WEB:The Oracle of Omaha- Warren Buffett

» stocksystm - Re: Re: WEB: Nothin but a very rich chicken thief.

-- posted by stocksystm

» Kirk - Emperor Buffett has no clothes

Emperor Buffett has no clothes
http://www2.marketwatch.com/news/story.a...

His buy-and-hold strategy deprives investors of useful tools
By Thomas Kostigen, CBS.MarketWatch.com
Last Update: 8:34 PM ET March 15, 2004

SANTA MONICA, Calif. (CBS.MW) -- Warren Buffett may be the most overrated money manager in history.

Last year, his investment vehicle Berkshire Hathaway (BRKA: news, chart, profile) (BRKB: news, chart, profile) underperformed the Standard & Poor's 500 Index by nearly 8 percentage points. Some $36 billion of his holdings are in cash, or cash equivalents. He sidestepped the dot.com bubble (and all those gains too). He barely participates in the technology sector (besides a reported throw-away personal ownership of 100 shares of Microsoft). And his biggest claim to fame is: buy and hold, otherwise known as value investing.

Any chimp can buy and hold an investment. As any money manager will tell you, the art to managing money is in the sale. But Buffett hasn't sold well either, as he admitted in his most recent shareholder letter: "We are neither enthusiastic nor negative about the portfolio we hold. We own pieces of excellent businesses -- all of which had good gains in intrinsic value last year -- but their current prices reflect their excellence. The unpleasant corollary to this conclusion is that I made a big mistake in not selling several of our larger holdings during The Great Bubble. If these stocks are fully priced now, you may wonder what I was thinking four years ago when their intrinsic value was lower and their prices far higher. So do I."

Berkshire Hathaway bought home manufacturer Clayton Homes and Wal-Mart distribution unit McLane. Monday it joined to lead a group acquiring Safeco. See story. Its biggest holdings are American Express (AXP: news, chart, profile), Coca-Cola (KO: news, chart, profile), Gillette (G: news, chart, profile), Moody's (MCO: news, chart, profile), H&R Block (HRB: news, chart, profile) and The Washington Post (WPO: news, chart, profile).

To be sure, Buffett's portfolio is "safe." But when you are paying nearly $100,000 per share for Berkshire Hathaway stock, (about $3,000 per shares for B class), there should be some more zip to your portfolio.

No hedging, no derivatives, no alternative structures or fancy trading can be found at Berkshire Hathaway. Indeed, it wasn't until two years ago that Buffett even decided to buy foreign currencies.

Buffett has, of course, been called out before. During the tech boom of the 1990s, he was called a "has been" and someone who, according to Technology Investor Magazine, missed the "silicon, wireless, DSL, cable and biotech revolutions."

Options have expanded

These too are different times, different from the 1960s and 1970s when Buffett's buy-and-hold strategy was "ahead of its time." Now, international markets can be accessed through cutting-edge trading techniques to acquire positions in companies that may be better performers than those here in the U.S.

Shouldn't sophisticated investors be paying a money manager to utilize the best the securities markets have to offer? Shouldn't that include customized securities, innovative structures, facile trading, deep research and dead-on forecasting? Shouldn't these be the tools of the trade for "the best money manager in the world?"

How embarrassing to underperform the S&P in today's day and age. But maybe that's the problem; Buffett doesn't look at the capital markets as today's day and age. He invests for the long-term -- too long, in my opinion.

We all know trading the market is a greater risk than buying the market. However, participation in the equity market in any form incurs risk. (It's called equity risk premium, and it's the risk one expects to take by investing in the stock market versus risk-free investments such as Treasury bonds.) For this, investors expect to be compensated by increased return.

By mitigating risk and investment possibilities, Buffett has boxed himself into a corner. He admits as much in this year's much-scrutinized shareholder letter released earlier this month: "We've found it hard to find significantly undervalued stocks." And several years ago, he wrote this about his lack of technology knowledge: "In effect, that's a 7- or 8-foot bar that I can't clear. There are people who can, but I can't."

Buffett has set the bar too low for himself and his investors. And he knows it. "Unless we achieve gains in per-share intrinsic value in the future that outdo the S&P's performance, (Vice Chair Charlie Munger) and I will be adding nothing to what you can accomplish on your own."

