Knowledge grows through sharing!
To be the best, learn from the best!
May all your dreams come true!
Collections of Value Investing articles, interviews and videos, especially on Warren Buffett and Charlie Munger and articles from various disciplines to build "Latticework of Mental Models"
Showing posts with label Berkshire Hathaway. Show all posts
Showing posts with label Berkshire Hathaway. Show all posts
Ted Weschler, the hedge-fund manager and marathoner, made money trading Bank of America Corp. stock and held the biggest stake of a bankrupt chemicals firm before being hired by Warren Buffett’s Berkshire Hathaway Inc.
Weschler bought 2 million Bank of America shares in the first quarter of 2009 when the credit crunch pushed down financial stocks. The shares had more than doubled, on a quarterly average basis, when he sold them a year later. Weschler’s $217 million holding of W.R. Grace & Co., which entered bankruptcy in 2001, dates from at least 2003.
Weschler, 50, is part of the second generation of Berkshire leaders whom Buffett, 81, is picking to maintain the culture and performance of the firm he built over four decades. Weschler’s bets will get bigger at Omaha, Nebraska-based Berkshire, which holds about $100 billion in stocks and bonds. His investment approach may serve him well under Buffett, who touts his own fondness for reading corporate regulatory filings, said Bruce Kershner, a headhunter who previously worked for Weschler.
“All he liked to do was read and read and read,” Kershner, president and founder of Bethesda, Maryland-based Kershner & Co., said of Weschler. “He said he took vacations and he would just read his financial statements.” Kershner recruited analyst Bill Beisswanger for Weschler’s fund.
Weschler and Todd Combs, the former hedge-fund manager hired by Berkshire last year, will assume Buffett’s investment responsibilities when the billionaire chairman retires, Berkshire said yesterday in a statement. Until then, Buffett will oversee the bulk of the portfolio. A third manager may eventually be added to the investment team, Berkshire said.
Peninsula Capital
Weschler is shutting his Charlottesville, Virginia-based Peninsula Capital Advisors LLC and returning funds to limited partners. He’ll join Berkshire early next year. Peninsula, which had about $2 billion in nine U.S. stocks as of June 30, counted Michael Bills, the former chief operating officer of Tiger Management LLC, among its investors.
“This is a brilliant move for Berkshire,” Bills, founder and chief investment officer at Charlottesville-based fund of hedge funds Bluestem Asset Management LLC, said in an e-mail. “We are fortunate to have been limited partners with Ted, and think the world of him.”
Peninsula held stock in Cincinnati Bell Inc., Cogent Communications Group Inc., DaVita Inc., DirecTV, FiberTower Corp., Liberty Media Corp., Valassis Communications Inc. and WSFS Financial Corp. at the end of the second quarter.
The hedge fund is run in a three-person office, with Weschler assisted by an analyst and an office manager, a person familiar with the business said. It is based in an office above a bookstore in downtown Charlottesville.
Bank of America Corp., the biggest U.S. lender, said Warren Buffett's Berkshire Hathaway Inc. will invest $5 billion to bolster the company after losses tied to subprime mortgages drained capital. Bank of America surged in New York trading.
Berkshire will get cumulative perpetual preferred stock paying a 6 percent dividend, the Charlotte, North Carolina-based bank said today in a statement. Omaha, Nebraska-based Berkshire also gets warrants to buy 700 million shares at $7.14 each.
The deal aids Bank of America Chief Executive Officer Brian T. Moynihan, 51, who is cutting jobs and selling assets to help restore investors' confidence. Bank of America lost almost half its value on the New York Stock Exchange this year through yesterday as investors speculated the lender would have to access the public markets to raise capital.
“This is a tremendous vote of confidence in the U.S. banking industry as well as Bank of America,” said Anthony Polini, an analyst with Raymond James Financial Inc. “Bank of America was being punished or victimized as one of the weakest U.S. banks that could be in financial distress. For Buffett to step up like this for BofA has implications for all the other banks.”
The lender jumped $1.03, or 15 percent, to $8.02 in New York Stock Exchange composite trading at 10:25 a.m., leading the KBW Bank Index higher. Berkshire fell less than 0.1 percent.
