Berkshire Hathaway

[clifp]

I know Nords has a position in Berkshire Hathway, as do I (my 2nd largest holding). Anybody else own Warren Buffett's company, or thinking about buying. I am especially interested in people who think it is a bad investment.

This week financial publications, (Barrons, WSJ, Bus Week, Fin. Times ...) almost all had article about how the market volitality and liquidity/credit crunch all bode will for folks cash, and singled out Warren Buffett, with his mountain of cash $45 billion in the case of BRK or about $30,000/share.

Not surprisingly Berkshire has gone up a bit during the latest market turmoil.

[Hamlet]

Berkshire is my largest non-indexed holding. I own more SPY than BRK.b.

I think it should be a decent long term investment, but I don't expect it to dramatically outperform the market, since it has reached a size that makes outperformance challenging.

Berkshire is always well-positioned to benefit from market turmoil. I would expect that Buffet will have bought some of the distressed bonds and mortgage-backed securities in this recent credit crunch. I suspect that he will have bought them at a price that will make losing money on them very difficult. Whether this will be a large enough gain to be a big deal is hard to say.

I'm currently very curious to see what he did last month with the bank stocks. Berkshire owns US Bank and Wells Fargo. It will be interesting to see if he is buying more, selling or holding. Any new bank stock positions would be interesting as well.

[Nords]

Originally Posted by clifp

I know Nords has a position in Berkshire Hathway, as do I (my 2nd largest holding).
I am especially interested in people who think it is a bad investment.

I think BRK has become a huge research facility for the study of investor psychology. Not the company, but the subject of owning (or not owning) the stock itself. And it's interesting how flat things have been for the last nine months.

Ye gods, Clif, what's your biggest holding?

[kcowan]

It's been on my watch list since December but I am waiting for them to do something with their cash

[Hamlet]

I suspect that that will be a great time to buy BRK. Buffet will probably deploy all of his cash during some sort of market meltdown, which will probably pull BRK's stock price down as well.

I bet there will also be a good buying opportunity after Buffet dies. It will be interesting to see how much value the market places on him being in charge.

Originally Posted by kcowan

It's been on my watch list since December but I am waiting for them to do something with their cash

[clifp]

Originally Posted by Nords

I think BRK has become a huge research facility for the study of investor psychology. Not the company, but the subject of owning (or not owning) the stock itself. And it's interesting how flat things have been for the last nine months.

Ye gods, Clif, what's your biggest holding?

LOL, so what do you think Berkshire tells you about investor psychology? It is one of the few fool boards, that I read faithful but seldom post on. Most of the people on the Berkshire board appear to sophisticated investors and all but three think is heading higher of course.

Intel is my biggest holding (although 1/4 of what it used to be.) I have hard time parting with a stock that I paid less than a $1 and pays $.45/year in dividends.

[lswswein]

Originally Posted by clifp

LOL, so what do you think Berkshire tells you about investor psychology? It is one of the few fool boards, that I read faithful but seldom post on. Most of the people on the Berkshire board appear to sophisticated investors and all but three think is heading higher of course.

BRK is my only stock holding (rest in Mutual Funds) and I am hoping to add more soon. It started as my play money stock but I am adding more and more into it.
You know how you read about the rational man in economics, I think BRK is an example of how few of those exist. Show them an incredible track record, great bunch of assets which throw out cash, and at a time when we have a liquidity crunch - some one sitting on a cash horde and all people talk about is when is he going to die and what are going to do about that cash? Seriously everyone is shouting swing you bum when Buffett has constantly talked about circle of competence and patience as the most important attributes of investing and a lot of people complain about exactly those. I am working towards making BRK about 20% of my portfolio.

If someone offers you a choice to bet on heads when tossing a loaded coin which shows up heads 6/10 times, the question is do you have the guts to keep betting when a string of tails show up? Right now BRK showed about 5 tails in a row and everyone is panicking. BRK just seems like a wrong stock for the times - but then the sexy choics don't always work out do they?

The main negatives I see are that Mkt moves it as an Insurance stock and a lot of the profits come from Insurance - so every august if there is hurricane activity expect the stock to drop. I think the MKt assumes a Conglomorate discount to the stock price - the question is do you think it will be resolved over time.

