The Master: Warren Buffett 9 (9/9)

For more on Buffett

Entire books have been written on Buffett, his personality, humor, lifestyle, experiences and teachings. One can enjoy the rich material available in other books devoted to him as a topic.

Another interesting place to get information from and about Buffett and Berkshire Hathaway is the corporate website, easily accessed at www.berkshirehathaway.com. Buffett's letteres to shareholders are particularly worthwhile and exemplify his deep understanding and sense of humour.

To find out what stocks your favourite guru is holding, buying, or selling, you can visit Web sites that track this sort of thing - but they come and go.

The best bet is to Google "Berkshire Hathaway Stock Holdings" or something similar (for example, George Soros Stock Holdings"). Better yet, keep up with the changes by reviewing the SEC 13F filings - do that search on "Berkshire Hathaway's 13F filings" or "George Soros 13F filings" instead.


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Smaller Slices

Buffett doesn't always buy the whole company,

• for either it is too big, or
• he simply wants to take a position without a complete commitment.

Needless to say, the list of 42 holdings in publicly traded companies as of March 2007 is instructive.

Buffett Public Company Holdings

Company--Business/Sector--Estimated 2007 P/E
Ameriprise Financial--Financial services--14.1
American Standard--Building products--10.6
USG Corporation--Building products--24.7
Norfolk Southern--Railroad--12.8
Comcast Corporation--Cable, communications--32.7
PetroChina ADRs--International energy-- ..
Gannett Corp--Newspapers--10.0
Burlington Northern--Railroad--15.0
Tyco International--Diversified--21.7
Ingersoll-Rand--Industrial--13.9
ConocoPhillips--Energy--8.2
SunTrustBanks--Financial services--13.0
H&R Block--Financial services--14.8
Home Depot--Retail--14.7
UnitedHealthGroup--Healthcare--13.4
American Express--Financial services--16.9
Nike Inc.--Consumer apparel--16.2
Torchmark Corp--Financial services--11.1
Moody's Corp--Financial services--20.8
M&T Bank--Financial services--13.6
Pier 1 Imports--Retail--..
Union Pacific--Railroad--16.8
USBancorp--Financial services--11.2
Lowe's Corp--Retail--13.9
WellPoint Inc--Healthcare--13.7
General Electric--Diversified--17.3
First Data Corp--Info services--24.4
Sanofi-Aventis ADR--Pharmaceuticals--11.3
Comdisco Holdings--Industrial--..
Wal-Mart Stores--Retail--14.5
Western Unin--Technology services--18.1
Anheuser-Busch--Consumer beverages--17.2
Wells-Fargo--Financial services--12.6
Wesco Financial--Financial services--78.8
Johnson & Johnson--Healthcare--15.1
United Parcel Service--Logistics--18.5
Costco Wholesale--Retail--24.8
Washington Post--Newspapers--26.7
Coca-Cola Co.--Consumer beverages--21.1
Procter & Gamble--Diversified consumer--18.9
Iron Mountain--Technology security--40.1


Check this out:
SEC 13F filings contain the disclosures as statements of change of ownership. You can find these 13 Fs yourself simply by doing a search on Berkshire Hathaway 13F and the year you're interested in.
http://www.hoovers.com/free/co/secdoc.xhtml?ID=10206&ipage=6253178

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Berkshire Hathaway Manufacturing, Retail and Services Subsidiaries

Beyond insurance, the manufacturing, retail and service group now consists of some 70 companies large and small, all successful in their own arena.