That's a sad admission.

The 'oracle' is 'so yesterday'

With a portfolio that is about as fancily put together as my father's Oldsmobile, he is outdated.

Coca-Cola? Gillette? Wells Fargo (WFC: news, chart, profile)? Gee whiz.

Take a look at the returns garnered by the top strategists tracked by the Hulbert Financial Digest, a service of CBS MarketWatch. Take a look at the top hedge fund managers' rates of return. Or even take a look at an investment in water for the past seven years. Compared to any of these benchmarks, Buffett is sinking.

At 73, Buffett sounds dire: "We are certain Berkshire's performance into the future will fall far short of what it has been in the past," he writes. Ah, but he does philosophize about security valuations: "Yesterday's weeds are today being priced as flowers." That's something you won't find even on the back of a Lipton tea bag.

Here, I'll say it: The emperor has no clothes, and the Oracle of Omaha ain't all that.

-- posted by Kirk

» Normxxx - Where Are All The Dot.com Billionaires?

It's always fashionable to mock WB, but the bottom line is that, over 40 years, BRKA has gone from under $8 to over $93000 currently (far outperforming the go-go stock loaded S&P) for an average annual gain of 22.2%. Moreover, the only drawdown he has had since 1965 when he took over was -6.2% in 2001 (and that was the year his re-insurance company paid for the twin towers)! He managed to sail through two major bear markets almost completely unscathed. His risk-adjusted gains would dwarf those of the S&P. Even not adjusted for risk, he is way ahead of the S&P.

-- posted by Normxxx

» Kirk - Re: Where Are All The Dot.com Billionaires?

Well, the writer's flaw was easily seen with this quote:

How embarrassing to underperform the S&P in today's day and age. But maybe that's the problem; Buffett doesn't look at the capital markets as today's day and age. He invests for the long-term -- too long, in my opinion.

As for Dot.com billionaiares. I believe Bill Gates is ahead of WEB on the list.

I just pulled out my Copy of Forbes showing the Richest in the World... Forbes 400.

Top 10

Bill Gates $46B - MSFT
WEB $36B
Paul Allen $22B - MSFT
5 Waltons worth $20.5B each, so Sam would be #1 if alive
Larry Ellison $18B (Oracle)
Michael Dell $13B (Dell PC)

So WEB is no slouch but I see 4 on the list that have come along much later than Buffett...making their fortunes in the last 15 years...

Balmer (MSFT) is worth 12.2B
Omidyar $6.9B eBay
Bezos $5.1B from Amazon (not a bad start for selling CDs and Books)
Gordon More worth $5B - Intel
2 guys from SAS worth $3.2B combined
Steve Jobs $2.3B - Aple and Pixar

Many new technology investors are near the top.... and they took far fewer years to get there.

Still, I believe WEB is a great investor.

-- posted by Kirk

» Kirk - Berkshire Hathaway deserves tougher scrutiny

This is the first contrarian look at BRK that's ever been brought to my attention. I googled and could not find original source link.
____________________________________________
Risky Business

Warren Buffett's Berkshire Hathaway deserves tougher scrutiny

By MARK R. HAKE

BERKSHIRE HATHAWAY shareholders and other followers ought to pay more attention to what Warren Buffett does and less to what he says. First, let's look at Buffett's track record. The cover page of his annual shareholder letter shows a remarkable outperformance by Berkshire Hathaway versus the Standard & Poor's 500 index. However, this record measures Berkshire's book-value gains against gains in a stock-price index.

That seems a bit like comparing apples to oranges. Why not measure Berkshire's book-value gains against the book-value gains in the S&P?

There is a footnote in the letter that implies that Berkshire's performance is handicapped by having to pay taxes whereas the S&P index doesn't pay taxes. This is true in itself, but again it is based on an unfair comparison. Surely Buffett meant that, despite the fact that the S&P 500 companies in the index pay taxes, the S&P 500 index itself doesn't pay taxes. Now Berkshire does pay taxes, albeit not as much as most other S&P 500 companies (more on this later). He shouldn't imply Berkshire is somehow handicapped.

