There is an old saying, that if you do the little things right, the big things will take care of themselves. And in almost every case, from a football team driving towards a championship season, to a fledgling business trying to gain customers, does this maxim usually prove correct. Then why, one might ask, in the investment world do most professionals focus most of their time on trying to make the big decisions?
Several years ago, there was a bunch of research done that suggested that most folks’ investment returns were primarily determined by which assets or sectors they allocated a percentage of their capital to. And like the light of a match, people started trying to determine what their “optimal asset allocation framework” should be. They posited that maybe it should be 60% stocks and 40% bonds, or 50% towards healthcare companies and 50% towards commodities, or 20% in cash and 80% in real estate, and well you get the idea, this list goes on. The thinking was, that if you get the exact percentage of each asset class right, it wouldn’t matter so much what the individual investments actually are.
And while I’d probably agree that methodology of this research was likely done with solid empirical backing, I’d argue that the conclusions drawn from it were entirely backward. To me, at least, it seems impossible to determine the exact percentage of one’s portfolio that should be invested in a particular asset class, no matter how much data analysis one does. Nor is it feasible to determine in which asset class, in fact, the money should be invested.
The problem was that most folks’ conclusions were that the most important thing to do was to make big top down decisions about how they wanted to invest their money. I’d argue, on the other hand, that this asset allocation research should instead be interpreted as the outcome of continuously searching for reasonably priced individual investments. And if one starts finding good investments (which can tend to cluster in the same assets or sectors), their portfolio will exhibit a certain “asset allocation framework,” but it will be arrived at by finding good investments, rather than drawing a line in the sand and deciding how the assets should be allocated.
The difference in these interpretations is dramatic. One viewpoint (the top down one) compels action. The other, (the outcome one) educates the investor about what her portfolio actually looks like. And to me, at least, education almost always trumps action.
The bigger implication of this “outcome” viewpoint, though, is that the individual investments do matter. There are thousands of stocks and thousands of bonds, and by just saying that you have 60% of one basket and 40% of another, says nothing about the quality of your portfolio. If, on the other hand, one finds good and understandable investments at reasonable prices, that investor will do just fine, regardless how someone else labels their investments. Just like the old saying above implies, by focusing on the individual investments in your portfolio, your larger “asset allocation framework” will eventually take care of itself.
I welcome dialogue with my readers, so please send me any questions and comments you have. Also, if you haven’t already done so, please be sure to sign-up for my free email alerts by emailing me at BuffettInsights@gmail.com.
Justin
Copyright © 2009 BuffettInsights
The content contained in this blog represents the opinions of Mr. Fuller. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business. This content is intended solely for the entertainment of the reader, and the author.
Monday, July 20, 2009
Friday, July 3, 2009
Does Diversification Make Sense?
If you were to go to a restaurant today and order some food, would you order one of everything on the menu, or would you just order a few of the things you really knew that you liked? Chances are—and I might be taking a big leap here—that you would know what you liked for whatever reason (taste, healthiness, price), and would order just a few of those things, rather than thinking you had to have one of everything on the menu. Maybe I’m in the minority here, but that course of action seems to make the most sense to me.
Yet in the investment world, most folks seem to be encouraged to have one of everything off of the proverbial financial menus that larger financial firms offer. The reason typically given for promoting this type of behavior, is that the more investment products one has, the more that person’s portfolio is diversified. This assumes, of course, that diversification is something that should be universally desired among all investors. But does this really make sense?
At first blush, diversification seems like a good idea. In theory, when one investment declines in value, another less correlated investment should tend to rise in value, leaving the investor’s portfolio somewhat unchanged. While this should generally make folks feel better about their portfolios, to me at least, it doesn’t make a lot of sense from an investment perspective. For example, if the aim of a diversified portfolio—a likely moving definition—is to protect investors on the downside, the natural corollary to this, is that investors are giving up the potential for gains as well. And if an unchanged portfolio is the typical outcome of a diversified portfolio, why pay the huge fees of various investment products sold by larger firms? Why not just hold cash?
But I think that in some cases that this “diversification” mantra can be even worse than only holding cash. How many of your portfolios were supposed to be fully diversified over the last year, and even so, they are now worth 40-50% less than they were two years ago? Not much of a ringing endorsement, if you ask me. In times of crisis—just when diversification is needed most—all the correlations of the different investment products tend to converge to one, thereby reducing an investor’s downside protection. In this case, folks would have even been better off holding cash, and what’s more, they wouldn’t have had to pay all those fees to their “financial advisors”—a euphemism for sales person--for their various investment products.
A couple of years ago at the Berkshire Hathaway (BRK-A) annual meeting, an attendee asked Berkshire Vice-Chairman Charlie Munger a question about the merits of diversification in investing, and Munger sagely advised, “The whole secret of investment is to find places where its safe and wise not to diversify.”
If one thinks about this, what Munger is actually saying is that the notion of diversification--as most “financial advisors” interpret it--is nothing but hogwash. Rather, the advice he is imparting in the first part of that statement is that investors should search for a few businesses or securities where the margin of safety is so great—or said another way, the price is so low—that it is highly unlikely for an investor to lose money. Downside protection, in this case, is not contingent on a group esoteric correlations, but rather by the price you pay for a particular investment.
In the “wise” part of the statement, Munger is implying that if you can find a few investments with upside potential, where you understand the business or security so well that you have an edge over others, it would behoove an investor to make that a larger investment in their portfolio, as long as the price paid for the investment has a large enough margin of safety.
And, in my opinion, this approach to investing espoused by Munger is actually better than even diversification in theory, as it gives investors both downside protection as well as the potential for huge upside for their portfolio.
My best wishes to you and yours for a happy and safe Fourth of July holiday.
I welcome dialogue with my readers, so please send me any questions and comments you have. Also, if you haven’t already done so, please be sure to sign-up for my free email alerts by emailing me at BuffettInsights@gmail.com.
Justin
Copyright © 2009 BuffettInsights
The content contained in this blog represents the opinions of Mr. Fuller. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business. This content is intended solely for the entertainment of the reader, and the author.
Yet in the investment world, most folks seem to be encouraged to have one of everything off of the proverbial financial menus that larger financial firms offer. The reason typically given for promoting this type of behavior, is that the more investment products one has, the more that person’s portfolio is diversified. This assumes, of course, that diversification is something that should be universally desired among all investors. But does this really make sense?
