eBooks
Links of Interest – May 18, 2012
Notes From Ira Sohn Conference Presentations 2012 ~ market folly
Graham & Doddsville Spring 2012 Newsletter
The 3 Way Trade That Could Imperil Google – Seeking Alpha
Google’s Market Share in Your Country
INSIGHT-Motorola deal offers Google tax, patent benefits | Reuters
Barry Diller’s Latest Effort to Torch the Tube — New York Magazine
Value Investing World: 2012 Berkshire Hathaway Annual Meeting Notes
Berkshire Hathaway 2012 Shareholder Meeting Notes (part 2) – GregSpeicher.com
Hedges
Some hedging required in operating businesses.
Buffett thinks about worse case scenarios all the time – more than most. They won’t take risks that threaten the business.
Valuations
Valuing GEICO is different than valuing Gen Re.
GEICO’s intrinsic value is greater than net worth and float. This is not true for all insurance businesses. GEICO will have growth plus underwriting profits.
Buffett would love to buy operating businesses at 9-10x pre-tax earnings if they had similar characteristics to Berkshire’s operating businesses. He would pay even more for Berkshrie’s businesses since they know the businesses.
Gold
Buffett would not buy gold. He prefers productive assets.
JP Morgan
Buffett bought JP Morgan for his personal account. He could not buy Wells Fargo in is personal account so he bought JP Morgan. His best ideas are in Berkshire.
Munger likes focused, long-term investing. Munger thinks investors should be thinking about the 98 1/2 percent of things that drive results, not the 1 1/2 percent.
If Buffett was not running Berkshire, he would own a lot of WFC in his personal account.
Acquisitions and Dividends
Buffett would use Berkshire’s stock in acquisitions, if it sold for intrinsic value. Buffett does not want to pay a dividend. It does not make sense to payout 100% when it is worth 110% in Berkshire.
Newspapers
They once were the primary source of information. Now there are other means which are more timely.
The areas where newspapers are the primary source of information has gone way down. They have lost primacy. However, they are still primary in a great many areas, such as local sports, obituaries, marriages, etc.
They are expensive to distribute.
Many newspapers give information away for free which is a poor business model.
There is a future for newspapers in areas where people care about local items. They are not as bullet-proof as they once were.
Berkshire makes reasonable money with the Buffalo News.
Buffett may buy more newspapers in the future. They need strong local interest – a strong sense of community.
Concern about Interent
The Internet is a powerhouse. The Nebraska Furniture Mart is probably OK.
GEICO was affected by the Internet.
Amazon has millions of happy customers. The Internet is really terrible for most retailers.
Buying businesses
It took a long time for Berkshire to be top of mind when someone wants to sell a private business. There is generally no #2.
They generally vote yes in proxies of investee companies. They don’t rule out businesses where they don’t see eye to eye.
If they saw a particularly dumb acquisition, they might vote against it.
They would buy a great P&C insurance business, but there are not many.
Share repurchases
Berkshire’s willingness to repurchase shares under 1.1x book value has not put a ceiling on the stock. It signals that there is not a lot to lose.
Walmart
There may be a large fine but the fundamental dynamics of Walmart have not changed.
Buffett does not think the earnings power in 5 years will be affected.
Munger: A company that big will always have someone doing something wrong.
Takeover concerns
A takeover of Berkshire by a hedge fund is unlikely. Members of the Buffett family will maintain large voting power for many years to come. The size of Berkshire makes a takeover unlikely, and Berkshire is continuing to grow.
Munger: Berkshire’s momentum is in place for the next $200 billion. Berkshrie will continue to attract private sellers.
Capital intensive businesses
Buffett thinks the utilities businesses can return 12%.
BNSF’s capex exceeds D&A, but Buffett is confident that Berkshire will be allowed to earn a decent rate of return on these investments.
Float
It is difficult to predict how fast Berkshire’s float will grow. It could shrink.
They are looking for ways to intelligently grow float.
Declining businesses
It is best to stay away. The real money is in growing businesses. Buffett doesn’t look for a cigar butt in a declining business.
Avoiding dumb things
The most important thing is to understand the earnings power of a business in 5-10 years plus its competitive position.
Investing in IPO’s is dumb. The seller picks the timing.
It is dumb to invest where the winners can’t be picked.
They have a number of filters. If something does not get through the filters, it is rejected. You don’t have to do a lot of great things to do well.
You can’t have a big disaster.
They avoid investments where someone is earning a large commission.
They look at things that other smart people are buying. If Graham Newman was buying something, Buffett would take a look.
Meet Hipster Berkshire: The Markel Annual Breakfast
By Michael Olsen, CFA, The Motley Fool - DailyFinance
If Berkshire Hathaway‘s (NYS: BRK.A) annual meeting is the main event in Omaha, and the Value Investing Congress is a delightful foodie dish, the Markel(NYS: MKL) brunch is that somewhat unknown, fringe trendy pub you frequent with your friends — before it’s cool, while it’s still accessible, and because it stays open for love of the craft. Each year, Steve Markel, founder and CEO of Markel, and Tom Gayner, the company’s colorful and successful chief investment officer, hold a brunch.
