Ben Franklin once said “If a man empties his purse into his head, no one can take it from him. An investment in knowledge always pays the best interest.” Warren Buffett heeded and he recommends you to do the same thing.
"Right now, I would pay a hundred-thousand dollars for 10 percent of the future earnings of any of you. So, if anyone wants to see me after this is over ... (laughter and applause). If that's true, you're a million dollar asset right now, right? If ten percent of you is worth a hundred-thousand? You could improve on that, many of you, and I certainly could have when I got out, just in terms of learning communication skills.
It's not something that's taught, I actually went to a Dale Carnegie course later on in terms of public speaking. But if you improve your value 50 percent by having better communication skills, it's another 500-thousand dollars in terms of capital value. See me after the class and I'll pay you 150-thousand. (Laughter and applause)"
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CNBC TRANSCRIPT: Warren Buffett & Bill Gates - Keeping America Great
QUESTION: I'd like to know your perspective on whether greed and immoral behavior, unethical behavior, were key causes of the recent financial crisis.
BUFFETT: It certainly played a part. We have always had greed. That didn't get invented in the last few years. And greed, fear in the third quarter -- I mean, the American people were really panicked there for a while. And it affected their -- it started out on Wall Street but then spilled over into the general economy subsequently. But we're never going to get rid of greed. We're never going to get rid of fear. What we do have is a system, as Bill said, a market system where we have the quality of opportunity and the rule of law combined to unleash human potential in this country over the last couple of hundred years to the degree nobody would have believed possible a few centuries before that. There's nothing that's gone wrong with that system. Our economy was sputtering and still is sputtering some. But we've got the greatest engine ever devised. And it's just beginning. Greed will continue. Don't worry about that. Oliver Stone is putting out a second film here pretty soon. Probably get mentioned again in this one with Gordon Gekko making a return. But that is not what drives the American system. What drives the American system is the quality of opportunity in a market system and the knowledge that when you get out of here, you're going to enjoy the fruits of the knowledge you have gained. And it will keep working. I'd love to trade places with any of you.
On what you should do after graduation.
BUFFETT: Find what turns you on. Find what you have a passion for. If somebody said to me when I was getting out of Columbia, you know, that Bill's business was going to be the one that would be exciting, you know, I don't think I'd have done so well. [LAUGHTER] But I knew what turned me on. I had a professor, Ben Graham, I offered to go to work for him for nothing. He said, "You're overpriced." Nonetheless, I went into the business. [APPLAUSE] I will guarantee, you will do well at whatever turns you on. There's no question about that. Don't let anybody else tell you what to do. You figure out what you are doing. [APPLAUSE]
Full transcript here: Warren Buffett & Bill Gates - Keeping America Great
Showing posts with label warren buffett. Show all posts
Showing posts with label warren buffett. Show all posts
Sunday, November 15, 2009
Friday, November 6, 2009
Why Warren Buffett Acquires Burlington Northern?
Why Warren Buffett Acquires Burlington Northern? (my 3cents)
The price is right. Buffett think he can earn meaningful return from the investment over the long term. I think Burlington is worth more than $200 if it is still listed. (Buy with wide margin of safety, or return of at least 100%)
Management is the key to business success. Buffett is very very good at evaluating management. Passion, honesty, integrity are some of the important traits in a great leader.
The business itself. Even though railroad businesses were not popular investment in the past, things changes over time.(something 2 ponder: railroad businesses are of high capex, why Buffett still buy? It can make higher return on assets?)As oil prices increase due to diminishing oil resources, demand for transportation through railroads will increase due to competitive pricing. As Buffett knows it best, rail transportation consumes significantly less fuel than other types of transportation. Read the pieces below to know more. Last but not least, it is a boring but great business.
___________________________________
Buffett’s Buy Includes CEO Who Engineered Railroad (Update2)
Nov. 5 (Bloomberg) -- Warren Buffett didn’t just buy a railroad when he announced his purchase of Burlington Northern Santa Fe Corp. He hired the engineer, too.
“It’s a bet not only on the company but on talent,” said Gary Bradshaw, portfolio manager at Hodges Capital Management Inc. in Dallas, which owns 150,000 Burlington Northern shares. “I can’t imagine anything changing. That’s Buffett’s style. He’s always bet on management and let those guys run it.”
Chief Executive Officer Matthew Rose has led Fort Worth, Texas-based Burlington Northern to the top of the U.S. industry in sales. Revenue almost doubled through 2008 from 2001, his first full year at the helm. That growth outpaced the 50 percent rise at Union Pacific Corp., his biggest competitor. Becoming a part of Buffett’s Berkshire Hathaway Inc., with its AAA credit rating from Standard & Poor’s, may make Rose’s job easier by lowering his company’s borrowing costs.
Berkshire has been building its stake since 2006, giving Buffett a glimpse of Rose, 50, a 16-year employee who has been CEO since December 2000. In a Nov. 3 statement, the Berkshire chairman and chief executive said the deal was an investment in the railroad, “Matt Rose and his team.”
Buffett didn’t return a message left with his assistant Carrie Kizer.
Berkshire’s largest purchase will cost the company $26 billion, or $100 a share in cash and stock, for the 77.4 percent of the railroad it doesn’t already own. Including the previous investment and debt assumption, the deal is valued at $44 billion, Omaha, Nebraska-based Berkshire said.
Expanded Capacity
What may have attracted Buffett to Burlington Northern is the company’s reduction of expenses as it expanded capacity, said Anthony Hatch, an independent railroad analyst based in New York.
“One of the ways they’ve improved is taking a high percentage of their variable costs down,” including by using longer and fewer trains, which has increased average velocity across its system, Hatch said.
Hatch also cited Burlington Northern’s development of its intermodal business, beginning in 1989 under Rose’s predecessor Robert Krebs. Intermodal refers to containers that move by a combination of rail, road and sea. Krebs, now a director of General Motors Co., set up a partnership with Lowell, Arkansas- based J.B. Hunt Transport Services Inc., now the third-largest U.S. trucking company.
Since taking over as CEO, Rose has continued the strategy, Hatch said.
New Tracks
“In my nine years we’ve probably laid out $25 billion worth of capital for our railroad,” said Rose, who earned $15.6 million in total compensation last year, according to a Securities and Exchange Commission filing.
Those investments include new locomotives and adding tracks alongside existing ones, he said. Operating parallel tracks boosts train speeds. On the single-track lines that are the most prevalent in the industry, a train heading in one direction must pull off on a siding to let oncoming traffic pass.
During a quarterly earnings call on Oct. 22, Chief Financial Officer Thomas Hund said spending on tracks, equipment and other improvements would remain at $2.6 billion for 2009. Being owned by Berkshire probably won’t change those plans, said Jason Seidl, analyst at New York-based Dahlman Rose & Co.
“If he was buying a railroad that was small and capital- constrained, there would be a big change if you’re with Berkshire,” Seidl said of Buffett’s deal. “But Burlington generates an enormous amount of free cash flow.”
‘Hands-Off’ Shareholder
The railroad will probably have lower borrowing costs as a unit of Berkshire, even if Standard & Poor’s strips Buffett’s company of its AAA rating, said B. Craig Hutson, a Chicago-based railroad debt analyst at Gimme Credit LLC. S&P said yesterday Berkshire’s rating may be cut to as low as AA because of the acquisition. That’s still six levels higher than Burlington Northern’s BBB.
“It would be safe to assume that Burlington will have a broader access to capital and a lower cost of capital than they would have had on a stand-alone basis,” Hutson said. “They haven’t really held back per se on spending on growth opportunities recently. It gives them the ability to invest for the long-term without being asked every quarter how those investments in their infrastructure are doing.”
Burlington Northern has $10 billion of long-term debt and paid $462 million in interest expense this year through Sept. 30, according to its most recent 10-Q regulatory filing.
‘Very Friendly’
Rose said Buffett has been a “hands-off” shareholder who phones “fairly infrequently.” The two met before Berkshire began buying Burlington Northern shares, Rose said.
“We have a large operation in Omaha, so I had a chance to meet him through some charity events,” Rose said in an interview yesterday. “It’s been very friendly, and he’s always told me he wouldn’t do anything hostile that we weren’t aware of (see how Buffett changed his behavior compared with the past!). The biggest change is that instead of having quarterly analyst meetings, I’ll go to Omaha every once in a while. Warren told me one requirement is I have to go to his annual meeting.” :D
Buffett, 79, while not immersed in industry intricacies, understands that railroads stand to benefit from rising diesel fuel prices because they can transport goods more efficiently than trucks, Rose said.
“I wouldn’t call him a detail guy on the railroads,” Rose said. “But he clearly understands the U.S. economy very well.”
Burlington Northern fell 12 cents to $96.98 at 4:15 p.m. in New York Stock Exchange composite trading. The stock climbed 28 percent this year before today and has jumped almost fourfold since December 2000, when Rose was promoted to CEO.
Berkshire’s Class A shares increased $370 to $101,900.
Rose, who lives with his wife in the Fort Worth suburb of Westlake, is the father of two children, a trustee of Texas Christian University in Fort Worth and serves on the board of Fort Worth-based AMR Corp., parent of American Airlines.
____________________________
Berkshire Buys Burlington in Buffett’s Biggest Deal
Nov. 3 (Bloomberg) -- Warren Buffett’sBerkshire Hathaway Inc. agreed to buy railroad Burlington Northern Santa Fe Corp. in what he described as an “all-in wager on the economic future of the United States.”
The purchase, the largest ever for Berkshire, will cost the company $26 billion, or $100 a share in cash and stock, for the 77.4 percent of the railroad it doesn’t already own. Including his previous investment and debt assumption, the deal is valued at $44 billion, Omaha, Nebraska-based Berkshire said today in a statement. The railroad’s stock closed yesterday at $76.07.
Berkshire has been building a stake in the Fort Worth, Texas-based railroad since 2006 as Buffett looked for what he called an “elephant”-sized acquisition allowing him to deploy his company’s cash hoard, which was more than $24 billion at the end of June. Trains stand to become more competitive against trucks with fuel prices high, he has said.
“It is Warren being Warren, taking advantage of a market that is soft at a time when the possibility for competitive bids is relatively low,” said Tom Russo, a partner at Gardner Russo & Gardner, which holds Berkshire shares. “He looks at this as a business that has advantages against other forms of transportation.”
