May 152018

In its SEC Form 13F filed after the market closed today, Berkshire Hathaway revealed the following major portfolio changes that were not previously reported:

(1) Teva Pharmaceuticals (TEVA) – a $400 million or 115% increase in its stake.  (Likely purchase of Todd Combs or Ted Weschler)

(2) Monsanto (MON) – a $800 million or 62% increase in its stake.  (Note: Monsanto closed at $125.29 per share today and it is being acquired by Bayer at $128 per share.)


 Posted by at 5:10 pm
May 152018


May 15, 2018

World Class Faculty & Research
David Kass
Since 2006, finance professor David Kass has led students from the University of Maryland’s Robert H. Smith School of Business on an annual trek to Omaha, Nebraska, to partake in the Berkshire Hathaway Annual Shareholders Meeting. This year he and Smith School finance professor Elinda Kiss tried something different. They hosted more than 100 students, faculty and staff for a “Watch & Learn” event on May 5, 2018, at Van Munching Hall.

Beginning at 9:45 a.m., the 7-hour event was live-streamed via Yahoo Finance into Frank Auditorium, and the two professors answered questions and provided insights into some of Warren Buffett and Charlie Mungers’ investment strategies.

Kass, a clinical professor with the Department Finance and the faculty champion for the Sophomore Finance Fellows program, maintains a Smith School “Warren Buffett” blog. He also contributed a chapter to a recently published book, “Warren Buffett Shareholder: Stories from Inside the Berkshire Hathaway Annual Meeting.”

In the book, edited by L. Cunningham and S. Cuba, Kass wrote, “The Berkshire Meeting weekends are a perfect combination of education and entertainment.” Kass’s chapter details past excursions when students could “mingle with both other university students and longtime Berkshire investors from all walks of life.”

More than 40,000 people from all over the world descend on Omaha for the two-day event, and the presentation and Q&A session is live-streamed to 3 million people worldwide in English and Chinese.

This year, thanks to the dedication of Kass, many MBA, MS and undergraduate students were able to benefit from listening to the “Oracle of Omaha” and from Kass’s expertise while staying right here in College Park.

 Posted by at 2:04 pm
May 072018
  1. Buffett: Bonds will fall a lot from current prices (as interest rates rise). Investors should buy S&P 500 Index instead. We are not in a stock market bubble. There has never been a good time to buy U.S. Treasury bonds.
  2. Buffett: Wells Fargo will outperform its rivals in the future.  Berkshire owns 10% and will not buy more because Berkshire would then be classified as a bank holding company and subject to more regulation.
  3. Buffett: If a $100 billion deal came along that we like, we will get it done.
  4. Buffett likes Apple a lot.  He would like to own 100% of Apple if he could.  He likes the business and the management.
  5. Charlie Munger: “I’m delighted to be here. Actually, I am delighted to be anywhere.”
  6. Buffett admits mistake of not following Munger’s advice to buy a large stake in Costco many years ago.
  7. Munger recommends investing in Chinese companies. They are cheaper than U.S. companies.
  8. Munger: When Democrats control government there will be a single payer system for health care with an opt out.
  9. Buffett: Associate with people who are better than you and you will move in that direction.
  10. Munger wishes Berkshire owned more of Apple.  It is reasonably priced and strong.



 Posted by at 9:57 am
May 052018

These are the highlights of the May 5, 2018 Berkshire Hathaway annual meeting.  Warren Buffett (87) and Charlie Munger (94) responded to shareholder questions during the five hour meeting.  A record number of about 42,000 shareholders attended.

In opening comments, Warren Buffett mentioned that $10,000 invested in the S&P 500 in March 1942 would be worth $51,000,000 today (compounded annual rate of return = 12%).  By contrast, $10,000 invested in gold in 1942 would be worth only $400,000 today (compounded annual rate of return = 5%), since gold is a non-productive asset.  By following a buy and hold strategy (stocks), “brokers would starve to death”.  With a long time horizon, it does not matter whether the Federal Reserve will raise interest rates three or four times this year.  (Warren Buffett at age 11 bought his first stock on March 11, 1942, which was 3 shares of Cities Service Preferred at $38.25 per share.  He subsequently sold these shares for $40 each after they declined to $27. )

Buffett also mentioned that in the first quarter of 2018, Berkshire’s operating earnings of $5.3 billion were its highest ever.  However, as a result of a change in Generally Accepted Accounting Principles requiring the inclusion of unrealized gains/losses in its equity security investments, Berkshire reported a loss of $1.1 billion.  Buffett had previously stated that the amount of investment gains/losses in any given quarter is usually meaningless and investors should focus on Berkshire’s operating earnings. (Berkshire reported that the fair value of its investment in Kraft Heinz Co. dropped by more than $5 billion to $20.3 billion in the quarter, as its shares declined by almost 20 percent.)