-h

[Nords]

I think BRK is less about Buffett's personality today than it's ever been. It's about his legacy, and the best thing he can do is less of whatever he's doing now. There's hardly a reason for him to step aside because he's already doing the minimum allowed by law.

The company is a self-fulfilling prophecy that's succeeded for one reason: it appeals to a CEO's fundamental desires of autonomy, power, greed, and control. A successful owner can cash out to Buffett, avoid a tremendous inheritance tax on the owner's family, and still run the show. OBTW he can have more cheap capital if he needs to expand without having to deal with a bunch of short-term losers stockholders looking over his shoulder. What else does a CEO have left to worry about-- handling the business or his golf handicap? No wonder stocks are a minority of the company's present business-- Buffett's found something far more profitable.

Buffett's attracted a tremendous bench of people who are already running the show. Essentially he's already been succeeded. Everyone calls up Buffett to tell him what they're doing-- Jain & Nicely are selling more insurance, Santulli is buying more airplanes, the four CIO disciples are running their stock portfolios and complaining about Simpson's "boot camp" attitude toward them, Bill Gates wants more tickets to the next annual meeting, and Howard has some chairman's questions for the next board meeting agenda. All Buffett has to do is smile & nod. Meanwhile Buffett & Astrid are out doing photo ops with the GEICO Gecko and the Cavemen (which would be an excellent name for a rock band) and meeting with college students. Maybe now that Bill Gates actually has his Harvard degree, at their next gathering he'll be allowed to sit next to Buffett wearing his school sweatshirt (Buffett will be wearing Nebraska's colors).

Buffett has established a reputation that's attracted all these people to him, and a business environment that brings out their strengths. Who else would an investor trust with their savings? The stock's biggest problems are the ones associated with every stock-- volume volatility & single-stock risk.

Meanwhile the company's breakup value is anywhere from 30%-50% higher than its stock price. Alice Schroeder, one of the insurance industry's better analysts, is writing the definitive Buffett hagiography biography for a wave of favorable publicity in 2008. What's the downside?

If Buffett declines mentally from Alzheimer's or "simple" dementia then his staff and the Omaha locals will rally around his privacy until he makes an announcement. The board will also announce the succession plan so there'll be little volatility. If Buffett wakes up dead tomorrow, the stock will take a 30-40% hit while the emotional investors flee to the sidelines (there's not enough volume to soak up the panic sales). When the board meeting is over, new Chairman Howard will have led the voting of someone like Santulli to assume the COO reins. (Charlie Munger will decline the executive seat because he'll feel he has nothing further to add.) The media will debate the whole story ad nauseum until Britney or Lindsay or Paris have another crisis, and the world will move on…

It'll be interesting to see whether the next generation assumes that they can still deploy capital better than the stockholders, or whether they'll cave to popular (ignorant) demand and start paying a dividend. It'll also be interesting to see if the float is manipulated (through splits or some other share scheme) to pump up the trading volume enough to be able to add BRK to the S&P500 index.

Either way I can't think of a reason to sell off any shares.

Originally Posted by clifp

Intel is my biggest holding (although 1/4 of what it used to be.) I have hard time parting with a stock that I paid less than a $1 and pays $.45/year in dividends.

Makes a lot of sense. That's probably how Buffett feels about his Washington Post holdings...

[Hamlet]

I don't know that its ignorant to want the next generation to start sending some of the profits on to the shareholders via dividends. I won't have the same level of confidence in the next generation's capital allocation skills as I do in Buffett's.

Originally Posted by Nords

It'll be interesting to see whether the next generation assumes that they can still deploy capital better than the stockholders, or whether they'll cave to popular (ignorant) demand and start paying a dividend. It'll also be interesting to see if the float is manipulated (through splits or some other share scheme) to pump up the trading volume enough to be able to add BRK to the S&P500 index.

[clifp]

My Berkshire is in my IRAs, so i don't really care about dividends from income prespective.

I am not even particularly worried about the chief investment officer won't do as good a job as Warren has done. Computer, and spreadsheets are useful tools, and I am sure the new guy(s) will use them even if Warren hasn't bothered.