What’s amazing at this point in Markel’s lifecycle is that the meeting’s not better attended: Markel, for all intents and purposes, is a mini-Berkshire. It’s carefully refined a unique underwriting model and culture, and it skillfully deploys its insurance profits into best-of-breed companies at value prices. Better, it’s managed to fly under the radar — the company has a middling $4.3 billion market cap. It’s more of a value cognoscenti favorite than mainstream dish. But don’t mistake its potential: It’s an organization that over time appears truly built to last.
Links of Interest – May 11, 2012
How Will You Measure Your Life? – Harvard Business Review
Jardine Matheson: An Under-the-Radar Asian Growth Story (Contest)
Norfolk Southern Shares Can Head North – Barrons.com
DirecTV Gains As Bernstein Turns Bullish; Stock Too Cheap? – Forbes
Don Yacktman Sees the Beauty in Ugly-Duckling Stocks – Barrons.com
Notes & Presentations From the Value Investing Congress Omaha 2012 ~ market folly
Gabelli: Invest in booze – YouTube - includes his thoughts on Berkshire Hathaway
Lauren Templeton: Methods Sir John Templeton Used to Take Advantage of Crisis Events
50-year buying opportunity – authers note – markets – FT.com
Berkshire Hathaway 2012 Shareholder Meeting Notes (part 1) – GregSpeicher.com
The following is the first part of my notes from the 2012 Berkshire Hathaway shareholder meeting. I have tried to be accurate, but I make no guaranty that I have been so. The notes are not complete, but rather the thoughts I wrote down during the meeting. I hope they are useful. Please take them with a grain of salt and cross check them against other sources.
Managing risk
Buffett’s successor must be the chief risk officer.
Insurance divisions are already overseeing their own risk. Leverage will be avoided in the future.
Berkshire may not have access to all the deals they could do with Buffett, but there will be opportunities. They will do some things better after Buffett.
The special side deals such as the warrants have not been material.
Berkshire has a strong board with deep experience managing risk.
Repurchase of Berkshire shares
Berkshire has always tried to have an attitude of partnership towards shareholders. When Berkshire issued B shares, Buffett said in the proxy that he would not buy them at the offering price.
Buffett stated that Berkshire’s intrinsic value is significantly higher than 110% of book value. Buffett feels very comfortable with 1.1x book. Significantly (dramatically) undervalued.
Some of Berkshire’s businesses are undervalued; some are fairly valued.
Buffett would love to buy “tens of billions” at 1.1x book. The value of each shares goes up if shares are repurchased at 110% of book. It’s obvious.
He won’t go below cash buffer of $20 billion.
Many companies repurchase their stock at overvalued prices.
Banks
American banks are in a better position than European banks. American banks have taken large losses already have large liquidity. The system is in fine shape.
Euro is gasping for air. $1 trillion Euros just pumped into the system. European banks rely more on wholesale funding.
Munger – Having a union in the U.S. is a big structural plus. 17 countries make it a lot tougher.
Energy
MidAmerican will pass on cost savings on coal.
KW hours down 4.7% (last year?).
The ratio of gas to oil is not 50:1 vs. the longterm average of 6:1.
Telematics
Buffett stated that nothing is being done at GEICO to introduce telematics. He does not yet think that it is a factor. They are watching it and he is open to it.
GEICO is worth 15 billion more than book value. Even that price would not tempt him to sell it.
Investment Education
MBA’s have been taught a lot of nonsense about investing.
If Buffett were teaching about investing, he would teach two courses:
- How to value a business
- How to think about market prices
Ray Kroc did not think about options; he thought about how to sell more hamburgers.
You must know the difference between which businesses can be valued and which cannot. Buying cheap businesses works.
Insurance Pricing
Rates in Thailand have gone higher as a result of flooding and Berkshire is selling more insurance. Losses in New Zealand have been huge on a per capita basis.
Berkshire has proposals out for $10 billion in business.
Market for insurance is significantly better in parts of the world.
Energy Subsidies
There is a $.022 per KWH subsidy from federal government for the next ten years. Solar and wind would not work without subsidies. Wind does not work as base power generation (storing issue).
Berkshire can use tax breaks in energy companies in full because it pays so much in taxes. Up to 80% of other companies cannot use these tax credits. This gives MidAmerican a significant advantage.
Acquisitions
Buffett would do an acquisition greater than $20 billion. He just considered a $22 billion acquisition.
Buffett won’t use stock in the future, not even for 30-40% of a deal.
He wants $20 billion in cash to be on hand. He would not do a $40 billion deal because he does not want the company to be susceptible to a shock. Money is building up month by month.
