Friday, December 27, 2013

Quotes of 2013

A collection of quotes said or written at some point during this calendar year.

Grantham: Investing in a Low-Growth World
"All corporate growth has to funnel through return on equity. The problem with growth companies and growth countries is that they so often outrun the capital with which to grow and must raise more capital. Investors grow rich not on earnings growth, but on growth in earnings per share. There is almost no evidence that faster-growing countries have higher margins. In fact, it is slightly the reverse." - Jeremy Grantham

"The fact that growth companies historically have underperformed the market – probably because too much was expected of them and because they were more appealing to clients – was not accepted for decades, but by about the mid-1990s the historical data in favor of 'value' stocks began to overwhelm the earlier logically appealing idea that growth should win out. It was clear that 'value' or low growth stocks had won for the prior 50 years at least. This was unfortunate because the market's faulty intuition had made it very easy for value managers or contrarians to outperform. Ah, the good old days! But now the same faulty intuition applies to fast-growing countries. How appealing an assumption it is that they should beat the slow pokes. But it just ain't so." - Jeremy Grantham

Buffett on Berkshire's "Powerhouse Five" & "Big Four"
"At Berkshire we much prefer owning a non-controlling but substantial portion of a wonderful business to owning 100% of a so-so business. Our flexibility in capital allocation gives us a significant advantage over companies that limit themselves only to acquisitions they can operate." - Warren Buffett

Buffett on Berkshire's Float
"If our premiums exceed the total of our expenses and eventual losses, we register an underwriting profit that adds to the investment income our float produces. When such a profit is earned, we enjoy the use of free money – and, better yet, get paid for holding it. That's like your taking out a loan and having the bank pay you interest." - Warren Buffett

"...we have now operated at an underwriting profit for ten consecutive years, our pre-tax gain for the period having totaled $18.6 billion. Looking ahead, I believe we will continue to underwrite profitably in most years. If we do, our float will be better than free money." - Warren Buffett

"So how does our attractive float affect the calculations of intrinsic value? When Berkshire's book value is calculated, the full amount of our float is deducted as a liability, just as if we had to pay it out tomorrow and were unable to replenish it. But that's an incorrect way to look at float..." - Warren Buffett

"The value of our float is one reason – a huge reason – why we believe Berkshire's intrinsic business value substantially exceeds its book value." - Warren Buffett

Warren Buffett on "The Key to Investing"
"American business will do fine over time. And stocks will do well just as certainly, since their fate is tied to business performance. Periodic setbacks will occur, yes, but investors and managers are in a game that is heavily stacked in their favor. (The Dow Jones Industrials advanced from 66 to 11,497 in the 20th Century, a staggering 17,320% increase that materialized despite four costly wars, a Great Depression and many recessions. And don't forget that shareholders received substantial dividends throughout the century as well.)

Since the basic game is so favorable, Charlie and I believe it's a terrible mistake to try to dance in and out of it based upon the turn of tarot cards, the predictions of 'experts,' or the ebb and flow of business activity. The risks of being out of the game are huge compared to the risks of being in it." - Warren Buffett

Not Picking Stocks By The Numbers
An exchange between Warren Buffett and Charlie Munger as summarized by the Wall Street Journal's live blog:

"We are looking at businesses exactly like we are looking at them if somebody came in and asked us to buy the whole business," Buffett said. He said they then want to know how it will do in ten years. 

Munger was even more forceful: "We don't know how to buy stocks by metrics ... We know that Burlington Northern will have a competitive advantage in years ... we don't know what the heck Apple will have. ... You really have to understand the company and its competitive positions. ... That's not disclosed by the math.

Buffett: "I don't know how I would manage money if I had to do it just on the numbers."

Munger, interupting, "You'd do it badly."

Buffett on Bonds and Productive Assets
"I bought a piece of real estate in New York in 1992, I have not had a quote on it since. I look to the performance of the assets. Maybe...my piece of real estate have had pull backs, but I don't even know about 'em. People pay way too— way too much attention to the short term. If you're getting your money's worth in a stock, buy it and forget it." - Warren Buffett

"...interest rates have a powerful effect on...all assets. Real estate, farms, oil, everything else...they're the cost of carrying other assets. They're the alternative. They're the yardstick." - Warren Buffett

"...the fact that there are troubles in Europe, and there are plenty of troubles, and they're not going go away fast, does not mean you don't buy stocks. We bought stocks when the United States was in trouble, in 2008 and— and it was in huge trouble and we spent 15 1/2 billion in three weeks in— between September 15th and October 10th. It wasn't because the news was good, it was because the prices were good." - Warren Buffett

"In terms of stocks, you know, stocks are reasonably priced. They were very cheap a few years ago. They're reasonably priced now. But stocks grow in value over time because they retain earnings..." - Warren Buffett
(Stocks prices were, of course, generally much lower when Buffett said this compared to now.)

"There could be conditions under which we...would own bonds. But— they're conditions far different than what exist now." - Warren Buffett

"I would have productive assets. I would favor those enormously over fixed dollars investments now, and I think it's silly — to have some ratio like 30 or 40 or 50% in bonds. They're terrible investments now." - Warren Buffett

"News is better now. Stocks are higher. They're still not— they're not ridiculously high at all, and bonds are priced artificially. You've got some guy buying $85 billion a month. (LAUGH) And— that will change at some point. And when it changes, people could lose a lot of money if they're in long-term bonds." - Warren Buffett

"...I bought a farm in 1985, I haven't had— had a quote on it since. But I know what it's produced every year. And I know it's worth more money now. You know, it— if I'd gotten a quote on it every day and somebody's said, "You know, maybe you oughta sell because there's, you know, there's clouds in the West," or something. (LAUGH) It's — it's crazy." - Warren Buffett

Charlie Munger: What Buying a House and Rabbit Hunting Have in Common
"Partly there was a time you felt foolish you didn't buy a house because you weren't making all the money everybody else was making, so it was a typical crazy boom. Now people have learned house prices can go down as well as up." - Charlie Munger

"It's like a fella who goes rabbit hunting and thoroughly enjoys himself. And then the rabbits haul out guns and start firing back. It would dim your enthusiasm for rabbit hunting, and that's what happened in the housing market." - Charlie Munger

More quotes in a follow-up.