What does worry me about Warren's passing is the potential to buy great business at a discount. If you are the founder of a company selling to Berkshire has a lot of appeal. You get paid a fair price in cash, but more importantly you know your legacy will be preserved, you and/or your trusted managers can continue running the business for as long as you want with little interference. The level of trust that Waren has built up, I think will take years if not decades to match by the new guy.

Given the torrent of cash flowing into Berkshire, by profitable but low growth business, I'd rather see the dividend being paid, than have Berkshire compete with hedge funds for private equity deals.

[Nords]

Originally Posted by clifp

The level of trust that Waren has built up, I think will take years if not decades to match by the new guy.
Given the torrent of cash flowing into Berkshire, by profitable but low growth business, I'd rather see the dividend being paid, than have Berkshire compete with hedge funds for private equity deals.

I agree that trust is an issue, and hopefully the new guys don't screw it up.

As for competing with hedge funds, the current tactic of being able to write a check for $40B seems to be working just fine...

[Running_Man]

What is the price to book ratio for Berkshire?

Are you paying $2.00 for $1.00 in cash?

[Bigritchie]

Originally Posted by clifp

LOL, so what do you think Berkshire tells you about investor psychology? It is one of the few fool boards, that I read faithful but seldom post on. Most of the people on the Berkshire board appear to sophisticated investors and all but three think is heading higher of course.

Intel is my biggest holding (although 1/4 of what it used to be.) I have hard time parting with a stock that I paid less than a $1 and pays $.45/year in dividends.

Am I reading this right. You paid less then 1 dollar per share for IBM, and get 45 cents per share a year in dividends? lol that is a 45% return on your investment per year not to mention the stock value increase.

[clifp]

Originally Posted by Bigritchie

Am I reading this right. You paid less then 1 dollar per share for IBM, and get 45 cents per share a year in dividends? lol that is a 45% return on your investment per year not to mention the stock value increase.

Intel not IBM, but yup. My lowest cost basis $.86
from options I got back in 1987 and it has split 48-1, the current dividend is .45 or just over 2%, but on a cost basis about 50%. I had some stock at roughly 1/2 that price but sold in in the early 90s.

Impressive but not nearly as great as would have done selling when Intel was $70 back in spring 2000, cause I would have had almost a 100 bagger. I did sell some at that price, and I think CFB did also, but in hindsight not enough.

My Intel bonanza pales in comparison to one of my favorite teaching assistant at college, who's options are up easily 100x, and being CEO he got a lot more... If I had just followed Eric Schmidt to Google.... sigh

[Nords]

Originally Posted by Running_Man

What is the price to book ratio for Berkshire?
Are you paying $2.00 for $1.00 in cash?

Pretty much. Book value at the end of 2006 was about $92B for a P/B of 1.85. However he's pretty ruthless on book value, for example carrying the value of Berkshire's stock holdings at 65% (assuming a corporate tax rate of 35%). Businesses are probably valued at a correspondingly conservative number.

Berkshire's reports focus on intrinsic value, which is more of a moving target: Berkshire Hathaway Intrinsivaluator. Buffett says the stock price should stay closer to that number but of course people start drooling over the company's breakup value.

Originally Posted by clifp

If I had just followed Eric Schmidt to Google.... sigh

You guys should follow each other around for a few days and decide who has the better lifestyle!

[hayekcapitalist]

You can be sure Buffet will NEVER do something with the shareholder's cash that he states well managed companies should do: return a single dime to shareholders in the form of dividends.

(I am aware that Buffet-heads consider it a sin to sugest that St. Warren has anything besides their best interest at heart, with his aw shucks fake midwestern values, or that he may not be able to invest all the excess retained earnings efficiently).

[clifp]

Originally Posted by hayekcapitalist

You can be sure Buffet will NEVER do something with the shareholder's cash that he states well managed companies should do: return a single dime to shareholders in the form of dividends.

(I am aware that Buffet-heads consider it a sin to sugest that St. Warren has anything besides their best interest at heart, with his aw shucks fake midwestern values, or that he may not be able to invest all the excess retained earnings efficiently).

