> Warren Buffett Blog: December 2013

Tuesday, December 31, 2013

How Buffett made a killing from Bank of America

A few years ago, Bank of America was having a stock crisis along. Warren Buffett in August 2011 proposed an investment in Bank of America . Buffett called Mr. Moynihan (CEO at BOA) to discuss a potential deal. At first, his advances were rejected saying the bank didn't need a capital injection. But Mr. Buffett emphasized it would be a long-term investment, not a short-term fix.In the two weeks prior to the announced deal, the following headlines were all circulated:

8/8/2011:    Bank of America stock plunges 20% (CNN)
8/8/2011:    BofA plunges as AIG sues for $10 billion "fraud" (Reuters)
8/18/2011:  BofA Says Some Debit Cards Compromised (Bloomberg)
8/22/2011:  Bank of America's stock takes a beating ... again (CNN)
8/23/2011:  Here's Why Bank Of America's Stock Is Collapsing Again (Business Insider)
8/23/2011:  Wall Street's Rumor Of The Day: JPMorgan Taking Over Bank Of America (Forbes)

In fact, from August 1, 2011 to August 23,2011, Bank of America's stock fell an astonishing 36%, from $9.81 per share to $6.30 per share. The Business Insider story stated plainly that the reason for the dramatic collapse in the stock price was "fears that Bank of America will go bust, taking the whole economy down with it."

New book on Buffett 

Warren Buffett steps in action
Buffett has been quoted saying "be fearful when others are greedy, and be greedy when others are fearful". This probably spurred him to invest $5 billion in Bank of America on August 25, 2011.

Fast forward to 2013, Berkshire Hathaway now collects a $300 million annual dividend from Bank of America as a result of its preferred shares. In addition, Berkshire Hathaway has the option at any time to buy up to $5 billion of Bank of America's stock at a cost of $7.14 per share. At today's prices, the warrants alone would net Berkshire a 120% return -- or $6 billion -- in just 28 months.

Monday, December 30, 2013

Windpower could be promising sector

Warren Buffett’s utility company, MidAmerican Energy Holdings, has made a purchase offer of an estimated $1 billion dollars worth of wind turbines. 

Buffett's Wind Turbines purchase is proof that wind power is getting more competitive compared with other types of energy sources(mainly compared with fossil fuels). 

Buffett’s purchase, the largest ever in the land-based wind industry, will be spent on projects across Iowa, USA.

Thursday, December 26, 2013

Warren Buffett Quote on capital gains tax in US

Suppose that an investor you admire and trust comes to you with an investment idea. “This is a good one,” he says enthusiastically. “I’m in it, and I think you should be, too.”

Would your reply possibly be this? “Well, it all depends on what my tax rate will be on the gain you’re saying we’re going to make. If the taxes are too high, I would rather leave the money in my savings account, earning a quarter of 1 percent.”

Only in Grover Norquist’s imagination does such a response exist.”

Tuesday, December 24, 2013

Frugal lifestyle and cost priority at Berkshire

We cherish cost-consciousness at Berkshire. Our model is the widow who went to the local newspaper to place an obituary notice. 

Told there was a 25-cents-per-word charge, she requested, 'Fred Brown died.' 

She was then informed there was a seven-word minimum. 'OK,' the bereaved woman replied, 'make it 'Fred Brown died, golf clubs for sale'.

Monday, December 23, 2013

Buffett earns $37 Million everyday in 2013

Warren Buffett is one of the most successful investors in the world. In 2013, he made an estimated total of $12.7 billion dollars. Calculate that amount per day, and it comes to $37 million dollars a day. When calculated per hour, that works out to a gain of $1.5 million an hour. 

Thursday, December 19, 2013

New Academic Paper explains Warren Buffett's investment Success

Yes, of course we’d all like to know the secret of Warren Buffett’s incredible investment success at Berkshire Hathaway Berkshire Hathaway. For some it might be mere academic interest, for others a question of how to get some of that investment success. Fortunately, there’s a very good little academic paper that has just been published which explains what Buffett’s been doing. There isn’t anything magical, no trickery here. Nor is it, as some commentators would have it, simply that someone’s going to be the best investor and it’s just random chance that has led to Buffett being it. The real secret really is just that Buffett is a very good stock picker and that he’s been able to finance his investments at very low rates. Combine these two with a long period of time and that really is just about it.