Adam

Long position in Berkshire Hathaway (BRKb) established at much lower prices

Quotes of 2012

This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.

Friday, December 20, 2013

Forecasters & Fortune Tellers

"We've long felt that the only value of stock forecasters is to make fortune tellers look good. Even now, Charlie and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children." - Warren Buffett in the 1992 Berkshire Hathaway (BRKaShareholder Letter

Well, with that Buffett quote in mind, this The Motley Fool article by Morgan Housel points out that it doesn't pay to ignore analyst ratings, it actually pays to do the exact opposite:

"...the 50 stocks with the lowest Wall Street analyst ratings at the end of 2011 outperformed the S&P 500 by seven percentage points in 2012. Think about that. Warren Buffett's goal was once to outperform the market by 10 percentage points a year. Doing the opposite of what Wall Street's smartest minds recommended last year got you two-thirds of the way there."

(More on going with "the opposite" approach later on in this post.)

The article also points out that essentially something very similar happened this past year:

Stocks with the Most Sell Ratings - January 2013

YTD Average Return: 75%
YTD Median Return: 52%

Stocks with the Most Buy Ratings - January 2013

YTD Average Return: 22%
YTD Median Return: 20%

Including dividends, the S&P 500 is up 27.4% over the same time frame.

Now, one year just isn't a long enough horizon to judge investment performance.

So, as a result, I'd generally say this means very little.

What makes this a bit more meaningful is when you consider that many analysts DO often set price targets that are over relatively short time frames like, for example, 12 months or so.
(Here are four examples of 12-month price targets by analysts on stocks of otherwise, at least for me, no particular significance.)

In other words, if an analyst is making a recommendation to buy or sell a stock because they believe it can now be bought with a margin of safety (i.e. a nice discount to per share intrinsic value exists) and will produce a good result, all risks considered, over 5-10 years or more then it would be unfair to focus on the 1-year performance.

Well, for a variety of reasons, analysts just generally don't deal with those kind of time horizons.

On the other hand, when you are setting 12-month price targets (or anything similar), highlighting these unimpressive results seems a whole lot more fair.

I have no idea if this awkward performance is an anomaly or a persistent pattern over time but, whether it is or not, trying to guess what the price action of something will be over such time horizons is essentially like flipping coins.

"Absent a lot of surprises, stocks are relatively predictable over twenty years. As to whether they're going to be higher or lower in two to three years, you might as well flip a coin to decide." - Peter Lynch

It's just not a good use of valuable time and energy in my view. I understand, at least in part, some of the incentives and cultural factors at work that lead to these attempts at predicting near term price moves.

More from the article:

"One of the most important lessons in all of finance is to understand the incentives of the guy sitting across the table from you. 

It sounds crazy, but a lot of professional stock analysts aren't terribly concerned with the accuracy of their picks."

Consider this carefully the next time, for whatever reason, an analyst opinion on a particular stock is highlighted by one of the major business media outlets.

What they are saying may be articulated extremely well and sound compelling.

It may even be informed by significant industry specific knowledge and insight.*

Unfortunately, for investors, that doesn't logically mean that their predictions will prove particularly useful or lucrative.

Toward the end of Morgan Housel's article, he makes the point that analysts tend to, in herds, project forward what recently happened. 
(i.e. When a stock rises predict it will keep rising, when a stock falls predict it will keep falling, etc.)

So I guess they're generally better historians than forecasters.


The Seinfeld episode where George Costan
za finally implements an effective strategy to overcome his innately terrible instincts comes to mind. The title of that episode happens to be "The Opposite".

"If every instinct you have is wrong, then the opposite would have to be right." - Jerry Seinfeld speaking to George in "The Opposite"

So maybe it's time for some on Wall Street to adopt George's strategy.

"A job with the New York Yankees! This has been the dream of my life ever since I was a child, and it's all happening because I'm completely ignoring every urge towards common sense and good judgment I've ever had." - George Costanza in "The Opposite"

Finally, I'd point out it's best to be at least a little bit wary of what is a special category of prognosticator; that'd be those who are primarily in the business of making attention grabbing -- occasionally extreme in nature -- predictions (and not necessarily limited to stock selection).

Sometimes, a little charisma (and maybe a charming accent) can make what's otherwise mostly useless -- or maybe even nonsensical -- seem informed, thoughtful, and intelligent.

Whether the predictions end up being frequently right or not ends up being mostly irrelevant.

Make enough predictions and at least a couple of them are bound to end up being correct.

Of course, better if the predictions are provocative in nature to maximize exposure.

Moderate forecasts just don't sell.

"...techniques shrouded in mystery clearly have value to the purveyor of investment advice. After all, what witch doctor has ever achieved fame and fortune by simply advising 'Take two aspirins'". -Warren Buffett in the 1987 Berkshire Hathaway Shareholder Letter

The illusion of forecasting skill only then need be promoted in a clever way by the soothsayer. Unfortunately, if marketed well, the evidence seems to suggest there'll be no shortage of willful buyers.

So the fortune teller does not actually need a crystal ball.

In order to sell the illusion, what they say just has to be cloaked in complex sounding terminology, sound compelling, and, even if due mostly to pure chance, end up occasionally making what seems a brilliant prediction.**

That's not necessarily profitable for those who act in accordance with the next prognostication, but probably ends up being fruitful for the prophet.

Adam

Long position in BRKb established at much lower than recent prices

* Mutual funds, hedge funds, and other large institutional investors tend to be buyers of this kind of research. These entities are apparently more interested in their industry knowledge, less interested in their stock selection skills according to an Institutional Investor magazine survey. 
** Some seem to be very good at using language that makes it difficult to actually pin down what the prediction is.
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This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.

Friday, December 13, 2013

Is Buffett Just Lucky?

Well, a recent paper* answers the above question with a resounding no.

"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..."

At first glance, this would seem to qualify as one of the least surprising conclusions in history.

Yet, for adherents to efficient markets and related ideas, somehow it is not.

"While much has been said and written about Warren Buffett and his investment style, there has been little rigorous empirical analysis that explains his performance. Every investor has a view on how Buffett has done it, but we seek the answer via a thorough empirical analysis..." 