On the other hand, perhaps it is: Berkshire has recently had a lousy track record. Look at its year-end shareholders' equity in the table nearby. It demonstrates a compound annual rate of return of just 6.2% over the past five years -- about what shareholders would make if they were allowed to enter and exit Berkshire Hathaway at book value, as in an open-ended mutual fund. The S&P 500 book value had slightly better gains -- roughly 6.5% annually over the past five years. And investors could have done almost as well holding five- year Treasuries (which were paying 4.85% at the end of 1998). Certainly there would have been much less risk. In addition, the Berkshire book-value return would not have compensated adequately for the risks taken.

Although Buffett's shareholder letter goes on for two pages about publicly traded investments, there is no real reporting of investment-management performance -- not one word about the public securities' annual returns. Buffett provides the bare minimum required, like realized gains, base cost and cumulative unrealized investment gains. If Berkshire were ever to register as an investment company, it would have to allow investors to see the actual rate of return for a particular year in both the equity and fixed-income portfolios.

With $180 billion in assets at the end of 2003, Berkshire Hathaway is about 1.8% of the S&P 500 market capitalization ($10.163 trillion). Leaving out half of institutional investors' S&P 500 holdings as being permanent (i.e. half of 64.5% held by institutions), Berkshire's assets are 2.5% of the S&P 500's free float. Taking into account his investible-universe criteria, his assets would be 5% of the remaining free float. No wonder Buffett increased his investments in private equities and has begun investing in foreign stocks, currencies, junk bonds, silver and the like over the past several years. What's next, real estate?

What about the returns on these investments? Don't ask, he won't tell. (Buffett has also written that one should be comfortable holding onto a stock for a long period without needing interim quotations.) One issue is that he never sells, so there is no benchmark internal rate of return that can be independently verified and measured. Most private-equity firms, for example, tend to hold their company investments for 7 to 10 years and then either sell, liquidate, spin-off or shut down the companies, so that a real "cash on cash" rate of return can be ascertained. Not so with Buffett. It would go against his buy-and-hold creed.

Review the simplified analysis of Berkshire Hathaway at the top of this column. Private companies are now 47% of Berkshire Hathaway's assets, and almost 110% of its equity (derived by dividing the total private-company assets by the shareholder equity). His shareholders must simply trust him on these investments' valuation There is only a little bit of reporting by Buffett on the returns on his private- company returns on equity. Since the private-company information is quite complex, it is almost impossible to ascertain how well this side of his business is doing compared with the investment portfolio side.

Buffett has begun reporting a separate balance sheet and net income for the "manufacturing, service and retailing operations." Based on that information, it appears that this segment produced a return on equity of 9.59% in 2003. But that begs the question: What was the return on equity of the insurance, finance, MidAmerican Energy and investment assets? The information is not clearly laid out.

Buffett has steadily followed an accumulation, almost hoarding, strategy with regard to his main public- and private-company investments. He has ruled out a number of value-creating strategies that have consistently been shown to benefit shareholders, such as paying a dividend (especially now that tax laws favor it), spinning off underperforming assets, or carving out some private-company assets by selling and listing a portion on public markets.

It seems ironic, to put it politely, that Buffett advocates the independence of mutual funds' boards in his annual report. Berkshire's board is full of his friends and family members, and some even have significant, related-party transactions with Berkshire -- for example, Walter Scott Jr. and MidAmerican Energy. Also, he talks about the large amount of taxes that Berkshire pays, but fails to mention that, as a percent of pretax profits, Berkshire is actually paying a lower amount than the average company in the S&P 500. Remember, mutual funds are required to pay out all realized gains and earnings to shareholders -- who must pay tax on them -- but Berkshire Hathaway is not technically considered a mutual fund and so is allowed to retain all its earnings. Shareholders get a tax- free ride.

There are several other risks that shareholders of Berkshire Hathaway are taking, perhaps unknowingly, by following Buffett's major strategies and policies:

• Berkshire's overall goal seems to be the reinsurer of last resort for other reinsurers, so a massive terrorist attack on the U.S. or other disaster of unprecedented size could wipe out a good portion of Berkshire's liquid assets -- or the liquid portion of its equity.

• Any major tax-law change or regulatory change adversely affecting companies with large deferred tax liabilities, retained earnings, or investment-company status could dramatically affect Berkshire's fortunes.