Or, as we might say, Buffett has been doing exactly what he’s been telling everyone he’s been doing for the past 50 years.

The paper is here and the abstract is:

Berkshire Hathaway has realized a Sharpe ratio of 0.76, higher than any other stock or mutual fund with a history of more than 30 years, and Berkshire has a significant alpha to traditional risk factors. However, we find that the alpha becomes insignificant when controlling for exposures to Betting-Against-Beta and Quality-Minus-Junk factors. Further, we estimate that Buffett’s leverage is about 1.6-to-1 on average. Buffett’s returns appear to be neither luck nor magic, but, rather, reward for the use of leverage combined with a focus on cheap, safe, quality stocks. Decomposing Berkshires’ portfolio into ownership in publicly traded stocks versus wholly-owned private companies, we find that the former performs the best, suggesting that Buffett’s returns are more due to stock selection than to his effect on management. These results have broad implications for market efficiency and the implementability of academic factors.

If what makes Buffett and Berkshire Hathaway tick is one of the things that interest you then I recommend reading the whole paper. The particular part that interested me was the discussion of financing. I’ve been saying for some time now that part of Buffett’s success has been down to the fact that he is, at least in part, financing investments through the insurance float. And indeed he has been:

Finally, we consider whether Buffett’s skill is due to his ability to buy the right stocks versus his ability as a CEO. Said differently, is Buffett mainly an investor or a manager? To address this, we decompose Berkshire’s returns into a part due to investments in publicly traded stocks and another part due to private companies run within Berkshire. The idea is that the return of the public stocks is mainly driven by Buffett’s stock selection skill, whereas the private companies could also have a larger element of management. We find that both public and private companies contribute to Buffett’s performance, but the portfolio of public stocks performs the best, suggesting that Buffett’s skill is mostly in stock selection. Why then does Buffett rely heavily on private companies as well, including insurance and reinsurance businesses? One reason might be that this structure provides a steady source of financing, allowing him to leverage his stock selection ability. Indeed, we find that 36% of Buffett’s liabilities consist of insurance float with an average cost below the T-Bill rate.

Or in more detail from the paper:

Berkshire’s more anomalous cost of leverage, however, is due to its insurance float. Collecting insurance premia up front and later paying a diversified set of claims is like taking a “loan.” Table 3 shows that the estimated average annual cost of Berkshire’s insurance float is only 2.2%, more than 3 percentage points below the average T-bill rate. Hence, Buffett’s low-cost insurance and reinsurance business have given him a significant advantage in terms of unique access to cheap, term leverage. We estimate that 36% of Berkshire’s liabilities consist of insurance float on average.

This is a point that I have made before in a number of different pieces. With an insurance company there is always that float. That float is then invested into a variety of short and sometimes long term investments. So much so that in a truly competitive market for insurance we would expect an insurer to make a loss on the actual underwriting of the policies. The real profit from the business coming from the investment returns on that float.

This has a number of implications: for example, the ACA’s insistence that medical insurers pay out 80% of premiums in actual health care costs doesn’t really make much difference to anything. For there is that profit to be made from investing the float. We might also look at MF Global MF Global which, while not an insurance company had a similar cash flow position. The margins that speculators had to leave with the company on the futures and options the company handled for them were investable to the profit of the company. When short term interest rates plummeted as a result of the crisis and the subsequent QE the firm went looking for yield so as to enjoy that by now traditional income from investing the float. And it really was only the investment of the float that provided a profit, the basic ongoing business of clearing futures wasn’t going to feed everyone. As we know they took on too much risk in that search for yield and lost some part of that float and thus went bankrupt.

Reinsurance, the practice of writing insurance for insurance companies leaves the company with money for much longer periods of time. And yes, Berkshire Hathaway is heavy on reinsurance. And a company like MunichRe can best be viewed as a giant investment fund rather than an insurer at all. Certainly, it will be how well it invests the float which is the determinant of its profitability, not particularly the terms upon which it underwrites risk.

As the paper is at pains to point out, yes, Warren Buffett is indeed an excellent stock picker. But it is the combination of this, the leverage of being able to invest that insurance float and then the sheer length of time that he has been doing this which are the three things that add up to his total success.