At $100 a share, Buffett is paying 18.2 times Burlington Northern’s estimated 2010 earnings of $5.51, according to the average analyst projection in a Bloomberg survey. That compares with the 13.4 multiple for the Standard & Poor’s 500 Index as of yesterday’s close. Shares of Burlington Northern, the largest U.S. railroad, dropped 13 percent in the 12 months through yesterday.
Union Pacific, CSX
Competing railroad Union Pacific Corp.’s ratio was 13, while Jacksonville, Florida-based CSX Corp.’s was 13.1, Bloomberg data show.
Union Pacific rose $4.35, or 7.9 percent, to $59.41 at 4 p.m. in New York Stock Exchange composite trading. CSX climbed 7.3 percent. Burlington Northern surged to $97. Berkshire Class A shares rose $1,700, or 1.7 percent, to $100,450.
The deal culminates a search by Buffett, 79, that sent him to Europe looking for possible acquisitions and lamenting in letters to shareholders that he and Vice Chairman Charles Munger couldn’t find companies they considered large enough to meaningfully add to annual earnings.
Buffett needs “elephants in order for us to use Berkshire’s flood of incoming cash,” he said in his annual letter to shareholders in 2007. “Charlie and I must therefore ignore the pursuit of mice and focus our acquisition efforts on much bigger game.”
Trains, Trucks
Burlington Northern, with pretax income of $3.37 billion on revenue of $18 billion last year, would be Berkshire’s second- largest operating unit by sales. The McLane unit, which delivers food to grocery stores and restaurants by truck, earned $276 million on revenue of $29.9 billion in 2008.
Berkshire’s largest business is insurance, with units including auto specialist Geico Corp. Buffett, who is the company’s chairman and chief executive officer, has said he likes insurance because he gets to invest the premiums paid by customers until the cash is needed to pay claims. The insurance businesses last year collectively earned $7.51 billion on revenue of $30.3 billion.
Buffett will use $16 billion in cash for the deal, half of which is being borrowed from banks and will be paid back in three annual installments, he told CNBC. Berkshire will have more than $20 billion in consolidated cash after the purchase, he said.
Cash Hoard
“It doesn’t mean we’re out of business, but it does mean that we won’t be making any huge deals for a while,” Buffett told the network today. He said earlier this year the company needs at least $10 billion in cash to be ready for unforeseen events such as catastrophe claims at its insurance units.
Berkshire would get $264 million from Burlington Northern if the railroad’s board accepts a higher bid, according to a regulatory filing today.
Buffett built Berkshire into a $150 billion company buying firms that he deems to have durable competitive advantages. His largest purchases include the 1998 deal for General Reinsurance Corp. for more than $17 billion. Buffett expanded into power production with the purchase of MidAmerican Energy Holdings Co., and last year bought Marmon Holdings Inc., the collection of more than 100 businesses, from the Pritzker family. Marmon’s Union Tank Car unit manufactures and leases railroad cars.
He expects the economy to recover, he said in an interview in September with his company’s Business Wire unit.
“We are still tossing out 14 trillion worth of product a year,” he said. “It will return. It’s already returned with most people in most ways, but it’s not back 100 percent. It’ll get there.”
‘Simple Bet’
The U.S. economy returned to growth in the third quarter after a yearlong contraction as government incentives spurred consumers to spend more on homes and cars. The world’s largest economy expanded at a 3.5 percent pace from July through September, Commerce Department figures showed last week.
“It’s a pretty simple bet,” said Mario Gabelli, CEO of Gamco Investors Inc., which has holdings in Berkshire and Burlington Northern. “Warren knows the assets. He’s been involved in basic businesses like this for years.”
Buffett is increasing his stake in an industry that doesn’t have any competitors for certain types of freight. Federal law requires some chemicals to be moved only by rail.
Railroads burn less diesel fuel than trucks for each ton of cargo carried, giving companies such as Burlington Northern and Omaha-based Union Pacific a grip on bulk commodities such as coal. That fuel-efficiency advantage also gives railroads a share of the profits from moving goods such as Asian imports of cars and other consumer goods sent to U.S. West Coast ports.
Fuel Prices
From ships, containers are loaded onto railcars to be hauled to so-called intermodal terminals, where they’re transferred to trucks for the final leg of their journey.
Buffett said in 2007 that railroads may prosper at the expense of trucks. “As oil prices go up, higher diesel fuel raises costs for rails, but it raises costs for its competitors, truckers, roughly by a factor of four,” Buffett told shareholders in 2007 at his company’s annual meeting. “There could be a lot more business there than there was in the past.”
Berkshire’s board approved a 50-to-1 split of its Class B shares as part of the acquisition plan, the company said in a second statement. Berkshire will schedule a shareholder meeting to vote on an amendment to the company’s certificate of incorporation that’s needed to split the stock. B share typically trade for about a thirtieth of the price of A shares.
Stock Split
Most of the shares exchanged for Burlington Northern stock will be Class A shares, Berkshire said. Splitting the B shares is designed to accommodate the smallest holders who elect for a tax-free swap of the railroad’s stock, it said.
Goldman Sachs Group Inc., Evercore Partners Inc., and Cravath Swaine & Moore LLP are advising Burlington. Berkshire didn’t disclose a financial adviser and said Munger Tolles & Olson LLP furnished legal advice.
Matthew Rose, the chief executive officer of Burlington Northern, said he struck the deal with Buffett after the two met in Texas. Buffett, named by Forbes as the second-richest American, was visiting because he has other business interests in the state, Rose said.
“We spent a couple hours talking about the economy and the business,” Rose told Bloomberg Television. “The next day I got a call. He asked me to meet on a Friday night down in downtown Fort Worth. It was a relatively short conversation; he told me what he wanted to do. The next day we fired up the process.”
Antitrust Review
Burlington Northern operates 32,000 miles of track, with 6,700 locomotives, according to its Web site. Most of the carrier’s network is west of the Mississippi, where it competes with Union Pacific.
The U.S. Department of Justice will conduct an antitrust review, which Burlington expects to be completed by the first quarter of next year, the company said today in a conference call with analysts and investors.
Burlington Northern said two-thirds of the shares that aren’t held by Berkshire must vote in favor of the transaction for it to proceed under Delaware law. The railroad said it anticipates a shareholder meeting in the first quarter of 2010 and the completion of the transaction “very shortly thereafter.”
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Transcript: Warren Buffett on FOX Business Network today with Liz Claman
But I -- you know, I like the business very much. I think the management is the best there is, and, like I say, when I didn't get thrown out of the office, I made it specific, and it was a good offer from their standpoint. And they decided to accept it. And now we're going to own a railroad. And we never fool around on things, Liz. I mean, I tell the lawyers, get this thing done, you know.
Well, the rails move a freight at a much more environmentally friendly (the future way) way than the truckers do. And they also only use about a third of the fuel. So, it's helping -- it helps our trade balance in the long run. It helps in terms of the atmosphere. It is a very, very efficient, effective, environmentally friendly way of moving freight. And, you know, our rail system is a huge asset to the country.
Well, they haul a lot of coal and coal from the Powder River Basin in the West -- is more competitive, it's lower-sulfur coal than in the East. So, it will be around a long time. But coal, over the long run, coal will diminish in relative importance.
BUFFETT: It's true. I didn't have to listen to that, but it's true any company that has long-life assets is replacing assets that they bought many years ago with things that cost more money now. That's true of our utility business, that's true of any business. It's true -- if you build a plant that 30 years ago had a 30-year life. When you go to replace that same plant, it's going to cost you more money. That's a fact of life in an inflationary economy.
The price is right. Buffett think he can earn meaningful return from the investment over the long term. I think Burlington is worth more than $200 if it is still listed. (Buy with wide margin of safety, or return of at least 100%)
Management is the key to business success. Buffett is very very good at evaluating management. Passion, honesty, integrity are some of the important traits in a great leader.
The business itself. Even though railroad businesses were not popular investment in the past, things changes over time.(something 2 ponder: railroad businesses are of high capex, why Buffett still buy? It can make higher return on assets?)As oil prices increase due to diminishing oil resources, demand for transportation through railroads will increase due to competitive pricing. As Buffett knows it best, rail transportation consumes significantly less fuel than other types of transportation. Read the pieces below to know more. Last but not least, it is a boring but great business.
___________________________________
Buffett’s Buy Includes CEO Who Engineered Railroad (Update2)
Nov. 5 (Bloomberg) -- Warren Buffett didn’t just buy a railroad when he announced his purchase of Burlington Northern Santa Fe Corp. He hired the engineer, too.
“It’s a bet not only on the company but on talent,” said Gary Bradshaw, portfolio manager at Hodges Capital Management Inc. in Dallas, which owns 150,000 Burlington Northern shares. “I can’t imagine anything changing. That’s Buffett’s style. He’s always bet on management and let those guys run it.”
Chief Executive Officer Matthew Rose has led Fort Worth, Texas-based Burlington Northern to the top of the U.S. industry in sales. Revenue almost doubled through 2008 from 2001, his first full year at the helm. That growth outpaced the 50 percent rise at Union Pacific Corp., his biggest competitor. Becoming a part of Buffett’s Berkshire Hathaway Inc., with its AAA credit rating from Standard & Poor’s, may make Rose’s job easier by lowering his company’s borrowing costs.
Berkshire has been building its stake since 2006, giving Buffett a glimpse of Rose, 50, a 16-year employee who has been CEO since December 2000. In a Nov. 3 statement, the Berkshire chairman and chief executive said the deal was an investment in the railroad, “Matt Rose and his team.”
Buffett didn’t return a message left with his assistant Carrie Kizer.
Berkshire’s largest purchase will cost the company $26 billion, or $100 a share in cash and stock, for the 77.4 percent of the railroad it doesn’t already own. Including the previous investment and debt assumption, the deal is valued at $44 billion, Omaha, Nebraska-based Berkshire said.
Expanded Capacity
What may have attracted Buffett to Burlington Northern is the company’s reduction of expenses as it expanded capacity, said Anthony Hatch, an independent railroad analyst based in New York.
“One of the ways they’ve improved is taking a high percentage of their variable costs down,” including by using longer and fewer trains, which has increased average velocity across its system, Hatch said.
Hatch also cited Burlington Northern’s development of its intermodal business, beginning in 1989 under Rose’s predecessor Robert Krebs. Intermodal refers to containers that move by a combination of rail, road and sea. Krebs, now a director of General Motors Co., set up a partnership with Lowell, Arkansas- based J.B. Hunt Transport Services Inc., now the third-largest U.S. trucking company.