• The inbred nature of his board could cause trouble for the company down the road when Berkshire makes a mistake. Who, in fact, does Buffett really report to? Who will even challenge him on the board? Berkshire is basically run like a family company and shareholders are simply along for the ride.

• The cult-like following that Buffett has attracted among money managers, regulators, and the press is a bad sign. Everyone drinks his Kool-Aid.

• Buffett will not live forever, and his sudden death could expose the company to forces that his successors could not control. Would the stock lose its premium valuation -- and would there be pressure on new management to provide a more transparent rate of return?

Warren Buffett is a great, investor and has made a lot of money for his investors. If things go as they have in the past, his shareholders should continue to make a good deal of money. But to follow any great investor uncritically is a risky business. That's why Berkshire Hathaway could be a risky investment.

MARK R. HAKE is a small-cap value manager and general partner of Hake Partnership in Scottsdale, Ariz.

FYI: BRK Article was from this week's Barron's.

-VViz

-- posted by Kirk

» Normxxx - Buffett Criticizes Hedge Funds

By Philip Klein | Sat May 1, 6:28 PM ET

OMAHA, Neb. (Reuters) - Warren Buffett on Saturday criticized hedge funds and warned of the dangers of derivatives and looming inflation in front of nearly 20,000 shareholders who trekked to Omaha, Nebraska for the annual meeting of his Berkshire Hathaway Inc. (NYSE:BRKA).

Buffett, the world's second richest person, took questions from shareholders for nearly six hours along with his longtime partner, Charlie Munger. He also responded to shareholder groups who criticized his role on the board of directors at Coca-Cola Co. (NYSE:KO). Buffett responded to critics, California pension fund Calpers and shareholder advisory group ISS, who argued for withholding votes for him on the Coke board because ice cream chain Dairy Queen and food distributor McLane do business with the soft drink company. "The problem is a checklist," Buffett said in an interview with Reuters before the meeting. "The idea that you do a little business with Coke, and it doesn't matter that you own 200 million shares." Berkshire's ownership represents 8.2 percent of Coke.

He also told Reuters that the Coke board would soon conclude the search for a replacement to retiring Coca-Cola Chairman and Chief Executive Doug Daft, which has entered a third month, making some investors jittery. "That will be resolved fairly soon," Buffett said.

Buffett, an advocate of boardroom reform, said that while their intentions may be proper, these shareholder groups have taken too technical an approach to corporate change. He later addressed the issue in his remarks to shareholders, saying, "a checklist is no substitute for thinking."

Buffett called hedge funds a "fad" that was more about Wall Street marketing than sound investing. "People that are now investing in hedge funds in aggregate are going to be disappointed," Buffett, who is known as the "Oracle of Omaha," said. The fees that hedge fund managers charge were unfair, he said.

Buffett said he was seeing inflation 'heat up' in the United States. Berkshire owns dozens of businesses including insurer GEICO, apparel maker Fruit of the Loom and ice cream chain Dairy Queen.

He told shareholders the companies that will be best suited for this environment will be ones that either have unique products and services or are less dependent on purchasing inflation sensitive goods.

In his remarks to shareholders, he used the example of the $6 billion accounting scandal at mortgage financier Freddie Mac (NYSE:FRE) to demonstrate the risks of derivatives. Despite having intelligent board members, being chartered by the U.S. Congress, and being followed by dozens of Wall Street analysts, he said Freddie Mac could not get a hold on the complexity of these financial instruments. "Sometime in the next 10 years you will have a huge problem that will either be caused by or accentuated by people's activities in derivatives," he said.

Buffett said that the larger Berkshire gets, the more difficult it is to find places to park its money. "It gets harder all the time to deploy all the funds that come into Omaha," Buffett said. The company was sitting on a stockpile of $31 billion in cash at the end of 2003.

Buffett told the audience not to rely on financial consultants and was especially critical of those who advise some sort of specified 60-40 percent split between stocks and bonds. "It's nonsense," he said. Instead, Buffett advised the audience to seek out bargains no matter what type of investments they are.

Buffett, whose net worth was estimated by Forbes at $42.9 billion, reflected on some of his mistakes. He said by being trigger shy on buying into Wal-Mart Stores Inc. (NYSE:WMT), he cost Berkshire $10 billion.

"If every shot was a hole in one it wouldn't make the game very interesting," Buffett said. "You have to hit balls in the woods a few times."