In fact, some still think it may just be luck:

"Buffett's success has become the focal point of the debate on market efficiency that continues to be at the heart of financial economics. Efficient market academics suggest that his success may simply be luck, the happy winner of a coin-flipping contest as articulated by Michael Jensen at a famous 1984 conference at Columbia Business School celebrating the 50th anniversary of the book by Graham and Dodd (1934). Tests of this argument via a statistical analysis of the extremity of Buffett's performance cannot fully resolve the issue. Instead, Buffett countered at the conference that it is no coincidence that many of the winners in the stock market come from the same intellectual village, 'Graham-and-Doddsville' (Buffett (1984))."

Some context is in order. Back in 1984, Columbia Business School arranged a conference to celebrate the 50th Anniversary of the influential book Security Analysis by Benjamin Graham and David Dodd.

At least in part, the celebation essentially became a contest between competing schools of thought with Warren Buffett representing one side and Michael Jensen, a University of Rochester professor, representing the other.

Jensen made the case for the efficient markets view of the world.

In fact, Jensen did argue that an apparent outperformance like Buffett's might be the result of pure luck.

"If I survey a field of untalented analysts all of whom are doing nothing but flipping coins, I expect to see some who have tossed two heads in a row and even some who have tossed 10..." - Michael Jensen

Buffett, in his now well-known speech at the conference, made the case for Graham and Dodd and against efficient markets. The speech became the basis of this article published later that same year.
(The article remains well-worth reading in its entirety.)

The Superinvestors of Graham-and-Doddsville

For those, like myself, who are convinced that...umm...Buffett just might be onto something (considering the track record over more than half a century), it at first all seems more than just a little bit amazing that there'd still be doubt there is real skill involved.

Skills that, at least in part even if with varying degrees of success, can be learned and applied.

It's only when certain aspects of human nature are taken into account that what is surprising at first glance becomes much less so.

"When you hatch a theory, you don't easily let go..." - Robert Shiller in this CNBC Interview

That's true even for theories that are influential yet also the highly flawed variety. In any case, I'm of the view that this question about Buffett's capabilities was answered a very long time ago.
(I know this will come as a shock to those who might read this blog from time to time).

More from the paper...

"We show that Buffett's performance can be largely explained by exposures to value, low-risk, and quality factors. This finding is consistent with the idea that investors from Graham-and-Doddsville follow similar strategies to achieve similar results and inconsistent with stocks being chosen based on coin flips. Hence, Buffett's success appears not to be luck. Rather, Buffett personalizes the success of value and quality investment, providing out-of-sample evidence on the ideas of Graham and Dodd (1934). The fact that both aspects of Graham and Dodd (1934) investing – value and quality – predict returns is consistent with their hypothesis of limited market efficiency. However, one might wonder whether such factor returns can be achieved by any real life investor after transaction costs and funding costs? The answer appears to be a clear 'yes' based on Buffett's performance and our decomposition of it."

Well, it may be achievable in the real world but those that go to the other extreme (i.e. assume investing effectively is easy to do well versus impossible to do well as some efficient market adherents seem to believe) will likely end up with disappointing results. Naturally, intelligence matters to an extent. Yet the importance of that alone sometimes gets overestimated. Among other things, investing well requires the right combination of knowledge, skills, temperament, hard work, discipline, patience and an awareness of psychological factors.

It also requires a realistic appraisal of one's own limits.

If it was just about I.Q., then the disaster at Long-Term Capital Management (LTCM) should probably not have happened.

The paper points out that Buffett's performance was "very good but not super-human," so "how did Buffett become among the richest in the world? The answer is that Buffett has boosted his returns by using leverage, and that he has stuck to a good strategy for a very long time period, surviving rough periods where others might have been forced into a fire sale or a career shift."

For those who think that Buffett's ability to negotiate special deals on private transactions is the key driver of returns consider this:

"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."

The lucrative deals he made during the financial crisis understandably get lots of attention but this leads, I think, to the incorrect conclusion that Buffett's results are primarily the result of the unique perch from which he now sits. Well, while those deals are surely good for shareholders, they just aren't big enough relative to the all other assets to really drive increases to intrinsic value.**

Now, the modest leverage Buffett uses -- mostly in the form of insurance float which provides cheap and, crucially, stable funding -- plays an important role. Yet it would also be a mistake to conclude it alone is the dominant driver of his long-term outperformance:

"...Buffett's leverage can partly explain how he outperforms the market, but only partly."

The fact that the leverage is employed in moderation is also an important element here. The paper estimates Buffett's leverage at ~ 1.6-to-1, so we aren't exactly talking about extreme leverage.
(During the financial crisis some large financial institutions employed extreme leverage -- easily 25-to-1 and even much worse with an appropriate consideration for what, in many cases, was off-balance-sheet -- while often relying too much on short-term funding sources.)

So the leverage Buffett uses is cheap, stable, and moderate. He keeps lots of cash on hand. All these things matter.

The strongest adherents to efficient markets essentially believe that, when it comes to publicly-traded equities, participants should not be able to systematically profit from market inefficiencies.

"In summary, if one had applied leverage to a portfolio of safe, high-quality, value stocks consistently over this time period, then one would have achieved a remarkable return, as did Buffett. Of course, he started doing it half a century before we wrote this paper!"

For some, Buffett's argument nearly 30 years ago was very persuasive while others still, to this day, don't think sufficient evidence exists.***

This recent paper certainly attempts to remedy this.

More in a follow up.

Adam

* By AQR Capital Management's Andrea Frazzini and David Kabiller along with NYU professor Lasse Pedersen. 
** Of course, those deals have been a good thing for shareholders. That doesn't logically mean that they are the key driver of overall investment results. Do some quick math and it becomes pretty obvious that those deals, at least relative to the size of all the investments he is responsible for, do not really move the needle in terms of increasing intrinsic value.
*** From this Morningstar article: "There are two ways to validate an economic or financial theory: wait 100 years and collect new data, or look at a fresh new data set, such as another time period or different markets. It can take decades before someone's held accountable for a bunk theory." This gives a huge advantage to the promoter of a questionable financial theory. Those trying to achieve a good balance between risk and reward in the real world can't afford to wait for undeniable proof based upon unbiased data. In the meantime, someone with impressive academic credentials can continue promoting their ideas knowing that, not only is it not easy to obtain sufficient data, that most data can be made to say just about whatever one wants with a tweak or two. Some theories may be mostly about getting published and looking brilliant among academic peers. Whether it happens to reveal anything useful in the real world a secondary consideration. With or without this recent paper, I happen to think that Buffett's approach is built upon sound investment principles. I also think that are well worth learning and putting to use within one's own inevitably unique set of capabilities and limits.
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This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.