Since taking over as CEO, Rose has continued the strategy, Hatch said.
New Tracks
“In my nine years we’ve probably laid out $25 billion worth of capital for our railroad,” said Rose, who earned $15.6 million in total compensation last year, according to a Securities and Exchange Commission filing.
Those investments include new locomotives and adding tracks alongside existing ones, he said. Operating parallel tracks boosts train speeds. On the single-track lines that are the most prevalent in the industry, a train heading in one direction must pull off on a siding to let oncoming traffic pass.
During a quarterly earnings call on Oct. 22, Chief Financial Officer Thomas Hund said spending on tracks, equipment and other improvements would remain at $2.6 billion for 2009. Being owned by Berkshire probably won’t change those plans, said Jason Seidl, analyst at New York-based Dahlman Rose & Co.
“If he was buying a railroad that was small and capital- constrained, there would be a big change if you’re with Berkshire,” Seidl said of Buffett’s deal. “But Burlington generates an enormous amount of free cash flow.”
‘Hands-Off’ Shareholder
The railroad will probably have lower borrowing costs as a unit of Berkshire, even if Standard & Poor’s strips Buffett’s company of its AAA rating, said B. Craig Hutson, a Chicago-based railroad debt analyst at Gimme Credit LLC. S&P said yesterday Berkshire’s rating may be cut to as low as AA because of the acquisition. That’s still six levels higher than Burlington Northern’s BBB.
“It would be safe to assume that Burlington will have a broader access to capital and a lower cost of capital than they would have had on a stand-alone basis,” Hutson said. “They haven’t really held back per se on spending on growth opportunities recently. It gives them the ability to invest for the long-term without being asked every quarter how those investments in their infrastructure are doing.”
Burlington Northern has $10 billion of long-term debt and paid $462 million in interest expense this year through Sept. 30, according to its most recent 10-Q regulatory filing.
‘Very Friendly’
Rose said Buffett has been a “hands-off” shareholder who phones “fairly infrequently.” The two met before Berkshire began buying Burlington Northern shares, Rose said.
“We have a large operation in Omaha, so I had a chance to meet him through some charity events,” Rose said in an interview yesterday. “It’s been very friendly, and he’s always told me he wouldn’t do anything hostile that we weren’t aware of (see how Buffett changed his behavior compared with the past!). The biggest change is that instead of having quarterly analyst meetings, I’ll go to Omaha every once in a while. Warren told me one requirement is I have to go to his annual meeting.” :D
Buffett, 79, while not immersed in industry intricacies, understands that railroads stand to benefit from rising diesel fuel prices because they can transport goods more efficiently than trucks, Rose said.
“I wouldn’t call him a detail guy on the railroads,” Rose said. “But he clearly understands the U.S. economy very well.”
Burlington Northern fell 12 cents to $96.98 at 4:15 p.m. in New York Stock Exchange composite trading. The stock climbed 28 percent this year before today and has jumped almost fourfold since December 2000, when Rose was promoted to CEO.
Berkshire’s Class A shares increased $370 to $101,900.
Rose, who lives with his wife in the Fort Worth suburb of Westlake, is the father of two children, a trustee of Texas Christian University in Fort Worth and serves on the board of Fort Worth-based AMR Corp., parent of American Airlines.
____________________________
Berkshire Buys Burlington in Buffett’s Biggest Deal
Nov. 3 (Bloomberg) -- Warren Buffett’sBerkshire Hathaway Inc. agreed to buy railroad Burlington Northern Santa Fe Corp. in what he described as an “all-in wager on the economic future of the United States.”
The purchase, the largest ever for Berkshire, will cost the company $26 billion, or $100 a share in cash and stock, for the 77.4 percent of the railroad it doesn’t already own. Including his previous investment and debt assumption, the deal is valued at $44 billion, Omaha, Nebraska-based Berkshire said today in a statement. The railroad’s stock closed yesterday at $76.07.
Berkshire has been building a stake in the Fort Worth, Texas-based railroad since 2006 as Buffett looked for what he called an “elephant”-sized acquisition allowing him to deploy his company’s cash hoard, which was more than $24 billion at the end of June. Trains stand to become more competitive against trucks with fuel prices high, he has said.
“It is Warren being Warren, taking advantage of a market that is soft at a time when the possibility for competitive bids is relatively low,” said Tom Russo, a partner at Gardner Russo & Gardner, which holds Berkshire shares. “He looks at this as a business that has advantages against other forms of transportation.”
At $100 a share, Buffett is paying 18.2 times Burlington Northern’s estimated 2010 earnings of $5.51, according to the average analyst projection in a Bloomberg survey. That compares with the 13.4 multiple for the Standard & Poor’s 500 Index as of yesterday’s close. Shares of Burlington Northern, the largest U.S. railroad, dropped 13 percent in the 12 months through yesterday.
Union Pacific, CSX
Competing railroad Union Pacific Corp.’s ratio was 13, while Jacksonville, Florida-based CSX Corp.’s was 13.1, Bloomberg data show.
Union Pacific rose $4.35, or 7.9 percent, to $59.41 at 4 p.m. in New York Stock Exchange composite trading. CSX climbed 7.3 percent. Burlington Northern surged to $97. Berkshire Class A shares rose $1,700, or 1.7 percent, to $100,450.
The deal culminates a search by Buffett, 79, that sent him to Europe looking for possible acquisitions and lamenting in letters to shareholders that he and Vice Chairman Charles Munger couldn’t find companies they considered large enough to meaningfully add to annual earnings.
Buffett needs “elephants in order for us to use Berkshire’s flood of incoming cash,” he said in his annual letter to shareholders in 2007. “Charlie and I must therefore ignore the pursuit of mice and focus our acquisition efforts on much bigger game.”
Trains, Trucks
Burlington Northern, with pretax income of $3.37 billion on revenue of $18 billion last year, would be Berkshire’s second- largest operating unit by sales. The McLane unit, which delivers food to grocery stores and restaurants by truck, earned $276 million on revenue of $29.9 billion in 2008.
Berkshire’s largest business is insurance, with units including auto specialist Geico Corp. Buffett, who is the company’s chairman and chief executive officer, has said he likes insurance because he gets to invest the premiums paid by customers until the cash is needed to pay claims. The insurance businesses last year collectively earned $7.51 billion on revenue of $30.3 billion.
Buffett will use $16 billion in cash for the deal, half of which is being borrowed from banks and will be paid back in three annual installments, he told CNBC. Berkshire will have more than $20 billion in consolidated cash after the purchase, he said.
Cash Hoard
“It doesn’t mean we’re out of business, but it does mean that we won’t be making any huge deals for a while,” Buffett told the network today. He said earlier this year the company needs at least $10 billion in cash to be ready for unforeseen events such as catastrophe claims at its insurance units.
Berkshire would get $264 million from Burlington Northern if the railroad’s board accepts a higher bid, according to a regulatory filing today.
Buffett built Berkshire into a $150 billion company buying firms that he deems to have durable competitive advantages. His largest purchases include the 1998 deal for General Reinsurance Corp. for more than $17 billion. Buffett expanded into power production with the purchase of MidAmerican Energy Holdings Co., and last year bought Marmon Holdings Inc., the collection of more than 100 businesses, from the Pritzker family. Marmon’s Union Tank Car unit manufactures and leases railroad cars.
He expects the economy to recover, he said in an interview in September with his company’s Business Wire unit.
“We are still tossing out 14 trillion worth of product a year,” he said. “It will return. It’s already returned with most people in most ways, but it’s not back 100 percent. It’ll get there.”
‘Simple Bet’
The U.S. economy returned to growth in the third quarter after a yearlong contraction as government incentives spurred consumers to spend more on homes and cars. The world’s largest economy expanded at a 3.5 percent pace from July through September, Commerce Department figures showed last week.
“It’s a pretty simple bet,” said Mario Gabelli, CEO of Gamco Investors Inc., which has holdings in Berkshire and Burlington Northern. “Warren knows the assets. He’s been involved in basic businesses like this for years.”
Buffett is increasing his stake in an industry that doesn’t have any competitors for certain types of freight. Federal law requires some chemicals to be moved only by rail.
Railroads burn less diesel fuel than trucks for each ton of cargo carried, giving companies such as Burlington Northern and Omaha-based Union Pacific a grip on bulk commodities such as coal. That fuel-efficiency advantage also gives railroads a share of the profits from moving goods such as Asian imports of cars and other consumer goods sent to U.S. West Coast ports.
Fuel Prices
From ships, containers are loaded onto railcars to be hauled to so-called intermodal terminals, where they’re transferred to trucks for the final leg of their journey.
Buffett said in 2007 that railroads may prosper at the expense of trucks. “As oil prices go up, higher diesel fuel raises costs for rails, but it raises costs for its competitors, truckers, roughly by a factor of four,” Buffett told shareholders in 2007 at his company’s annual meeting. “There could be a lot more business there than there was in the past.”
Berkshire’s board approved a 50-to-1 split of its Class B shares as part of the acquisition plan, the company said in a second statement. Berkshire will schedule a shareholder meeting to vote on an amendment to the company’s certificate of incorporation that’s needed to split the stock. B share typically trade for about a thirtieth of the price of A shares.
Stock Split
Most of the shares exchanged for Burlington Northern stock will be Class A shares, Berkshire said. Splitting the B shares is designed to accommodate the smallest holders who elect for a tax-free swap of the railroad’s stock, it said.
Goldman Sachs Group Inc., Evercore Partners Inc., and Cravath Swaine & Moore LLP are advising Burlington. Berkshire didn’t disclose a financial adviser and said Munger Tolles & Olson LLP furnished legal advice.
Matthew Rose, the chief executive officer of Burlington Northern, said he struck the deal with Buffett after the two met in Texas. Buffett, named by Forbes as the second-richest American, was visiting because he has other business interests in the state, Rose said.
“We spent a couple hours talking about the economy and the business,” Rose told Bloomberg Television. “The next day I got a call. He asked me to meet on a Friday night down in downtown Fort Worth. It was a relatively short conversation; he told me what he wanted to do. The next day we fired up the process.”
Antitrust Review
Burlington Northern operates 32,000 miles of track, with 6,700 locomotives, according to its Web site. Most of the carrier’s network is west of the Mississippi, where it competes with Union Pacific.