-- posted by Normxxx

» Normxxx - Buffett Increases Bet Against Dollar

By David Plumb, Bloomberg.net | 3 May 2004

May 3 (New York) -- Billionaire Warren Buffett is increasing his bet against the U.S. dollar and seeking acquisitions because he sees no bargains in U.S. stocks and wants to ``rapidly deploy'' Berkshire Hathaway Inc.'s $36 billion in cash.

``Our hope is we can deploy the money in businesses that are just as good as the ones we have,'' Buffett, 73, told a crowd of 19,500 people this weekend at Berkshire's annual shareholder meeting near its headquarters in Omaha, Nebraska. ``We think the odds are good that we will.''

Buffett, Berkshire's chairman, said the U.S. Federal Reserve may be keeping interest rates too low and the trade deficit is swelling, hurting the dollar even as the U.S. economy expands. Buffett this weekend said he increased his investment in foreign currencies by ``more than a little bit'' this year from $12 billion at year-end.

``We think that over time that the dollar is likely to decline in value against some of the major currencies,'' Buffett, the world's second-richest man, said in an interview before the annual meeting.

Charles Munger, Berkshire's vice chairman and Buffett's business partner, asked investors to be patient as the company considers acquisitions and other ways to use its cash.

``Don't get too fretful,'' Munger, 80, said. ``Patience is part of the game.''

Patience Rewarded

Some investors agreed with Munger.

``I'm extremely confident that they will find something to do with that money,'' said Thomas Russo, a partner at Gardner, Russo & Gardner in Lancaster, Pennsylvania, which manages more than $1 billion and has about a quarter of its funds in Berkshire stock. ``Patience is very much rewarded. The best acquisitions will come about from some sort of shock.'' This was Russo's 17th Berkshire meeting.

The foreign currency investments don't signal a greater focus by Berkshire on overseas acquisitions, Buffett said. He has doubled his money to about $1 billion by investing in Hong Kong- listed PetroChina Co. He met earlier this year with foreign Berkshire holders for the first time.

``We've had no luck in Germany, the U.K. or any other country with someone picking up the phone and saying that `I have a business that requires a lot of capital and would you be interested in acquiring us.' They know the name but it doesn't jump out of their mind like it does in the United States.''

Berkshire Shares

Shares of Berkshire, which owns energy, aviation, paint and carpet companies, have increased 33 percent in the past year and risen in all but three of the past 16 years. They fell $110 to $93,390 Friday in New York Stock Exchange composite trading.

Buffett owns about 37 percent of Berkshire's Class A shares, giving him a personal fortune valued at about $44.5 billion. Bill Gates, chairman of Microsoft Corp., is the world's richest person, according to Forbes magazine.

Below-investment-grade, or junk, bonds are another market where bargains have disappeared, Buffett said in an interview. Berkshire has sold some of the more than $7 billion of the high- yield, high-risk bonds he bought in 2002, Buffett said.

``Junk bonds are more than fully priced,'' Buffett said. ``It's gone from one extreme to another in a very, very short period of time. It's almost miraculous.''

Ice Cream, Insurance

Under Buffett, Berkshire has made more than 27 acquisitions in the past six years, including $590 million for ice-cream chain International Dairy Queen Inc. and $18 billion in 1998 for reinsurance seller General Re Corp.

During the last four decades, Buffett has transformed Berkshire from a failing textile manufacturer into a $143-billion holding company by buying out-of-favor securities and businesses on the cheap. Admirers and shareholders travel to Berkshire's annual meetings to hear Buffett, sometimes referred to as the Sage of Omaha, give his opinions about investing and attend company cocktail parties, barbecues and shopping trips.

The foreign exchange purchases are Buffett's biggest investment in the last two years. Buffett started betting against the dollar in 2002 on concern that the U.S. trade deficit would erode the value of the currency. The dollar has dropped about 6 percent against the euro in the past 12 months.

Buffett said the U.S. Federal Reserve probably should raise interest rates as the economy and inflation pick up.

``They've perhaps been a little slow in terms of moving up because the economy has heated up considerably,'' he said. ``People are passing along price increases. It gets into housing. Housing doesn't get into the CPI much, but it gets into people's pockets. You get feedback effects with labor costs, and a ball gets rolling that is hard to stop.''