Worth adding one more point that the paper doesn’t address. That Berkshire Hathaway is in large part an insurance company also explains the size of Buffett’s personal wealth. If, just as an example with numbers, $1 million were invested for 50 years at a 19% return annually then the end result would be some $6 billion. But if you were to use $1 million (I emphasise that this is just a made up number to use as an example) to purchase an insurance company which had a $10 million float upon which you then made that 19% return over 50 years then the personal fortune that would accrue would be $60 billion. And that is, in part, what Buffett has done. He’s been using his incredible stock picking and investment skills on the much larger amount of money within the company and thus providing significant leverage to his own initial investment.

It’s a very clever thing to have been doing all these years.

Wednesday, December 18, 2013

5 Warren Buffett Stocks dumb money should avoid

 By Meena Krishnamsetty

There are three types of investors: smart, dumb and dumber. Eugene Fama, best known for his Efficient Market Hypothesis, helped millions of "dumber" investors to switch to dumb investing, by having them use passive investing, where you invest in low-cost passive portfolios that mimic the performance of the S&P 500 index or some other broader index. Academic studies have shown that retail investors, on average, significantly underperform the market after accounting for transaction costs. Switching to passive investing is a big improvement for these investors. However, this doesn't change the fact that they are still leaving money on the table.

Smart investors don't imitate the S&P 500 index. There are better ways of investing. Warren Buffett has been claiming publicly for the past 30 years that he can outperform the market. Our research has shown that imitating Warren Buffett 's top-five large-cap stock picks outperformed the market by 30 basis points per month between 1999 and 2012. These stocks also outperformed the market by 37 basis points per month between 2008 and 2012.

Imitating Buffett's top-five large-cap picks in an IRA account has been a superior alternative to dumb investing. The list of Buffett's top-five large-cap picks didn't change dramatically from quarter to quarter, yet it managed to outperform the market by four percentage points per year over the past decade or so.
read more @ marketwatch

Tuesday, December 17, 2013

WARREN BUFFETT: During The Financial Crisis, George W. Bush Made The Greatest Economic Statement Of All Time

In mid-November, Warren Buffett met with 20 MBA students from eight universities.

On his blog, University of Maryland business school professor David Kass has published notes from that meeting.

One student asked Buffett about his investment in Goldman Sachs that he made during the pit of the financial crisis.

In answering the question, Buffett vividly set the scene of the crisis, describing an economy that was truly teetering on the brink.  And in setting that scene Buffett heaped gigantic praise on George W. Bush, which we've highlighted in red:

Money market funds held a lot of Lehman paper. It happened overnight, 30+ million Americans who believed money markets were safe, and then Lehman fails. This caused a major money market fund to “break the buck” and lose value. It became a great silent electronic run on money markets. There was $3 1/2 trillion in money market funds and $175 billion of funds flowed out in the first three days after Lehman failed. All money market funds held commercial paper. Companies like GE had a lot of commercial paper. After this, American industry literally stopped. George Bush said, “If money doesn’t loosen up, this sucker will go down” – I believe this was the greatest economic statement of all time. This is why he backed up Paulson and Bernanke. Companies were counting on the commercial paper market. In September 2008, we came right to the abyss. If Paulson and Bernanke had not intervened, in two more days it would have been all over. BRK always has $20 billion or more in cash. It sounds crazy, never need anything like it, but some day in the next 100 years when the world stops again, we will be ready. There will be some incident, it could be tomorrow. At that time, you need cash. Cash at that time is like oxygen.


Monday, December 16, 2013

Warren Buffett's Bet on the Huddled Masses

The Bus vs. the Private Jet
Yesterday, The Wall Street Journal’s Spencer Jakab reminded me of a wager that I had forgotten: the performance of the S&P 500 against that of five hedge funds of funds, or HFOFs. The bet occurred in late 2007, with hedge fund manager Protege Partners selecting five HFOFs to compete against Warren Buffett's selection of Vanguard 500 Index (VFIAX) portfolio. On Dec. 31, 2018, the 10-year results will be tallied. The loser must pay $1 million to charity.

At the time, Buffett's decision appeared odd. Hedge funds were regarded as one of the ways that the rich became richer. Index funds, in contrast, were a sound way of investing in mutual funds--but they were only mutual funds. How good could they be if anybody could own them?

 Indeed, hedge funds had thrashed the stock market over the previous 10 years. Hedge funds had profited nicely during the decade's seven feast years and had also finished in the black during the famine of 2000-02, when stocks were thrashed. Over that period, HFOFs had trailed hedge funds themselves because of the cost of their extra layer of fees, but they were still well ahead of the S&P 500. From 1998 through 2007, HFOFs had gained an average of 9% per year*, with the S&P 500 at 6%.