The U.S. Department of Justice will conduct an antitrust review, which Burlington expects to be completed by the first quarter of next year, the company said today in a conference call with analysts and investors.
Burlington Northern said two-thirds of the shares that aren’t held by Berkshire must vote in favor of the transaction for it to proceed under Delaware law. The railroad said it anticipates a shareholder meeting in the first quarter of 2010 and the completion of the transaction “very shortly thereafter.”
_______________________
Transcript: Warren Buffett on FOX Business Network today with Liz Claman
But I -- you know, I like the business very much. I think the management is the best there is, and, like I say, when I didn't get thrown out of the office, I made it specific, and it was a good offer from their standpoint. And they decided to accept it. And now we're going to own a railroad. And we never fool around on things, Liz. I mean, I tell the lawyers, get this thing done, you know.
Well, the rails move a freight at a much more environmentally friendly (the future way) way than the truckers do. And they also only use about a third of the fuel. So, it's helping -- it helps our trade balance in the long run. It helps in terms of the atmosphere. It is a very, very efficient, effective, environmentally friendly way of moving freight. And, you know, our rail system is a huge asset to the country.
Well, they haul a lot of coal and coal from the Powder River Basin in the West -- is more competitive, it's lower-sulfur coal than in the East. So, it will be around a long time. But coal, over the long run, coal will diminish in relative importance.
BUFFETT: It's true. I didn't have to listen to that, but it's true any company that has long-life assets is replacing assets that they bought many years ago with things that cost more money now. That's true of our utility business, that's true of any business. It's true -- if you build a plant that 30 years ago had a 30-year life. When you go to replace that same plant, it's going to cost you more money. That's a fact of life in an inflationary economy.
Friday, September 18, 2009
Warren Buffett's Latest Interview
Warren Buffett to CNBC: No Regrets From Crisis Weekend One Year Ago
Here's the link: http://www.cnbc.com/id/32867249
Enjoy!
Happy Raya! Drive safely :)
Here's the link: http://www.cnbc.com/id/32867249
Enjoy!
Happy Raya! Drive safely :)
Thursday, August 20, 2009
Warren Buffett Has Something To Say About US Economy
Op-Ed Contributor
The Greenback Effect
By WARREN E. BUFFETT
Published: August 18, 2009
IN nature, every action has consequences, a phenomenon called the butterfly effect. These consequences, moreover, are not necessarily proportional. For example, doubling the carbon dioxide we belch into the atmosphere may far more than double the subsequent problems for society. Realizing this, the world properly worries about greenhouse emissions.
The butterfly effect reaches into the financial world as well. Here, the United States is spewing a potentially damaging substance into our economy — greenback emissions.
To be sure, we’ve been doing this for a reason I resoundingly applaud. Last fall, our financial system stood on the brink of a collapse that threatened a depression. The crisis required our government to display wisdom, courage and decisiveness. Fortunately, the Federal Reserve and key economic officials in both the Bush and Obama administrations responded more than ably to the need.
They made mistakes, of course. How could it have been otherwise when supposedly indestructible pillars of our economic structure were tumbling all around them? A meltdown, though, was avoided, with a gusher of federal money playing an essential role in the rescue.
The United States economy is now out of the emergency room and appears to be on a slow path to recovery. But enormous dosages of monetary medicine continue to be administered and, before long, we will need to deal with their side effects. For now, most of those effects are invisible and could indeed remain latent for a long time. Still, their threat may be as ominous as that posed by the financial crisis itself.
To understand this threat, we need to look at where we stand historically. If we leave aside the war-impacted years of 1942 to 1946, the largest annual deficit the United States has incurred since 1920 was 6 percent of gross domestic product. This fiscal year, though, the deficit will rise to about 13 percent of G.D.P., more than twice the non-wartime record. In dollars, that equates to a staggering $1.8 trillion. Fiscally, we are in uncharted territory.
Because of this gigantic deficit, our country’s “net debt” (that is, the amount held publicly) is mushrooming. During this fiscal year, it will increase more than one percentage point per month, climbing to about 56 percent of G.D.P. from 41 percent. Admittedly, other countries, like Japan and Italy, have far higher ratios and no one can know the precise level of net debt to G.D.P. at which the United States will lose its reputation for financial integrity. But a few more years like this one and we will find out. (lets wait and see what will happen)
An increase in federal debt can be financed in three ways: borrowing from foreigners, borrowing from our own citizens or, through a roundabout process, printing money. Let’s look at the prospects for each individually — and in combination.
The current account deficit — dollars that we force-feed to the rest of the world and that must then be invested — will be $400 billion or so this year. Assume, in a relatively benign scenario, that all of this is directed by the recipients — China leads the list — to purchases of United States debt. Never mind that this all-Treasuries allocation is no sure thing: some countries may decide that purchasing American stocks, real estate or entire companies makes more sense than soaking up dollar-denominated bonds. Rumblings to that effect have recently increased.
Then take the second element of the scenario — borrowing from our own citizens. Assume that Americans save $500 billion, far above what they’ve saved recently but perhaps consistent with the changing national mood. Finally, assume that these citizens opt to put all their savings into United States Treasuries (partly through intermediaries like banks).
Even with these heroic assumptions, the Treasury will be obliged to find another $900 billion to finance the remainder of the $1.8 trillion of debt it is issuing. Washington’s printing presses will need to work overtime.
Slowing them down will require extraordinary political will. With government expenditures now running 185 percent of receipts, truly major changes in both taxes and outlays will be required. A revived economy can’t come close to bridging that sort of gap.
Legislators will correctly perceive that either raising taxes or cutting expenditures will threaten their re-election. To avoid this fate, they can opt for high rates of inflation, which never require a recorded vote and cannot be attributed to a specific action that any elected official takes.
In fact, John Maynard Keynes long ago laid out a road map for political survival amid an economic disaster of just this sort: “By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.... The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”
I want to emphasize that there is nothing evil or destructive in an increase in debt that is proportional to an increase in income or assets. As the resources of individuals, corporations and countries grow, each can handle more debt. The United States remains by far the most prosperous country on earth, and its debt-carrying capacity will grow in the future just as it has in the past.
But it was a wise man (and my best partner) who said, “All I want to know is where I’m going to die so I’ll never go there.” We don’t want our country to evolve into the banana-republic economy described by Keynes.
Our immediate problem is to get our country back on its feet and flourishing — “whatever it takes” still makes sense. Once recovery is gained, however, Congress must end the rise in the debt-to-G.D.P. ratio and keep our growth in obligations in line with our growth in resources.
Unchecked carbon emissions will likely cause icebergs to melt. Unchecked greenback emissions will certainly cause the purchasing power of currency to melt. The dollar’s destiny lies with Congress.
Warren E. Buffett is the chief executive of Berkshire Hathaway, a diversified holding company.
Source: http://www.nytimes.com/2009/08/19/opinion/19buffett.html?pagewanted=2&_r=2
The Greenback Effect
By WARREN E. BUFFETT
Published: August 18, 2009
IN nature, every action has consequences, a phenomenon called the butterfly effect. These consequences, moreover, are not necessarily proportional. For example, doubling the carbon dioxide we belch into the atmosphere may far more than double the subsequent problems for society. Realizing this, the world properly worries about greenhouse emissions.
The butterfly effect reaches into the financial world as well. Here, the United States is spewing a potentially damaging substance into our economy — greenback emissions.
To be sure, we’ve been doing this for a reason I resoundingly applaud. Last fall, our financial system stood on the brink of a collapse that threatened a depression. The crisis required our government to display wisdom, courage and decisiveness. Fortunately, the Federal Reserve and key economic officials in both the Bush and Obama administrations responded more than ably to the need.
They made mistakes, of course. How could it have been otherwise when supposedly indestructible pillars of our economic structure were tumbling all around them? A meltdown, though, was avoided, with a gusher of federal money playing an essential role in the rescue.
The United States economy is now out of the emergency room and appears to be on a slow path to recovery. But enormous dosages of monetary medicine continue to be administered and, before long, we will need to deal with their side effects. For now, most of those effects are invisible and could indeed remain latent for a long time. Still, their threat may be as ominous as that posed by the financial crisis itself.
To understand this threat, we need to look at where we stand historically. If we leave aside the war-impacted years of 1942 to 1946, the largest annual deficit the United States has incurred since 1920 was 6 percent of gross domestic product. This fiscal year, though, the deficit will rise to about 13 percent of G.D.P., more than twice the non-wartime record. In dollars, that equates to a staggering $1.8 trillion. Fiscally, we are in uncharted territory.
Because of this gigantic deficit, our country’s “net debt” (that is, the amount held publicly) is mushrooming. During this fiscal year, it will increase more than one percentage point per month, climbing to about 56 percent of G.D.P. from 41 percent. Admittedly, other countries, like Japan and Italy, have far higher ratios and no one can know the precise level of net debt to G.D.P. at which the United States will lose its reputation for financial integrity. But a few more years like this one and we will find out. (lets wait and see what will happen)
An increase in federal debt can be financed in three ways: borrowing from foreigners, borrowing from our own citizens or, through a roundabout process, printing money. Let’s look at the prospects for each individually — and in combination.
The current account deficit — dollars that we force-feed to the rest of the world and that must then be invested — will be $400 billion or so this year. Assume, in a relatively benign scenario, that all of this is directed by the recipients — China leads the list — to purchases of United States debt. Never mind that this all-Treasuries allocation is no sure thing: some countries may decide that purchasing American stocks, real estate or entire companies makes more sense than soaking up dollar-denominated bonds. Rumblings to that effect have recently increased.
Then take the second element of the scenario — borrowing from our own citizens. Assume that Americans save $500 billion, far above what they’ve saved recently but perhaps consistent with the changing national mood. Finally, assume that these citizens opt to put all their savings into United States Treasuries (partly through intermediaries like banks).
Even with these heroic assumptions, the Treasury will be obliged to find another $900 billion to finance the remainder of the $1.8 trillion of debt it is issuing. Washington’s printing presses will need to work overtime.
Slowing them down will require extraordinary political will. With government expenditures now running 185 percent of receipts, truly major changes in both taxes and outlays will be required. A revived economy can’t come close to bridging that sort of gap.
Legislators will correctly perceive that either raising taxes or cutting expenditures will threaten their re-election. To avoid this fate, they can opt for high rates of inflation, which never require a recorded vote and cannot be attributed to a specific action that any elected official takes.