At first blush, diversification seems like a good idea. In theory, when one investment declines in value, another less correlated investment should tend to rise in value, leaving the investor’s portfolio somewhat unchanged. While this should generally make folks feel better about their portfolios, to me at least, it doesn’t make a lot of sense from an investment perspective. For example, if the aim of a diversified portfolio—a likely moving definition—is to protect investors on the downside, the natural corollary to this, is that investors are giving up the potential for gains as well. And if an unchanged portfolio is the typical outcome of a diversified portfolio, why pay the huge fees of various investment products sold by larger firms? Why not just hold cash?
But I think that in some cases that this “diversification” mantra can be even worse than only holding cash. How many of your portfolios were supposed to be fully diversified over the last year, and even so, they are now worth 40-50% less than they were two years ago? Not much of a ringing endorsement, if you ask me. In times of crisis—just when diversification is needed most—all the correlations of the different investment products tend to converge to one, thereby reducing an investor’s downside protection. In this case, folks would have even been better off holding cash, and what’s more, they wouldn’t have had to pay all those fees to their “financial advisors”—a euphemism for sales person--for their various investment products.
A couple of years ago at the Berkshire Hathaway (BRK-A) annual meeting, an attendee asked Berkshire Vice-Chairman Charlie Munger a question about the merits of diversification in investing, and Munger sagely advised, “The whole secret of investment is to find places where its safe and wise not to diversify.”
If one thinks about this, what Munger is actually saying is that the notion of diversification--as most “financial advisors” interpret it--is nothing but hogwash. Rather, the advice he is imparting in the first part of that statement is that investors should search for a few businesses or securities where the margin of safety is so great—or said another way, the price is so low—that it is highly unlikely for an investor to lose money. Downside protection, in this case, is not contingent on a group esoteric correlations, but rather by the price you pay for a particular investment.
In the “wise” part of the statement, Munger is implying that if you can find a few investments with upside potential, where you understand the business or security so well that you have an edge over others, it would behoove an investor to make that a larger investment in their portfolio, as long as the price paid for the investment has a large enough margin of safety.
And, in my opinion, this approach to investing espoused by Munger is actually better than even diversification in theory, as it gives investors both downside protection as well as the potential for huge upside for their portfolio.
My best wishes to you and yours for a happy and safe Fourth of July holiday.
I welcome dialogue with my readers, so please send me any questions and comments you have. Also, if you haven’t already done so, please be sure to sign-up for my free email alerts by emailing me at BuffettInsights@gmail.com.
Justin
Copyright © 2009 BuffettInsights
The content contained in this blog represents the opinions of Mr. Fuller. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business. This content is intended solely for the entertainment of the reader, and the author.
Thursday, June 18, 2009
More Box Checking
A lot of you have commented on the last article I wrote, “The Box Checking Syndrome.” Some of you have agreed with me and given me some great examples of box checking in practice, and others of you have vehemently disagreed with my opinion, which I also like, as it gives me different perspectives to think about. But what really gets me excited about all the responses I have received, is that it has indicated to me that this viewpoint has struck a cord with many of you, which means, of course, that this a good debate to have.
And as I have thought more and more about the article, and more importantly all of your responses, it struck me that there are several additional examples of box checking, rather than only the “financial advisors” that I singled out in the first article. The first of these that comes to mind is the accounting industry, which I might add, Berkshire Hathaway (BRK-A) Vice-Chairman Charlie Munger regularly pontificates about each year.
In my opinion, the accounting profession--and for that matter most consultant practices--have made a huge push over the last several years for focusing entirely on a particular firm’s process of doing things—rather than asking why a particular company does things a certain way during an audit.
The reason for this, in my opinion, is not because it is better accounting, bur rather, because it is better for business for these firms to focus on process. If an accounting firm develops what it decides is “best practices” for doing something a particular way, it helps to insulate them from potential lawsuits down the road should something have run afoul during an audit. The defense thus becomes, well if everyone does this particular activity the same way, how can it be wrong? To me, at least, that’s like saying, well if everyone decides to jump off the Golden Gate Bridge, how can that be a bad idea? Doesn’t make a lot of sense now, does it?
The other main reason that I think there is a focus on process, is because it helps the margins of the accounting firms. By developing what they feel is a “best practices” process, they can, in effect, create a simple check-list that their employees can run through during an audit, without ever having to even think about if something makes sense or not. As such, these firms can hire throngs of folks right out of college, which helps to keep their compensation costs down, and effectively pay the people to check boxes off their list, as long as the process is the same. Check, check, check, you’re done, and then onto the next client. Again, any type of thought or rationality has been removed from—ironically—their process, in favor of box checking.
What I find so ironic about all this, is that every four or five years or so, there is some type of fallout or scandal in the markets, and each time most folks try to point their finger at the accounting profession. And rather than examining if the box checking culture could be the culprit, laws are simply passed which require even more “best practices,” processes, and box checking, without ever addressing the real problem. Is it any wonder that accounting shenanigans get repeated over and over again every few years?
The other industry that, in my view, is guilty of the “box checking syndrome” is the credit rating agencies. In my opinion, several of these firms simply developed a bunch of ratios for each particular industry or group of securities, and then associated a group of ratios with a particular credit rating. Then they had their analysts simply crunch a bunch of numbers, and run a bunch of stress tests, and then assign several securities or companies certain ratings, depending on what boxes were--or were not--checked.
Given what has happened in the markets over the last couple years, I think it’s fairly evident what the outcome of all this box checking was. In fact, the reputation of many credit rating firms is now on life support, at best. What makes it even worse, though, is many investors were simply checking boxes of their own, and overly relied on the credit rating firms to help them decide which investments to make. Scary, I know.
Essentially what all this box checking does is try to make shortcuts for things that require a lot of thought, analysis, and judgment. The lesson from all this is not new, as there is simply no substitute for sitting down and rolling up one’s sleeves, doing the analysis, and independently thinking about what makes sense. The bright is, though, that as long as the great majority of people keep going through life checking boxes, for those of us that don’t--and also have the wherewithal to think sensibly--there is huge opportunity.
I welcome dialogue with my readers, so please send me any questions and comments you have. Also, if you haven’t already done so, please be sure to sign-up for my free email alerts email me at buffettinsights@gmail.com.
