Buffett And Goldman Sachs Do Sweetheart Deal

Buffett And Goldman Sachs Do Sweetheart Deal

Tickers in this Article » BRKB, GS, WFC, IBM, KO, AXP, SPY

Goldman Sachs (NYSE:GS) announced March 26 that in October it will issue to Berkshire Hathaway (NYSE:BRK.B) exactly the number of shares equal to Warren Buffett's profit from the 2008 warrants he got as part of his $5 billion investment in the investment bank. The deal is a win/win for both companies. What does it mean for stockholders?

Deal History
Think back to September 23, 2008, when the two parties made their original deal. Goldman Sach's stock was trading at $125.05, 24% less than just three weeks earlier. Its reputation in question after the collapse of Bear Stearns and Lehman Brothers, investors were skeptical about most investment banks. Warren Buffett rode in on his big white horse providing Goldman Sachs with the reputational shot in the arm it needed. Berkshire Hathaway bought $5 billion in perpetual preferred shares that paid a 10% dividend.

As part of the deal it received warrants giving it the right to purchase 43.5 million shares of Goldman stock at $115 each anytime up to October 1, 2013.

Goldman was paying $500 million in dividends annually on the preferred shares--an untenable amount--so it bought back the shares for $5.5 billion plus a special, one-time dividend of $1.64 billion. What happens next depends on what Goldman's stock does between now and October 1. For example, should the 10 trading days prior to October 1 average $150 per share, Berkshire Hathaway's profit would be $1.52 billion, meaning it would receive 10.15 million shares of Goldman Sachs. Buffett ends up with approximately 2% of the investment bank and a $2.14 billion profit while Goldman reduces its potential dilution by 77%.

Shareholders
Regardless of what happens to Goldman's stock price over the next six months you have to consider Berkshire Hathaway shareholders are the big winners. Its annualized total return from the deal over the last five years is 11.6%. That's 180 basis points higher than the SPDR S&P 500 (ARCA:SPY). But of course that's not the final tally. Should Buffett hang on to its stock perhaps even building a larger position, then it could become the gift that keeps on giving. Time will tell how enthusiastic he is about owning Goldman but clearly it's not red hot because if it were he'd force the issue and buy the 43.5 million shares outright at $115 each. If I had to guess I'd say it will become one of the billion-dollar holdings we read about in every Berkshire Hathaway annual report but not one of his big four - Wells Fargo (NYSE:WFC), IBM (NYSE:IBM), Coca-Cola (NYSE:KO) and American Express (NYSE:AXP).

As for Goldman Sachs, it gains a partner and loses a quasi-lender. It was an expensive deal for the company but one that probably needed to be done. By coming up with a creative solution, Goldman Sachs reduces its dilution by 33 million shares and Berkshire Hathaway reduces its cash outlay by $5 billion, which it can now put toward one of those "elephant" deals Buffett always speaks of. If Berkshire had to buy all 43.5 million shares in order to crystalize its profit, it's very possible the company could have sold its entire investment. This way Buffett stays in the game which is good news for Goldman Sachs shareholders.

Bottom Line
Warren Buffett didn't get to where he is by being stupid. In Goldman, he's acquired a piece of one of banking's biggest and well known firms. Even better, Berkshire Hathaway was paid $2.15 billion over five years to do so. Anytime someone offers to pay you to acquire something they own, especially when it has real value, the answer should always be yes.

If you're a Berkshire Hathaway shareholder this is just another example why you already own its stock. If you're a Goldman Sachs shareholder, and have been for some time, this is the end of a very difficult time in the company's history. Would I own either stock? I'd have no problem owning Berkshire Hathaway. As for Goldman Sachs, I'd consider its stock but only if Buffett remains a shareholder.

http://www.investopedia.com/stock-analysis/032713/buffett-and-goldman-sachs-do-sweetheart-deal-brkb-gs-wfc-ibm-ko-axp-spy.aspx?utm_source=coattail-buffett&utm_medium=Email&utm_campaign=WBW-03/28/2013

This Has Been a Huge Win for Buffett

By Steve Symington 

March 19, 2013 

Since Warren Buffett released his annual letter to Berkshire Hathaway (NYSE: BRK-B  ) (NYSE: BRK-A  ) shareholders earlier this month, I've spent some time dissecting the world-famous CEO's unsurprisingly eloquent words of wisdom.