Subsidiary Name----Subsidiary Business
Acme Brick----Face brick and other building materials
Applied Underwriters ----Worker's compensation solutions
Ben Bridge Jeweler----Retail fine jewelry
Benjamin Moore----Architectural and industrial coatings - paint
Berkshire Hathaway Homestates Companies----Specialty property/casualty insurance
Borsheim Fine Jewelry----Retail fine jewelry
Buffalo News----Newspaper
Business Wire----Business news and information services
Central States Indemnity Company----Consumer credit insurance
Clayton Homes----Modular and manufactured homes
CORT Business Services----Rental furniture
CTB, Inc.----Agricultural equipment
Fechheimber Brothers----Safety equipment
Flight Safety International----Training for aircraft and ship operators
Forest River----Towable RVs and trailers
Fruit of the Loom----Textiles
Garan Incorporated----Children's clothing
Gateway Underwriters----Property and casualty insurance
GEICO----Property and casualty insurance
General Re----Reinsurance
H.H.Browne Shoe Co.----Work shoes, boots, casual footwear
Helzberg's Diamond Shops----Retail fine jewelry
Home Services of America----Residential real estate
International Dairy Queen----Licensing and servicing D.Q. stores
Iscar Metalworking Companies----Machine tools
Johns Manville----Insulation, roofing
Jordan's Furniture----Retail home furnishings
Justin Brands----Western boots, hats
Larson-Juhl----Custom picture frames
McClane Company----Food distribution, logistics
Medical Protective----Healthcare provider insurance
MidAmerica Energy----Production, supply, distribution of energy
MiTek Inc.----Engineered building products and services
National Indemnity Co.----Property/casualty insurance
Nebraska Furniture Mart----Retail home furnishings
NetJets----Fractinal jet ownership
The Pampered Chef----Direct marketer, kitchen products
Precision Steel Products----Steel service center
RC Willey Home Furnishings----Retail home furnishings
Scott Fetzer Companies----Subsidiary group includes Kirby Vacuums, Campbell Hausfeld, World Book
See's Candies----Boxed candies, confectionary
Shaw Industries----Flooring, carpet
Star Furniture Company----Retail home furnishings
TTI, Inc----Transportation equipment components
United States Liability Insurance Group----Specialty insurance products
Wesco Financial----Holding company
XTRA Corporation----Transport equipment leasing


What do all Berkshire Hathaway companies have in common?

• They are profitable, safe and solid.
• They are easy to understand with simple business models.
• They produce plenty of cash flow to reinvest.
• They are unique businesses with strong market positions and franchises.
• They have solid, trustworthy management.
• They were bought at reasonable prices.

We ordinary value investors can't assemble this kind of portfolio, but we can learn from what makes Berkshire Hathaway and its master tick.


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What do all Berkshire Hathaway companies have in common?

Berkshire Hathaway's Acquisition Criteria: Telling it like it is
Take a look at the following set of "acquisition criteria," straight from the 2006 Berkshire Hathaway Annual report. Straight, clear, to the point - and never before have we seen anything like this - including the commentary - in a shareholder report.


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Shares? Why not the whole company?

Acquiring shares certainly works over time and is what we ordinary value investors should be focused on. But Berkshire went beyond this strategy - way beyond - to buy whole companies for its portfolio.

Why? Two reasons, mainly.

• If you own the whole company, you're entitled to its cash and cash flow and can reinvest it as you wish.
• You don't have to compete with other shareholders, and management and reporting relationships are simpler.

So Berkshire Hathaway has made many "whole enchilada" investments.

The insurance group has grown substantially and is anchored by consumer favourite GEICO, (originally bought by Ben Graham in the 1950s), and by General Re, in the lucrative reinsurance (wholesale insurance) market. The companies play in different insurance segments, and combine to produce $81 billion in revenue in 2006, with almost $13 billion in pretax income and an amazing $50 billion in "float" - cash taken in but not paid out on claims and used for investments.

Beyond insurance, the manufacturing, retail, and service group now consists of some 70 companies, large and small, all successful in their own arena.

An obvious favourite is Borsheim's, a chain of high-end jewelry stores. Dairy Queen, RC Willey Pampered Chef, and See's Candies are strong consumer names.

Applied Underwriters (worker's comp), NetJets (company jet leasing), FlightSafety International and MiTek, are for the business-to-business world.

Some companies are large and others are small, including the Nebraska Furniture Mart, which Buffett bought one morning as a $60 million birthday present to himself.


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Things go better with Coke

Berkshire put together a world-class portfolio of high visibility, blue chip growth stocks, including such household names as Coca-Cola, Gillette, American Express, and Wells Fargo.