Justin
Copyright © 2009 BuffettInsights
The content contained in this blog represents the opinions of Mr. Fuller. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business. This content is intended solely for the entertainment of the reader, and the author
And as I have thought more and more about the article, and more importantly all of your responses, it struck me that there are several additional examples of box checking, rather than only the “financial advisors” that I singled out in the first article. The first of these that comes to mind is the accounting industry, which I might add, Berkshire Hathaway (BRK-A) Vice-Chairman Charlie Munger regularly pontificates about each year.
In my opinion, the accounting profession--and for that matter most consultant practices--have made a huge push over the last several years for focusing entirely on a particular firm’s process of doing things—rather than asking why a particular company does things a certain way during an audit.
The reason for this, in my opinion, is not because it is better accounting, bur rather, because it is better for business for these firms to focus on process. If an accounting firm develops what it decides is “best practices” for doing something a particular way, it helps to insulate them from potential lawsuits down the road should something have run afoul during an audit. The defense thus becomes, well if everyone does this particular activity the same way, how can it be wrong? To me, at least, that’s like saying, well if everyone decides to jump off the Golden Gate Bridge, how can that be a bad idea? Doesn’t make a lot of sense now, does it?
The other main reason that I think there is a focus on process, is because it helps the margins of the accounting firms. By developing what they feel is a “best practices” process, they can, in effect, create a simple check-list that their employees can run through during an audit, without ever having to even think about if something makes sense or not. As such, these firms can hire throngs of folks right out of college, which helps to keep their compensation costs down, and effectively pay the people to check boxes off their list, as long as the process is the same. Check, check, check, you’re done, and then onto the next client. Again, any type of thought or rationality has been removed from—ironically—their process, in favor of box checking.
What I find so ironic about all this, is that every four or five years or so, there is some type of fallout or scandal in the markets, and each time most folks try to point their finger at the accounting profession. And rather than examining if the box checking culture could be the culprit, laws are simply passed which require even more “best practices,” processes, and box checking, without ever addressing the real problem. Is it any wonder that accounting shenanigans get repeated over and over again every few years?
The other industry that, in my view, is guilty of the “box checking syndrome” is the credit rating agencies. In my opinion, several of these firms simply developed a bunch of ratios for each particular industry or group of securities, and then associated a group of ratios with a particular credit rating. Then they had their analysts simply crunch a bunch of numbers, and run a bunch of stress tests, and then assign several securities or companies certain ratings, depending on what boxes were--or were not--checked.
Given what has happened in the markets over the last couple years, I think it’s fairly evident what the outcome of all this box checking was. In fact, the reputation of many credit rating firms is now on life support, at best. What makes it even worse, though, is many investors were simply checking boxes of their own, and overly relied on the credit rating firms to help them decide which investments to make. Scary, I know.
Essentially what all this box checking does is try to make shortcuts for things that require a lot of thought, analysis, and judgment. The lesson from all this is not new, as there is simply no substitute for sitting down and rolling up one’s sleeves, doing the analysis, and independently thinking about what makes sense. The bright is, though, that as long as the great majority of people keep going through life checking boxes, for those of us that don’t--and also have the wherewithal to think sensibly--there is huge opportunity.
I welcome dialogue with my readers, so please send me any questions and comments you have. Also, if you haven’t already done so, please be sure to sign-up for my free email alerts email me at buffettinsights@gmail.com.
Justin
Copyright © 2009 BuffettInsights
The content contained in this blog represents the opinions of Mr. Fuller. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business. This content is intended solely for the entertainment of the reader, and the author
Tuesday, June 2, 2009
The Box Checking Syndrome
If you, or perhaps you have a child, that has been in almost any school system over the past twenty years, you must be keenly aware that there has been a distinct movement away from written tests to multiple choice examinations, where all a student does is fill in an answer box. Even some students—and probably parents, too—refer to these exams not as multiple choice tests, but as “multiple guess” exams, thereby implying that there is even less thought and analysis given to the exam questions than you might already have believed.
You see, when one is forced to write out an answer to a question, on the other hand, that person is forced to grapple with all sides of a particular issue, form a cogent argument, and put it down on a piece of paper in a way that communicates their point of view to the reader. That, my friends, is a real test (no pun intended) to see if someone actually comprehends a particular concept. It is really quite obvious too. So if it is, why has this been discarded in favor of multiple guess? This reason is also quite obvious, as it is simply easier to check boxes—for both takers and graders—than to write.
And while this box checking syndrome, as I like to call it, perhaps started in schools, it has become much more prevalent elsewhere. You’ll frequent overhear people explaining to friends the reason for their doing something or even going somewhere, was that they wanted to check that box of their list in life (as if there really was some end-all be-all list). Or, when someone applies for a new position, they often spend their application process checking boxes on the Internet about their background, rather than having to write out their reasons why they desire this new role. Or, ever been to a doctor lately? Some doctors simply check off boxes to see if someone’s test scores are all in a “normal” range, and pronounce them healthy, without ever giving effect of whether those boxes or ranges really make sense for the particular person.
While these are but a few of the examples that you might readily observe today, one of the biggest offenders of box checking, in my opinion, is the investment industry. Many financial advisors—a euphemism for sales person to be sure—blindly run through their checklist of questions when they meet with a client, check-off boxes on their list based on the clients response, and then pronounce that the client should have a little bit of everything from the firm (i.e. checking all of the investment product boxes) if they want to be fully diversified. Then they move onto the next prospect and do the same thing. And this is practiced far and wide, despite, in my opinion, being utter nonsense.
This financial advisor box checking, in effect, makes the client feel as though their unique needs are being met--as if unique can be fit into a box--and that the sales person cares more about them than selling product. But what it really is, though, is a systematized approach by many larger firms to simply gather client assets. And then both the advisor and the firm hide behind this diversification—a euphemism for average—mantra, so that the even though the client shouldn’t theoretically lose a lot, they flip side is that they shouldn’t make a lot either. It’s perfect for the advisor, the clients performance will be average at best--without including the enormous downward effect of fees--which means that the client will typically not get angry at any point, and decide to fire them.
But shouldn’t most clients aspire to have better than average performance over the long-term—net of fees? And how many people who were supposed to be fully diversified, have done even worse than those that weren’t diversified over the past year? And if someone has been sold—or I should say checked the boxes—on all the types of investment products a firm has to offer, how is this unique, and how can their “advisor” actually know the intimate details of each product, and more importantly, if it is actually appropriate for the client?