First, I explored the value of Buffett's relatively hidden series of bolt-on acquisitions. After all, while it may seem crazy that any company could quietly spend $2.3 billion to absorb 26 distinct, profitable businesses into its existing operations in a single year, Berkshire managed to do just that in 2012.

Next, I noted Buffett's propensity for outperforming the broader market over the long haul, thanks (in Buffett's words) not just to Berkshire's "outstanding businesses, a cadre of terrific operating managers, and a shareholder-oriented culture," but also largely to the company's incredible ability to effectively function as a defensive stock.

Let's talk about the big boys
Now, we're going to take a look at an excerpt from Buffett's letter in which he highlights the strengths of some of Berkshire's larger "outstanding businesses":

Last year I told you that BNSF, Iscar, Lubrizol, Marmon Group and MidAmerican Energy -- our five most profitable non-insurance companies -- were likely to earn more than $10 billion pre-tax in 2012. They delivered. Despite tepid U.S. growth and weakening economies throughout much of the world, our "powerhouse five" had aggregate earnings of $10.1 billion, about $600 million more than in 2011. Of this group, only MidAmerican, then earning $393 million pre-tax, was owned by Berkshire eight years ago.

Buffett goes on to note the $9.7 billion gain in annual earnings delivered to Berkshire by the five companies was "accompanied by only minor dilution," thanks to the fact that three of the five businesses were acquired on an all-cash basis. The fifth, of course, was Burlington Northern, of which 70% was paid for in cash with the remainder covered by newly issued Berkshire shares, which increased the amount outstanding by 6.1%. 

Sure enough, here's yet another example that Buffett knews what the heck he was doing when he acquired five huge, solidly profitable companies to the benefit of Berkshire shareholders with little dilution. Of course, that's not to mention Buffett has also been actively working to reverse at least some of that dilution, most notably through the company's recent substantial share buybacks.

Even still, let's put things in perspective by digging a little deeper to see just how effective these acquisitions have been. In addition to owning 89.8% of MidAmerican, here's the skinny on Buffett's remaining aforementioned purchases, circa the end of 2011:

• May, 2006: Purchased an 80% stake in Iscar for $4 billion in cash.
• December 2007: Acquired 64% of Marmon Holdings for $4.8 billion in cash.
• November, 2009: Acquired the remaining stake of BNSF for $26.3 billion in cash and stock.
• March, 2011: Acquired Lubrizol for $9 billion in cash, at the same time assuming $700 million of its debt.
• In "early" 2011: Acquired an additional 16% of Marmon for approximately $1.5 billion, bring Berkshire's stake to 80%.

When we consider the fact that Berkshire's slice of net earnings from MidAmerican last year totaled more than $1.3 billion, that leaves nearly $8.4 billion in 2012 earnings achieved as a direct result of Buffett's spending $46.3 billion over the past seven years for its stakes in Iscar, Marmon, BNSF, and Lubrizol -- not a bad recurring return on investment by any measure, thanks to Buffett's supreme demonstrations of patience and a long-term outlook. What's more, Buffett later wrote that "unless the U.S. economy tanks -- which we don't expect -- our powerhouse five should again deliver higher earnings in 2013."

As an aside, it's also important to note that Berkshire yet again raised its stake in Marmon late in the fourth quarter of 2012, bringing it to 90%. Additionally, according to its most recent 10-K, Berkshire will purchase the remaining 10% sometime in 2014 with a price to be determined from an existing formula based on Marmon's future earnings.

Of course, any one of Berkshire's "powerhouse five" could easily be considered a fantastic business in its own right. After all, that is why Buffett bought each of them in the first place. However, Berkshire's comprehensive value becomes much more apparent when you combine those businesses with its world-class insurance operations, which not only provided a $1.6 billion underwriting profit in 2012, but the float from which also gave Buffett more than $73 billion in free money to invest. 

As we look at Berkshire from a broader standpoint, this also goes to show just how relentless and effective Buffett's efforts have been to diversify his company's income streams. In addition, considering the fact that Buffett still has a cash pile of least $15 billion pegged for acquisitions (even after putting $12 billion to work last month for a 50% stake in Heinz(NYSE: HNZ  ) ), you can bet it won't be long before he adds another elephant to the ranks of his powerhouse brands.