In response to shareholder questions:

(1) Warren Buffett defended Wells Fargo, one of Berkshire’s largest equity holdings, despite several scandals at the bank. Wells Fargo had a flawed incentive system, an issue that was compounded by ignoring it.  He compared Wells Fargo with some of Berkshire’s best investments that experienced scandals in the past, including American Express Co. (1960’s) and automobile insurer Geico (1970’s).  “All the big banks have had troubles of one sort or another,” he said. “And I see no reason why Wells Fargo as a company, from both an investor standpoint and a moral standpoint going forward, is in any way inferior to the other big banks with which it competes.”  “I like it as an investment. I like CEO Tim Sloan as a manager. He is correcting mistakes made by other people.”The point is that finding problems and fixing them makes a company stronger. Buffett believes that’s the case with Wells Fargo.

(2) Despite its $108.6 billion in cash as of March 31,  Buffett  continued to argue against paying a dividend to shareholders.  Buffett said even a one-time special dividend would be “very unlikely,” but he noted that if the firm decided it couldn’t use its capital effectively, it would figure out the best way to return it to shareholders.  If repurchases of Berkshire stock were really attractive, they would find a way to do it in a very big way.  Berkshire invested $15 billion in equities this year through April, with $13 billion being invested in Apple.

(3) Warren Buffett stated that Berkshire doesn’t initiate hostile takeovers, but he doesn’t think they’re “evil.”  “We seldom take a position opposite the management, very seldom, on anything involving a proxy contest of sorts. But we don’t rule them out,” he said. “There are certainly companies that deserve challenge, and they propose things that deserve challenge occasionally.”

(4) With respect to brand loyalty, “We want products where people feel like kissing you instead of slapping you,”   That philosophy drove investments in American Express and Coca-Cola in the past and is driving their purchase of Apple shares today.

(5) Buffett stated that today’s companies require much less capital intensity to produce huge levels of profit.  The four largest companies by market value essentially don’t need any tangible net assets, he said. Most are highly profitable and stand to become even more so due to the lower corporate tax rate.  “This has become something of an asset-light economy.”

(6) Buffett mentioned that every week, Berkshire businesses generate $400 million in cash flow.

(7) “Cryptocurrencies will come to bad endings.”  Bitcoin is not a productive asset like land or shares of stock.  Price gains are dependent on more people coming into the market so one holder can sell it to the next at a higher price than they bought it for.  The same argument goes for stamp collections and gold. “If you had bought gold at the time of Christ and you figure the compound rate on it, it’s a couple tenths of a percent,” Buffett said.  Such assets tend to attract “charlatans.”‘ Charlie Munger added: “Someone else is trading turds and you decide I can’t be left out.”

(8)  Buffett said that changes in the corporate tax law were good for shareholders across the country and generally very good for Berkshire shareholders.  He said that the government’s intent had to be if you were going to cut taxes, shareholders would get a particularly large portion of the gains.

(9) Berkshire sold back some of its Phillips 66 stock to the company earlier this year to keep its ownership under 10% — and missed out on a rally. Because of regulations, Berkshire likes to keep its equity stakes under 10%. (He added that he’s not planning to sell any American Express stock.  Berkshire 0wns 17.6% of American Express.)  Buffett praised Phillips 66 and its leadership, and Charlie Munger praised the subsidiary that Berkshire bought from Phillips 66 a few years ago.

(10) Berkshire’s Mastercard and Visa stakes were purchased by his portfolio managers, Todd Combs and Ted Weschler. Berkshire’s large American Express stake was Buffett’s purchase.  With respect to Mastercard and Visa, Buffett said: “I could have bought them as well, and looking back, I should have.”  He then praised American Express for doing “a fantastic job in a very competitive field. … We love the fact that we own it.”