I think each client or prospect should ask their particular “advisor” to write a personal essay—in plain English, no less—which describes what they have learned about a clients personal financial and life circumstances, details why that “advisor” got in the business in the first place, explains to their clients what they actually do all day (probably cold calling), and finally describe the intimate details of each investment product and why it is appropriate for this particular client.
It is then, and only then, that a client or prospect can ascertain whether or not a financial professional actually knows what they are talking about, and has the ability to mentally grapple with the various issues in each person’s unique circumstances. Anything less, and it would probably be very apparent that these “advisors” are just product of what has happened to examinations in most schools. They are simply checking boxes to try and win a clients business.
I welcome dialogue with my readers, so please send me any questions and comments you have. Also, if you haven’t already done so, please be sure to sign-up for my free email alerts from BuffettInsights by emailing me at BuffettInsights@gmail.com.
Justin
Copyright © 2009 BuffettInsights.com
The content contained in this blog represents the opinions of Mr. Fuller. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business. This content is intended solely for the entertainment of the reader, and the author
You see, when one is forced to write out an answer to a question, on the other hand, that person is forced to grapple with all sides of a particular issue, form a cogent argument, and put it down on a piece of paper in a way that communicates their point of view to the reader. That, my friends, is a real test (no pun intended) to see if someone actually comprehends a particular concept. It is really quite obvious too. So if it is, why has this been discarded in favor of multiple guess? This reason is also quite obvious, as it is simply easier to check boxes—for both takers and graders—than to write.
And while this box checking syndrome, as I like to call it, perhaps started in schools, it has become much more prevalent elsewhere. You’ll frequent overhear people explaining to friends the reason for their doing something or even going somewhere, was that they wanted to check that box of their list in life (as if there really was some end-all be-all list). Or, when someone applies for a new position, they often spend their application process checking boxes on the Internet about their background, rather than having to write out their reasons why they desire this new role. Or, ever been to a doctor lately? Some doctors simply check off boxes to see if someone’s test scores are all in a “normal” range, and pronounce them healthy, without ever giving effect of whether those boxes or ranges really make sense for the particular person.
While these are but a few of the examples that you might readily observe today, one of the biggest offenders of box checking, in my opinion, is the investment industry. Many financial advisors—a euphemism for sales person to be sure—blindly run through their checklist of questions when they meet with a client, check-off boxes on their list based on the clients response, and then pronounce that the client should have a little bit of everything from the firm (i.e. checking all of the investment product boxes) if they want to be fully diversified. Then they move onto the next prospect and do the same thing. And this is practiced far and wide, despite, in my opinion, being utter nonsense.
This financial advisor box checking, in effect, makes the client feel as though their unique needs are being met--as if unique can be fit into a box--and that the sales person cares more about them than selling product. But what it really is, though, is a systematized approach by many larger firms to simply gather client assets. And then both the advisor and the firm hide behind this diversification—a euphemism for average—mantra, so that the even though the client shouldn’t theoretically lose a lot, they flip side is that they shouldn’t make a lot either. It’s perfect for the advisor, the clients performance will be average at best--without including the enormous downward effect of fees--which means that the client will typically not get angry at any point, and decide to fire them.
But shouldn’t most clients aspire to have better than average performance over the long-term—net of fees? And how many people who were supposed to be fully diversified, have done even worse than those that weren’t diversified over the past year? And if someone has been sold—or I should say checked the boxes—on all the types of investment products a firm has to offer, how is this unique, and how can their “advisor” actually know the intimate details of each product, and more importantly, if it is actually appropriate for the client?
I think each client or prospect should ask their particular “advisor” to write a personal essay—in plain English, no less—which describes what they have learned about a clients personal financial and life circumstances, details why that “advisor” got in the business in the first place, explains to their clients what they actually do all day (probably cold calling), and finally describe the intimate details of each investment product and why it is appropriate for this particular client.
It is then, and only then, that a client or prospect can ascertain whether or not a financial professional actually knows what they are talking about, and has the ability to mentally grapple with the various issues in each person’s unique circumstances. Anything less, and it would probably be very apparent that these “advisors” are just product of what has happened to examinations in most schools. They are simply checking boxes to try and win a clients business.
I welcome dialogue with my readers, so please send me any questions and comments you have. Also, if you haven’t already done so, please be sure to sign-up for my free email alerts from BuffettInsights by emailing me at BuffettInsights@gmail.com.
Justin
Copyright © 2009 BuffettInsights.com
The content contained in this blog represents the opinions of Mr. Fuller. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business. This content is intended solely for the entertainment of the reader, and the author
Saturday, May 23, 2009
The Opportunity to Begin Anew
Not only do I look forward to May each year for the Berkshire Hathaway (BRK-A) annual meeting, but the month is much more than that too. Yes, it is the beginning of spring, and yes, the tulips are blooming, but more importantly than that, across the country thousands of students are graduating. Maybe it is all the pomp and circumstance, maybe it is all the speeches, maybe it’s the buzz that fills most schools and campuses, but whichever way it grips you, it makes this particular time of year not like any other.
The reason for this, of course, is that even though graduation is the end of an important chapter in many folks’ lives, it also offers the opportunity to start something new. For some it may symbolize an unblemished canvas that they can begin painting in any manner they see fit. Or for others, it may appear to be a road with unending opportunity. And while this privilege of starting anew is typically reserved for graduates each May, whether they be from college, high school, vocational school, or heck, even pre-school, I’d argue that in 2009, many more folks can, in fact, start thinking like graduates again.
You see, what’s happened over the past year in the economy, the investment world, politics, government, and I’d argue pretty much anything else, has caused such an upheaval, and has shell shocked so many people, that almost everyone has now been forced to reset their path to some extent, and probably more poignantly, reexamine their expectations.
And I realize that for many, this hasn’t been a pleasant experience. Businesses have lost customers. As a result, employees have lost jobs. Others have lost savings and retirement. Some have even lost their homes. And the most natural feeling to have when any of these events—or even others that I didn’t mention—occurs is to feel frightened, and to hearken back to the feeling of an easier and more comfortable time. That, in my opinion, is human nature.
What this fails to take account of, though, is that when practically everyone is forced to reset, it also has the effect of creating huge amounts of opportunity for those able to recognize it. Folks who had been unable to make changes, or breakout into something new, because the status quo was so accepted (rightly or wrongly), may now have the opportunity to freely paint their proverbial masterpiece, however they see fit.
