WEB:The Oracle of Omaha- Warren Buffett
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» JenL_2 - Barron's on Buffet
Rande recommended the cover article of 12/27 Barron's about Warren Buffet:What's Wrong, Warren?
Berkshire's down for the year, but don't count it out
By Andrew Bary
After more than 30 years of unrivaled investment success, Warren Buffett may be losing his magic touch.
Shares in Buffett's Berkshire Hathaway are set to experience their first annual decline since 1990 and their second-worst year of performance, relative to the Standard & Poor's 500 Index, since Buffett took control of what had been a struggling New England textile maker in 1965.
At around $54,000 a share, Berkshire's Class A stock is off 23% in 1999, against an 18% return for the S&P 500 (including dividends). Berkshire has been hurt this year by weak operating results at its core insurance operations and by a rare annual drop in the company's famed investment portfolio, which includes such stocks as Coca-Cola, Gillette and American Express.
But there's more to Berkshire's weak showing than just the operating and investment performance. To be blunt, Buffett, who turns 70 in 2000, is viewed by an increasing number of investors as too conservative, even passe. Buffett, Berkshire's chairman and chief executive, may be the world's greatest investor, but he hasn't anticipated or capitalized on the boom in technology stocks in the past few years.
Indeed, Buffett has even started taking flak on Internet message boards. One contributor called Berkshire a "middlebrow insurance company studded with a bizarre melange of assets, including candy stores, hamburger stands, jewelry shops, a shoemaker and a third-rate encyclopedia company [the World Book]."
Not everyone shares those sentiments, however. "I don't think Buffett has lost it," says Jim Engle, chief investment officer at Wood Struthers & Winthrop, a New York investment firm owned by Donaldson Lufkin & Jenrette. "Berkshire offers an incredible investment opportunity for those with a long time horizon."
Adds Peter Russ, an analyst at Fairholme Capital, a New Jersey money manager that holds Berkshire stock: "Berkshire's market value is less than Yahoo's, yet Berkshire could earn $2 billion after taxes in 2000, while Yahoo will be lucky to make $200 million." Berkshire now is valued at $83 billion, while Yahoo has a capitalization of $120 billion. Russ believes that Berkshire could double over the next several years.
Bulls say the stock now looks very attractive, trading at around 1.5 times its book value and considerably below its March high of $81,000. …….
Going Beyond Cigar Butts
Buffett began his career looking for beaten-down stocks in the tradition of his mentor, the illustrious Benjamin Graham. In the 1960s, this approach led him to the depressed but asset-rich Berkshire Hathaway.
But Buffett's genius was to go beyond Graham's limited world of socalled cigar butts-those with one good puff on them-and invest in great franchise companies like Coke and American Express, whose attributes lie outside the confines of their balance sheets.
Yet Buffett hasn't been able to make the next leap forward and adapt to the current technology-driven bull market. The reason: Technology isn't in Buffett's "circle of competence," and thus he doesn't feel comfortable seeking long-term winners in the sector. Buffett's avoidance of technology is ironic, given his longtime friendship with Microsoft Chairman Bill Gates. At the same time, Buffett's favorite sector, insurance, has been taking a beating. Late last year, Berkshire doubled its bet on insurance, paying $22 billion in Berkshire stock for General Re, the prominent reinsurer -- a deal that so far has proven a bust. Steering clear of the market's highflyers, Buffett has made other investments for Berkshire in the past two years, including the purchases of a furniture retailer and International Dairy Queen, and the pending acquisition of an Iowa-based electric utility, Mid-American Energy. These may turn out to be solid long-term deals for Berkshire shareholders, but none of them is setting hearts racing on Wall Street at a time when Internet stocks and other tech stars are doubling every few months…..
….There's even some speculation that Buffett may view Berkshire's stock as sufficiently depressed to implement the company's first major stock-buyback program. Berkshire certainly has the wherewithal, given what Buffett has called the corporation's "Fort Knox" balance sheet, which features minimal debt and $36 billion of bonds and cash. One of Buffett's few comments about Berkshire's valuation came in the 1998 annual report, in which he said that its intrinsic value "far exceeds book value," which stood at $37,800 a share at year-end '98. Book value equals balance-sheet assets less debt, and thus doesn't fully capture the income-producing value of many of the company's businesses, including its Geico insurance unit.