Buffett said he has become an economic adviser to Democratic presidential contender John Kerry. He said President George W. Bush's tax cuts are ``tilted toward the rich.

``I support John Kerry,'' Buffett said. ``I've got way more money in my pocket because of the tax change and I don't think it's a good idea.''

-- posted by Normxxx

» Kirk - Fuzzy Math And Stock Options

Fuzzy Math And Stock Options

By Warren Buffett
Tuesday, July 6, 2004; Page A19
http://www.washingtonpost.com/wp-dyn/art...

Until now the record for mathematical lunacy by a legislative body has been held by the Indiana House of Representatives, which in 1897 decreed by a vote of 67 to 0 that pi -- the ratio of the circumference of a circle to its diameter -- would no longer be 3.14159 but instead be 3.2. Indiana schoolchildren momentarily rejoiced over this simplification of their lives. But the Indiana Senate, composed of cooler heads, referred the bill to the Committee for Temperance, and it eventually died.

What brings this episode to mind is that the U.S. House of Representatives is about to consider a bill that, if passed, could cause the mathematical lunacy record to move east from Indiana. First, the bill decrees that a coveted form of corporate pay -- stock options -- be counted as an expense when these go to the chief executive and the other four highest-paid officers in a company, but be disregarded as an expense when they are issued to other employees in the company. Second, the bill says that when a company is calculating the expense of the options issued to the mighty five, it shall assume that stock prices never fluctuate.

Give the bill's proponents an A for imagination -- and for courting contributors -- and a flat-out F for logic.

All seven members of the Financial Accounting Standards Board, all four of the big accounting firms and legions of investment professionals say the two proposals are nonsense.

Nevertheless, many House members wish to ignore these informed voices and make Congress the Supreme Accounting Authority. Indeed, the House bill directs the Securities and Exchange Commission to "not recognize as 'generally accepted' any accounting principle established by a standard setting body" that disagrees with the House about the treatment of options.

The House's anointment of itself as the ultimate scorekeeper for investors, it should be noted, comes from an institution that in its own affairs favors Enronesque accounting. Witness the fanciful "sunset" provisions that are used to meet legislative "scoring" requirements. Or regard the unified budget protocol, which applies a portion of annual Social Security receipts to reducing the stated budget deficit while ignoring the concomitant annual costs for benefit accruals.

I have no objection to the granting of options. Companies should use whatever form of compensation best motivates employees -- whether this be cash bonuses, trips to Hawaii, restricted stock grants or stock options. But aside from options, every other item of value given to employees is recorded as an expense. Can you imagine the derision that would be directed at a bill mandating that only five bonuses out of all those given to employees be expensed? Yet that is a true analogy to what the option bill is proposing.

Equally nonsensical is a section in the bill requiring companies to assume, when they are valuing the options granted to the mighty five, that their stocks have zero volatility. I've been investing for 62 years and have yet to meet a stock that doesn't fluctuate. The only reason for making such an Alice-in-Wonderland assumption is to significantly understate the value of the few options that the House wants counted. This undervaluation, in turn, enables chief executives to lie about what they are truly being paid and to overstate the earnings of the companies they run.

Some people contend that options cannot be precisely valued. So what? Estimates pervade accounting. Who knows with precision what the useful life of software, a corporate jet or a machine tool will be? Pension costs, moreover, are even fuzzier, because they require estimates of future mortality rates, pay increases and investment earnings. These guesses are almost invariably wrong, often substantially so. But the inherent uncertainties involved do not excuse companies from making their best estimate of these, or any other, expenses. Legislators should remember that it is better to be approximately right than precisely wrong.

If the House should ignore this logic and legislate that what is an expense for five is not an expense for thousands, there is reason to believe that the Senate -- like the Indiana Senate 107 years ago -- will prevent this folly from becoming law. Sen. Richard Shelby (R-Ala.), chairman of the Senate Banking Committee, has firmly declared that accounting rules should be set by accountants, not by legislators.

Even so, House members who wish to escape the scorn of historians should render the Senate's task moot by killing the bill themselves. Or if they are absolutely determined to meddle with reality, they could attack the obesity problem by declaring that henceforth it will take 24 ounces to make a pound. If even that friendly standard seems unbearable to their constituents, they can exempt all but the fattest five in each congressional district from any measurement of weight.