Buffett could not resist the low price of Coca-Cola in the mid-1980s as the company seemed to struggle for reinvention with new Coke and other twists and turns in corporate strategy (most of which turned out to be unnecessary). Coca-Cola had the balance sheet and certainly the stability of earnings that one would expect of the world's leading purveyor of sugar water. Buffett saw not only the intrinsic value but also the franchise or marketplace value. Coke is arguably the world's most recognized brand, and that brand was and still is the closest thing to a guarantee against dips and significant competitive inroads. It's what Buffett calls a moat around the business.

Intrinsic value on the balance sheet, solid earnings with at least some growth and growth potential, and solid value in the franchise are what Buffett looked for in all his investments. And always -repeat, always - at a good price. Berkshire Hathaway acquired 200 million shares of Coke in the mid-1980s at around $6 to $6.50 per share (split adjusted). Coke generally sells at over $50 today. The Berkshire before-tax profit is in the $10 billion range.

Wanna know what Berkshire buys?

It isn't easy to find out. Berkshire keeps its puchases a secret (to avoid market overreaction, among other reasons). But as much as it tries to avoid disclosure, investmens of certain size and that constitue a certain proportion of ownership must be disclosed. SEC 13F filings contain the disclosures as statements of change of ownership. You can watch these directly or just watch the news. Any time a 13F surfaces, the financial news media is quick to pounce.

The most recent 13F filing, released in mid-May 2007 for the close of business on March 31, uncovered four new purchases, three of them in railroad companies (Union Pacific, Norfolk Southern, Burlington Northern Santa Fe) and a new position in health provider, Wellpoint. Buffett increased positions in Comcast, Iron Mountain, Wells Fargo, Johnson & Johnson, and Sanofi-Adventis, while reducing holdings in financials Ameriprise and H&R Block, brewer Anheuser-Busch and Western Union.

We know now, but hardly soon enough to have made a market killing from the knowledge. That said, knowing where Buffett has been and where he is going never hurts. By the way, you can find these 13Fs yourself simply by doing a search on Berkshire Hathaway 13F and the year you're interested in.


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To insurance and beyond

Neither Berkshire nor Buffett made it very far in the textile business. No "Buffett" line of designer towels ever made it to the shelves at Nordstrom's (although they's be worth a lot today, too, if they had!). Instead, Berkshire is now the world's largest investing pool.

The Berkshire's formula is as follows:

• Employ cash flows from businesses owned within the holding company.
• Buy stocks and bonds in the open market.
• Use the cash flow to buy businesses outright - preferably cash rich and cash generating - to build the investment pool and increase book value.
• Acquire solid insurance companies to provide cash flow and further build investing float and to insulate from downturns.

In short, Berkshire as a combined insurer and investment holding company is a fabulous investment ship and capital allocator - especially when you have someone of Buffett's investing prowess at the helm.

From socks to stocks

Gradually, Buffett shifted his emphasis from small, opportunistic, turnaround situations, often of a short-term nature, to longer-term, large cap investments - he even acquired whole companies when the numbers were right. He did this with a clear eye on tapping the growth potential of the major companies and major brands that are abundant in American life. No more buying "cigar butts with one puff left in them," such as trading stamp companies, as he often did in the mid-1950s.

Berkshire Hathaway was off to the races with a winning portfolio of value investments, a world-class pit crew, and high-octane fuel provided by the insurance business.

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The start of Berkshire Hathaway

Buffett spied a faltering Massachusetts textile company known as Berkshire Hathaway. He saw potential value in a very depressed stock and began buying shares cheaply for his partnership. These shares traded at less than half of working capital (remember Ben Graham's net current asset value model). If the stock price would just grow to reflect the balance sheet value, a 100 percent gain was in store, at the very least. Buffett continued to accumulate shares until the partnership owned 49 percent of the company by 1965. He effectively controlled the company.

Originally, Buffett planned to righ some of the wrongs and capture quick gains by selling or merging the company. But he saw a tempting opportunity to use Berkshire as an investment conduit to build worth by buying other businesses. The opportunity owes its origin to favourable tax treatments for companies owning other companies. The ability to defer taxes is very important in value investing as a way to keep capital deployed and continuously earning returns.