Over the years, Buffett successfully urged the managements of Coke and Washington Post, another significant Berkshire holding, to repurchase stock-decisions that proved fortuitous, given the stocks' subsequent surges. Yet Buffett has never bought back an appreciable amount of Berkshire stock, believing he could find better opportunities elsewhere. If Berkshire has started to repurchase shares, it would be evident in the company's fourth-quarter profit report, due in February. Buffett is unlikely to announce such a plan because it probably would raise the share price and make any buyback program more costly.
For his part, Buffett says his conglomerate possesses "a marvelous collection of businesses," including Geico, the fastgrowing auto-insurance company; See's Candies, the Buffalo News, FlightSafety International, the dominant pilot-training operation; Executive Jet, the leader in selling time shares in corporate jets, and Scott Fetzer, an industrial outfit that makes Kirby vacuum cleaners.
Buffett has much to be proud of. Berkshire's profits over the past three decades have compounded at a phenomenal 24% annual rate. In view of the company's large size, Buffett has told shareholders to scale back their earnings growth expectations to around 15% annually.
Buffett also aims to increase Berkshire's intrinsic value by 15% per annum. This year, however, Berkshire isn't likely to accomplish either goal, largely because of poor results at General Re and a drop in the value of some investments, including Coke, Gillette and Freddie Mac.
PaineWebber's Alice Schroeder, one of only a handful of Street analysts following Berkshire, cut her 1999 and 2000 profits estimates following the company's weak third-quarter report last month. She now sees operating earnings, before a goodwill charge, of $982 per share, down 10% from 1998's level, and way below her early-year estimate of almost $1,300 a share. The company's book value should be about unchanged from last year's $37,800. Based on Schroeder's estimates, Berkshire trades at over 50 times projected 1999 profits, a lofty multiple. But the effective P/E is lower because the earnings reflect only the dividends received from the stocks in Berkshire's investment portfolio. "Look-through" profits, a theoretical number favored by Buffett that reflects the company's proportional interest in the earnings of the companies in the portfolio, are higher than reported profits.
Berkshire's stock may be down this year, but no one should grieve for Buffett, whose 32% stake is worth $26 billion. Buffett was America's richest individual in the early 1990s, but he has since been passed by Bill Gates and by two other Microsoft billionaires, cable baron Paul Allen and Microsoft President Steve Ballmer.
Berkshire has such a lofty share price because Buffett has refused to split the Class A stock. The company did issue Class B shares, which now trade at around $1,720 each, in 1996, when some financial entrepreneurs threatened to create low-priced Berkshire unit trusts. Each B share is equivalent to 1/30 of an A share. The Class B stock trades at a 6% discount to the A shares, making the B shares a better bet in the eyes of some Berkshire fans.
Berkshire's Biggest Headache
Berkshire is widely viewed as Buffett's investment vehicle, but the reality is that, following the company's acquisitions in recent years, it has become much more than just a way to play such stocks as Coke or Gillette.
"Ten years ago, you could argue that Berkshire amounted to a closed-end investment fund," says Fairholme Capital's Russ. "But now, it's really an insurance company headed by a unique investor who allocates capital and manages the investment portfolio."
Over 70% of Berkshire's operating revenues now come from insurance. The company's investment portfolio, recently valued at around $37 billion, accounts for under half its market value.
Buffett has built up Berkshire's operating side because he believes Berkshire generally does better acquiring entire businesses rather than taking passive stakes in large public companies at a time of lofty stock-market valuations.
When Berkshire controls companies, earnings flow up to the parent, where Buffett deploys the money as he sees fit. Stakes in public companies, in contrast, provide just dividend income to Berkshire.
Berkshire's biggest headache is General Re. Buffett thought he had scored a major coup when Berkshire reached a deal to buy the company in June 1998. In fact, Berkshire's stock hit a record $84,000 immediately after the announcement, amid enthusiasm for the deal. Gen Re is one of the leading global reinsurers. Such companies offer coverage to insurance companies that want to reduce their own risks.
Buffett figured that under Berkshire's umbrella, Gen Re would benefit because it could become more aggressive, taking on larger risks at opportune times without concern about the potential profit volatility. Buffett likes to say he prefers a "lumpy 15% return to a smooth 12%." Because investors place so much trust in Buffett, they've made Berkshire Hathaway one of the few publicly traded companies that isn't graded on each quarterly profit report.
But so far, General Re has done poorly. …..
…..Gen Re's woes may take time to fix. Berkshire stated in its third-quarter report that "premium rates for both the reinsurance industry and General Re are currently inadequate."
Geico has had weaker underwriting performance this year as well……
…..The investment portfolio, as noted, is set to decline this year, following a slight increase in 1998. The stock prices of Coke, the largest holding, and Gillette have each fallen 12% in 1999. Freddie Mac, the No. 4 stock in the portfolio at yearend 1998, is down 27%.