Foolish final thoughtsIn the end, I'm reminded of a comment last year from a friend of mine when he joked that Berkshire was his favorite "mutual fund." There's certainly some truth to the statement, but I think even that doesn't do justice to the depth of Berkshire's enviable moat. 

As Buffett wrote in his 2011 shareholder letter, "When you look at Berkshire, you are looking across corporate America." Thanks to his unparalleled good judgment, though, it might be more accurate to rephrase that statement as "When you look at Berkshire, you are looking across [the best of] corporate America" (addition mine).

http://www.fool.com/investing/general/2013/03/19/this-has-been-a-huge-win-for-buffett.aspx

8 Buffett Secrets for Investing in Banks

By Matt Koppenheffer
November 29, 2012

Berkshire Hathaway's (NYSE: BRK-A  ) (NYSE: BRK-B  ) Warren Buffett is seen by many as one of the best investors of our time. But he's also often seen as particularly insightful when it comes to investing in banks.

Certainly Berkshire shareholders should hope that the latter is the case as the company owns 8% of banking giant Wells Fargo  (NYSE: WFC  ) along with $5 billion in Goldman Sachs  (NYSE: GS  ) , nearly $2 billion of US Bancorp  (NYSE: USB  ) stock, and roughly another $1 billion between M&T Bank  (NYSE: MTB  ) and Bank of New York Mellon  (NYSE: BK  ) . Not to mention $5 billion in preferred shares of Bank of America (NYSE: BAC  ) .

So what does Warren know that makes him so prescient when it comes to banks?

1. Owning a bank can be a long-term endeavor.
The banking business is a cyclical one, but bank ownership for Buffett typically isn't. In 1969, Berkshire acquired Illinois National Bank and Trust Company and held onto it until it was forced by regulators to sell the bank in 1980. The company's ownership position in Wells Fargo goes back to 1989, while the stake in M&T Bank dates back to at least 1999.

2. Management matters.
We've seen from the financial crisis how reckless management can lead to outright disaster. When Buffett talks about the banks he's owned, he's generally taking time to praise management. Here's what he had to say in Berkshire's 1990 shareholder letter when praising Wells Fargo's management:

[The team at Wells Fargo pays] able people well, but abhor having a bigger head count than is needed... attack costs as vigorously when profits are at record levels as when they are under pressure. Finally, [they] stick with what they understand and let their abilities, not their egos, determine what they attempt.

3. Leverage kills.
Again from the 1990 shareholder letter:

When assets are twenty times equity-a common ratio in this industry-mistakes that involve only a small portion of assets can destroy a major portion of equity. ... Because leverage of 20:1 magnifies the effects of managerial strengths and weaknesses, we have no interest in purchasing shares of a poorly managed bank at a "cheap" price. Instead, our only interest is in buying into well-managed banks at fair prices.

4. Panic? Not a chance.
Rather than panic during banking downturns, Buffett has used them to build his ownership stakes. The original stake in Wells Fargo was purchased between late 1989 and early 1990 -- when banks were faltering during the previous banking crisis. During the latest meltdown, Buffett upped Berkshire's ownership in Wells Fargo and US Bancorp, maintained the company's position in M&T Bank, and famously provided preferred-share financing to Goldman. Just last year he sunk $5 billion into Bank of America when it was facing a market freak-out.

The fact that Wells Fargo's price fell after Berkshire initially bought didn't phase Buffett one bit:

Even though we had bought some shares at the prices prevailing before the fall, we welcomed the decline because it allowed us to pick up many more shares at the new, panic prices. Investors who expect to be ongoing buyers of investments throughout their lifetimes should adopt a similar attitude toward market fluctuations; instead many illogically become euphoric when stock prices rise and unhappy when they fall. 

In case you're wondering, yes, this is that classic Buffett "be greedy when others are fearful" sentiment.

5. Know where to look for performance.
As Marty Whitman puts it: "Rarely do more than three or four variables really count. Everything else is noise." 

Three things that Buffett has highlighted when it comes to evaluating a bank are: return on assets, risk (leverage ratio), and expenses (efficiency ratio).

6. Remember to own for a long time.
There's no reason to not mention this one twice, because it's an important one. To have a year where an attractive bank he owned made no profit "would not distress us." Instead, "at Berkshire we would love to acquire businesses or invest in capital projects that produced no return for a year, but that could then be expected to earn 20% on growing equity."