‘Acting Aggressively'
Buffett conceived of the investment while in the bathtub yesterday morning and had his assistant contact Moynihan's to get the banker's private number, CNBC reported, citing an interview with Buffett.
“Bank of America is a strong, well-led company, and I called Brian to tell him I wanted to invest,” Buffett said in the statement. “I am impressed with the profit-generating abilities of this franchise, and that they are acting aggressively to put their challenges behind them.”
Berkshire's warrants may be exercised at any time in a 10- year period, according to the statement. Bank of America can redeem the preferred stock at any time for a 5 percent premium.
Buffett helped prop up Goldman Sachs Group Inc. during the credit crisis in 2008 with a $5 billion investment that was repaid this year. The Goldman Sachs investment paid a 10 percent dividend. Berkshire is the largest stock investor in Wells Fargo & Co., the only U.S. home lender larger than Bank of America.
‘Plenty Profitable'
Banking can “still be plenty profitable,” Buffett told Bloomberg Television's Betty Liu on the “In the Loop” program on July 8.
The cost to protect against a default by Bank of America plunged. Credit-default swaps on the bank, which surged to a record this week, dropped 65 basis points to 308 basis points as of 10:43 a.m. in New York, according to data provider CMA.
Bank of America's trading floor in New York erupted in cheers and applause when the news was announced this morning, said a person at the company who witnessed the reaction but who wasn't authorized to speak publicly.
Moynihan agreed to sell the bank's Canadian card unit, with about $8.6 billion in loan balances, and plans to leave the U.K. and Irish card markets, Bank of America said this month. The bank has been forced to write down credit-card and mortgage units acquired by Moynihan's predecessor, Kenneth D. Lewis. Bank of America has sold more than 20 assets or units since Moynihan took over last year.
Job Cuts
The bank will eliminate about 3,500 jobs this quarter to focus “on what we can control” amid market turmoil, Moynihan said last week. Some workers already were informed of the dismissals, which are in addition to 2,500 reductions made this year, Moynihan said in a memo to senior managers.
Berkshire sold a stake in Bank of America last year and Buffett has publicly criticized Lewis, for missteps including the purchase of Merrill Lynch & Co., a deal struck the same day Lehman Brothers Holdings Inc. filed for bankruptcy in 2008.
Lewis “paid a crazy price, in my view,” Buffett said in remarks released Feb. 10 by the Financial Crisis Inquiry Commission. “He could have bought them the next day for nothing.” Moynihan became CEO early last year.
While the company suffered from errors, its reach among consumers are a source of strength, Buffett told CNBC in 2009.
“One thing about Bank of America,” Buffett said. “It has a wonderful deposit-gathering system.”
Warren Buffett says Berkshire Hathaway is the "dumbest" stock he ever bought.
He calls his 1964 decision to buy the textile company a $200 billion dollar blunder, sparked by a spiteful urge to retaliate against the CEO who tried to "chisel" Buffett out of an eighth of a point on a tender deal.
Buffett tells Becky that his holding company (presumably with a different name) would be "worth twice as much as it is now" — another $200 billion — if he had bought a good insurance company instead of dumping so much money into the dying textile business.
Here's his story:
BUFFETT: The— the dumbest stock I ever bought— was— drum roll here— Berkshire Hathaway. And— that may require a bit of explanation. It was early in— 1962, and I was running a small partnership, about seven million. They call it a hedge fund now.
And here was this cheap stock, cheap by working capital standards or so. But it was a stock in a— in a textile company that had been going downhill for years. So it was a huge company originally, and they kept closing one mill after another. And every time they would close a mill, they would— take the proceeds and they would buy in their stock. And I figured they were gonna close, they only had a few mills left, but that they would close another one. I'd buy the stock. I'd tender it to them and make a small profit.
So I started buying the stock. And in 1964, we had quite a bit of stock. And I went back and visited the management, Mr. (Seabury) Stanton. And he looked at me and he said, ‘Mr. Buffett. We've just sold some mills. We got some excess money. We're gonna have a tender offer. And at what price will you tender your stock?’