In fact, John Maynard Keynes long ago laid out a road map for political survival amid an economic disaster of just this sort: “By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.... The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”
I want to emphasize that there is nothing evil or destructive in an increase in debt that is proportional to an increase in income or assets. As the resources of individuals, corporations and countries grow, each can handle more debt. The United States remains by far the most prosperous country on earth, and its debt-carrying capacity will grow in the future just as it has in the past.
But it was a wise man (and my best partner) who said, “All I want to know is where I’m going to die so I’ll never go there.” We don’t want our country to evolve into the banana-republic economy described by Keynes.
Our immediate problem is to get our country back on its feet and flourishing — “whatever it takes” still makes sense. Once recovery is gained, however, Congress must end the rise in the debt-to-G.D.P. ratio and keep our growth in obligations in line with our growth in resources.
Unchecked carbon emissions will likely cause icebergs to melt. Unchecked greenback emissions will certainly cause the purchasing power of currency to melt. The dollar’s destiny lies with Congress.
Warren E. Buffett is the chief executive of Berkshire Hathaway, a diversified holding company.
Source: http://www.nytimes.com/2009/08/19/opinion/19buffett.html?pagewanted=2&_r=2
Saturday, July 11, 2009
Warren Buffett's Complete Sun Valley CNBC Interview
Warren Buffett spoke tonight (Thursday) on tape with CNBC's Julia Boorstin at Herb Allen's Sun Valley media conference.
He remains pessimistic about the economy's short-term prospects, saying the latest numbers from his Berkshire Hathaway companies show that consumer spending remains very weak.
Buffett also says a second economic stimulus will probably be needed, but he warned that no one should expect any stimulus plan to be a "panacea."
For a summary, see the WBW post Warren Buffett Tells CNBC Consumer Sales Remain "Very, Very Soft"
This is a video clip and preliminary transcript of Julia's entire conversation with Buffett:
JULIA BOORSTIN: Warren Buffett, thank you so much for talking to us here in Sun Valley. I want to start off with a question about what happened today. We got some same-store sales numbers. And Costco's [COST 44.97 -0.53 (-1.16%) ] numbers were down despite some of those rebate checks, and I was wondering, you have a lot of consumer-facing businesses, what's your take on the consumer economy? Is it as bad as it seems?
WARREN BUFFETT: I think it is. I haven't seen the figures you're referring to but I had heard ahead of time, not from Costco, they were going to be very poor. Over Father's Day, I don't know whether America's families rebelled against their fathers that day, but sales were bad. Apparel sales were bad. We're in the underwear business. We see how they're moving every day and, wives are not buying underwear for their husbands. (Laughs.) It's still very, very soft.
JULIA: The underwear indicator is bad.
BUFFETT: Yeah, right, underwear is going down. (Laughs.)
JULIA: Looking across the consumer businesses you own, do you have a sense of when the consumer economy will pick up?
BUFFETT: No. I will know when it does. I get very, very contemporaneous figures on it. So when it happens, I'll know. But there's nothing in the figures today that tells me what's going to happen tomorrow. What they do tell me is that today it hasn't picked up yet.
JULIA: The global economic downturn is a big topic of conversation here. Yesterday I know there was a big panel discussion on it. From everything I've heard, it sounds like the mood was very glum. I've heard somber. I've heard glum. It was not a positive mood. Do you agree with that sentiment?
BUFFETT: Well, I would say that right now we're in a very, very tough period. We've been in it - it really took off last September, mid-September, when it hit the financial world like nothing we've ever seen, and that's gotten spilled over into the economy. And it's a tough period now. On the other hand, this movie will have a good ending.
JULIA: Now, good ending over what sort of time period?
BUFFETT: (Laughs). I don't know how long the movie will be. I know the ending will be good but I don't know whether its a two-hour movie or a four-hour movie.
JULIA: Well, you've said that the stimulus has done little, not enough, to get the economy moving. Do you think that people here agree with you on that?
BUFFETT: Well, I don't know about people agreeing with me, but yeah, I think they probably, generally. But the stimulus was never designed to act fast. People hoped it would start trickling in. In general, I think, and this is no criticism of the administration because I believe in the stimulus and would probably believe in another one, they may be overrated in terms of their ability to end the recession fast.
JULIA: But if you're advocating another one, are they overrated?
BUFFETT: I think they're useful, but I think that anybody who looks on them as a panacea is making a mistake. But they're useful, they're useful.
JULIA: What do you think should be done now in terms of, do you think there should be another stimulus right now?
BUFFETT: I think there probably should be. But I wouldn't expect miracles out of it.
JULIA: But so little of the 800-billion dollar stimulus has already been spent. Does it make sense to do another stimulus now, or do we want until some of that money, or more of that money, is out there?
BUFFETT: Well, I would. If you had another one you'd try to load as little on the Christmas tree as possible for specific constituencies, and you would try to get it spent fast. But the President said that originally, let's try to go with the shovel-ready projects. And then Congress got into the act and I think watered it down some.
JULIA: So if the stimulus is, a stimulus is, multiple stimuli, not a panacea, what is the solution?
BUFFETT: There is no silver bullet. I mean, the original cause of this was the housing bubble. Now a lot of things were contributing to it and flowed out of it and all of that. We built a couple million housing units a year. We formed a million, three-hundred thousand households a year, surprise, we had too many houses at a point. You can't work that off in a day, or a week, or a month. The best thing we can do is not to be building a lot of new houses now. I mean, we will work off the excess inventory faster. If you want to end the recession as soon as possible, you do nothing to encourage new housing construction. Very tough on the home builders but that is the prescription for getting supply and demand back into balance.
JULIA: And so what does that mean in terms of interest rates?
BUFFETT: Well, you want low interest rates. The more affordable houses are, I mean people have to have a job too, but low interest rates are a boon to housing in that they mean people qualify for owning housing of a given type that wouldn't otherwise. But we still have too many houses. And the only way to do that, we can either form more households, get all the 14-year-olds to start living together, which they would probably like, (laughs), or we can blow up a bunch of houses, which I don't think any of us would like, or we can produce more than the household formation and we will use up the inventory and we will get back to a vibrant economy.
JULIA: You supported President Obama -
BUFFETT: 100 percent.
JULIA: And what do you think of his behavior, his decisions since he's been in office?
BUFFETT: He's been terrific. I think it's very important that the people in the country, just as in the 30's, that they have a leader they believe in. And they've got good reason to believe in him. Plus he communicates extraordinarily well so they can understand what he's doing and why he's doing it and what the timetables may be and all that sort of thing. So we have the right person in the White House.
JULIA: But you feel like the stimulus hasn't done enough, so do you agree with the way he's handled the financial crisis?
BUFFETT: Well, the Congress wrote the stimulus bill. Yeah. (Smiles.)
JULIA: You've mentioned that you're not worried about inflation right now. You're concerned about inflation down the line. What can the government and the Fed do right now to minimize that risk?
BUFFETT: Well, right now they're pouring the medicine on. Unfortunately the medicine will have an after-effect, and it will be inflation, and the question is how much and how extreme? We're going to apply a lot of medicine, and we're likely to get a lot of inflation down the road. But it's better to have the patient recover than to sit there and say I'm worried about the after-effects of the medicine so we'll just ignore it.
JULIA: Oil prices have come way down over the past six weeks. I think they're now around 60 dollars. Will that help the situation?
BUFFETT: Well, it always helps. I mean, we are importing 10-million plus barrels a day of oil and that's a tax that the rest of the world imposes on us. We give them goods and services that we produce, or IOUs, in exchange for that. And the cheaper we buy oil, the better off we are.
JULIA: And where do you think oil prices are going to head in another year?
BUFFETT: (Laughs.) If I knew it, I wouldn't tell you, but I don't know it. (Laughs.)
JULIA: So President Obama spent a lot of time recently overseas dealing with international relations. Obviously he has a lot of issues on his plate. Is that where he should be focusing his attention?
BUFFETT: Well, it's important that he do that, obviously. The number one job is the economy but that doesn't mean you ignore the rest of the world. Plus he has this, he is favorably regarded by the rest of the world and he should take advantage of that. He should establish relationships that are better with important countries than has been the case in the last eight years.
JULIA: So do you think the biggest issue that Obama is facing right now is the U.S. economy?
BUFFETT: For sure. I mean, if you're unemployed, your most important job is to get another job, and get an income. And the country is becoming unemployed to a degree. And it's very important the economy gets, comes back. It will come back. Government has less influence on how fast that happens than a lot of people would like to hope that it would. But government is a player, but it has no silver bullet. The economy will come back, though.
JULIA: It seems like one of the big issues facing the economy, and also a big topic of discussion here, is health care. I know that there were a number of panels on health care here today. How grave a problem do you think is, do you think the U.S. health care system is, and what do you think the solution is?
BUFFETT: Well, (laughs), I know how big a problem it is but I don't know what the solution is. If I knew the solution I wouldn't hesitate to offer it. But I don't bring anything to that party that hundreds of thousands of other people don't know as much or more about it than I do. But it's obviously a huge problem when it's using up whatever it may be, some people say it's as high as 17 percent of GDP. But we can't go on with health care accelerating at a faster rate than GDP. We've done it for a long time, but we need a solution, and there are better people, people better qualified than I.
JULIA: One of the ideas that Senate Democrats are talking about is a surcharge tax on individuals earning over 200-hundred thousand dollars. What do you think of that as an idea to help address the health care cost issue?
BUFFETT: Well, I wouldn't do it in respect necessarily to the health care specifically, but I think that on balance the rich have been undertaxed compared to the middle class and the lower class. I mean, over the last decade in particular, the tax law has been tilted in favor of guys like me and we don't need any help. And there are plenty of people in this country that do.
JULIA: So what would you advocate in terms of the future of taxes?
BUFFETT: I would have something that hits guys like me harder and hits the people that served us breakfast this morning a little less.
JULIA: So where is that dividing line? Is it 200-hundred thousand dollars? Does that make sense as a -
BUFFETT: I think it should be more progressive the higher up you go. But I think it's ridiculous when my tax on capital gains is less than the payroll tax on what you're earning today.
JULIA: What do you think some of the other people here would say about that?