Friday, December 6, 2013

Apple's Buyback: Does It Still Make Sense?

Not long ago, Carl Icahn began calling for Apple (AAPL) to buyback $ 150 billion worth of its stock.

He eventually pushed for a large and immediate tender offer.

Prior post: A Bigger Buyback For Apple?

Essentially, Icahn wanted the company to quickly buyback lots of its stock before the window of opportunity closed.

Here's what he wrote in a late October letter to Tim Cook:

"In our view, irrational undervaluation as dramatic as this is often a short term anomaly. The timing for a larger buyback is still ripe, but the opportunity will not last forever."

This more recent CNBC article points out that Icahn has now reduced the amount of stock he thinks Apple should repurchase to more like $ 50 billion.

Well, I'll just point out that the stock has not only risen nearly 20% since he started pushing for the $ 150 billion buyback, but is also up more than 40% from its lows earlier this year.

The better time to buyback at that kind of scale has, at the very least, temporarily passed.

So the window of opportunity to buyback stock may not have completely closed, but eventually that rising price begs for the scale of the buyback to be smaller.

The arithmetic is such that what would have had powerful effects on per share intrinsic value at lower prices increasingly becomes less compelling.

Each dollar invested in the stock simply goes less far and naturally, as a result, returns less for continuing shareholders.

So, inevitably, the "relentless rules of humble arithmetic" dictate what makes sense here. For those who own Apple with longer term outcomes in mind, the merit of a very large buyback is just not quite as clear as it was not too long ago.

Naturally, those attempting to trade around the company's nearer term prospects likely have a totally different agenda.

Warren Buffett, who had talked to Steve Jobs about whether buying back Apple's stock was a smart thing to do several years back, did say the following about the idea of increasing the buyback this past October:

"I think the Apple management and directors have done a pretty darn good job of running the company. My vote would be with them."

Now, keep in mind that earlier this year Apple expanded its share repurchase authorization to $ 60 billion and, when the stock was much lower, did buyback a nice chunk of their own shares. So it's not like they don't already have a meaningful buyback program in place even if not at the scale Icahn seems to want.

Share count is down to 909 million compared to 948 million a year earlier (and seems certain to be even lower when they next report).

Buffett, who is no small fan of buybacks when they make sense, also added the following about the pressure on Apple to buyback even more of their stock:

"I do not think that companies should be run primarily to please Wall Street and largely shareholders who are going to sell. I believe in running Berkshire for the shareholders who are going to stay and not the one's who are going to leave."

His emphasis is always on doing what's best for those who are willing to have a longer investment time horizon.

That doesn't change the fact that, as I've said before, tech stocks are generally not what I like -- and that includes an enterprise as capable as Apple -- unless extremely cheap (i.e. selling at a substantial discount to conservatively estimated intrinsic value). It has to be priced in such a way that little good has to happen to get a nice result considering the risks.

With the company's already sizable repurchase authorization and increased stock price in mind, I'm not sure whether an increased/accelerated buyback plan matters a whole lot at this point.

What matters more right now is whether the stock can remain cheap enough to warrant buying more.

"The first law of capital allocation – whether the money is slated for acquisitions or share repurchases – is that what is smart at one price is dumb at another." - Warren Buffett in the 2011 Berkshire Hathaway (BRKa) Shareholder Letter

In fact, if Apple's stock does continue to rise, it will eventually make sense to put a halt to their buyback plans altogether.

More generally speaking, continuing long-term shareholders are generally better off when a stock underperforms in the near term (or even intermediate term) and the business continues to have sound long run economics. Potential reward is actually increased while risk is reduced* when the stock of a sound business remains cheap, there's no imminent intent or need to sell, and the investment time horizon is long enough. The further an investor is away from selling, the better off they become much further down the road. The reason is simple: It not only allows the investor to buy more shares cheap, it allows the company to buyback shares cheap over time. This can have a significant compounding effect longer term.
(Buybacks can make sense when both a stock is cheap AND more than sufficient funds are available to meet all the operational/liquidity needs of the business.)

With patience, the combination of a not so great performing inexpensive stock and a sound business that's been bought at a reasonable price can be a powerful one.**

It may not be a lot of fun -- and professional money managers must consider "career risk" -- to stare at the quoted price of a listless stock, but the arithmetic at work here is undeniable.***

An investor can develop a trained response that more heavily weighs the longer run big picture while mostly ignoring the short-term noise. A more rational response should, on the surface, not exactly be difficult or impossible to learn but things like loss aversion do tend to make it a real challenge.

An investor has to also consider the opportunity costs and make high quality ongoing assessments of future business prospects. Sometimes prospects change; other times they're misjudged out of the gate.

In other words, this approach to investing works for a sound business that's bought well.

It doesn't work for a broken business.

It doesn't work when a big premium to intrinsic value was paid in the first place.

Stubbornly holding onto shares of an unsound business is a great way to wreck investment results.

The same is true for the investor who stubbornly holds onto shares after it becomes clear that a dumb price was paid (usually in a desperate attempt to get their money back out).

These are mistakes that must be avoided.

Adam

Long position in AAPL and BRKb established at much lower than recent prices. No intent to buy or sell shares near current prices.

Related posts:
A Bigger Buyback for Apple
Apple's Buyback
Technology Stocks

* Risk and reward need not always positively correlated even if modern finance theory, not to mention cultural norms, seem to more than suggest otherwise.
** The potential impact on risk and reward over time from this is not insignificant but also may not be completely obvious. For me, creating and working with simple, but meaningful, spreadsheets is one useful way to develop this into something that's more intuitive. The compounded effect over, lets say, 20 years or so isn't small at all. That can be easier to see with a thoughtful, but not unnecessarily complex, spreadsheet.
*** Especially a stock that ends up selling quite a bit below where it was bought -- and for a long period of time. Even if an unpleasant experience for some (I mean, nobody really likes seeing even paper losses no matter how rational this may be) and maybe just a bit counterintuitive, this approach still works out over the long haul if the company produces lots of cash flow, capital gets allocated well over time, and the price paid made sense. This way of thinking will no doubt be of little interest to those primarily in the business of trading price action.
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This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.