And I said, ‘11.50.’ And he said, ‘Do you promise me that you'll tender it 11.50?’ And I said, ‘Mr. Stanton, you have my word that if you do it here in the near future, that I will sell my stock to— at 11.50.’ I went back to Omaha. And a few weeks later, I opened the mail—
BECKY: Oh, you have this?
BUFFETT: And here it is: a tender offer from Berkshire Hathaway— that's from 1964. And if you look carefully, you'll see the price is—
BECKY: 11 and—
BUFFETT: —11 and three-eighths. He chiseled me for an eighth. And if that letter had come through with 11 and a half, I would have tendered my stock. But this made me mad. So I went out and started buying the stock, and I bought control of the company, and fired Mr. Stanton. (LAUGHTER)
Now, that sounds like a great little morality table— tale at this point. But the truth is I had now committed a major amount of money to a terrible business. And Berkshire Hathaway became the base for everything pretty much that I've done since. So in 1967, when a good insurance company came along, I bought it for Berkshire Hathaway. I really should— should have bought it for a new entity.
Because Berkshire Hathaway was carrying this anchor, all these textile assets. So initially, it was all textile assets that weren't any good. And then, gradually, we built more things on to it. But always, we were carrying this anchor. And for 20 years, I fought the textile business before I gave up. As instead of putting that money into the textile business originally, we just started out with the insurance company, Berkshire would be worth twice as much as it is now. So—
BECKY: Twice as much?
BUFFETT: Yeah. This is $200 billion. You can— you can figure that— comes about. Because the genius here thought he could run a textile business. (LAUGHTER)
BECKY: Why $200 billion?
BUFFETT: Well, because if you look at taking that same money that I put into the textile business and just putting it into the insurance business, and starting from there, we would have had a company that— because all of this money was a drag. I mean, we had to— a net worth of $20 million. And Berkshire Hathaway was earning nothing, year after year after year after year. And— so there you have it, the story of— a $200 billion— incidentally, if you come back in ten years, I may have one that's even worse. (LAUGHTER)
The day after Lehman collapsed in September 2008, David Sokol noticed that the stock of Constellation Energy, a Baltimore utility, was plummeting. He called his boss, Warren Buffett, and said, "I see an opportunity here." Buffett, who had noticed the same thing, replied after a brief discussion: "Let's go after it."
Constellation held vast amounts of energy futures contracts that had gone sour, and the company appeared to be on the verge of bankruptcy. Sokol, as chairman of the Berkshire subsidiary MidAmerican Energy Holdings, knew the utility industry and saw a chance to buy solid assets at a bargain price. The deal, however, had to be done within 48 hours or the company would have to file for bankruptcy.
Sokol phoned the office of Constellation CEO Mayo Shattuck III, who was in an emergency board meeting. When his assistant answered, Sokol told her he'd like to speak to him. The secretary replied that if she interrupted the meeting, she might lose her job. Sokol replied, "If you don't interrupt the meeting, you might lose your job."
Sokol boarded a Falcon 50EX and sped to Baltimore. He met with Shattuck and struck a deal that evening to buy the company for $4.7 billion, staving off bankruptcy.
Within weeks, before the acquisition was completed, Constellation's board received a competing bid from Électricité de France for about a 30% premium. The board liked the offer, and so did Sokol -- who walked away with a $1.2 billion breakup fee for Berkshire.
When investors think of Berkshire Hathaway, they of course think of Warren Buffett and his record as a hands-off, if highly attentive, CEO. He gives free rein to the heads of his large collection of companies, ranging from Geico to Dairy Queen to Benjamin Moore to the Buffalo News to NetJets. Yet even in Buffett's empire, sometimes a CEO blows it, and his business needs to be fixed or a deal needs to get done -- fast. When that happens, Buffett's go-to guy is David Sokol.
Of all Berkshire's lieutenants, Sokol, 53, is mentioned most often as Buffett's heir, although Sokol shrugs off such speculation. Buffett likes Sokol just where he is, getting deals done, boosting profits, and turning around ailing businesses. In the foreword to Sokol's book, Pleased but Not Satisfied, Buffett writes, "He brings the business equivalent of Ted Williams' .406 batting average to the field of business management."