For the great majority of people, this means that someone who has lost their job can now think about doing something else that they’ve always wanted to do, but never felt that the timing was right. Or maybe others can retrain themselves to do something that they are more passionate about pursuing. Or even others, can think about starting a business to try and capture some of the customers that existing firms inadvertently jettisoned as they retrenched. All of these are enormous opportunities that often only come around once or twice in a lifetime—if you are lucky.
What got me thinking about all this as an investor were comments made by Berkshire Hathaway Vice-Chairman Charlie Munger in Omaha a few weekends ago. Munger said, and I’m definitely paraphrasing here, that even though the current turmoil is nothing like the 1973-74 retrenchment in the economy and the markets, he knew then that it (73-74) was his time, his only time. He went on to say that unfortunately he had practically no money at that time, which, in fact, is why those times occur. Munger then provided some advice for the audience by saying, “If I were you, I wouldn’t wait for 1973 and 1974. Anytime we get an opportunity to do something that makes sense, we do that.”
And for most folks, be it in their careers, life, or investments, this might, in fact, be their time to do something that in, Munger’s words, “makes sense” for them. As an investor, maybe this means re-examining one’s financial position, and not reacting out of fear, or doing things now that they should have done two years ago to deal with today’s reality, but instead looking at their current opportunity set, and doing something that makes an enormous amount of sense for them right now.
While it seems so simple, what it also requires, in my opinion, is the emotional temperament to confidently think differently. It requires the ability to tune out all the naysayers, or the people trying to sell you product, or those trying to make you afraid of something--which, ironically, is often the same people trying to sell you things--and really start thinking again like a graduate, where the slate is clean and the possibilities are abundant. And even better, this might be the time—the only time—where one can match all these possibilities with their accumulated experience and knowledge, to, in effect, seize their day. After all, Munger’s not such a bad example to follow, as he seized his and became enormously successful.
It is my hope that you—as well as all of today’s graduates--will be too.
I welcome dialogue with my readers, so please send me any questions and comments you have. Also, if you haven’t already done so, please be sure to sign-up for my free email alerts emailing me at bufffettinsights@gmail.com.
Justin
Copyright © 2009 BuffettInsights
The content contained in this blog represents the opinions of Mr. Fuller. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business. This content is intended solely for the entertainment of the reader, and the author
The reason for this, of course, is that even though graduation is the end of an important chapter in many folks’ lives, it also offers the opportunity to start something new. For some it may symbolize an unblemished canvas that they can begin painting in any manner they see fit. Or for others, it may appear to be a road with unending opportunity. And while this privilege of starting anew is typically reserved for graduates each May, whether they be from college, high school, vocational school, or heck, even pre-school, I’d argue that in 2009, many more folks can, in fact, start thinking like graduates again.
You see, what’s happened over the past year in the economy, the investment world, politics, government, and I’d argue pretty much anything else, has caused such an upheaval, and has shell shocked so many people, that almost everyone has now been forced to reset their path to some extent, and probably more poignantly, reexamine their expectations.
And I realize that for many, this hasn’t been a pleasant experience. Businesses have lost customers. As a result, employees have lost jobs. Others have lost savings and retirement. Some have even lost their homes. And the most natural feeling to have when any of these events—or even others that I didn’t mention—occurs is to feel frightened, and to hearken back to the feeling of an easier and more comfortable time. That, in my opinion, is human nature.
What this fails to take account of, though, is that when practically everyone is forced to reset, it also has the effect of creating huge amounts of opportunity for those able to recognize it. Folks who had been unable to make changes, or breakout into something new, because the status quo was so accepted (rightly or wrongly), may now have the opportunity to freely paint their proverbial masterpiece, however they see fit.
For the great majority of people, this means that someone who has lost their job can now think about doing something else that they’ve always wanted to do, but never felt that the timing was right. Or maybe others can retrain themselves to do something that they are more passionate about pursuing. Or even others, can think about starting a business to try and capture some of the customers that existing firms inadvertently jettisoned as they retrenched. All of these are enormous opportunities that often only come around once or twice in a lifetime—if you are lucky.
What got me thinking about all this as an investor were comments made by Berkshire Hathaway Vice-Chairman Charlie Munger in Omaha a few weekends ago. Munger said, and I’m definitely paraphrasing here, that even though the current turmoil is nothing like the 1973-74 retrenchment in the economy and the markets, he knew then that it (73-74) was his time, his only time. He went on to say that unfortunately he had practically no money at that time, which, in fact, is why those times occur. Munger then provided some advice for the audience by saying, “If I were you, I wouldn’t wait for 1973 and 1974. Anytime we get an opportunity to do something that makes sense, we do that.”
And for most folks, be it in their careers, life, or investments, this might, in fact, be their time to do something that in, Munger’s words, “makes sense” for them. As an investor, maybe this means re-examining one’s financial position, and not reacting out of fear, or doing things now that they should have done two years ago to deal with today’s reality, but instead looking at their current opportunity set, and doing something that makes an enormous amount of sense for them right now.
While it seems so simple, what it also requires, in my opinion, is the emotional temperament to confidently think differently. It requires the ability to tune out all the naysayers, or the people trying to sell you product, or those trying to make you afraid of something--which, ironically, is often the same people trying to sell you things--and really start thinking again like a graduate, where the slate is clean and the possibilities are abundant. And even better, this might be the time—the only time—where one can match all these possibilities with their accumulated experience and knowledge, to, in effect, seize their day. After all, Munger’s not such a bad example to follow, as he seized his and became enormously successful.
It is my hope that you—as well as all of today’s graduates--will be too.
I welcome dialogue with my readers, so please send me any questions and comments you have. Also, if you haven’t already done so, please be sure to sign-up for my free email alerts emailing me at bufffettinsights@gmail.com.
Justin
Copyright © 2009 BuffettInsights
The content contained in this blog represents the opinions of Mr. Fuller. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business. This content is intended solely for the entertainment of the reader, and the author
Monday, May 18, 2009
Berkshire Hathaway Re-allocates Capital
At the Berkshire Hathaway (BRK-A) annual meeting a couple of weeks ago, Chairman Warren Buffett was very enthusiastic about investing in well run banks, and even said, and I paraphrase here, that if there was one stock right now that he would put the bulk of his net worth in, it was Wells Fargo (WFC). And not surprisingly, now with Berkshire releasing its first quarter From-13F, Buffett has evidently been putting his money where his mouth is, as the conglomerate re-allocated some of its equity portfolio, and upped it’s stake in Wells, among others.