BUFFETT: Well, you'll have to ask them. (Smiles.) Some of them would agree. No, a lot of them would agree. They wouldn't like it. Nobody likes having their taxes increase. I don't like having my taxes increase. But on the other hand, we're raising 2.3, something like that, trillion. We may spend four-trillion. There's going to have to be some adjustment made someplace and I think it's better to adjust it, to some degree, on guys like me rather than on the people who gave me breakfast this morning.
JULIA: How long -- do you think taxes will go up in the near future?
BUFFETT: I don't know about the near future, but they will go up over time because we're not going to bring spending down from four-trillion to 2.3 trillion, and we're not going to take up revenues unless we -- it will be helped some when we get a recovery, but we'll need somewhat higher taxes someplace.
JULIA: So back to the health care issue. Speaking of taxes, one of the questions is whether to tax employer-provided health care. And this is a big issue of debate. What do you think?
BUFFETT: It will all be, there will be so many tradeoffs involved, it won't be a perfect bill. Nobody could design a perfect bill. So, you can't really look at one part of it until you're looking at other parts of it. So I don't have any magic answer on that.
JULIA: Another thing that we're hearing a lot about is the hospital industry has agreed to a lot of cost cuts. We've seen the pharmaceutical industry agree to a lot of discounts. Together, that amounts to hundreds of millions of dollars. How much are those kinds of compromises going to be to finding a health care solution?
BUFFETT: Well, they're going to be important. But they problem you have is you have a health care situation now where more than two-trillion dollars a year is being spent. That means two-trillion dollars is going to somebody, whether its doctors, nurses, hospitals, pharmaceutical companies, you name it. Everyone is going to look at that bill and they're going to say, 'Am I getting more or less?' It's like a tax law change. Every line in the tax code has a constituency. Well, every dollar in medical expenses has a constituency, and that's the tough thing at the end. It will take a lot of leadership and some statesmanship on the part of people to get something. But it is a question that needs to be addressed.
JULIA: Now, in addition to health care, this year digital media and distribution of media and monetization of media has been a big topic of conversation here. Last year we talked about the Kindle and you were really enjoying your Kindle. What do you think is the big topic this year?
BUFFETT: Well, I'm here as part of their outreach program. I'm the village idiot in terms of this stuff. So they try everything out on me, if it gets past me any three-year-old can do it. I'm the wrong guy to ask ..
JULIA: Have they tried to get you to use something this year?
BUFFETT: People are always trying to get me to use things. Like I say, I will be the last guy around using a landline phone and reading a newspaper and doing all those things.
JULIA: Have you tried Twitter?
BUFFETT: I have not tried Twitter, although I met the fellow who, one of the co-founders of it, he's from a little town in Nebraska called Clark and he went to the University of Nebraska for a couple of years. So can't be all bad. (Laughs.)
JULIA: It can't be all bad. Now one question, since we're hearing a lot about watching television on the internet, have you ever watched TV on the internet?
BUFFETT: I haven't watch TV on the internet, but I have used the internet a lot. A lot.
JULIA: So, here, talking to media CEOs, talking to CEOs from a big range of businesses, the CEO of Coca-Cola [KO 48.31 -0.40 (-0.82%) ], American Express [AXP 23.22 0.42 (+1.84%) ], they're all here, what is the sense you're getting from them about the state of the economy?
BUFFETT: Well, they would see it the same way. The economy, they would probably say that the decline has stopped, most of them would say this in their business, but there's been no rebound. Now that doesn't mean there wouldn't be a further decline. It doesn't mean the rebound won't start tomorrow. But what they are seeing in their businesses is sort of a flat line after a big descent.
JULIA: Is there anything that you've heard here from these CEOs that surprised you?
BUFFETT: No, I wouldn't say that at all. They're seeing the same things I see. We're in about 70 businesses ourselves, and I've got CEOs of every one of those companies , so I've already talked to a lot of them before I got here.
JULIA: So I have to ask you a question --
BUFFETT: Uh oh. (Laughs.)
JULIA: I know that you are friends with LeBron James. I know he's a huge fan of your's. Yesterday I was chatting with him and he said he'd be game for a game of pickup basketball with any CEO, anyone here who is interested. Are you going to play pickup basketball with LeBron James?
BUFFETT: I've already done it. I played him in basketball a couple of year ago. We played for hours, and maybe I'll even reveal the results of that --
JULIA: Who won?
BUFFETT: Well, I will play him any game he wants to play as long as I get to keep score. (Laughs.) But I won't tell him my scoring method ahead of time.
JULIA: So there's no match here that's been planned?
BUFFETT: We're going to play golf, but not basketball.
JULIA: Is he a good golf player?
BUFFETT: He tells me he's never played. I've played 65 years and if you want to place a bet on either one of us, bet on him. (Laughs.) He's got a special set of clubs, though. Phil Knight at Nike [NKE 51.30 0.24 (+0.47%) ] gave him this special set of clubs, so who knows what it's going to be like.
JULIA: Maybe he'll be a big pro. Well, thank you so much for talking with us. I really appreciate it.
BUFFETT: It's been a pleasure. Thanks.
Current Berkshire stock prices:
Class A: [US;BRK.A 85125.0 -475.00 (-0.55%) ]
Class B: [US;BRK.B 2745.0 -25.79 (-0.93%) ]
Source: http://www.cnbc.com/id/31836625/
He remains pessimistic about the economy's short-term prospects, saying the latest numbers from his Berkshire Hathaway companies show that consumer spending remains very weak.
Buffett also says a second economic stimulus will probably be needed, but he warned that no one should expect any stimulus plan to be a "panacea."
For a summary, see the WBW post Warren Buffett Tells CNBC Consumer Sales Remain "Very, Very Soft"
This is a video clip and preliminary transcript of Julia's entire conversation with Buffett:
JULIA BOORSTIN: Warren Buffett, thank you so much for talking to us here in Sun Valley. I want to start off with a question about what happened today. We got some same-store sales numbers. And Costco's [COST 44.97 -0.53 (-1.16%) ] numbers were down despite some of those rebate checks, and I was wondering, you have a lot of consumer-facing businesses, what's your take on the consumer economy? Is it as bad as it seems?
WARREN BUFFETT: I think it is. I haven't seen the figures you're referring to but I had heard ahead of time, not from Costco, they were going to be very poor. Over Father's Day, I don't know whether America's families rebelled against their fathers that day, but sales were bad. Apparel sales were bad. We're in the underwear business. We see how they're moving every day and, wives are not buying underwear for their husbands. (Laughs.) It's still very, very soft.
JULIA: The underwear indicator is bad.
BUFFETT: Yeah, right, underwear is going down. (Laughs.)
JULIA: Looking across the consumer businesses you own, do you have a sense of when the consumer economy will pick up?
BUFFETT: No. I will know when it does. I get very, very contemporaneous figures on it. So when it happens, I'll know. But there's nothing in the figures today that tells me what's going to happen tomorrow. What they do tell me is that today it hasn't picked up yet.
JULIA: The global economic downturn is a big topic of conversation here. Yesterday I know there was a big panel discussion on it. From everything I've heard, it sounds like the mood was very glum. I've heard somber. I've heard glum. It was not a positive mood. Do you agree with that sentiment?
BUFFETT: Well, I would say that right now we're in a very, very tough period. We've been in it - it really took off last September, mid-September, when it hit the financial world like nothing we've ever seen, and that's gotten spilled over into the economy. And it's a tough period now. On the other hand, this movie will have a good ending.
JULIA: Now, good ending over what sort of time period?
BUFFETT: (Laughs). I don't know how long the movie will be. I know the ending will be good but I don't know whether its a two-hour movie or a four-hour movie.
JULIA: Well, you've said that the stimulus has done little, not enough, to get the economy moving. Do you think that people here agree with you on that?
BUFFETT: Well, I don't know about people agreeing with me, but yeah, I think they probably, generally. But the stimulus was never designed to act fast. People hoped it would start trickling in. In general, I think, and this is no criticism of the administration because I believe in the stimulus and would probably believe in another one, they may be overrated in terms of their ability to end the recession fast.
JULIA: But if you're advocating another one, are they overrated?
BUFFETT: I think they're useful, but I think that anybody who looks on them as a panacea is making a mistake. But they're useful, they're useful.
JULIA: What do you think should be done now in terms of, do you think there should be another stimulus right now?
BUFFETT: I think there probably should be. But I wouldn't expect miracles out of it.
JULIA: But so little of the 800-billion dollar stimulus has already been spent. Does it make sense to do another stimulus now, or do we want until some of that money, or more of that money, is out there?
BUFFETT: Well, I would. If you had another one you'd try to load as little on the Christmas tree as possible for specific constituencies, and you would try to get it spent fast. But the President said that originally, let's try to go with the shovel-ready projects. And then Congress got into the act and I think watered it down some.
JULIA: So if the stimulus is, a stimulus is, multiple stimuli, not a panacea, what is the solution?
BUFFETT: There is no silver bullet. I mean, the original cause of this was the housing bubble. Now a lot of things were contributing to it and flowed out of it and all of that. We built a couple million housing units a year. We formed a million, three-hundred thousand households a year, surprise, we had too many houses at a point. You can't work that off in a day, or a week, or a month. The best thing we can do is not to be building a lot of new houses now. I mean, we will work off the excess inventory faster. If you want to end the recession as soon as possible, you do nothing to encourage new housing construction. Very tough on the home builders but that is the prescription for getting supply and demand back into balance.
JULIA: And so what does that mean in terms of interest rates?
BUFFETT: Well, you want low interest rates. The more affordable houses are, I mean people have to have a job too, but low interest rates are a boon to housing in that they mean people qualify for owning housing of a given type that wouldn't otherwise. But we still have too many houses. And the only way to do that, we can either form more households, get all the 14-year-olds to start living together, which they would probably like, (laughs), or we can blow up a bunch of houses, which I don't think any of us would like, or we can produce more than the household formation and we will use up the inventory and we will get back to a vibrant economy.
JULIA: You supported President Obama -
BUFFETT: 100 percent.
JULIA: And what do you think of his behavior, his decisions since he's been in office?
BUFFETT: He's been terrific. I think it's very important that the people in the country, just as in the 30's, that they have a leader they believe in. And they've got good reason to believe in him. Plus he communicates extraordinarily well so they can understand what he's doing and why he's doing it and what the timetables may be and all that sort of thing. So we have the right person in the White House.
JULIA: But you feel like the stimulus hasn't done enough, so do you agree with the way he's handled the financial crisis?
