Berkshire’s compounded annual gain from 1965-2019 (55 years) equals 20.3%, which is more than double the 10.0% compounded annual gain for the S&P 500.  Buffett dropped his usual discussion of book value.  When Berkshire realizes capital gains, it pays a federal tax rate of 21%.  (Note:  Berkshire would have “79 cent dollars” to reinvest on realized profits which would have to appreciate by 27% to recover their pre-tax value.)

(2) Reinvesting retained earnings in Berkshire’s businesses will result in substantial growth over time (“compound interest”).  Berkshire’s cash position equaled $128 billion at year end 2019.  This represents 23% of its market capitalization of $560 billion. Berkshire’s biggest deal in 2019 was a  $10 billion deal in Occidental Petroleum (8% preferred stock and warrants to purchase common stock) to assist its bid to acquire Anadarko Petroleum Corp.  Some of Berkshire’s 60-odd subsidiaries spent $1.7 billion on bolt-on acquisitions in 2019 up from $1 billion the prior year.

(3) Berkshire seeks to buy businesses that meet three criteria: (1) they must earn good returns on the net tangible capital required in their operation, (2) they must be run by able and honest managers, and (3) they must be available at a sensible price.

(4) Berkshire prefers to buy 100% ownership of businesses, but otherwise will buy large, but non-controlling positions in publicly traded companies that meet its standards.

(5) Questions at the annual meeting may now be addressed to Greg Abel and Ajit Jain, in addition to Warren Buffett and Charlie Munger.  There will no longer be three analysts on the stage asking questions.

(6) Berkshire posted a 23% decline in operating earnings of $4.4 billion, down from $5.7 billion a year earlier, due to lower results in insurance underwriting and some of Berkshire’s smaller operating businesses. Although Buffett stated that Berkshire’s insurance business has been the superstar. Its property/casualty business has been the engine propelling Berkshire’s growth. It has had an underwriting profit in 16 of the past 17 years.

(7) Berkshire’s common stock investments, on a weighted basis, are earning more than 20% on the net tangible equity capital required to run their businesses, and they earn their profits without employing excessive levels of debt.

(8) Stocks will outperform bonds over time if interest rates prevail close to current rates and corporate tax rates remain near the low level businesses now enjoy.  “Equities are a much better long term choice for the individual who does not use borrowed money and who can control his or her emotions. Others? Beware!”

(9) People should pursue professionally what they are good at.  “We are all duds at one thing or another.  For most of us the list is long.  The important point to recognize is that if you are Bobby Fischer, you must play only chess for money.”

(10) In 2019, Berkshire purchased $5 billion of its shares, or about 1% of the company when the “price/value discount was modestly favorable”.

 

 Posted by at 10:50 am
Feb 212020
 
In advance of Warren Buffett’s letter to shareholders to be released tomorrow morning, Barron’s this evening published my Letter to the Editor relating to their cover story on Berkshire published last week:
To the Editor:

Although I agree with Andrew Bary’s positive outlook for Berkshire Hathaway, I disagree with the suggestion of a corporate breakup.

Buffett has stated that a CEO’s primary role is to allocate capital. Under Berkshire’s current structure, the free cash flow generated by each of its numerous businesses can be quickly distributed internally to those businesses with the highest expected return on capital. Furthermore, by being under the Berkshire umbrella, each business can focus on maximizing its long-term profits without being subject to the pressure of meeting short-term targets set by activist investors and analysts.

On a second issue, although the author mentions that Berkshire gets only 20% of its earnings from its investments, its $240 billion equity portfolio represents 44% of its market capitalization of $550 billion. Berkshire’s common stock portfolio, led by its largest investment, its stake in Apple ($81 billion), substantially outperformed the S&P 500 index in 2019, while its own common stock underperformed this benchmark. This is a further indication of Berkshire being undervalued. Buffett’s two portfolio managers, Todd Combs and Ted Weschler, have outstanding track records and are likely to continue outperforming the S&P 500 in the future.

David I. Kass, Clinical Professor of Finance, University of Maryland, College Park, Md. 