When Buffett distributed the partnership in 1969, he offered a choice of cash or Bershire shares as part of the distribution. For his portion, Buffett took shares. He offered to buy the shares of other partners for himself.

Suppose you had invested with Buffett. Your modest investment in the partnership resulted in getting offered 200 shares of Berkshire Hathaway or $8,400 cash (equivalent to two new cars, or maybe a third of a new house in 1969). What would you have done? We all know the answer NOW: At a current share price of $111,600, your investment would be worth over $22 million! A small group of wealthy folks made the choice to stick with Buffett. Many of them still make the annual pilgrimage to Omaha to enjoy those juicy steaks and count their blessings.


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Taking charge

Like most investors, Buffett evolved his investing style, trying different things along the way.

Often, Buffett would simply buy shares, hold them, and wait for growth prospects to materialize.

Sometimes his objective was a little more short term in nature, buying to capture arbitrage - small differences between price and value that often emerge in merger, acquisition, and liquidation situations. (Capturing arbitrage is value investing, too; it's very short term in nature and you had better be good. You're going up against other professionals who have access to a lot of information and are betting for something different to happen.)

Sometimes, Buffett would buy a large stake in an undervalued company, large enough to be noticed and reported to the SEC, usually 5 percent or more. He then would get himself installed on the company's board of directors. Many of these companies were having financial problems or problems translating company value into shareholder value. Many welcomed his presence. Buffett would help right these problems and, if necessary, assist in selling or finding a merger partner for the company. Of course, most ordinary investors can't do this, bu the thought process is important.


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Warren Buffett was born on September 30, 1930. He has turned his steady devotion to value investing principles into some $52 billion in net worth. He is the second wealthiest person in the world (depending on the price of Microsoft stock). His on-court record cannot be touched. His off-court demeanor, where his candor, clairvoyance and wit combine with his own enviably humble lifestyle, creates a model for investors to emulate.

In the beginning

The early stages of Buffett's career and lifestyle suggested investing success, although hardly on the scale he actually went on to achieve. Warren grew up in an investing environment. His father, Howard, ran an Omaha brokerage house in the 1930s that was known as Buffett, Sklenicka, & Co. In his late teens, Warren worked in the house posting stock quotes and doing odd jobs providing exposure to the trade. He learned about business through this experience and through a series of small business ventures in his high school days.

Like many other financial prodigies, Warren's aptitude did not go unnoticed by his parents, who urged him to atteend the revered Wharton School at the University of Pennsylvania. This didn't work out well. Warren soon became bored and dissatisfied, feeling that he knew as much or more than Penn's vaunted faculty. Perhaps he was homesick; perhaps he had a more practical view of matters than the pages and pages of portfolio theory he has no doubt exposed to. in any case, he retreated to more familiar territory at age 19 to finish his degree at the University of Nebraska.

Benjamin Graham's Intelligent Investor hit the shelves, and legent has it that Warren, with a newly rekindled interest in investing and the business world, decided to put the finishing touches on his business education by attending Harvard Business School. Again, a poor match. Warren was rejected, as the story goes, after a 10-minute interview. Perhaps the admissions department had already reached its quota of Nebraskans.

Warren bounced back quickly from this setback and applied to Columbia Business School. Then and there, Buffett hooked up with Benjamin Graham. The rest, as they say, is history.

Warren took to Graham's preachings. The two bantered in engaging dialogue from the opening bell to the end of class. Warren graduated in a year with a Master's in Economics. More important, he left with a philosophy of investing based on valuing companies and finding undervaluation in the market-place.

Buffett returned to work in his father's brokerage firm and later went to work for Ben at Graham's brokerage firm, Graham Newman. There, he learned to manage investment portfolios and use insurance assets as an effective investing vehicle.

From these beginnings Buffett started his own investment fund (with contributed capital from neighbours, relatives, coworkers, and the like) and later built the Taj Mahal of investment companies, Berkshire Hathaway.

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