Given the continued tumult in markets during the first quarter, which created some potentially bargain prices in businesses that rarely become bargains, it appears as though Berkshire became relatively opportunistic, and added to its holdings in a number of good businesses. To pay for these added stakes, Berkshire sold some of its position in a few other businesses, two of which we have already known that Berkshire was in the process of reducing.
It is also worth noting—and as I had mentioned above—that it appears as though Berkshire has indeed re-allocated some capital among the securities it owns rather than only using new money in its portfolio. This is likely a consequence of Berkshire having a number of other cash commitments, one of which was putting capital into Swiss Re, and then also helping Dow Chemical (Dow) finance its acquisition of Rohm & Haas on April 1. In addition, Buffett’s desire to have gobs of cash on hand for insurance regulatory purposes, and to also take advantage of potentially new investment or acquisition opportunities, is likely behind some of the efforts to re-allocate the portfolio.
Increased Stakes
During the first quarter, Berkshire upped its stake in two banks that it already owned, the aforementioned Wells Fargo as well as US Bancorp (USB), both of which, in my opinion, are high on the quality scale as far as how banks are run. Berkshire also added to its stake in Johnson & Johnson (JNJ), which it had sold some of last fall to help pay for its preferred shares in General Electric (GE) and Goldman Sachs (GS). In fact, Buffett also recently said that he didn’t want to sell part of Berkshire’s J&J position, but that he wanted to have some additional cash on hand at the holding company when he made those two large preferred stock deals. Given that during the first quarter J&J’s share price declined to levels that it hadn’t seen in at least five years, it isn’t surprising, to me at least, that Berkshire bought back in.
Berkshire also continues to accumulate shares in railroads, having continued to up its position in Burlington Northern (BNI) and Union Pacific (UNP). As for the former, Berkshire owns over 20% of the firm, and over the last year has aggressively added to its position, and also wrote some put options on it, which was effectively going long the businesses. On the latter, Berkshire owns a little bit more than 2% of the business based on this most recent filing. As I’ve written about previously, it appears as though the competitive positioning of railroads vis-à-vis truckers has slowly improved, after decades of brutal competition. What is more, it appears, in my opinion, that railroads have also become somewhat more efficient with double-decker trains and being able to load containers from ships right onto rail cars. This may, or may not, have factored into Berkshire’s decision, but with the decline in economic activity over the past years, the price for railroads—and most other transportation or shipping stocks--has also declined, which may have continued to make the price for the railroads somewhat attractive to a long-term buyer like Berkshire.
Finally, Berkshire increased its stake in Nalco Holdings (NLC), which is a business that Berkshire had established a position in last quarter. Nalco is a business that provides water treatment services to its customers.
Here is a summary of the businesses that Berkshire increased its position in last quarter:
• Wells Fargo
• US Bancorp
• Burlington Northern
• Union Pacific
• Nalco Holdings
Decreased Stakes
During the first quarter Berkshire continued to reduce its position in Constellation Energy (CEG). This was not unexpected, as Berkshire’s Mid-American subsidiary attempted to purchase all of Constellation last fall, when the Baltimore utility ran into problems in its energy-trading book, and was in desperate need of a cash infusion to meet collateral calls. Ultimately Mid-American lost out on purchasing Constellation to a deal from a French utility, but as a break-up fee, Berkshire received both cash and shares in Constellation as consideration. Since then, Berkshire has been continuously selling its stake in the utility.
In Berkshire’s most recent annual report, it also indicated that it had been selling some of its position in ConocoPhillips (COP), as the purchase price of some of the lots was so high from last year, that those lots were deemed to be permanently impaired by accounting tests. As such, Berkshire sold some of its stake in Conoco, which also created substantial tax losses, which should help to shield some of Berkshire’s future gains from taxes.
The two decreases that were not disclosed until the filing of this most recent Form 13-F were Berkshire’s position in used car retailer Carmax (KMX), as well as its stake in managed care company, UnitedHealth Group (UNH). In my opinion, Carmax is a business that recently has struggled with declining inventory values of used cars as well as the effective closing of some securitization markets. That said, Carmax could also benefit from the recent large automaker dealer closings, which longer-term, could allow Carmax gain share in the used car market. As of the first quarter filing, Berkshire still had a substantial stake in Carmax, but this is the second quarter in a row where Berkshire has trimmed its position in the business.
As for UnitedHealth, the managed care company continues to struggle with declining enrollments thanks to higher unemployment, and will likely continues to be caught in the cross-hairs, as the government seeks to restructure the health care industry. Similar to Carmax, this is the second quarter in a row that Berkshire has reduced its position in UnitedHealth.
Here is a summary of the businesses that Berkshire decreased its position in last quarter:
• Constellation Energy
• ConocoPhillips
• Carmax
• UnitedHealth Group
Unchanged Positions
Despite the activity above, the bulk of Berkshire’s equity portfolio was unchanged from last quarter, and I’ve listed below those positions that Berkshire continues to own based on its most recent Form 13-F.
• American Express (AXP)
• Bank of America (BAC)
• Coca-Cola (KO)
• Comcast (CMCSA)
• Comdisco (CDCO)
• Costco (COST)
• Eaton (ETN)
• Gannett (GCI)
• General Electric (GE)
• GlaxoSmithKline (GSK)
• Home Depot (HD)
• Ingersoll-Rand (IR)
• Iron Mountain (IRM)
• Kraft (KFT)
• Lowes (LOW)
• M&T Bank (MTB)
• Moodys (MCO)
• Nike (NKE)
• Norfolk Southern (NSC)
• NRG Energy (NRG)
• Procter & Gamble (PG)
• Sanofi-Aventis (SNY)
• SunTrust Bank (STI)
• Torchmark (TMK)
• United States Gypsum (USG)
• UPS (UPS)
• Wabco Holdings (WBC)
• Wal-Mart (WMT)
• Washington Post (WPO)
• Wellpoint (WLP)
• Wesco Financial (WSC)
I welcome dialogue with my readers, so please send me any questions and comments you have. Also, if you haven’t already done so, please be sure to sign-up for my free email alerts by emailing me at buffettinsights@gmail.com.
Justin
Copyright © 2009 BuffettInsights.com
The content contained in this blog represents the opinions of Mr. Fuller. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business. This content is intended solely for the entertainment of the reader, and the author.