Friday, November 29, 2013

Buffett: How to Minimize Investment Returns

At the beginning of the "How to Minimize Investment Returns" section found in the 2005 Berkshire Hathaway (BRKa) shareholder letter, Warren Buffett mentions that the Dow increased from 65.73 to 11,497.12 during the 20th century.*

He then says:

"This huge rise came about for a simple reason: Over the century American businesses did extraordinarily well and investors rode the wave of their prosperity. Businesses continue to do well. But now shareholders, through a series of self-inflicted wounds, are in a major way cutting the returns they will realize from their investments."

The reason is straightforward enough as Buffett goes on to point out. He says the "fundamental truth" is that owners, in aggregate, can only earn what the businesses, in aggregate, earn over time. 

Naturally, individual participants attempt to gain advantage over other participants. 

Yet, it's not difficult to show how unwise this behavior generally ends up being.
(More on this below.)

I'd emphasize Buffett's point above that "businesses continue to do well."

Why?

Well, as long as a fair price is paid in the first place, how the businesses perform will be the long-term driver of future returns.

Buffett adds this later in the letter:

"For owners as a whole, there is simply no magic – no shower of money from outer space – that will enable them to extract wealth from their companies beyond that created by the companies themselves.

Indeed, owners must earn less than their businesses earn because of 'frictional' costs. And that's my point: These costs are now being incurred in amounts that will cause shareholders to earn far less than they historically have.

To understand how this toll has ballooned, imagine for a moment that all American corporations are, and always will be, owned by a single family. We'll call them the Gotrocks."

In 2005, American corporations were earning roughly $ 700 billion each year and, as outright owners, this fictional family will spend obviously some of it. Yet that remaining large unspent portion is saved and compounds for these continuing long-term owners. More from Buffett:

"In the Gotrocks household everyone grows wealthier at the same pace, and all is harmonious.

But let's now assume that a few fast-talking Helpers approach the family and persuade each of its members to try to outsmart his relatives by buying certain of their holdings and selling them certain others. The Helpers – for a fee, of course – obligingly agree to handle these transactions. The Gotrocks still own all of corporate America; the trades just rearrange who owns what. So the family's annual gain in wealth diminishes, equaling the earnings of American business minus commissions paid. The more that family members trade, the smaller their share of the pie and the larger the slice received by the Helpers. This fact is not lost upon these broker-Helpers: Activity is their friend and, in a wide variety of ways, they urge it on.

After a while, most of the family members realize that they are not doing so well at this new 'beat-my-brother' game. Enter another set of Helpers. These newcomers explain to each member of the Gotrocks clan that by himself he'll never outsmart the rest of the family. The suggested cure: 'Hire a manager – yes, us – and get the job done professionally.' These manager-Helpers continue to use the broker-Helpers to execute trades; the managers may even increase their activity so as to permit the brokers to prosper still more. Overall, a bigger slice of the pie now goes to the two classes of Helpers.

The family's disappointment grows. Each of its members is now employing professionals. Yet overall, the group's finances have taken a turn for the worse. The solution? More help, of course.

It arrives in the form of financial planners and institutional consultants, who weigh in to advise the Gotrocks on selecting manager-Helpers. The befuddled family welcomes this assistance. By now its members know they can pick neither the right stocks nor the right stock-pickers. Why, one might ask, should they expect success in picking the right consultant? But this question does not occur to the Gotrocks, and the consultant-Helpers certainly don’t suggest it to them.

The Gotrocks, now supporting three classes of expensive Helpers, find that their results get worse, and they sink into despair. But just as hope seems lost, a fourth group – we'll call them the hyper-Helpers – appears. These friendly folk explain to the Gotrocks that their unsatisfactory results are occurring because the existing Helpers – brokers, managers, consultants – are not sufficiently motivated and are simply going through the motions. 'What,' the new Helpers ask, 'can you expect from such a bunch of zombies?'

The new arrivals offer a breathtakingly simple solution: Pay more money. Brimming with self-confidence, the hyper-Helpers assert that huge contingent payments – in addition to stiff fixed fees – are what each family member must fork over in order to really outmaneuver his relatives.

The more observant members of the family see that some of the hyper-Helpers are really just manager-Helpers wearing new uniforms, bearing sewn-on sexy names like HEDGE FUND or PRIVATE EQUITY. The new Helpers, however, assure the Gotrocks that this change of clothing is all-important, bestowing on its wearers magical powers similar to those acquired by mild-mannered Clark Kent when he changed into his Superman costume. Calmed by this explanation, the family decides to pay up.

And that's where we are today: A record portion of the earnings that would go in their entirety to owners – if they all just stayed in their rocking chairs – is now going to a swelling army of Helpers. Particularly expensive is the recent pandemic of profit arrangements under which Helpers receive large portions of the winnings when they are smart or lucky, and leave family members with all of the losses – and large fixed fees to boot – when the Helpers are dumb or unlucky (or occasionally crooked).

A sufficient number of arrangements like this – heads, the Helper takes much of the winnings; tails, the Gotrocks lose and pay dearly for the privilege of doing so – may make it more accurate to call the family the Hadrocks. Today, in fact, the family's frictional costs of all sorts may well amount to 20% of the earnings of American business. In other words, the burden of paying Helpers may cause American equity investors, overall, to earn only 80% or so of what they would earn if they just sat still and listened to no one."

This 80% number might seem extreme. It's not. The reality that roughly 80% of returns is now going to "helpers" has been highlighted by John Bogle as well:

"Think about that. That means the financial system put up zero percent of the capital and took zero percent of the risk and got almost 80 percent of the return, and you, the investor in this long time period, an investment lifetime, put up 100 percent of the capital, took 100 percent of the risk, and got only a little bit over 20 percent of the return. That is a financial system that is failing investors because of those costs of financial advice and brokerage, some hidden, some out in plain sight, that investors face today. So the system has to be fixed."