In the late 1990s, too many managers found it easier to increase "profits" by accounting maneuvers than by operational excellence. But just as the schoolchildren of Indiana learned to work with honest math, so can option-issuing chief executives learn to live with honest accounting. It's high time they step up to that job.

The writer is chief executive officer of Berkshire Hathaway Inc., a diversified holding company, and a director of The Washington Post Co., which has an investment in Berkshire Hathaway.

-- posted by Kirk

» Kirk - What funds can learn from Buffett

Fri Oct 22,11:00 AM ET
http://news.yahoo.com/news?tmpl=story&u=...
By James Altucher

Critics have accused Berkshire Hathaway of being a closed-end mutual fund and that it should perhaps be valued that way.

This is a simplistic way of looking at how Warren Buffett (news - web sites), the world's greatest asset allocator, has spent his time over the past 50 years. Another favourite claim (often made by Mr Buffett himself) is that he is a buy-and-hold investor. "My favourite holding period is forever," he likes to say.

The reality is that Berkshire has a lot of fast-moving parts and that the most apt comparison is to say Berkshire is like a fund of hedge funds.

Over the past 50 years, first with his investment partnership then with his mini-empire of pink sheet stocks - Berkshire Hathaway, Blue Chip Stamps, and Diversified Retailing - and finally with the combined entity Berkshire Hathaway, the allocation strategies that have propelled Buffett to investment greatness more resemble the collection of alternative strategies used by today's fund of hedge fund managers than a long-only mutual fund that barely mimics the market (minus the fees).

A study of Mr Buffett and Berkshire's use of these strategies is a must for funds of hedge funds. Merger arbitrage: at the 1998 Berkshire Hathaway annual meeting Buffett said that he and Charlie Munger, his long-time investing partner, were among a handful of people who could make 50 per cent a year at "merger arb", buying the shares of a target company and perhaps hedging by selling short the shares of the acquirer.

In his early partnership letters (pre-Berkshire) Mr Buffett often wrote about how up to a third or more of the profits of his partnership came from short-term arbitrage plays. Some of the known examples of Mr Buffett's merger arb acumen can be seen in Arcata (which private equity group KKR offered to buy in 1981), the 1963 acquisition of Texas National Petroleum, and even the failed arbitrage of General Dynamics, which worked out as a long-term stock play. In fact, the hallmark of Mr Buffett's success is that he focuses on targets that were deep value plays or trading below their intrinsic value. Pipes: private investments in public equities are often used by companies to raise money directly from an interested investor rather than going through a roadshow with a secondary. Usually the investor in a Pipe gets favourable returns and the Pipe is structured either as an equity investment or as a debt instrument that can be converted later into equity. A recent Pipe that worked out favourably for Mr Buffett was his 2002 investment in Level 3 Communications. The Pipe was structured as a $500m convertible (the company had $1.5bn in cash in the bank already) with a 9 per cent dividend and convertible at $3.41 a share.

Although the stock had closed at $2.89 the day before the deal was announced, the next day the stock opened at $4.26. By the time Mr Buffett converted and sold his shares he had made almost 100 per cent on his money. If he had never converted, he was confident he could make 9 per cent a year. Closed end fund trading: buying a closed end fund at a severe discount to its net asset value (nav) and either hedging by shorting the components of the fund or waiting for a catalyst that will bring the fund back to its nav. In the 1970s, when go-go style momentum investing collapsed, momentum-based funds collapsed even further. Source Capital, started by Fred Carr, one of the famous momentum investors of the 1960s, was trading at a 50 per cent discount to its nav when Blue Chip Stamps, controlled by Mr Buffett and Mr Munger, began buying up the shares. When the shares had doubled a short time later, the pair began to liquidate their position. Source Capital, under investing genius George Michaelis, went on to return an average 18 per cent a year over 20 years. Commodities: 125m ounces of silver represented close to 25 per cent of the known above-ground usable supply of silver when Mr Buffett bought that much in 1997. A non earnings- yielding, dividend-yielding asset, silver at that time was trading at an all-time low compared to gold. It is unknown whether Mr Buffett has sold at this time but the rumour is that he has since sold. Silver is trading at about $7 per ounce now against the $4 and $5 level when Mr Buffett was accumulating. Fixed income arbitrage: Berkshire has a significant investment in Value Capital. Value uses leverage to arbitrage by selling low-yielding fixed-income instruments, buying higher-yielding fixed-income notes, capturing the spread. Distressed debt: (his short-term investments in both Amazon and Dynegy) and obviously his large collection of private equity investments are two of the other sharp weapons in this diverse arsenal.