7. Pick your spots to go outside the box.
With all of this in mind (especially the risk part), Goldman Sachs may not seem like a very Buffett-esque bank to invest in. And it's really not. However, when we think about the investment banks that Berkshire could have invested in -- Bear Stearns, Lehman Brothers, Morgan Stanley  (NYSE: MS  ) , etc. -- Goldman stands out as head and shoulders above the rest.

Not to mention that Buffett was no stranger to Goldman. In Berkshire's 2003 shareholder letter, you can find Buffett singing the praises of -- believe it or not -- a Goldman Sachs investment banker:

I should add that Byron [Trott] has now been instrumental in three Berkshire acquisitions. He understands Berkshire far better than any investment banker with whom we have talked and – it hurts me to say this – earns his fee.

8. Don't get all mushy over the whole thing.
It's certainly possible to find great banks to invest in and Buffett has found his fair share for Berkshire. But banking ain't an easy slog, and even Buffett will admit he's not going out of his way for a bank unless it's really worthwhile. As he put it: "The banking business is no favorite of ours."

Buffett picks 'em, and you benefit

You can, of course, take the above points and use them to help you find great banks to invest in. Or, you could leave the picking to Warren and simply invest in Berkshire Hathaway. But is now the best time to be buying Berkshire?

http://www.fool.com/investing/general/2012/11/29/8-buffett-secrets-for-investing-in-banks.aspx

Warren Buffett - The Philosophy of Berkshire Hathaway

Should Berkshire Pay a Dividend?

Buffett authors weigh in on the possibility and wisdom of Berkshire Hathaway returning capital to shareholders.

http://www.morningstar.com/cover/videocenter.aspx?id=547398

Buffett’s Berkshire Hathaway lags behind S&P for third year in a row

Andrew Frye, Bloomberg News  May 3, 2012 – 6:12 PM ET 

Daniel Acker/Bloomberg

Warren Buffett, 81, is seeking to reassure investors that the US$200-billion company he built over 42 years as chief executive officer is positioned to thrive after his eventual departure.

Berkshire Hathaway Inc. shareholders missed out on better returns from the Standard & Poor’s 500 Index by sticking with Chairman Warren Buffett after each of his last three annual meetings.

Berkshire fell 2.4% from the firm’s April 30, 2011, meeting through yesterday, compared with the 2.8% advance in the S&P 500. This year’s gathering, planned for May 5 in Omaha, Nebraska, concludes three years in which Berkshire climbed about 32%, trailing the S&P 500’s gain of around 60%.

Buffett, 81, is seeking to reassure investors that the US$200-billion company he built over 42 years as chief executive officer is positioned to thrive after his eventual departure. Growth slowed in the last 15 years as Buffett, a former hedge fund manager, directed Berkshire’s earnings toward takeovers in industries like machine tools, power production and railroads.

http://business.financialpost.com/2012/05/03/buffetts-berkshire-hathaway-lags-behind-sp-for-third-year-in-a-row/

Buffett Loves The Insurance Operations that deliver "float" or costless capital of $70 BILLION .

• Our insurance operations continued their delivery of costless capital that funds a myriad of other opportunities.

• This business produces “float” – money that doesn’t belong to us, but that we get to invest for Berkshire’s benefit. 
• And if we pay out less in losses and expenses than we receive in premiums, we additionally earn an underwriting profit, meaning the float costs us less than nothing. 
• Though we are sure to have underwriting losses from time to time, we’ve now had nine consecutive years of underwriting profits, totaling about $17 billion. 
• Over the same nine years our float increased from $41 billion to its current record of $70 billion. Insurance has been good to us

http://www.berkshirehathaway.com/letters/2011ltr.pdf

Growth Investing Examples from Berkshire Hathaway

-  On September 16th we acquired Lubrizol, a worldwide producer of additives and other specialty chemicals. The company has had an outstanding record since James Hambrick became CEO in 2004, with pre-tax profits increasing from $147 million to $1,085 million. Lubrizol will have many opportunities for “bolt-on” acquisitions in the specialty chemical field. Indeed, we’ve already agreed to three, costing $493 million. James is a disciplined buyer and a superb operator. Charlie and I are eager to expand his managerial domain.