Given the continued tumult in markets during the first quarter, which created some potentially bargain prices in businesses that rarely become bargains, it appears as though Berkshire became relatively opportunistic, and added to its holdings in a number of good businesses. To pay for these added stakes, Berkshire sold some of its position in a few other businesses, two of which we have already known that Berkshire was in the process of reducing.
It is also worth noting—and as I had mentioned above—that it appears as though Berkshire has indeed re-allocated some capital among the securities it owns rather than only using new money in its portfolio. This is likely a consequence of Berkshire having a number of other cash commitments, one of which was putting capital into Swiss Re, and then also helping Dow Chemical (Dow) finance its acquisition of Rohm & Haas on April 1. In addition, Buffett’s desire to have gobs of cash on hand for insurance regulatory purposes, and to also take advantage of potentially new investment or acquisition opportunities, is likely behind some of the efforts to re-allocate the portfolio.
Increased Stakes
During the first quarter, Berkshire upped its stake in two banks that it already owned, the aforementioned Wells Fargo as well as US Bancorp (USB), both of which, in my opinion, are high on the quality scale as far as how banks are run. Berkshire also added to its stake in Johnson & Johnson (JNJ), which it had sold some of last fall to help pay for its preferred shares in General Electric (GE) and Goldman Sachs (GS). In fact, Buffett also recently said that he didn’t want to sell part of Berkshire’s J&J position, but that he wanted to have some additional cash on hand at the holding company when he made those two large preferred stock deals. Given that during the first quarter J&J’s share price declined to levels that it hadn’t seen in at least five years, it isn’t surprising, to me at least, that Berkshire bought back in.
Berkshire also continues to accumulate shares in railroads, having continued to up its position in Burlington Northern (BNI) and Union Pacific (UNP). As for the former, Berkshire owns over 20% of the firm, and over the last year has aggressively added to its position, and also wrote some put options on it, which was effectively going long the businesses. On the latter, Berkshire owns a little bit more than 2% of the business based on this most recent filing. As I’ve written about previously, it appears as though the competitive positioning of railroads vis-à-vis truckers has slowly improved, after decades of brutal competition. What is more, it appears, in my opinion, that railroads have also become somewhat more efficient with double-decker trains and being able to load containers from ships right onto rail cars. This may, or may not, have factored into Berkshire’s decision, but with the decline in economic activity over the past years, the price for railroads—and most other transportation or shipping stocks--has also declined, which may have continued to make the price for the railroads somewhat attractive to a long-term buyer like Berkshire.
Finally, Berkshire increased its stake in Nalco Holdings (NLC), which is a business that Berkshire had established a position in last quarter. Nalco is a business that provides water treatment services to its customers.
Here is a summary of the businesses that Berkshire increased its position in last quarter:
• Wells Fargo
• US Bancorp
• Burlington Northern
• Union Pacific
• Nalco Holdings
Decreased Stakes
During the first quarter Berkshire continued to reduce its position in Constellation Energy (CEG). This was not unexpected, as Berkshire’s Mid-American subsidiary attempted to purchase all of Constellation last fall, when the Baltimore utility ran into problems in its energy-trading book, and was in desperate need of a cash infusion to meet collateral calls. Ultimately Mid-American lost out on purchasing Constellation to a deal from a French utility, but as a break-up fee, Berkshire received both cash and shares in Constellation as consideration. Since then, Berkshire has been continuously selling its stake in the utility.
In Berkshire’s most recent annual report, it also indicated that it had been selling some of its position in ConocoPhillips (COP), as the purchase price of some of the lots was so high from last year, that those lots were deemed to be permanently impaired by accounting tests. As such, Berkshire sold some of its stake in Conoco, which also created substantial tax losses, which should help to shield some of Berkshire’s future gains from taxes.
The two decreases that were not disclosed until the filing of this most recent Form 13-F were Berkshire’s position in used car retailer Carmax (KMX), as well as its stake in managed care company, UnitedHealth Group (UNH). In my opinion, Carmax is a business that recently has struggled with declining inventory values of used cars as well as the effective closing of some securitization markets. That said, Carmax could also benefit from the recent large automaker dealer closings, which longer-term, could allow Carmax gain share in the used car market. As of the first quarter filing, Berkshire still had a substantial stake in Carmax, but this is the second quarter in a row where Berkshire has trimmed its position in the business.
As for UnitedHealth, the managed care company continues to struggle with declining enrollments thanks to higher unemployment, and will likely continues to be caught in the cross-hairs, as the government seeks to restructure the health care industry. Similar to Carmax, this is the second quarter in a row that Berkshire has reduced its position in UnitedHealth.
Here is a summary of the businesses that Berkshire decreased its position in last quarter:
• Constellation Energy
• ConocoPhillips
• Carmax
• UnitedHealth Group
Unchanged Positions
Despite the activity above, the bulk of Berkshire’s equity portfolio was unchanged from last quarter, and I’ve listed below those positions that Berkshire continues to own based on its most recent Form 13-F.
• American Express (AXP)
• Bank of America (BAC)
• Coca-Cola (KO)
• Comcast (CMCSA)
• Comdisco (CDCO)
• Costco (COST)
• Eaton (ETN)
• Gannett (GCI)
• General Electric (GE)
• GlaxoSmithKline (GSK)
• Home Depot (HD)
• Ingersoll-Rand (IR)
• Iron Mountain (IRM)
• Kraft (KFT)
• Lowes (LOW)
• M&T Bank (MTB)
• Moodys (MCO)
• Nike (NKE)
• Norfolk Southern (NSC)
• NRG Energy (NRG)
• Procter & Gamble (PG)
• Sanofi-Aventis (SNY)
• SunTrust Bank (STI)
• Torchmark (TMK)
• United States Gypsum (USG)
• UPS (UPS)
• Wabco Holdings (WBC)
• Wal-Mart (WMT)
• Washington Post (WPO)
• Wellpoint (WLP)
• Wesco Financial (WSC)
I welcome dialogue with my readers, so please send me any questions and comments you have. Also, if you haven’t already done so, please be sure to sign-up for my free email alerts by emailing me at buffettinsights@gmail.com.
Justin
Copyright © 2009 BuffettInsights.com
The content contained in this blog represents the opinions of Mr. Fuller. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business. This content is intended solely for the entertainment of the reader, and the author.