Personally, I am waiting for the old guy to be buried (hopefully not for many years) before I nominate him to sainthood.

I agree that Warren hasn't been able to efficiently invest the river of cash flowing into Berkshire. But, I haven't heard the Warren rail against companies that don't pay dividends because A. I don't think he believes and B. he'd look like a hypocrite. He has complained about excessing CEO comp and stock option, and companies make dumb acquistions just for CEO's ego.

Do you have an quote of Warren saying companies should pay dividends.

Personally, I think Berkshire should pay a dividend and probably will after Warren is gone. But, before plunking out $85K for my A. share, I did read the Berkshire owners manual (something other companies would do well to emulate) and so I have never expected a dividend.

[hayekcapitalist]

My mainpoint is that Buffett has a carefully crafted personna: he wasn't raised poor, he is the son of a congressman/stockbroker, and the reason he does it is because it gets him sweetheart deals that you and I could never negotiate. So maybe h'e just a good B.S.er. He thinks you and I don't pay enough taxes, that the estate tax should not be repealed (this from the world's 2nd/3rd richest person who claims he pays less taxes than his secretary and to ensure that is going to give his billions to the Bill "Gates foundation ( how special).
My contention about his dividend payout theory is that dividends should be paid by companies who have much less astute capital allocators than Buffet: just ask him.

I used to admire Buffet. But, the more I studied him, his techniques, and his personal life, which for better or worse is on display in so many books written about him, I find him a to be one vast Cherry Coke, oh sorry Pepsi drinking, cheeseburger eating contradiction. He's dangerous, he has made his money and doesn't want you to keep yours. He is a collectivist and I would like to see how much of the cost of tonight's fundraiser for Obama is shareholder money disguised. Low blow, maybe, but...

One question: do you really accept that he doesn't split the "A" share selling north of $100 big ones because of the potentially deleterious effects of traders. Surely he can do better than that, or why not just admit that his ego needs the status that potentially accretes from such a high per share price? He runs Berkshire as his personal company and actually ignores the shareholders who are the real owners, treating them like mushrooms, and they like it...until the manure hits the rfan one day, and it will. It amy be after his death that you alluded to, but it will IMO.

The Personal Finance Weblog: How to Think Like Warren Buffett, Part 8Buffett offers his view on whether companies should pay dividends and how much those dividends should be. It's a lengthy discussion--here's the most pertinent paragraph:

"For a number of reasons managers like to withhold unrestricted, readily distributable earnings from shareholders - to expand the corporate empire over which the managers rule, to operate from a position of exceptional financial comfort, etc. But we believe there is only one valid reason for retention. Unrestricted earnings should be retained only when there is a reasonable prospect - backed preferably by historical evidence or, when
appropriate, by a thoughtful analysis of the future - that for every dollar retained by the corporation, at least one dollar of market value will be created for owners."


The compounding factor Warren Buffett has on several occasions referred to the use by a company of its retained earnings as a test of company management. He tells us that, if a company can earn more money on retained earnings than the shareholder can, the shareholder is better off (taxation aside) if the company retains profits and does not pay them out in dividends. If the shareholder can achieve a higher rate of return than the company, the shareholder would be better off if the company paid out all its profits in dividends (taxation situation again excluded) so that they could use the money themselves.
Put simply, if a company can retain earnings to grow shareholder wealth at better than the market rates available to shareholders, it should do so. If it can’t, it should pay the earnings to shareholders and let them do with them what they wish.

Andy Kessler: TCS: Warren Buffett Hates Your GutsTCS: Warren Buffett Hates Your Guts


Donald Luskin on Warren Buffet on National Review OnlineThat's right, the beloved Warren Buffett. He's the second richest man in the world according to Forbes, and he's America's self-appointed corporate virtue czar — the Bill Bennett of the executive suite. He's the one whose folksy annual reports for Berkshire Hathaway Corp. sermonize against the sins of stock options, demonize the coming debacle in derivatives, and preach against the perils of pension accounting. And he's the one who wrote an op-ed in the Washington Post Tuesday blasting President Bush's plan to eliminate the unfair double taxation of dividends. And he used arguments based on accounting tricks that would make Arthur Andersen blush.