Buffett closes the "How to Minimize Investment Returns" section of the letter with the quote about Sir Isaac Newton that's located in the upper right hand corner of this blog.

For lots of reasons, I've liked the story of Isaac Newton's speculative folly for quite a long time. It not only highlights that being very smart and investment success need not have much to do with each other; it also highlights, despite massive progress in other ways, the persistence of human nature and how unlikely it is to change. Similar mistakes are made under what seems to be not sufficiently different circumstances. The lessons are there for the taking but not applied. Buffett's quote about Newton provides another dimension: The folly of allowing market hyperactivity and frictional costs to enter the equation. It emphasizes how poorly lots of trading activity is going to work out for investors as a whole. Of course, that leads many to conclude they'll be on the right side of this gross returns minus frictional costs game. What Buffett calls the "'beat-my-brother' game." Well, for most market participants, the odds aren't good that this approach will fatten their portfolio. It would seem that Buffett's parable and all the other available evidence would make this pretty obvious but, well, history suggests it won't change behavior.**

Some will rightly conclude that there's no point to buying individual stocks. For many that's the right conclusion. The good news is there are many convenient, low frictional cost ways available to approach long-term investment this way. Still, for those inclined and able to judge the prospects of a business well, the same essential lesson applies: It makes little sense to allow all the frictional costs to creep into the process.
(Not to mention the chance for additional misjudgments. When an action is taken, how the move might improve results isn't the only consideration. In fact, it's the opposite outcome that just might deserve greater consideration.)

Buffett points out that the annual growth rate required to produce an increase from 66 to 11,497 over 100 years was 5.3%.

Compounding is a powerful force.

Keep in mind that, in addition to that not exactly modest increase, long-term investors would have received a not at all small quantity of aggregate dividends (which were, earlier in that century, a much larger part of total returns) over that time frame.

Investment results via marketable stocks -- in contrast to speculative results -- come primarily from the increase to per share intrinsic business value (driven by what the business earns, in aggregate, over time). Those that achieve (or claim to achieve) above average results via cleverly timed trades make for great stories and headlines. Some individuals will actually even succeed at this kind of approach but results, in total, will otherwise inevitably be gross returns minus frictional costs. It's one of "the relentless rules of humble arithmetic."

So sure there will be exceptions, but is it wise to engage in a strategy that's based upon being the exception?

At any point in time some market participant will be able to promote the brilliant trade they made. It might even get its fair share of coverage. The incentive to boast is surely there. I'm guessing the not so brilliant trades will get promoted just a bit less.

Best to trust only carefully audited results over very long time frames.

Otherwise, skepticism is very much warranted.

Investing well means not being impressed by -- and not being susceptible to -- the compelling "story". That's not only true when attempting to judge the actual capabilities and results of other market participants. That's true when judging the risk-adjusted prospects of a particular investment alternative.

Investing is about how price compares to value.

It's about how well value is truly understood (or can be understood).

It's not about how compelling the "story" sounds.

In any case, hyperactivity among market participants, combined with the willful payment of excessive fees, is a recipe for making the "helpers" rich and paying lots of taxes.

Those putting up the capital take essentially all the risk (well, at least beyond "career risk") and end up compensated insufficiently or worse.

Adam

Long position in BRKb established at much lower than recent market prices

* Pages 18-19 of the letter.
** If attractive long run results at the lowest possible risk is the objective, being realistic about not only one's own capabilities, but also what approach has a high likelihood of working over time, is a good chunk of the battle. Unfortunately, overconfidence in abilities and overestimating future prospects gets in the way and, naturally, isn't likely to end up being particularly lucrative. Of course, efficient market hypothesis doesn't allow for such an outcome -- less risk, more reward -- but that's another subject altogether.
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This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.

Friday, November 22, 2013

Grantham on Efficient Markets, Bubbles, and Ignoble Prizes

The latest GMO quarterly letter was recently released.*

Below, I've highlighted some of Jeremy Grantham's thoughts on efficient markets, bubbles, and the 2013 Nobel Prize in Economics from his section of the letter:

"Economics is a very soft science but it has delusions of hardness or what has been called physics envy. One of my few economic heroes, Kenneth Boulding, said that while mathematics had indeed introduced rigor into economics, it unfortunately also brought mortis. Later in his career he felt that economics had lost sight of its job to be useful to society, having lost its way in a maze of econometric formulas, which placed elegance over accuracy.

At the top of the list of economic theories based on clearly false assumptions is that of Rational Expectations, in which humans are assumed to be machines programmed with rational responses. Although we all know – even economists – that this assumption does not fit the real world, it does allow for relatively simple conclusions, whereas the assumption of complicated, inconsistent, and emotional humanity does not. The folly of Rational Expectations resulted in five, six, or seven decades of economic mainstream work being largely thrown away. It did leave us, though, with perhaps the most laughable of all assumption-based theories, the Efficient Market Hypothesis (EMH).

We are told that investment bubbles have not occurred and, indeed, could never occur, by the iron law of the unproven assumptions used by the proponents of the EMH. Yet, in front of our eyes there have appeared in the last 25 years at least four of the great investment bubbles in all of investment history."

To me, this latest letter is Grantham at his best.
(His section begins on page 6.)

Well worth reading in its entirety.

Grantham goes on to describe the four bubbles that, for many, will hardly be unfamiliar:

1) Japanese equity bubble - By 1989 stocks were selling at 65 times earnings (on what may be not so great accounting). Grantham points out, before that, stocks had never peaked at more than 25 times earnings. Japanese stocks would go on to fall 90%.

2) Japanese land bubble - This bubble peaked a couple of years later in 1991. Grantham describes it this way:

"This was probably the biggest bubble in history and was certainly far worse than the Tulip Bubble and the South Sea Bubble. And, yes, the land under the Emperor's Palace, valued at property prices in downtown Tokyo, really was equal to the value of the land in the state of California. Seems efficient to me..."

3) U.S. equity bubble in 2000 - This one peaked at 35 times earnings but that doesn't even begin to describe how expensive certain stocks had become. For perspective, earnings peaked at 21 times earnings in 1929.

4) U.S. housing bubble - According to Grantham this was the first bubble that was truly global.

Grantham notes that, according to EMH, these annoying real world occurrences should happen something like once every 10,000 years.