It's ironic that Coke and Gillette began to run into trouble after Buffett, in a rare moment of hubris, labeled those two companies "inevitables" in Berkshire's 1997 annual report. Coke and Gillette still have great global prospects and, in Buffett's words, "may dominate their fields for an investment lifetime." But both have stumbled in the past two years, raising doubts about whether they can resume high-teens annual profit growth for an extended period.
Absent from Berkshire's portfolio is technology. Asked at Berkshire's annual meeting in May why he hadn't bought Microsoft, Buffett replied: "If I had to bet on anybody [in technology], I'd certainly bet on Microsoft-and heavily. But I don't have to bet. And I don't see that world as clearly as I see the soft-drink world." Buffett recently told a group of Nebraska high-school students that he once told Bill Gates that explaining technology to him was a waste, that Gates would have "better luck with chimps."
Tom McManus, strategist at Banc of America Securities and a Berkshire investor, observes that a limitation of many of Berkshire's businesses, ranging from See's Candies to Coca-Cola, is that they're expanding at the rate of global economic growth, while technology companies are experiencing far stronger growth.
Another issue facing Berkshire is succession. Buffett remains in good health, but many investors are afraid to own Berkshire. They don't know whether anyone can come close to filling the old master's big shoes and whether Berkshire will lose its magical aura after Buffett departs.
It's tough to tell how Wall Street would react if Buffett were to die suddenly, but some think Berkshire stock could fall at least 10% and perhaps as much as 20%. The company's fans maintain that any sizable drop would be a major buying opportunity.
Buffett has said that his job will be split in two; one executive will run Berkshire's investments and another will oversee the operating businesses. He hasn't identified his choices publicly, other than to say they are part of Berkshire's organization.
The betting is that the investment operation will be headed by Lou Simpson, the longtime manager of the equity investment portfolio at Geico, which Berkshire fully absorbed in early 1996. Though he appears to have stumbled in the past year, Simpson, who still guides a $2 billion portfolio, had a great record from 1980 through the mid-1990s.
There's more uncertainty about who will run Berkshire's operating business because there are several capable executives at the various divisions. One rising star is Rich Santulli, head of Executive Jet. Buffett praised Santulli as a "terrific executive" in Berkshire's annual report. When Buffett buys companies like Executive Jet, he likes to keep management in place.
"You obviously can't expect Buffett's successors to be as gifted as him," says Engle. "But whoever the next guy is will have a lot of good businesses to work with."
It should be said that Buffett's interest in the company shows no signs of flagging. At Berkshire's annual meeting in May 1998, Buffett was asked why he hadn't written a book. He reportedly replied that he wanted to wait, saying: "Perhaps it's unwarranted optimism that leads me to think that the best is yet to come."
<img src="http://www.geocities.com/WallStreet/Dist..." width=180 height=180>
……Jen
-- posted by JenL_2
» JenL_2 - To the Warren Buffett fans in the room
This post copied from the "Bob Brinker Discussion" thread:Author: PeteM
Date: February 6, 2000 7:11 AM
Subject: To the Warren Buffett fans in the room
To the Warren Buffett fans in the room, this is an excellent Fortune magazine article that was published in November 1999. It is an important article because Mr. Buffett does not often comment on stock market valuations in general or tech stock speculation and he adresses both of these topics in detail in this article. He also explains how stock prices are tied to interest rates. A point that seems to be falling on deaf ears of late.
http://www.pathfinder.com/fortune/1999/1...
Pete
-- posted by JenL_2
» MichaelC_AU - Buffett Purchases
http://www.fool.com/news/2000/breakfast0...Motley Fool:
News to Go
Federal filings from Warren Buffett's Berkshire
Hathaway (NYSE: BRK.A) reveal that the world's most
famous investor has purchased significant stakes in Liz
Claiborne (NYSE: LIZ), Jones Apparel Group (NYSE:
JNY), Citigroup (NYSE: C), and credit ratings company
Dun & Bradstreet (NYSE: DNB), The Wall Street
Journal reported. It's unclear from the filing if the
purchase of Citigroup is new.
-- posted by MichaelC_AU
» MichaelC_AU - Wrong?
This is not a mutual fund it is a career culmination of success. No one ever promised it would continue. I never bought any shares, just examined his purchases.What could anyone have done better? You've averaged 25% for 30 something years and have $20-30 Billion in entire corporations and major chunks of corporations, many somewhat overvalued.