Sunday, December 15, 2013

Warren Buffett’s Berkshire Hathaway acquires Hartford UK variable annuity business

Columbia Insurance Company, a Berkshire Hathaway firm, has purchased Hartford Life International Limited (HLIL) in a transaction valued at approximately $285m.

Property and casualty insurance provider Hartford originally signed an agreement with Columbia Insurance in June this year, to divest its UK variable annuity business, as part of its strategy to streamline its operations.

HLIL's sole asset is its subsidiary, Hartford Life Limited (HLL), a Dublin-based company that sold variable annuities in the UK from 2005 to 2009. As of 30 November 2013, HLL had $1.7bn in assets under management.

Hartford executive vice president and chief financial officer Christopher Swift had said, "The Hartford has made significant progress reducing the size and risk of Talcott Resolution's legacy variable annuity blocks and the business unit is now self-sufficient from a capital perspective.

more @ http://lifeinsuranceandpensions.insurance-business-review.com/news/warren-buffetts-berkshire-hathaway-acquires-hartford-uk-variable-annuity-business-131213-4145298

Friday, December 13, 2013

Will Warren Buffett's Berkshire Join Fannie, Freddie Privatization Effort?

Warren Buffett of Berkshire Hathaway (BRK.A_) has said that the government's conservatorship of Fannie Mae (FNMA_) and Freddie Mac (FMCC_) contained the terms he'd normally seek out when infusing capital into a struggling company. Now, five years after the U.S. Treasury's bailout of both government sponsored mortgage giants, one wonders whether the Oracle of Omaha might be enticed by Fannie and Freddie privatization bids.

Currently, Fairholme Capital Management is offering to infuse $52 billion in Fannie Mae and Freddie Mac, in an effort to bring private capital to both GSEs' traditional mortgage-backed securities insurance business. The deal would liquidate Fannie and Freddie at a profit to the U.S. Treasury, Fairholme said in a recent presentation, and put the private market behind new mortgages issued in 2014 and beyond.

Holders of Fannie and Freddie preferred stock would have their claims exchanged for new equity in the MBS insurance business and they would inject an additional $17.3 billion through a rights offering. Fairholme's proposal would also rely on the creation of two new state-regulated private insurers to recapitalize Fannie and Freddie and underwrite new business without a federal charter.


Thursday, December 12, 2013

Warren Buffett Places One Heck of Bet on Energy

Warren Buffett made big headlines in the energy space when Berkshire Hathaway publicly disclosed that it had accumulated a $3.4 billion position in ExxonMobil . This alone is a pretty significant bet on the future of oil and gas. When you look at some of Buffett's other energy holdings, though, it points to a very specific investment strategy: Canadian oil sands. Let's take a look at Buffett's energy holdings and what makes all of them work.

Cornering the market
In the Berkshire Hathaway holdings, there are three exploration and production companies: ExxonMobil, ConocoPhillips , and Suncor . The most obvious oil sands play among these three companies is Suncor, which is the largest oil sands producer and derives more than 66% of its 560,000 barrels per day of production from bitumen and upgraded oil sands. While Exxon and Conoco have extensive oil and gas operations across the globe, both are making large bets on Canadian oil sands as well.

 ConocoPhillips, through multiple joint ventures, produced 107,000 barrels per day of bitumen from the Athabasca oil sands region. The company plans to expand that capacity to 314,000 barrels per day by 2017, which would represent about 15% of its total production target of 2 million barrels per day.

Between its ownership stake in the Syncrude project and its 70% stake in Imperial Oil , Exxon has more than 4 billion barrels of proven oil reserves in Canadian oil sands. This represents 37% of the company's total oil reserves on the books. Current production is slightly more than 200,000 barrels per day, but total production should ramp up to around half a million barrels per day as the Kearl oil sands facility reaches full production in 2020.


Wednesday, December 11, 2013

Rabbit Hunting With Warren Buffett

In his 2010 annual letter to shareholders, Berkshire Hathaway   Chairman and CEO Warren Buffett used the metaphor of his company's cash as an "elephant gun" to be used in his hunt for big companies to purchase. Ever since then, the news media has fixated on Berkshire Hathaway's hunt to bag that elephant to fuel its future growth. After all, how can an enormous company the size of Berkshire Hathaway grow even larger without swallowing up increasingly larger subsidiaries?