Buffett first met Sokol in 1999 when Berkshire was buying MidAmerican, the Iowa utility. With longtime Buffett friend Walter Scott, Sokol had bought a small, $28-million-a-year geothermal business in 1991 and built it into that utility powerhouse. MidAmerican, headquartered in Des Moines, now represents an $11.4 billion slice of Berkshire's revenue (about 10%), and Sokol is its chairman. In 2007, Buffett asked Sokol to get Johns Manville, an underperforming roofing and insulation company, on track, and he did; he is now its chairman. In 2008, Charlie Munger, Buffett's vice chairman, asked Sokol to fly to China to conduct due diligence on BYD, a battery and electric car maker. Sokol liked what he saw, and Berkshire invested $230 million for 10% of the company. That stake is now worth around $1.5 billion. In April, when Buffett had concerns about a provision in the Senate financial regulation bill that would have required Berkshire and other companies to post billions of collateral on their existing derivatives, it was Sokol he sent to argue his case. Buffett's side of the argument won.
Last summer Buffett handed Sokol perhaps the biggest assignment of his career: turning around NetJets. The fractional-ownership jet company last year lost $711 million before taxes -- not the kind of performance that warms Buffett's heart. Today the company is profitable, and Fortune got a rare, exclusive view of how Sokol did it.
From Tiananmen Square to Possible Buffett Successor
By SUSAN PULLIAM
Twenty-one years ago, Li Lu was a student leader of the Tiananmen Square protests. Now a hedge-fund manager, he is in line to become a successor to Warren Buffett at Berkshire Hathaway Inc.
Mr. Li, 44 years old, has emerged as a leading candidate to run a chunk of Berkshire's $100 billion portfolio, stemming from a close friendship with Charlie Munger, Berkshire's 86-year-old vice chairman. In an interview, Mr. Munger revealed that Mr. Li was likely to become one of the top Berkshire investment officials. "In my mind, it's a foregone conclusion," Mr. Munger said.
The job of filling Mr. Buffett's shoes is among the most high-profile succession stories in modern corporate history. Mr. Buffett, who will turn 80 in a month, says he has no current plans to step down and will likely split his job after he leaves the company into separate CEO and investing functions. Mr. Li's emergence as a contender to oversee Berkshire investments is the first time a name has been identified to fill the investment part of Mr. Buffett's legendary role.
The development illustrates that Berkshire is moving toward putting in place—possibly sooner than investors anticipated—certain aspects of its succession plan.
The Chinese-American investor already has made money for Berkshire: He introduced Mr. Munger to BYD Co., a Chinese battery and auto maker, and Berkshire invested. Since 2008, Berkshire's BYD stake has surged more than six-fold, generating profit of about $1.2 billion, Mr. Buffett says. Mr. Li's hedge funds have garnered an annualized compound return of 26.4% since 1998, compared to 2.25% for the Standard & Poor's 500 stock index during the same period.
Mr. Li's ascent on Wall Street has been no less dramatic. He spent his childhood shuttling between foster families after his mother and father were sent to labor camps during the Cultural Revolution. After the Tiananmen Square protest, he escaped to France and came to the U.S. Investors in his hedge fund have included a group of senior U.S. business executives and the musician Sting, who calls Mr. Li "hardworking and clever."
Mr. Li's investing strategy represents a significant shift for Mr. Buffett: Mr. Li invests chiefly in high-technology companies in Asia. Mr. Buffett typically has ignored investments in industries he says he doesn't understand.
Mr. Buffett says Berkshire's top investing job could be filled by two or more managers who would be on equal footing and divide up responsibility for managing Berkshire's $100 billion portfolio. David Sokol, chairman of Berkshire unit MidAmerican Energy Holdings, is considered top contender for CEO. Mr. Sokol, 53, joined MidAmerican in 1991 and is known for his tireless work ethic.
In an interview, Mr. Buffett declines to comment directly on succession plans. But he doesn't rule out bringing in an investment manager such as Mr. Li while still at Berkshire's helm.