What would you do sell everything and buy NASDAQ? With hindsight being 20-20, that would have been idiotic, doubling the IRS' collections in one move, to speculate on a "new economy."
Get real! These are first major fiscal year losses for Berkshire, and not unexpected. I guarantee you that Warren has made the best choices in maximizing his wealth in the long term.
As for any admissions, you've got to say something when your company goes down 45%.
-- posted by MichaelC_AU
» Rande - Right -- you have to say something when your shareholders lose n
Right -- you have to say something when your shareholders lose nearly half their equity in the midst of a raging bull market. And to his credit, though he could have spun it any which way as so many seem eager to do these days when they're wrong, the Sage took the blame head on.-- posted by Rande
» JenL_2 - Buffet - Prescient??
This from 3/19 The Seattle Times:Further proof that Warren knows best
by Greg Heberlein
"My performance reminds me of the quarterback whose report card showed four F's and a D but who nonetheless had an understanding coach. 'Son,' he drawled, 'I think you're spending too much time on that one subject.' "
- Warren Buffett
There must be someone to blame for the past whacko week on Wall Street.
Like, who suddenly changed the rules and decided stocks with sales and profits were more attractive - perish the thought - than fiber-optic shells with neither? Just when we had converted all our rust-belt shares to the stock of itgoesstraightup.com.
(clip)
"Berkshire will someday have opportunities to deploy major amounts of cash in equity markets - we are confident of that. But as the song goes, `Who knows where or when?' Meanwhile, if anyone starts explaining to you what is going on in the truly manic portions of this `enchanted' market, you might remember still another line of song: `Fools give you reasons, wise men never try.' "
The word prescient comes to mind. Incidentally, in the five trading days since Buffett's comments appeared, Berkshire Hathaway stock, a value stock for the ages, climbed $10,000 to $51,300.....
......Jen
-- posted by JenL_2
» Kirk - Interesting how Value has come back
<img src=http://dcharts.stockmaster.com/cgi-bin/c... width=579 height=395>BRK-A [NYSE] - Berkshire Hathaway Inc is considered a value investment and was selling at a HUGE premium to the underlying stocks back in 1998 when it peaked. It put in a double top in 1999 then fell out of favor when the NASDAQ went on its run. NOW, value is making a comeback and so it BRK-A. Funny how buy and hold often works with a dash of patience.
<img src=http://dcharts.stockmaster.com/cgi-bin/c... width=579 height=395>
not a bad 10 year record either... Funny how even value stocks can get over bought, put in double tops and then recover.
I bet many would say that BRK-A, or value stocks in general, have been in a bear market, but the decade chart just shows they were ahead of the S&P500 and need some correcting to get back. Buffett is FAMOUS for buying value when others don't want it and it shows in the 1993 gains and might show again.
-- posted by Kirk
» Kirk - Now Warren can "Paint the tape"
http://biz.yahoo.com/rf/001108/n0847439....
Wednesday November 8, 9:34 pm Eastern Time
Berkshire Hathaway to buy Benjamin Moore for $1 bln
MONTVALE, N.J./OMAHA, Neb., Nov 8 (Reuters) - Berkshire Hathaway Inc. (NYSE:BRKa - news), whose chairman is billionaire investor Warren Buffett, has agreed to acquire paint maker Benjamin Moore for $37.82 a share cash in a tender offer valued at about $1 billion, the companies said.
Under the agreement, Benjamin Moore, which was founded in 1883, will become a wholly-owned subsidiary of Omaha, Nebraska-based Berkshire Hathaway. It will remain based in Montvale, N.J.
The tender offer will commence no later than November 17, 2000 and will be for all of Benjamin Moore's outstanding common stock, the companies said.
Once the tender offer is successfully completed, remaining shareholders will receive cash in the same amount as paid in the tender offer, they said.
The board of directors of Benjamin Moore has unanimously approved the merger agreement. In addition, shareholders who own about 18 percent of Benjamin Moore's common stock agreed to tender their shares.
The tender offer is subject to certain conditions, including the tender of not less than two-thirds of Benjamin Moore's outstanding common stock, on a fully diluted basis, and the obtaining of all necessary governmental approvals. The tender offer will expire 20 business days after it is commenced, but may be extended under certain circumstances.
Benjamin Moore shares closed down 1/2 to $25, while shares in Berkshire Hathaway lost $800 to $64,800. The announcement was made after the close of regular trading.
<img src=http://chart.yahoo.com/c/2y/m/mben.ob.gif width=512 height=288>
-- posted by Kirk
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