Buffett helped to finance half of the takeover of Heinz last spring, but people have widely agreed that the ketchup company wasn't the elephant Buffett was looking for. 3G Capital will run the company, and 3G is expected to make Heinz more profitable and then release it back into the wild.

Buffett has also fueled the elephant hunt rumors in his TV appearances, where he has tantalizingly revealed elephant near-misses -- that is, big potential acquisition deals this year that didn't get done.


Tuesday, December 10, 2013

Warren Buffett on saving up sex for your old age

Warren Buffett :  I think you are out of your mind if you keep taking jobs that you don’t like because you think it will look good on your resume. Isn’t that a little like saving up sex for your old age?

Sunday, December 8, 2013

Warren Buffett : It takes 20 years to build a reputation and five minutes to ruin it

Warren Buffett : It takes 20 years to build a reputation and five minutes to ruin it.  If you think about that, you’ll do things differently.

Tuesday, December 3, 2013

Warren Buffett says Detroit ripe for investors, including himself

The Oracle of Omaha said Wednesday he'd be willing to invest in Detroit if he found a suitable company.

Warren Buffett was on hand at a Goldman Sachs Group Inc. event to announce a program that will provide up to $15 million in loans to small business to spur economic development. An additional $5 million will go toward providing education and training to entrepreneurs, Goldman Sachs said in a statement.

“The resources are here to have a great, great city,” Buffett told the news conference, the Detroit Free Press reported.

Detroit, which declared bankruptcy in July, is reeling from the loss of tax revenue as the city's population has shrunk over several decades. The city's population is 701,000, down from its peak of 1.8 million in 1950.

Monday, December 2, 2013

Warren Buffett and Hedge Funds Don't See Eye to Eye on Big Oil

Everyone invests for different reasons, and different reasons can lead to different investment strategies. For individual investors like you and me, those differing opinions won't make much of a dent in an individual company. When Warren Buffett and Hedge Funds start investing in companies differently, however, it can actually have a deep impact on a stock.

A poll from Goldman Sachs just listed the top 25 companies shorted by hedge funds, and two major energy stocks on that list -- Conocophillips (NYSE: COP) and Exxonmobil (NYSE: XOM) -- just happen to be some of Berkshire Hathatway's (NYSE: BRK-B) largest holdings.

What could lead to hedge funds and Warren Buffett seeing these two groups differently? Let's take a look at why someone would short Conocophillips and Exxonmobil, and why someone else would pick up these stocks.

Why short big oil?
Over the past several years, the members of big oil have been under-performing the broader S&P index on a total return basis (stock appreciation and dividend returns). A large reason this has happened is because of the amount of money that big oil players have had to spend on growing their oil and gas production. Even though there has been a boom in oil and gas in the U.S. recently, the larger players like Exxonmobil and Chevron (NYSE: CVX  ) have mostly been left out of that movement. Instead, big oil players have been focusing on mega projects overseas.

A prime example of this was the Kashagan project in Kazakhstan. The Kashagan oilfield in the Kazakh portion of the Caspian Sea was the largest oil find of this millennium -- we have to go back all the way to the 1970's for a larger find. Both Exxon and Conocophillips were a major part of this project until recently, when Conoco sold its 5% stake in the field, and both of them spent billions of dollars over almost a decade to get this project flowing. Having that much money tied up in an asset that was not producing oil means lots of unproductive capital

Sunday, December 1, 2013

Warren Buffett calls Detroit land of 'huge potential'

DETROIT — A down-on-its-luck Motor City has huge potential for a rebound and can bounce back as the auto industry did a few years ago, legendary investor Warren Buffett said Tuesday.

Buffett was here to help bring $20 million in loans, education and mentor programs to Michigan small businesses in a $500 million national Goldman Sachs initiative that aims to help entrepreneurs grow jobs and revenues.

The resources are here to have a great, great city," he said at a news conference to mark the inclusion of Detroit as the 11th city in Goldman's 10,000 Small Businesses program.

The 83-year-old chief executive of Berkshire Hathaway and co-chairman of the advisory board for the Goldman program called the city an underutilized resource, which creates a great growth possibilities. He's so enthusiastic that he said he's ready to invest his own money if he finds a suitable company.