Berkshire invested $8.8 billion in U.S. last year.
Buffett’s Health
Buffett is feeling good. Munger won’t allow himself to be tested for prostate cancer. Munger views Buffett’s cancer as a non-event given his highly positive prospects.
Insurance Run-Off
Buffett would buy insurance run-off operations at the right price.
Advice on starting out
Buffett would do the same thing again. He would aggregate investment funds earlier. He would develop an audited record as early as possible. He would try to get to the stage of buying entire businesses ASAP.
Berkshire’s stock price
The stocks price has been cut in half four or five times. Cap Cities once sold for 1/3 of the prices that its assets could be sold for.
Read chapters 8 and 20 of The Intelligent investor. Mr. Market makes lots of mistakes.
High to low prices for Berkshire stock is less than that of other stocks.
Make decisions based on what a business is worth.
The stock market is the most obliging way to make money. There is lots of information. This isn’t available with farms. The rules are in your favor if you take advantage of it.
Munger: Get yourself into a position to buy businesses.
Macro risks
Buffett never let macro events affect a buying decision. There will always be good and bad news out there. Buffett bought his first stock in 1942.
Look to valuation, not headlines.
He keeps liquid reserves because he does not want to go broke. The 1st rule is to always play for tomorrow.
Berkshire’s businesses
BNSF has dramatically improved its position. It is an extremely efficient way to move things. Could not be duplicated for 5x or 6x (what Berkshire paid?).
GEICO is much better than its was 5 years ago. It is approaching 10% of the market.
MidAmerican and ISCAR have both done well.
Mistakes have been made when they misjudged the competitive position of the business.
Munger: good fortune will continue after Buffett’s death.
No links of interest… off to Omaha
There will be no links of interest this week as I am away in Omaha for the Berkshire Hathaway shareholders meeting. They will resume next Friday.
100 Ways to Beat the Market: #33: Don’t bowl without the bumpers
On occasion, Mohnish Pabrai has told a story he learned from management guru Tom Peters about imitation. Apparently there were two gas stations on the same corner. Each propriator could clearly see what the other was doing. One of them began building his business by extending full service to some, but not all, of his customers. The rival concluded that this wouldn’t work and refused to copy the practice even as he saw his competitor take away business.
The lesson: imitating smart practices works and – equally important – many, if not most, people fail to practice intelligent imitation, even in the face of evidence that it works (better than what they are currently doing). Mohnish practices what he preaches and has built a successful money management business largely – by his own admission – on imitating the practices of Warren Buffett and Charlie Munger.
At a recent talk he gave (via Skype) at the Ivey School of Business in Ontario, Mohnish spoke of the value of only making an investment if the stock is already owned by a successful value investor such as Warren Buffett or Prem Watsa. (Buffett himself benefited from cloning, for example, getting involved in GEICO when he learned that Graham was on the board.)
Mohnish compares this to only bowling with the bumpers up. He argues that you will make fewer mistakes than going it alone.
This is excellent advice. These great investors have enormous experience and are backing their ideas with serious capital, much of it their own. Mohnish goes on to argue that you could be successful by being a blind follower, but that few are willing to do this. He may very well be correct.
Nevertheless, I believe it makes sense to only invest when you understand a given investment. The issue is one of human behavior. It can be hard enough to stay with a position through periods of extreme volatility; this is doubly difficult if you don’t have conviction borne of your own understanding, particularly if you are a focused investor.
If you want to beat the market, one very intelligent thing to do is to limit your investments to those that are owned by a great value investor with a long-term proven track record. The market affords no style points for being innovative and creative. Money is earned by being right.
Links of Interest – April 27, 2012
Value Investing World: Value Investing: Investing for Grown Ups? – By Aswath Damodaran
Portfolio14: My investment checklist
The Secret Billionaires’ Club: Why Study Warren Buffett
Is This Company the Next Berkshire Hathaway? – DailyFinance
Energy in 2050: Shell’s Peter Voser – Forbes
To Win Big, It Helps to Be a Little “Nuts” – Bill Taylor – Harvard Business Review
Greg Speicher interview with Greatinvestors.TV
For those who are interested, I did an interview with John Mihaljevic, CFA who is the founder and Managing Editor of The Manual of Ideas. The interview is for their Greatinvestors.TV site.
We discuss how to become a better investor and my thoughts on Berkshire Hathaway and DIRECTV.
Links of Interest – April 20, 2012
Dick Bove: Everything Is Going ‘Right’ with Banks
Jeremy Grantham Explains How To “Survive Betting Against Bull Market Irrationality” | ZeroHedge
Peter Thiel’s “Startup” Course at Stanford
RIM’s hard choices: Five ways to rescue Canada’s tech icon – The Globe and Mail
Why Steve Romick Owns WellPoint (WLP): Stock of the Week ~ market folly
Jonah Lehrer on Decision-Making | FiveBooks | The Browser
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