He also makes the point that "this efficient market nonsense" certainly didn't hurt value managers like himself.

"...so I should find time to thank all those involved for producing and passionately promoting the idea. During the 1970s and 1980s I am convinced it helped reduce the number of quantitatively-talented individuals entering the money management business."

Warren Buffett has previously made a similar point.

Max Planck understood well the resistance of the human mind, even among those who happen to be very smart, to new ideas. He understood how that tendency impacted scientific advancement.

Buffett has said the same applies to finance.

Well, one of the more disappointing -- even if unfortunately not exactly surprising -- aspects of what has happened over these past decades is this:

"...the proponents of the EMH not only promoted their theory, but via the academic establishment the high priests badgered academic researchers into leaving, resigning themselves to non-tenure, or getting religion, as it were."

Much later in the letter, Grantham talks more specifically about the 2013 Nobel Prize in Economic Sciences:

"So, economics has been more or less threadbare for 50 years. Pity then the plight of the Bank of Sweden with all that money to give away in honor of Alfred Nobel and in envy, perhaps, of the harder sciences. If you had $1.2 million to give away but few worthy recipients, what would you do? I would suggest making it a once-every-three-year event..."

His primary reason?

To make it more likely that only "the Real McCoys" win the prize and to prevent "so many ordinary soldiers" from getting it.

That's unlikely to happen anytime soon, but that doesn't make it any less unfortunate that the Bank of Sweden did the following:

"...to further prove how completely they have lost the plot, they gave two-thirds of the prize to two economists who attempted to prove market inefficiency and one-third to another who claimed it was efficient and seriously efficient at that. What a farce. And to read all these genteel descriptions, or rather rationalizations, as to why this made sense is to realize to what extent the establishment is respected, regardless of its competence level."

The economists he is referring to are Eugene Fama, Robert Shiller, and Lars Peter Hansen.

"Robert Shiller at least served society – Kenneth Boulding would have approved – by loudly warning us of impending doom from the Tech Bubble with his superbly timed book Irrational Exuberance in the spring of 2000. Not bad! He also warned us well in advance of the much more dangerous housing bubble..."

Grantham is, not surprisingly, not quite so complimentary of Fama:

"As for Fama, who conversely provided a rationale for all of us to walk off the cliff with confidence, the less said the better. For believers in market efficiency and all the assumptions that go along with it, the real world really is merely an annoying special case."

Grantham has mentioned this so-called "special case" before.

Now, to get an idea how Eugene Fama looks at bubbles, consider what he said when presented with the following back in 2010:

Interview With Eugene Fama

"Many people would argue that, in this case, the inefficiency was primarily in the credit markets, not the stock market—that there was a credit bubble that inflated and ultimately burst."

He responded this way:

"I don't even know what that means. People who get credit have to get it from somewhere. Does a credit bubble mean that people save too much during that period? I don't know what a credit bubble means. I don't even know what a bubble means. These words have become popular. I don't think they have any meaning."

That comment from Fama just might help begin to explain how such ideas and assumptions have been able to maintain their widespread -- some, including myself, would argue rather more than a little bit damaging -- influence for so long.

From later in the same interview:

"But you are skeptical about the claims about how irrationality affects market prices?"

Fama's response:

"It's a leap. I'm not saying you couldn't do it, but I'm an empiricist. It's got to be shown."**

Naturally, there's nothing inherently wrong with needing it "to be shown", but somehow, at least for Fama, these recent bubbles don't offer much evidence. Also, for certain things "to be shown", we'll probably need several more centuries of data (if not more) for sufficient empirical evidence to exist. In the meantime most of us have to make judgments lacking that evidence.

Other related articles:
-In praise of empiricism: a Nobel prize for everyday economics
-It's the Data, Stupid! Empiricists grab this year's Nobel Prizes.
-Eugene Fama, King of Predictable Markets**

Fama continues to think, more or less, that efficient markets made up of even-tempered and rational participants exist in the real world. This way of thinking at least implies that it's tough to distinguish between what's been mispriced and changes to risk.

Fama seems to generally view any variation in market price as being rational and the reward one gets for taking on risk. In other words, if the market price changes then it must necessarily be a reflection of changes in risk.

Shiller's view seems to be that, at least in the shorter run, less than rational psychological forces may take hold that leads to mispriced assets but, in the longer run, those mispricings tend to be corrected.

Fama does, in fact, seem to have an almost unflappable confidence in things like efficient markets.

Shiller, of course, does not.

Not long after their Nobel Prize was announced Shiller was interviewed on CNBC. In the interview, Shiller called Fama the "father" of efficient markets as a theory and most responsible for popularizing it over the years.

Shiller also said the following about Fama's rather consistent, if nothing else, view that markets are mostly quite efficient and rational:

"When you hatch a theory, you don't easily let go, that's where he [Fama) is. I think he's a -- he's a brilliant man...but he's rather involved in this theory."

CNBC Video: Robert Shiller on Eugene Fama

Maybe, just maybe, the reason Fama doesn't see the empirical evidence relates, in part, to Shiller's explanation.

That doesn't really seem a stretch at all.

Well, in any case, Fama, Shiller, and Hansen have won a big prize.

No doubt winning it involved lots of hard work by what are well-intentioned and smart people.

Still, consider me more than a little bit skeptical of thinking that's built upon the foundation of efficient markets and rational expectations. I happen to be rather convinced that the influence of these theories over time have not been a good thing at all for civilization.

To me, the sooner they lose influence the better.

Naturally, some very capable proponents of these theories (and the many related models) will offer a more favorable view.

In any case, the outcome of this debate has important consequences.

To me, the market isn't terribly efficient. Yet outperforming the market as a whole remains extremely difficult. Some use market efficiency as the explanation for this difficulty. Well, there's no reason why capital markets can't have some inefficiencies AND be difficult to outperform.

To me, these things coexist just fine.

For example, a relatively small proportion of participants might have certain capabilities (both temperamental and intellectual) to consistently benefit from mispricings while the great majority of participants overestimate their ability to do so.

The logical way to go, with this in mind, will continue to be index funds for most market participants.