(11) With respect to Apple,  “We very much approve of them repurchasing shares,” Buffett said. Buffett mentioned that it now owns about 250 million shares of Apple, or about 5% of the company.  Buffett noted, as shares come out of the market due to repurchases, Berkshire’s stake in the company will grow on its own.  Buffett and Munger also expressed skepticism that Apple could find strong acquisition targets that are large to buy with its cash. “The reason companies are buying their stock is that they are smart enough to know it’s better for them than anything else,” Munger said, adding that they don’t approve of all repurchase strategies.

(12) With respect to Kraft Heinz, sales are growing for several products including ketchup.  “Consumer package goods are still a terrific business in terms of return on invested assets.”

(13) Buffett said that Berkshire’s managers already run lean operations, so they don’t need aggressive cost-cutting. Berkshire buys companies that don’t need improving, while 3G buys companies that could benefit from a turnaround.

(14) Buffett explained why he does not like long term U.S. Government bonds.  He says that with the Federal Reserve trying to get inflation up to 2% and rates on longer-term debt at 3%, the inflation-adjusted after tax returns are currently about 1/2% .  When the Fed lowered rates to near zero during the financial crisis, it reduced the amount that savers earned.  Munger said that it wasn’t fair but was probably necessary to combat the recession, but it did help lift stock prices. With respect to stock investors, Munger said, “We’re all a bunch of undeserving people and I hope we continue to be so.”

(15) With respect to tariffs,  Mr. Buffett said  “I don’t think either country (U.S. and China) will dig themselves,” into something that turns into a trade war.  Munger then added that some of the trade conditions in the steel industry needed changing. “Even Donald Trump can be right on some of this stuff.”

(16) A shareholder asked if Buffett was semi-retired, since he shares his investment responsibilities with portfolio managers Ted Weschler and Todd Combs, and has Ajit Jain and Greg Abel promoted to new jobs overseeing Berkshire’s operating businesses.  Buffett responded “I’ve been semi-retired for decades,”. He pointed out that Weschler and Combs oversee a total of about $25 billion in equity investments, while  Buffett is responsible for $170 billion in equity, $20 billion in long term bonds, and $100 billion in cash.  He said “Nothing’s really changed that much,” since the recent promotions. “I think, actually, semi-retired probably catches me at my most active point.” Charlie Munger then added: “Warren is very good at doing nothing.”

(17)  Buffett said that Todd Combs and Ted Weschler have both “slightly” beat the S&P 500 Index since they started managing Berkshire’s money.  Todd Combs and Ted Weschler, have almost identical performance since they joined, Buffett said. Combs was hired by Berkshire in late 2010 and Weschler joined about a year later. While Buffett said their performance roughly amounts to matching the S&P 500, they’ve received some incentive pay that they only get if they outperform that benchmark.  “It’s been better than I’ve done, so naturally I can’t criticize,” he said.

(18) Buffett and Munger acknowledged that they made a mistake by not investing early on in Amazon and Google. But they are very happy with their investment in Apple.

 Posted by at 9:48 pm
Apr 282018

In “Warren Buffett / Transformation From 1 to 87 Years Old /  Warren Buffett Best Quotes” , I am in picture 81 along with MBA and MS Finance students from the University of Maryland.

Slide 77 — Buffett and Hillary Clinton
Slide 78 — Buffett and Bill Gates
Slide 79 — Buffett and Wife (Susan Buffett)
Slide 80 — Buffett and President Obama
Slide 81 — Buffett and David Kass (with University of Maryland MBA and MS Finance students)
 Posted by at 3:37 pm
Apr 262018

I am quoted in this article:

With U.S. companies sitting on record amounts of cash, the multibillion-dollar question has become: What to do with it? For many companies, the answer involves returning capital to shareholders. And that means turning to one of two fundamental options: Cash dividend or stock buyback. Both have their upsides and downsides, though in recent years, stock buybacks have grown in popularity.

David Kass

Analysts say 2018 could shape up to be a massive year for stock buybacks, with U.S. companies spending as much as $600 billion in stock repurchases. Already some corporate giants have announced significant stock repurchases, including Google parent Alphabet, PepsiCo, Amgen, Lowe’s, Cisco Systems, Visa and Lowe’s.