Monday, May 11, 2009
Berkshire Hathaway First Quarter Earnings
On Friday, Berkshire Hathaway (BRK-A) reported first quarter earnings, which, not unexpectedly, were somewhat weak, given the current global economic downturn. In aggregate, Berkshire posted its first quarterly loss since 2001, and while I think the near term could remain challenging for many of the company’s businesses, longer-term Berkshire should emerge even stronger, given the current opportunities for Chairman Warren Buffett to put more capital to work, as well as the potential for some of the conglomerate’s businesses to gain market share.
Overall, Berkshire posted a net loss of almost $1.5 billion in the first quarter. This was primarily driven by write-downs on the conglomerate’s equity holdings of Conoco Philips (COP), as well as declines in some of its derivative positions. The latter are, for the most part, accounting, and not cash, losses, though Berkshire has begun to pay out losses approximating $675 million during the first quarter on some of its high yield credit default swaps (CDS). Since the end of the quarter, Berkshire paid another $450 million of losses on these contracts. As for Conoco, while the writedown is never a good thing, the losses should also allow Berkshire to shield some of its potential future gains from taxes.
Most of Berkshire’s operating business had fairly steep revenue declines during the quarter, and profits fell even more. This isn’t surprising given that many of these businesses are tied to the consumer. The declines were broad based for the most part, though McLane’s revenues held-up, and were relatively flat on the quarter. NetJets probably had the sharpest decline, posting a net loss of $96 million on the quarter, thanks, in part, to $55 million of writedowns of aircraft.
Despite these challenges, not all of Berkshire’s businesses were weak. The insurance businesses produced fairly good results, primarily led by auto-insurer Geico. As consumers have retrenched and examined their expenditures, many have turned to Geico to try and reduce their auto-insurance costs. As such, Geico’s policies-in-force increased at a healthy 10.4% clip on the quarter to 430,000, as the company continues to gain share. In addition, premiums in the Berkshire Hathaway Reinsurance Group increased thanks to a retroactive reinsurance contract with Swiss Re, as well as the continued premium inflows from an already existing pro-rata reinsurance contract with Swiss Re. These contracts have helped push Berkshire’s float—insurance premiums collected but not yet paid as claims—to $60 billion. The utility businesses also produced good results.
On the investing side of the house, and as I’ve written about previously, Berkshire invested 3 billion Swiss Francs in Swiss Re during the quarter, which likely helped to bolster Swiss Re’s ratings during a time of stress for the company. In addition, on April 1, after the first quarter closed, Berkshire invested $3 billion in convertible preferred stock in Dow Chemical (DOW), which helped Dow close its acquisition of Rohm & Haas. Taking account of the Dow deal, Berkshire now has around $20 billion of cash on hand for insurance regulatory purposes and additional investments.
Not surprisingly, Berkshire’s equity holdings, in aggregate, declined during the quarter, given the continued tumult in markets. This, along with the net loss, helped push Berkshire’s book value per share down by approximately 6% during the quarter to about $66,330 per each class-A share.
You might also be interested to know that this newsletter was mentioned in the following Associated Press article, which I have linked here.
I welcome dialogue with my readers, so please send me any questions and comments you have. Also, if you haven’t already done so, please be sure to sign-up for my free email alerts from buffettologist.com by emailing me at buffettinsights@gmail.com.
Copyright 2009 buffettinsights.blogspot.com
Justin
The content contained in this blog represents the opinions of Mr. Fuller. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business. This content is intended solely for the entertainment of the reader, and the author.
Overall, Berkshire posted a net loss of almost $1.5 billion in the first quarter. This was primarily driven by write-downs on the conglomerate’s equity holdings of Conoco Philips (COP), as well as declines in some of its derivative positions. The latter are, for the most part, accounting, and not cash, losses, though Berkshire has begun to pay out losses approximating $675 million during the first quarter on some of its high yield credit default swaps (CDS). Since the end of the quarter, Berkshire paid another $450 million of losses on these contracts. As for Conoco, while the writedown is never a good thing, the losses should also allow Berkshire to shield some of its potential future gains from taxes.
Most of Berkshire’s operating business had fairly steep revenue declines during the quarter, and profits fell even more. This isn’t surprising given that many of these businesses are tied to the consumer. The declines were broad based for the most part, though McLane’s revenues held-up, and were relatively flat on the quarter. NetJets probably had the sharpest decline, posting a net loss of $96 million on the quarter, thanks, in part, to $55 million of writedowns of aircraft.
Despite these challenges, not all of Berkshire’s businesses were weak. The insurance businesses produced fairly good results, primarily led by auto-insurer Geico. As consumers have retrenched and examined their expenditures, many have turned to Geico to try and reduce their auto-insurance costs. As such, Geico’s policies-in-force increased at a healthy 10.4% clip on the quarter to 430,000, as the company continues to gain share. In addition, premiums in the Berkshire Hathaway Reinsurance Group increased thanks to a retroactive reinsurance contract with Swiss Re, as well as the continued premium inflows from an already existing pro-rata reinsurance contract with Swiss Re. These contracts have helped push Berkshire’s float—insurance premiums collected but not yet paid as claims—to $60 billion. The utility businesses also produced good results.
On the investing side of the house, and as I’ve written about previously, Berkshire invested 3 billion Swiss Francs in Swiss Re during the quarter, which likely helped to bolster Swiss Re’s ratings during a time of stress for the company. In addition, on April 1, after the first quarter closed, Berkshire invested $3 billion in convertible preferred stock in Dow Chemical (DOW), which helped Dow close its acquisition of Rohm & Haas. Taking account of the Dow deal, Berkshire now has around $20 billion of cash on hand for insurance regulatory purposes and additional investments.
Not surprisingly, Berkshire’s equity holdings, in aggregate, declined during the quarter, given the continued tumult in markets. This, along with the net loss, helped push Berkshire’s book value per share down by approximately 6% during the quarter to about $66,330 per each class-A share.
You might also be interested to know that this newsletter was mentioned in the following Associated Press article, which I have linked here.
I welcome dialogue with my readers, so please send me any questions and comments you have. Also, if you haven’t already done so, please be sure to sign-up for my free email alerts from buffettologist.com by emailing me at buffettinsights@gmail.com.
Copyright 2009 buffettinsights.blogspot.com
Justin
The content contained in this blog represents the opinions of Mr. Fuller. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business. This content is intended solely for the entertainment of the reader, and the author.
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