Comment:  Lubrizol grew its pre-tax profits from $147 million from 2004 to $1,085 million.   Thus its pre-tax profit has grown at the compound annual growth rate of 33.05% over 7 years.

• Buffett likes this company for its good earnings growth.  
• The good earnings growth rate also is reflective of the good business fundamentals of this company.
• Buffett loves buying / owning wonderful company (that are growing).

-  Our major businesses did well last year. In fact, each of our five largest non-insurance companies – BNSF, Iscar, Lubrizol, Marmon Group and MidAmerican Energy – delivered record operating earnings. In aggregate these businesses earned more than $9 billion pre-tax in 2011. Contrast that to seven years ago, when we owned only one of the five, MidAmerican, whose pre-tax earnings were $393 million. Unless the economy weakens in 2012, each of our fabulous five should again set a record, with aggregate earnings comfortably topping $10 billion.

Comment:  

1994:  Mid American contributed pre-tax earnings of $393 million.

2011:  BSNF, Iscar, Lubrizol, Marmon Group and MidAmerican Energy earned $9 billion pre-tax.

• BSNF and Lubrizol are recent acquisitions of Buffett.  
• Buffett likes these companies for their earnings and growth.  
• Buffett even projected that their aggregate earnings will top $10 billion next year, 2012 (a growth rate of 11%).

-   In total, our entire string of operating companies spent $8.2 billion for property, plant and equipment in 2011, smashing our previous record by more than $2 billion. About 95% of these outlays were made in the U.S., a fact that may surprise those who believe our country lacks investment opportunities. We welcome projects abroad, but expect the overwhelming majority of Berkshire’s future capital commitments to be in America. In 2012, these expenditures will again set a record.

Comment:  

Yes, to grow one has to re-invest.  Looks like Buffett reinvest all the free cash flows ($8.2 billion capital expenditure) for future growth.

http://www.berkshirehathaway.com/letters/2011ltr.pdf

A Tour of Berkshire Hathaway World Headquarters

Warren Buffett gives a tour of Berkshire Hathaway’s World Headquarters in Omaha, Nebraska:

BERKSHIRE HATHAWAY AND RETAINED EARNINGS

BERKSHIRE HATHAWAY AND RETAINED EARNINGS

Berkshire Hathaway does not, following Buffett’s mantra, pay dividends to its shareholders and this is one reason why its compound return over the years of Buffett-Munger management has been so high.

• The downside of course is that shareholders have not received dividends, meaning, that if they were dependent on money coming in at a given time, their only recourse, in relation to their shareholding, would be to sell the shares or borrow against them.
• Having regard to the huge price of a single share over the past few years, this meant that investors may have had to either keep all their shareholding or dispose of it, not always the choice they wanted. Berkshire Hathaway partly catered for this dilemma by introducing B shares, which are in essence a fractional unit of the normal shares.

A POWERFUL FORCE

When asked to nominate the most powerful force on earth, Albert Einstein is reputed to have answered ‘compound interest’. Buffett might well agree.

The World According to "Poor Charlie"

The World According to "Poor Charlie"
Charlie Munger, Warren Buffet's number two speaks to Kiplinger's about investing, Berkshire and more.

December 2005

Charlie Munger has been Warren Buffett's partner and alter ego for more than 45 years. The pair has produced one of the best investing records in history. Shares of Berkshire Hathaway, of which Munger is vice chairman, have gained an annualized 24% over the past 40 years. The conglomerate, which the stock market values at $130 billion, owns and operates more than 65 businesses and invests in many others. Buffett's annual reports are studied by money managers. But Munger, 81, has always been media shy. That changed when Peter Kaufman compiled Munger's writing and speeches in a new book, Poor Charlie's Almanack: The Wit and Wisdom of Charles T. Munger ($49.00, PCA Publications). Here Munger speaks with Kiplinger's Steven Goldberg.

Why has Berkshire done so well?
Just remember that we had a long run and an early start, particularly in Warren's case. It's much easier for me to talk about Warren than myself, so let's talk about Warren. Not only did he have a long run from an early start, but he got very smart very young -- then continuously improved over 50 years.