BUFFETT: Well, the Congress wrote the stimulus bill. Yeah. (Smiles.)
JULIA: You've mentioned that you're not worried about inflation right now. You're concerned about inflation down the line. What can the government and the Fed do right now to minimize that risk?
BUFFETT: Well, right now they're pouring the medicine on. Unfortunately the medicine will have an after-effect, and it will be inflation, and the question is how much and how extreme? We're going to apply a lot of medicine, and we're likely to get a lot of inflation down the road. But it's better to have the patient recover than to sit there and say I'm worried about the after-effects of the medicine so we'll just ignore it.
JULIA: Oil prices have come way down over the past six weeks. I think they're now around 60 dollars. Will that help the situation?
BUFFETT: Well, it always helps. I mean, we are importing 10-million plus barrels a day of oil and that's a tax that the rest of the world imposes on us. We give them goods and services that we produce, or IOUs, in exchange for that. And the cheaper we buy oil, the better off we are.
JULIA: And where do you think oil prices are going to head in another year?
BUFFETT: (Laughs.) If I knew it, I wouldn't tell you, but I don't know it. (Laughs.)
JULIA: So President Obama spent a lot of time recently overseas dealing with international relations. Obviously he has a lot of issues on his plate. Is that where he should be focusing his attention?
BUFFETT: Well, it's important that he do that, obviously. The number one job is the economy but that doesn't mean you ignore the rest of the world. Plus he has this, he is favorably regarded by the rest of the world and he should take advantage of that. He should establish relationships that are better with important countries than has been the case in the last eight years.
JULIA: So do you think the biggest issue that Obama is facing right now is the U.S. economy?
BUFFETT: For sure. I mean, if you're unemployed, your most important job is to get another job, and get an income. And the country is becoming unemployed to a degree. And it's very important the economy gets, comes back. It will come back. Government has less influence on how fast that happens than a lot of people would like to hope that it would. But government is a player, but it has no silver bullet. The economy will come back, though.
JULIA: It seems like one of the big issues facing the economy, and also a big topic of discussion here, is health care. I know that there were a number of panels on health care here today. How grave a problem do you think is, do you think the U.S. health care system is, and what do you think the solution is?
BUFFETT: Well, (laughs), I know how big a problem it is but I don't know what the solution is. If I knew the solution I wouldn't hesitate to offer it. But I don't bring anything to that party that hundreds of thousands of other people don't know as much or more about it than I do. But it's obviously a huge problem when it's using up whatever it may be, some people say it's as high as 17 percent of GDP. But we can't go on with health care accelerating at a faster rate than GDP. We've done it for a long time, but we need a solution, and there are better people, people better qualified than I.
JULIA: One of the ideas that Senate Democrats are talking about is a surcharge tax on individuals earning over 200-hundred thousand dollars. What do you think of that as an idea to help address the health care cost issue?
BUFFETT: Well, I wouldn't do it in respect necessarily to the health care specifically, but I think that on balance the rich have been undertaxed compared to the middle class and the lower class. I mean, over the last decade in particular, the tax law has been tilted in favor of guys like me and we don't need any help. And there are plenty of people in this country that do.
JULIA: So what would you advocate in terms of the future of taxes?
BUFFETT: I would have something that hits guys like me harder and hits the people that served us breakfast this morning a little less.
JULIA: So where is that dividing line? Is it 200-hundred thousand dollars? Does that make sense as a -
BUFFETT: I think it should be more progressive the higher up you go. But I think it's ridiculous when my tax on capital gains is less than the payroll tax on what you're earning today.
JULIA: What do you think some of the other people here would say about that?
BUFFETT: Well, you'll have to ask them. (Smiles.) Some of them would agree. No, a lot of them would agree. They wouldn't like it. Nobody likes having their taxes increase. I don't like having my taxes increase. But on the other hand, we're raising 2.3, something like that, trillion. We may spend four-trillion. There's going to have to be some adjustment made someplace and I think it's better to adjust it, to some degree, on guys like me rather than on the people who gave me breakfast this morning.
JULIA: How long -- do you think taxes will go up in the near future?
BUFFETT: I don't know about the near future, but they will go up over time because we're not going to bring spending down from four-trillion to 2.3 trillion, and we're not going to take up revenues unless we -- it will be helped some when we get a recovery, but we'll need somewhat higher taxes someplace.
JULIA: So back to the health care issue. Speaking of taxes, one of the questions is whether to tax employer-provided health care. And this is a big issue of debate. What do you think?
BUFFETT: It will all be, there will be so many tradeoffs involved, it won't be a perfect bill. Nobody could design a perfect bill. So, you can't really look at one part of it until you're looking at other parts of it. So I don't have any magic answer on that.
JULIA: Another thing that we're hearing a lot about is the hospital industry has agreed to a lot of cost cuts. We've seen the pharmaceutical industry agree to a lot of discounts. Together, that amounts to hundreds of millions of dollars. How much are those kinds of compromises going to be to finding a health care solution?
BUFFETT: Well, they're going to be important. But they problem you have is you have a health care situation now where more than two-trillion dollars a year is being spent. That means two-trillion dollars is going to somebody, whether its doctors, nurses, hospitals, pharmaceutical companies, you name it. Everyone is going to look at that bill and they're going to say, 'Am I getting more or less?' It's like a tax law change. Every line in the tax code has a constituency. Well, every dollar in medical expenses has a constituency, and that's the tough thing at the end. It will take a lot of leadership and some statesmanship on the part of people to get something. But it is a question that needs to be addressed.
JULIA: Now, in addition to health care, this year digital media and distribution of media and monetization of media has been a big topic of conversation here. Last year we talked about the Kindle and you were really enjoying your Kindle. What do you think is the big topic this year?
BUFFETT: Well, I'm here as part of their outreach program. I'm the village idiot in terms of this stuff. So they try everything out on me, if it gets past me any three-year-old can do it. I'm the wrong guy to ask ..
JULIA: Have they tried to get you to use something this year?
BUFFETT: People are always trying to get me to use things. Like I say, I will be the last guy around using a landline phone and reading a newspaper and doing all those things.
JULIA: Have you tried Twitter?
BUFFETT: I have not tried Twitter, although I met the fellow who, one of the co-founders of it, he's from a little town in Nebraska called Clark and he went to the University of Nebraska for a couple of years. So can't be all bad. (Laughs.)
JULIA: It can't be all bad. Now one question, since we're hearing a lot about watching television on the internet, have you ever watched TV on the internet?
BUFFETT: I haven't watch TV on the internet, but I have used the internet a lot. A lot.
JULIA: So, here, talking to media CEOs, talking to CEOs from a big range of businesses, the CEO of Coca-Cola [KO 48.31 -0.40 (-0.82%) ], American Express [AXP 23.22 0.42 (+1.84%) ], they're all here, what is the sense you're getting from them about the state of the economy?
BUFFETT: Well, they would see it the same way. The economy, they would probably say that the decline has stopped, most of them would say this in their business, but there's been no rebound. Now that doesn't mean there wouldn't be a further decline. It doesn't mean the rebound won't start tomorrow. But what they are seeing in their businesses is sort of a flat line after a big descent.
JULIA: Is there anything that you've heard here from these CEOs that surprised you?
BUFFETT: No, I wouldn't say that at all. They're seeing the same things I see. We're in about 70 businesses ourselves, and I've got CEOs of every one of those companies , so I've already talked to a lot of them before I got here.
JULIA: So I have to ask you a question --
BUFFETT: Uh oh. (Laughs.)
JULIA: I know that you are friends with LeBron James. I know he's a huge fan of your's. Yesterday I was chatting with him and he said he'd be game for a game of pickup basketball with any CEO, anyone here who is interested. Are you going to play pickup basketball with LeBron James?
BUFFETT: I've already done it. I played him in basketball a couple of year ago. We played for hours, and maybe I'll even reveal the results of that --
JULIA: Who won?
BUFFETT: Well, I will play him any game he wants to play as long as I get to keep score. (Laughs.) But I won't tell him my scoring method ahead of time.
JULIA: So there's no match here that's been planned?
BUFFETT: We're going to play golf, but not basketball.
JULIA: Is he a good golf player?
BUFFETT: He tells me he's never played. I've played 65 years and if you want to place a bet on either one of us, bet on him. (Laughs.) He's got a special set of clubs, though. Phil Knight at Nike [NKE 51.30 0.24 (+0.47%) ] gave him this special set of clubs, so who knows what it's going to be like.
JULIA: Maybe he'll be a big pro. Well, thank you so much for talking with us. I really appreciate it.
BUFFETT: It's been a pleasure. Thanks.
Current Berkshire stock prices:
Class A: [US;BRK.A 85125.0 -475.00 (-0.55%) ]
Class B: [US;BRK.B 2745.0 -25.79 (-0.93%) ]
Source: http://www.cnbc.com/id/31836625/
Friday, June 26, 2009
Listen to the Great Investor Cum Businessman or Analyst?
BECKY: The last time we sat down to talk to you was on May 4, and at that point you told us that you think we're in an economic war right now. How much progress do you think we've made in that war?
BUFFETT: Well, it's been pretty flat. I get figures on 70-odd businesses, a lot of them daily. Everything that I see about the economy is that we've had no bounce. The financial system was really where the crisis was last September and October, and that's been surmounted and that's enormously important. But in terms of the economy coming back, it takes a while. There were a lot of excesses to be wrung out and that process is still underway and it looks to me like it will be underway for quite a while. In the (Berkshire Hathaway) annual report, I said the economy would be in a shambles this year and probably well beyond. I'm afraid that's true.
BECKY: We hear people on our air all the time who talk about the 'green shoots' that they're seeing. Are you seeing any of those green shoots?
BUFFETT: (Laughs.) I looked. I wasn't seeing anything (Thinking "Green shoots, what green shoots? Nonsense!"). I had a cataract operation on my left eye about a month ago and I thought maybe now I'll be able to see green shoots. We're not seeing them. Whether it's retailing, manufacturing, wherever. We have a big utility operation. Industrial demand is down like we've never seen it for a simple thing like electricity. So it hasn't happened yet. It will happen. I want to emphasize that. But it hasn't happened yet.