It is impossible for the retail investor to emulate Mr Buffett's approach since straightforward value investing is an over-simplification of what he has done over the past 50 years. However, the rise of hedge funds and alternative strategies over the past few years can perhaps best be explained by the extraordinary 50-year record of the best hedge fund investor.

As of 10/21/04, the Total Return for Kirk's Newsletter since 12/31/98 is 138%. Here are some more periods and comparative benchmarks:

 
              Kirk   S&P500  NASDAQ 
12/31/2002    +55%    +29%    +45%
12/31/2000    +24%    -11%    -22%
12/31/1998   +138%     -3%    -12%

-- posted by Kirk

» Kirk - Buffett targets Calif. worker's comp

Berkshire Hathaway plans to write $1 billion in premiums

By Alistair Barr, CBS MarketWatch

SAN FRANCISCO (CBS.MW) -- Warren Buffett, the world's second-richest man, is targeting California workers' compensation insurance; betting recent reforms will make the ailing market more profitable.

National Liability & Fire Insurance, a unit of Berkshire Hathaway (BRKA: news, chart, profile) (BRKB: news, chart, profile), Buffett's holding company, signed an agreement with San Francisco-based agent American All Risk Insurance Services to start writing worker's comp business in October.

The firm plans to write about $1 billion in premiums, according to people familiar with the situation, making Berkshire one of the largest private insurers in the $21 billion market and the first major entrant for years.

Berkshire Hathaway, which made $422 million in the second quarter from insurance businesses including Geico and General Re, refused to comment, as did American All Risk Insurance Services.

"A few companies like Berkshire are beginning to enter the market and I wouldn't be surprised to see more getting in soon," said Bob Hartwig, chief economist at the Insurance Information Institute.

Workers' compensation insurance covers the cost of medical care, lost wages and rehabilitation for on-the-job injuries and provides benefits for the family of any employee killed in work-related accidents.

Intense competition between workers' comp insurers in the late 1990s -- combined with spiraling medical costs, fraud and abuse -- caused more than 20 firms to go bust or leave California between 2000 and last year.

That helped drive rates up more than 150 percent in the period and pushed employers into the arms of the insurer of last resort; the State Compensation Insurance Fund.

This fund now writes more than half of all workers' comp policies in California and most of the highest-risk agricultural and construction policies, testing its solvency.

The fund reported assets of $15.3 billion and liabilities of $13.2 billion, giving it a surplus of more than $2 billion at the end of 2003. A year earlier, the surplus was less than $1.5 billion.

With the highest rates in the country and among the lowest benefits for injured workers, reform of California's system became a major issue in last year's election of Arnold Schwarzenegger as governor.

Schwarzenegger, who was advised by Buffett during the campaign, has since pushed through two laws aimed at controlling costs in the program.

"Schwarzenegger made good on his promise to reform the workers' comp system," said Hartwig. "By making costs more predictable, this has made the market more attractive to private insurers."

Still, the reforms have yet to attract many new insurers.

In September, CompWest Insurance, with $50 million in capital, gained a worker's comp license in California. The last major entrant before that was Employers Direct Insurance, which won a license in December 2002, also with $50 million in capital.

This lack of new capacity has meant that the reforms have yet to reduce rates as much as some, including California Insurance Commissioner John Garamendi, had hoped.

The State Compensation Insurance Fund dropped rates by just 7 percent after the reforms because it still needs to bolster its capital base, the Insurance Information Institute said.

That leaves Buffett's Berkshire Hathaway betting that the reforms will succeed and being rewarded with high premium rates for taking on that risk.

Berkshire Hathaway's other biggest investments include ice-cream chain Dairy Queen, T-shirt maker Fruit of the Loom and Shaw Industries, a textile and carpet manufacturer.

http://cbs.marketwatch.com/news/story.as...

-- posted by Kirk