Buffett was a student of Ben Graham, the father of security analysis. He was buying deep value stocks -- "cigar butts" -- until you got involved.
If I'd never lived, Warren would have morphed into liking the better businesses better and being less interested in deep-value cigar butts. The supply of cigar butts was running out. And the tax code gives you an enormous advantage if you can find some things you can just sit with.

There are a whole lot of reasons, and Warren was a natural for always just getting smarter. The natural drift was going that way without Charlie Munger. But he'd been brainwashed a little by worshiping Ben Graham and making so much money following traditional Graham methods that I may have pushed him along a little faster in the direction that he was already going.

How do you work together?
Well, it's mostly the telephone and as the years have gone on, and I've passed 80 and Warren is 75, there's less contact on the phone. Warren is a lot busier now than he was when he was younger. Warren has an enormous amount of contact with the operating businesses compared to what he had early in his career. And, again, he does almost all of that by phone, although he does fly around some.

What are your work styles like?
We have certain things in common. We both hate to have too many forward commitments in our schedules. We both insist on a lot of time being available almost every day to just sit and think. That is very uncommon in American business. We read and think. So Warren and I do more reading and thinking and less doing than most people in business. We do that because we like that kind of a life. But we've turned that quirk into a positive outcome for ourselves.

How much of your success is from investing and how much from managing businesses?
Understanding how to be a good investor makes you a better business manager and vice versa.

Warren's way of managing businesses does not take a lot of time. I would bet that something like half of our business operations have never had the foot of Warren Buffet in them. It's not a very burdensome type of business management.

The business management record of Warren is pretty damn good, and I think it's frequently underestimated. He is a better business executive for spending no time engaged in micromanagement.

Your book takes a very multi-disciplinary approach. Why?
It's very useful to have a good grasp of all the big ideas in hard and soft science. A, it gives perspective. B, it gives a way for you to organize and file away experience in your head, so to speak.

How important is temperament in investing?
A lot of people with high IQs are terrible investors because they've got terrible temperaments. And that is why we say that having a certain kind of temperament is more important than brains. You need to keep raw irrational emotion under control. You need patience and discipline and an ability to take losses and adversity without going crazy. You need an ability to not be driven crazy by extreme success.

How should most individual investors invest?
Our standard prescription for the know-nothing investor with a long-term time horizon is a no-load index fund. I think that works better than relying on your stock broker. The people who are telling you to do something else are all being paid by commissions or fees. The result is that while index fund investing is becoming more and more popular, by and large it's not the individual investors that are doing it. It's the institutions.

What about people who want to pick stocks?
You're back to basic Ben Graham, with a few modifications. You really have to know a lot about business. You have to know a lot about competitive advantage. You have to know a lot about the maintainability of competitive advantage. You have to have a mind that quantifies things in terms of value. And you have to be able to compare those values with other values available in the stock market. So you're talking about a pretty complex body of knowledge.

What do you think of the efficient market theory, which holds that at any one time all knowledge by everyone about a stock is reflected in the price?
I think it is roughly right that the market is efficient, which makes it very hard to beat merely by being an intelligent investor. But I don't think it's totally efficient at all. And the difference between being totally efficient and somewhat efficient leaves an enormous opportunity for people like us to get these unusual records. It's efficient enough, so it's hard to have a great investment record. But it's by no means impossible. Nor is it something that only a very few people can do. The top three or four percent of the investment management world will do fine.

What would a good investor's portfolio look like? Would it look like the average mutual fund with 2% positions?
Not if they were doing it Munger style. The Berkshire-style investors tend to be less diversified than other people. The academics have done a terrible disservice to intelligent investors by glorifying the idea of diversification. Because I just think the whole concept is literally almost insane. It emphasizes feeling good about not having your investment results depart very much from average investment results. But why would you get on the bandwagon like that if somebody didn't make you with a whip and a gun?

Is finding bargains difficult in today's market?
We wouldn't have $45 billion lying around if you could always find things to do in any volume you wanted. Being rational in the investment world at a time when other people are losing their minds -- usually all it does is keep you out of something that causes a lot of trouble for other people. If you stayed away from the mania in the high-tech stocks at its peak, you were saved from disaster later, but you didn't make any money.