Even Warren Buffett is considering a Berkshire Hathaway stock buyback — a striking reversal for the CEO. For decades he has said he would only repurchase shares under certain conditions — specifically, if they’re selling for less than 1.2 times book value, says David Kass, clinical professor of finance at the University of Maryland’s Robert H. Smith School of Business. And that hasn’t happened; Berkshire is currently selling at roughly 1.4 times book value.

“To buy it now,” Kass says, “would imply that Buffett believes Berkshire’s intrinsic value is above 1.4 times book value.” Otherwise, Buffett would be destroying shareholder value.

Nonetheless, in Buffett’s annual letter to shareholders this year, he seems to open the door to a potential buyback, writing, “As the subject of repurchases has come to a boil, some people have come close to calling them un-American — characterizing them as corporate misdeeds that divert funds needed for productive endeavors. That simply isn’t the case.”

Berkshire is currently sitting on about $116 billion in cash. The money is parked in U.S. Treasuries, which Buffett has called his worst investment to date because of its low rate of return.

Buffett wants to find something to acquire or invest in, Kass says, “but he has these high standards, and he will only invest in something where there is a margin of safety and he is convinced that he is paying below intrinsic value.”

Meanwhile, Berkshire’s cash pile continues to expand, faster than the company is spending it. Kass, who has followed Buffett’s investments and philosophy for more than 35 years, estimates that the company’s cash pile will grow to more than $125 billion by year’s end, so it’s little wonder that Buffett is thinking about a buyback.

He has these high standards, and he will only invest in something where there is a margin of safety and he is convinced that he is paying below intrinsic value.

For most shareholders of most companies, Kass says, a stock buyback comes as good news. Better news, in fact, than a cash dividend in many cases. For investors holding taxable investment accounts — rather than registered retirement accounts — cash dividends would be immediately taxable. Each dollar paid therefore is something less than a dollar, maybe 85 cents.

The repurchase would presumably improve the performance of the shares over time, by lowering the supply of shares and thereby increasing earnings per share.

In a stock buyback, a company dips into the open market and buys up a lot of shares — easy as that. Sometimes, however, a firm wanting to buy shares will issue a tender offer, essentially advertising that it will buy back a certain number of shares at some specified premium over the current share price, until a specified date. Shareholders can tender their shares if they choose to.

Buffett has always said he wants to keep $20 billion in cash on hand for a rainy day. In the event of another financial crisis or a recession, he says, it will assure that Berkshire will remain self-sufficient, and never need to seek external capital. But, even setting aside $20 billion, the Omaha-based conglomerate still has a lot of cash on hand.

Another way to return cash to shareholders is via dividends. Buffett makes the point that once dividends are paid, a company sets the expectation that it will continue to issue dividends at the same level, in perpetuity. Any time a company cuts its quarterly dividend, the stock price plunges, because that’s a signal that things have gotten worse

But it doesn’t have to be that way, says Kass. Decades ago, many companies issued something called a “special, one-time dividend.”

“This was quite typical a few decades ago,” Kass says, “but it’s rare now.”

But Buffett, himself, is rare. Kass suggests that Buffett’s Berkshire could pay a one-time special dividend, equivalent of perhaps $50 billion, reducing the amount of cash on hand to roughly $70 billion.  (Note:  A $50 billion one time cash dividend would equal about $30,000 per class A share and about $20 per class B share.)

It’s an option, but one that Buffett might not be inclined to take. The so-called Oracle of Omaha has often said that Berkshire can invest far better than shareholders could or would, Kass notes.

“So that leaves us with the stock buyback question,” Kass says. “With Warren Buffett unable to find anything to buy, will he possibly decide to raise his standard, from 1.2-times book value to 1.3 or higher? I think that’s a reasonable thing for him to do.”

 Posted by at 9:26 am
Apr 232018

I am quoted in the Washington Post on the 10-Year Treasury Note.

“The 10-year is potential competition for stocks,” said David Kass, a professor of finance at the University of Maryland.
“The 10-year is very visible,” Kass said. ”Financial markets tend to focus on the 10-year rate as a form of long-term interest rates.” 


 Posted by at 5:17 pm