Adam

Related posts:
-Efficient Markets - Part II
-Risk and Reward Revisited
-Efficient Markets
-Modern Portfolio Theory, Efficient Markets, and the Flat Earth Revisited
-Buffett on Risk and Reward
-Buffett: Why Stocks Beat Bonds
-Beta, Risk, & the Inconvenient Real World Special Case
-Howard Marks: The Two Main Risks in the Investment World
-Black-Scholes and the Flat Earth Society
-Buffett: Indebted to Academics
-Grantham on "The Greatest-Ever Failure of Economic Theory"
-Friends & Romans
-Superinvestors: Galileo vs The Flat Earth
-Max Planck: Resistance of the Human Mind

* Also published in Barron's.
** Fama is described as "a careful empiricist" in the article.
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This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.

Friday, November 15, 2013

Berkshire Hathaway 3rd Quarter 2013 13F-HR

The Berkshire Hathaway (BRKa) 3rd Quarter 13F-HR was released yesterday. Below is a summary of the changes that were made to the Berkshire equity portfolio during that quarter.
(For a convenient comparison, here's a post from last quarter that summarizes Berkshire's 2nd Quarter 13F-HR.)

There was plenty of buying and selling during the quarter. Here's a quick summary of the changes:*

New Position
Exxon Mobil (XOM): bought 40.1 million shares worth $ 3.74 billion

Most of the Exxon Mobil shares were actually purchased in the prior quarter but not disclosed.

Berkshire's 2nd Quarter 13F-HR filing did indicate some activity had been kept confidential. That filing said: "Confidential information has been omitted from the public Form 13F report and filed separately with the U.S. Securities and Exchange Commission."

We now know it was Exxon Mobil that was omitted.

It's certainly a sizable stake.

This separate 13F-HR/A filing (also released yesterday) reveals the specific number of shares of Exxon Mobil that had already been purchased by the end of the 2nd quarter:

31.2 million shares

So that means only 8.85 million shares were actually purchased in the 3rd quarter.**

Occasionally, the SEC allows Berkshire to keep certain moves in the portfolio confidential. The permission is granted by the SEC when a case can be made that the disclosure may cause buyers to drive up the price before Berkshire makes its additional purchases.

The current 13F-HR filing does not indicate any moves were kept confidential for the 3rd quarter.

Added to Existing Positions
U.S. Bancorp (USB): bought 840,200 shares worth $ 32.2 million, total stake $ 3.03 billion
DaVita (DVA): 1.5 million shares worth $ 87.98 million, total stake $ 1.85 billion
(The stake in DVA is actually now higher compared to end of 3Q.)
BNY Mellon (BK): 8,807 shares worth $ 292,000, total stake $ 816.7 million
Suncor (SU): 240,500 shares worth $ 8.58 million, total stake $ 642.4 million
Verisign (VRSN): 64,100 shares worth $ 3.58 million, total stake $ 611.8 million

Reduced Positions
ConocoPhillips (COP): sold 10.59 million shares worth $ 780.6 million, total stake now $ 996.8 million
DirecTV (DTV): 760,700 shares worth $ 48.95 million, total stake $ 2.35 billion
Sanofi (SNY): 157,800 shares worth $ 8.37 million, total stake $ 207.2 million
GlaxoSmithKline (GSK): 1.13 million shares worth $ 58.9 million, total stake $ 18.03 million

Todd Combs and Ted Weschler are responsible for an increasingly large number of the moves in the Berkshire equity portfolio, even if they still manage only a small percentage of the overall portfolio.

These days, any changes involving smaller positions will generally be the work of the two portfolio managers.

Top Five Holdings
After the changes, Berkshire Hathaway's portfolio of equity securities remains mostly made up of financial, consumer, and technology stocks (primarily IBM).

1. Wells Fargo (WFC) = $ 19.96 billion
2. Coca-Cola (KO) = $ 16.08 billion
3. American Express (AXP) = $ 12.42 billion
4. IBM (IBM) = $ 12.41 billion
5. Procter and Gamble (PG) = $ 4.45 billion

As is almost always the case it's a very concentrated portfolio.

The top five often represent 60-70 percent and, at times, even more of the equity portfolio. In addition, Berkshire owns equity securities listed on exchanges outside the U.S., plus cash and cash equivalents, fixed income, and other investments.***

The combined portfolio value (equities, cash, bonds, and other investments) was roughly $ 200 billion at the end of the most recent quarter.

The portfolio, of course, excludes all the operating businesses that Berkshire owns outright with ~ 290,000 employees.

Here are some examples of the non-insurance businesses:

MidAmerican Energy, Burlington Northern Santa Fe, McLane Company, The Marmon Group, Shaw Industries, Benjamin Moore, Johns Manville, Acme Building, MiTek, Fruit of the Loom, Russell Athletic Apparel, NetJets, Nebraska Furniture Mart, See's Candies, Dairy Queen, The Pampered Chef, Business Wire, Iscar, Lubrizol, and Oriental Trading Company.
(Among others.)

Then there's Berkshire's rather substantial deal for 50% ownership of H.J. Heinz that closed earlier this year.

In addition, the insurance businesses (BH Reinsurance, General Re, GEICO etc.) owned by Berkshire have naturally provided plenty of "float" for their investments over time and continue to do so.

See page 106 of the annual report for a full list of Berkshire's businesses.

Adam

Long positions in BRKb, KO, WFC, AXP, PG, USB, COP, DTV, SNY, and GSK established at much lower than recent market prices. Also, small long position in IBM established at slightly less than recent market prices.

* All values shown are based upon yesterday's closing price.
** It's worth mentioning that Berkshire did establish a small position in Exxon Mobil back in 2009, but later sold it.
*** Berkshire Hathaway's holdings of ADRs are included in the 13F-HR. What is not included are the shares listed on exchanges outside the United States. The status of those shares are updated in the annual letter. So the only way any of the stocks listed on exchanges outside the U.S. will show up in the 13F-HR is if Berkshire happens to buy the ADR. Also, after the 3rd quarter ended, Berkshire received shares in Goldman Sachs (GS) and General Electric (GE) from exercised warrants (both deals were amended from cash settlement to net share settlement). So, unless sold, those shares will show up in the next 13F-HR filing. Investments in things like the preferred shares (and, where applicable, related warrants) are not included in the 13F-HR. The same is true for the Heinz common shares (i.e. not just the Heinz preferred shares).
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This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
 
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