Should people be investing more abroad, particularly in emerging markets?
Different foreign cultures have very different friendliness to the passive shareholder from abroad. Some would be as reliable as the United States to invest in, and others would be way less reliable. Because it's hard to quantify which ones are reliable and why, most people don't think about it at all. That's crazy. It's a very important subject. Assuming China grows like crazy, how much of the proceeds of that growth are going to flow through to the passive foreign owners of Chinese stock? That is a very intelligent question that practically nobody asks.

What do you think of the U.S. trade and budget deficits -- and their impact on the dollar, which Berkshire is still betting against?
It's not at all clear exactly from some objective bunch of economic data just where the dollar ought to trade compared to the Euro. Who in the hell knows? It's clear that you can't run twin deficits on the scale that the U.S. has forever. As [economist] Herb Stein said, "If something can't go on forever, it will eventually stop." But knowing just when it's going to stop is a very difficult matter.

Is there a bubble in the real estate?
When I see people going to some old flea-bitten old condo and the list price is $1.8 million, and they decide to put it on the market for $2.2 million, and five people start bidding for it, and they sell it for $2.7 million, I say that's a bubble. So there are some bubbly places in the economy. I am amazed at the price of real estate in Manhattan.

So there is some bubble in the game. Is it going to go back to really cheap houses in good neighborhoods in good cities? I don't think so. So I think there will be huge collapses in some places, but, on average, I think that good houses in good places are going to be plenty expensive in future years.

Is there a bubble in energy stocks?
When it gets into these spikes, with shortages and uproar and so forth, people go bananas, but that's capitalism. If the price of automobiles were going up 40% a year, you'd have a boom in auto stocks. But if you stop to think about it, of the companies that you could have bought in, say, 1911, to hold for a long time, one of the very best stocks would have been Rockefeller's Standard Oil Trust. It became almost all of today's integrated oil companies.

How do you feel most corporate citizens behave in the U.S.?
Well, I disapprove of the way most executive compensation is arranged in America. I think it goes to gross excess. And I certainly don't like phony accounting that takes part of the real cost of running the business and doesn't run it through the income account as a charge against the reported earnings. I don't like dishonorable, lying accounting.

Do you think the stock market will return its long-term annualized 10% in the next decade?
A good figure for rational expectation would be no higher than 6%. I think it's unreasonable to assume that the world is going to try to arrange itself so that the inactive, asset-owning class is going to get a much higher share of the GDP than it normally gets. When you start thinking that way, you get into these modest figures. The reason the return has been so good in the past is that the price-earnings ratio went way up.

Ibbotson finds 10% average returns back to 1926, and Jeremy Siegel has found roughly the same back to 1802.
Jeremy Siegel's numbers are total balderdash. When you go back that long ago, you've got a different bunch of companies. You've got a bunch of railroads. It's a different world. I think it's like extrapolating human development by looking at the evolution of life from the worm on up. He's a nut case. There wasn't enough common stock investment for the ordinary person in 1880 to put in your eye.

What do you see for bonds?
The bond market has fewer opportunities now. The short-term rates are the same as the long-term rates, and the premium interest rate you get for taking risk is lower than it ought to be, given the risk. By definition, that's a world in which bond investment is much tougher to do with great advantage.

What do you expect in terms of returns for Berkshire Hathaway?
We have solemnly promised our shareholders that our future returns will be considerably below our previous returns.

But annual reports have been saying that year after year after year.
But lately we've been better at doing what we have long predicted.

What happens to Berkshire after the two of you?
Well, the world will go on and, in my opinion, Berkshire will still be a strong, rich place and with a central culture that will be shrewd and risk-averse. But do I think that we will get another person better than Warren to come in and replace Warren? I think the odds are against it.

SEPTEMBER 26, 2011, 10:12 AMMERGERS & ACQUISITIONS

Berkshire Hathaway to Buy Back Shares

BY DEALBOOK

Charles Dharapak/Associated PressWarren E. Buffett, chief of Berkshire Hathaway.

It looks as if Berkshire Hathaway’s “elephant gun” of $43 billion in cash will also be pointed at itself.

Warren E. Buffett’s company announced on Monday that its board had authorized the repurchase of the company’s class A and class B shares at premium of as much as 10 percent over the current book value.

The company did not disclose how big the buyback would be, but said the repurchases would not be made if they reduced Berkshire’s cash holdings below $20 billion.