 Posted by at 9:52 pm
Feb 142020
 

In Its SEC Form 13F filing released after the market closed on February 14, Berkshire Hathaway reported major changes to its portfolio during the fourth quarter of 2019.  The largest changes were:

 

New Stakes

Kroger (KR) + $550 million

Biogen (BIIB) + $200 million

 

Increased Stakes

Occidental Petroleum (OXY) + $500 million

RH (RH) + $165 million

Suncor Energy (SU) + $150 million

 

Reduced Stakes

Wells Fargo (WFC) – $1.5 billion

Goldman Sachs (GS) – $1 billion

Travelers (TRV) – $850 million

Phillips 66 (PSX) – $500 million

 

 

 

 

 

 

 Posted by at 4:51 pm
Feb 102020
 

The 10 largest common stock investments in Berkshire Hathaway’s portfolio had a one year weighted return of 44% through February 7, 2020. This was almost double the 23% return from the S&P 500 over this time period.

The top 10 stocks represent approximately 80% of the total value of Berkshire’s common stock investments.

8 out of the top 10 stocks rose in the past 12 months, with Apple (+ 87%) and Moody’s (+ 66%) having the largest percentage price increases. Only Kraft Heinz (-37%) and Wells Fargo (-1%) declined in price.

Since Berkshire’s portfolio of $220 billion represents about 40% of its $550 billion market capitalization, and Berkshire appreciated by only 13% in the past 12 months, this is an indication of Berkshire being undervalued.

 

The one year rate of return on Berkshire’s top 10 stock holdings as of February 7, 2020:

(1) Apple (Berkshire’s current investment: $80 billion) + 87%

(2) Bank of America ($33 billion) +23%

(3) Coca-Cola ($24 billion) +20%

(4) American Express ($20 billion) +26%

(5) Wells Fargo ($18 billion) – 1%

(6) Kraft Heinz ($10 billion)  – 37%

(7) JPMorgan Chase ($8 billion) +34%

(8) U.S. Bancorp ($7 billion) +7%

(9) Moody’s ($7 billion) +66%

(10) Goldman Sachs ($4 billion) + 23%

1 year weighted return on the top 10 stocks  +44%

1 year rate of return on S&P 500  +23%

1 year rate of return on Berkshire Hathaway  +13%

 

 

 

 Posted by at 8:25 am
Feb 092020
 

The one year rate of return on Berkshire’s top 10 stock holdings as of February 7, 2020:

(1) Apple ($80 billion) + 87%

(2) Bank of America ($33 billion) +23%

(3) Coca-Cola ($24 billion) +20%

(4) American Express ($20 billion) +26%

(5) Wells Fargo ($18 billion) – 1%

(6) Kraft Heinz ($10 billion)  – 37%

(7) JPMorgan Chase ($8 billion) +34%

(8) U.S. Bancorp ($7 billion) +7%

(9) Moody’s ($7 billion) +66%

(10) Goldman Sachs ($4 billion) + 23%

1 year weighted return on the top 10 stocks  +44%

1 year rate of return on S&P 500  +23%

1 year rate of return on Berkshire Hathaway  +13%

 

Note: 

(1) 8 out of the top 10 stocks rose in the past 12 months, with Apple (+ 87%) and Moody’s (+ 66%) having the largest percentage price increases. Only Kraft Heinz (-37%) and Wells Fargo (-1%) declined in price.

(2) The top 10 stocks represent approximately 80% of the total value of Berkshire’s common stock investments.

 

 

 

 Posted by at 8:33 am
Feb 022020
 

The one year rate of return on Berkshire’s top 10 stock holdings as of January 31, 2020:

(1) Apple ($77 billion) + 86%

(2) Bank of America ($31 billion) +15%

(3) Coca-Cola ($23 billion) +21%

(4) American Express ($20 billion) +26%

(5) Wells Fargo ($18 billion) – 4%

(6) Kraft Heinz ($10 billion)  – 39%

(7) JPMorgan Chase ($8 billion) +28%

(8) U.S. Bancorp ($7 billion) +4%

(9) Moody’s ($6 billion) +62%

(10) Goldman Sachs ($4 billion) + 20%

S&P 500 +19%

Note:

(1) 8 out of the top 10 stocks rose in the past 12 months, with Apple (+ 86%) and Moody’s (+ 62%) having the largest percentage price increases. Only Kraft Heinz (-39%) and Wells Fargo (-4%) declined in price.

(2) The average return on the top 10 stocks (unweighted) +22%

(3) 1 year rate of return on Berkshire Hathaway +8%

 Posted by at 12:59 pm