Source: http://www.cnbc.com/id/31526815/
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When u think the market is going to go up, sometimes it wont. Today is a good example. Dow and S&P up by more than 2%. Everyone expects our market will go up, so will you buy today? Isnt it better to buy when the market is going down? Buy low, sell high. Or buy high, sell low? When you have nothing to buy, do your homework and be prepared for the next selldown. Dont follow the herd. Fear not missing the boat because it will come back one day. Fear you must for taking the overloaded boat, for it will collapse while you're sleeping.
BUFFETT: Well, it's been pretty flat. I get figures on 70-odd businesses, a lot of them daily. Everything that I see about the economy is that we've had no bounce. The financial system was really where the crisis was last September and October, and that's been surmounted and that's enormously important. But in terms of the economy coming back, it takes a while. There were a lot of excesses to be wrung out and that process is still underway and it looks to me like it will be underway for quite a while. In the (Berkshire Hathaway) annual report, I said the economy would be in a shambles this year and probably well beyond. I'm afraid that's true.
BECKY: We hear people on our air all the time who talk about the 'green shoots' that they're seeing. Are you seeing any of those green shoots?
BUFFETT: (Laughs.) I looked. I wasn't seeing anything (Thinking "Green shoots, what green shoots? Nonsense!"). I had a cataract operation on my left eye about a month ago and I thought maybe now I'll be able to see green shoots. We're not seeing them. Whether it's retailing, manufacturing, wherever. We have a big utility operation. Industrial demand is down like we've never seen it for a simple thing like electricity. So it hasn't happened yet. It will happen. I want to emphasize that. But it hasn't happened yet.
Source: http://www.cnbc.com/id/31526815/
--------
When u think the market is going to go up, sometimes it wont. Today is a good example. Dow and S&P up by more than 2%. Everyone expects our market will go up, so will you buy today? Isnt it better to buy when the market is going down? Buy low, sell high. Or buy high, sell low? When you have nothing to buy, do your homework and be prepared for the next selldown. Dont follow the herd. Fear not missing the boat because it will come back one day. Fear you must for taking the overloaded boat, for it will collapse while you're sleeping.
Friday, April 17, 2009
To Invest Big Or Not At All
When you invest in a particular stock, how much money do you put into it? Is it 10% or 20% of your net worth (money available for investment) or more? Or just 2%? Most, not all (exceptions like Public Mutual and HLG Unit Trust), mutual fund investors invest an average of 2% in one stock. This is due to the fact that most mutual funds are well diversified - more than 50 stocks in each portfolio.
"Personally, Im amazed at how little conviction most investors have in the stocks they buy. Instead of putting 20% of their portfolio into a stock, as the Kelly Formula might say to do, they'll put 2% into it. Mathematically, using the Kelly Formula, it can be shown that a 2% position is the equivalent of betting on a stock has only a 51% chance of going up, and a 49% chance of going down. Why would you waste your time even making that bet? These guys are getting paid $1 million a year to identify stocks with a 51% chance of going up? Its insane." - Mark Seller in his article "So You Want To Be The Next Warren Buffett? How's Your Writing?"
How about that? If something is not worth doing at all, its not worth doing well. Familiar? The next time you invest in a stock, think about it. Is it worth investing 2% in this stock? Or not at all? Or is this one of the few good opportunities to put in 20%? If you cant do it now, when do you expect to do it? Think about it.
Time to ponder:
We continually look for ways to employ large sums in each area - ownership of business and marketable securities. But we try to avoid SMALL commitments - "If something is not worth doing at all, its not worth doing well". -Warren Buffett, 1981
"Personally, Im amazed at how little conviction most investors have in the stocks they buy. Instead of putting 20% of their portfolio into a stock, as the Kelly Formula might say to do, they'll put 2% into it. Mathematically, using the Kelly Formula, it can be shown that a 2% position is the equivalent of betting on a stock has only a 51% chance of going up, and a 49% chance of going down. Why would you waste your time even making that bet? These guys are getting paid $1 million a year to identify stocks with a 51% chance of going up? Its insane." - Mark Seller in his article "So You Want To Be The Next Warren Buffett? How's Your Writing?"
How about that? If something is not worth doing at all, its not worth doing well. Familiar? The next time you invest in a stock, think about it. Is it worth investing 2% in this stock? Or not at all? Or is this one of the few good opportunities to put in 20%? If you cant do it now, when do you expect to do it? Think about it.
Time to ponder:
We continually look for ways to employ large sums in each area - ownership of business and marketable securities. But we try to avoid SMALL commitments - "If something is not worth doing at all, its not worth doing well". -Warren Buffett, 1981
Monday, March 30, 2009
The Oracle of Omaha Has Something To Say About Market Forecasting
"I am not in the business of predicting general stock market or business fluctuations. If you think I can do this (even Buffett cant do it!), or think it is essential (nobody can predict what the market will do especially in the short term and it is not important!) to an investment program, you should not be in the partnership."
We dont buy and sell stocks based upon what other people think the stock market is going to do (I never have an opinion) but rather upon what we think the company is going to do. The course of the stock market will determine, to a great degree, WHEN we will be right, but the ACCURACY of our analysis of the company will largely determine whether we will be right. In other words, we tend to concentrate on WHAT should happen, not on WHEN it should happen.
In our department store business I can say with considerable assurance that December will be better than July. (Notice how sophisticated I have already become about retailing.) What really counts is whether December is better than LAST December by a margin greater than our competitors' and what we are doing to set the stage for future Decembers (always try to widen your competitive advantage).
However, in our partnership business I not only cant say whether December will be better than July, but I cant even say that December wont produce a very large loss (investment in stocks and we cant control the stock prices). It sometimes does. Our investment are simply not aware that it takes 365-1/4 days for the earth to make it around the sun. Even worse, they are not aware that your celestial orientation (and that of IRS) requires that I report to you upon the conclusion of each orbit (the earth's - not ours). Therefore, we have to use a standard other than the calendar to measure our progress.
This yardstick is obviously the general experience in securities as measured by the Dow. We have a strong feeling that this competitor will do quite decently over a period of years (Christmas will come even if it's in July) and if we keep beating our competitor we, we will have to do something BETTER than "quite decently". It's something like a retailer measuring his sales gains and profit margins against Sears - beat them every year and somehow you'll see daylight.
Source: Buffett Partnership Limited - Letter to Partners - July 12, 1966
my views are highlighted
We dont buy and sell stocks based upon what other people think the stock market is going to do (I never have an opinion) but rather upon what we think the company is going to do. The course of the stock market will determine, to a great degree, WHEN we will be right, but the ACCURACY of our analysis of the company will largely determine whether we will be right. In other words, we tend to concentrate on WHAT should happen, not on WHEN it should happen.
In our department store business I can say with considerable assurance that December will be better than July. (Notice how sophisticated I have already become about retailing.) What really counts is whether December is better than LAST December by a margin greater than our competitors' and what we are doing to set the stage for future Decembers (always try to widen your competitive advantage).
However, in our partnership business I not only cant say whether December will be better than July, but I cant even say that December wont produce a very large loss (investment in stocks and we cant control the stock prices). It sometimes does. Our investment are simply not aware that it takes 365-1/4 days for the earth to make it around the sun. Even worse, they are not aware that your celestial orientation (and that of IRS) requires that I report to you upon the conclusion of each orbit (the earth's - not ours). Therefore, we have to use a standard other than the calendar to measure our progress.
This yardstick is obviously the general experience in securities as measured by the Dow. We have a strong feeling that this competitor will do quite decently over a period of years (Christmas will come even if it's in July) and if we keep beating our competitor we, we will have to do something BETTER than "quite decently". It's something like a retailer measuring his sales gains and profit margins against Sears - beat them every year and somehow you'll see daylight.
Source: Buffett Partnership Limited - Letter to Partners - July 12, 1966
my views are highlighted
Wednesday, March 18, 2009
Business Valuation and Mr. Market
According to Warren Buffett, you just need to learn two courses in business school.
1. How to Value A Business
2. How to Think About Mr. Market and How to Deal with the Volatility
So finance students, go and ask your lecturers on these subjects. If you cant get a good answer from your lecturer, then maybe you should change school. In my opinion, good lecturers seldom rely heavily on textbook, but more to his/her own real life experience.
Views on Risk
We learned in college that Beta is risk. But, Warren Buffett said Beta is not risk. Risk is not knowing what you are doing. If you can understand how a business works, then your risk will be lower and vice versa. Beta shows the volatility of a stock. The higher the beta, the more volative is the stock. But a high beta stock does not necessarily means that it is a risky stock. If a good company with proven long term record of profitability drops by 50%, does it meant that it is a high-risk stock and you should avoid it? But what if the company's future prospect remains intact - good to excellent? Maybe you can slowly accumulate at low levels? Dont let Mr. Market to decide for you, you must decide for yourself. Ask yourself why you invest at this price, write it down. You must be certain why you are paying this business for this price. Or else, dont buy.
If you really know how to value a business, then investing in stock market is good for you. Although historical financial performance of a company doesnt guarantee future performance, at least it acts as a good guide for business valuation. Absent the proven long term track record, how do you justify your investment? Investing is easy, but making money in stock market is not that simple. If you really want to make money by investing in stock market, you need to know something about the business that not everyone's know.
1. How to Value A Business
2. How to Think About Mr. Market and How to Deal with the Volatility
So finance students, go and ask your lecturers on these subjects. If you cant get a good answer from your lecturer, then maybe you should change school. In my opinion, good lecturers seldom rely heavily on textbook, but more to his/her own real life experience.
Views on Risk
We learned in college that Beta is risk. But, Warren Buffett said Beta is not risk. Risk is not knowing what you are doing. If you can understand how a business works, then your risk will be lower and vice versa. Beta shows the volatility of a stock. The higher the beta, the more volative is the stock. But a high beta stock does not necessarily means that it is a risky stock. If a good company with proven long term record of profitability drops by 50%, does it meant that it is a high-risk stock and you should avoid it? But what if the company's future prospect remains intact - good to excellent? Maybe you can slowly accumulate at low levels? Dont let Mr. Market to decide for you, you must decide for yourself. Ask yourself why you invest at this price, write it down. You must be certain why you are paying this business for this price. Or else, dont buy.
If you really know how to value a business, then investing in stock market is good for you. Although historical financial performance of a company doesnt guarantee future performance, at least it acts as a good guide for business valuation. Absent the proven long term track record, how do you justify your investment? Investing is easy, but making money in stock market is not that simple. If you really want to make money by investing in stock market, you need to know something about the business that not everyone's know.
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