The cash war chest was highlighted in February, when Mr. Buffett told investors he was on the hunt for acquisitions. “Our elephant gun has been reloaded, and my trigger finger is itchy,” he wrote.As of June 30, Berkshire had more than $43 billion in cash.

The use of cash for share buybacks is unusual for Berkshire, which has preferred to use it for acquisitions.

Berkshire Hathaway’s class A and class B shares.

In its 2000 annual letter, the company said “we will not repurchase shares unless we believe Berkshire stock is selling well below intrinsic value,conservatively calculated.”

Shares of Berkshire, however, have slumped this year. The class A shares are down 12.2 percent, while the class B shares are down nearly 10 percent.

Investment advice by Warren Buffett: His Biggest Mistake

Dumbest investment by Warren Buffett: Berkshire Hathaway

Wednesday April 6, 2011

Billionaire Warren Buffett's Berkshire case highlights need for checks

Plain Speaking - By Yap Leng Kuen

THE case involving the purchase of shares by David Sokol a former manager ofBerkshire Hathaway Inc in Lubrizol Corp, whose takeover he helped to negotiate, highlights the need for higher governance in large funds.

In his statement following Sokol's resignation, Berkshire chief executive Warren Buffett admitted that Sokol had informed him in a “passing remark'' about his shareholding in Lubrizol but he (Buffett) did not pursue the matter.

“Shortly before I left for Asia on March 19, I learned that Dave first purchased 2,300 shares of Lubrizol on Dec 14, which he then sold on Dec 21.

“Subsequently, on Jan 5, 6 and 7, he bought 96,060 shares pursuant to a 100,000-share order he had placed with a US$104 per share limit price,'' said Buffett in the statement that appeared in the Telegraph last Thursday.

In this photo from May 1, 2010, David Sokol, chairman of Berkshire Hathaway's MidAmerican Energy, NetJets and Johns Manville units, speaks to shareholders at the annual Berkshire Hathaway shareholders meeting, in Omaha, Neb. Sokol, who suddenly resigned this week, said he wanted to start his own investment firm patterned after Warren Buffett's company. - AP

According to the statement, the two men first discussed the idea of buying Lubrizol in mid-January; however, Buffett became interested only after Sokol informed him of a talk with Lubrizol CEO James Hambrik on Jan 25.

Buffett then decided to buy Lubrizol, an engine lubricant maker, for US$9bil, in which Sokol may have made a profit of about US$3mil, according to Buffett's disclosure and data compiled by Bloomberg.

“Though the offer to purchase was entirely my decision, supported by Berkshire's board on March 13, it would not have occurred without Dave's early efforts,'' Buffett wrote in his statement.

Bloomberg reported, quoting an anonymous person, that the US Securities and Exchange Commission was examining if Sokol bought Lubrizol shares on inside information although there were opinions that this was more of a case of misconduct.

Buffett said in his statement that both men did not feel that Sokol's Lubrizol share purchases were in any way unlawful.

Sokol said in a CNBC interview that he didn't think he had done anything wrong.

This photo taken April 30, 2010, shows Todd Raba, left, president and CEO of Berkshire Hathaway subsidiary Johns Manville, as he walks with his boss, investor Warren Buffett, in Omaha, Neb. Raba will become chairman of Johns Manville following the surprise resignation of David Sokol. - AP

“I can understand the appearance issue and that's why we made it public in the press release,” Bloomberg reported, quoting Sokol.

“The reality is that I have no control over a deal ever happening,'' he added.

Top managers and supervisors are responsible for the actions of their key staff especially when it comes to sensitive implications like insider trading and conflict of interest.

Reliance on self-discipline may not be sufficient; instead, a system of checks and risk controls need to be put in place for better investor protection.

Similar cases can occur elsewhere and unless exposed, or in this instance, mentioned by Sokol himself, money made on the sidelines is usually quietly pocketed.

The lure of big money can lead to dangerous actions which, if left unchecked, can have overall disastrous consequences such as in the recent US subprime housing crisis.

There are moves to regulate hedge funds in the US and Europe but the industry should not just sit back and wait for the guidelines and rules before taking preventive measures on its own.

Top managers should be carefully screened for the job and their progress subsequently monitored. While too much micro managing is bad, it is inevitable that some form of surveillance has to be in place, especially after what happened in the subprime rout.

Associate editor Yap Leng Kuen views that it is often from small incidents that big mistakes develop.