"I like the idea of bringing on other investment managers while I'm still here," Mr. Buffett says. He says he doesn't preclude making a move this year, though he adds that there is no "goal" to bring on an additional manager that quickly either. Mr. Buffett says he envisions a team approach in which the Berkshire investment officials would be "paid as a group" from one pot, he says. "I don't want them to compete."
Mr. Li fits the bill in some important ways, Mr. Buffett says. "You want someone" who "can think about problems that haven't yet existed before," he says. Mr. Li is a contrarian investor, loading up on BYD shares when they were beaten down. And he's a big fan of Berkshire, which may also help his cause. "We don't want them unless they have special feelings about Berkshire," Mr. Buffett says.
But hiring Mr. Li could be risky. His big bet on BYD is his only large-scale investing home run. Without the BYD profits, his performance as a hedge-fund manager is unremarkable.
It's unclear whether he could rack up such profits if managing a large portfolio of Berkshire's.
What's more, his strategy of "backing up the truck," to make large investments and not wavering when the markets turn down could backfire in a prolonged bear market. Despite a 200% return in 2009, he was down 13% at the end of June this year, nearly double the 6.6% drop in the S&P-500 during the period.
Mr. Li declines to discuss a potential Berkshire position, saying only that he feels fortunate to be a member of the Berkshire inner circle. "This is the stuff you can't conjure in dreams," he says.
Mr. Li was born in 1966, the year Mao Zedong's Cultural Revolution began. When he was nine months old, he says, his father, an engineer, was sent to a coal mine to be "re-educated." His mother was sent to a labor camp. Mr. Li's parents paid various families to take him in. He was shuttled from family to family for several years until moving in with an illiterate coal miner, with whom he developed a close bond, in his hometown of Tangshan. Living apart from his family as a child taught him survival skills, Mr. Li says.
He was reunited with his family, including two brothers, by age 10, when a massive earthquake hit his hometown, killing an estimated 242,000 people in the area, including the coal miner and his family. His nuclear family was spared, he says, but "most of the people I knew were killed."
At the time, he says he had no direction and was fighting in the streets. Mr. Li says his grandmother, who was among the first women in her city to attend college, inspired him to begin reading and studying. He later attended Nanjing University, majoring in physics.
In April 1989, he traveled to Tiananmen Square in Beijing to meet with students who were gathering to mourn the death of Secretary General Hu Yaobang, who was viewed as a supporter of democracy and reforms.
The students protested against corruption, among other things, and Mr. Li helped organize the students and participated in a hunger strike.
He and other students fled to France. Later in 1989, he traveled to the U.S. to speak at Columbia University, where human-rights activists embraced him as a hero. He spoke little English but landed an advance to write a book about his experiences.
Helped by financial scholarships at Columbia, Mr. Li quickly learned English. He simultaneously earned three degrees: an economics degree, a law degree and a graduate degree in business, according to Columbia.
With his student loans piling up, Mr. Li attended a lecture by Mr. Buffett at Columbia in 1993. At the time, the 1990s bull market was in full swing, and hedge funds were on the rise. Mr. Li says in China he didn't trust financial markets but hearing Mr. Buffett helped him overcome skepticism about stock investing.
He began dabbling in stocks using money from his book advance. By his graduation in 1996, he had built a sizable nest egg and says he thought he could retire. Instead he took a job at securities firm Donaldson Lufkin & Jenrette and then left to set up his own hedge fund. In 1997, he had set up Himalaya Partners, a hedge fund. Later he started a venture-capital fund to invest in U.S. technology companies.
It was a heady time on Wall Street. The Internet boom was beginning. Investors were clamoring to find hot stocks.
Through his human-rights contacts, Mr. Li quickly attracted well-heeled clients including Bob Bernstein, former chairman of Random House and founder of Human Rights Watch as well as the musician Sting. Other investors included financier Jerome Kohlberg, News Corp. director emeritus and Allen & Co. executive Stanley Shuman and hedge fund manager Jack Nash, Mr. Li says.
But Mr. Li bombed out in 1998, his first year as a hedge fund manager. His fund, which was invested chiefly in Asian stocks, was hammered by the Asian debt crisis, and lost 19%.
"I felt bad that people had trusted me," he says. "All they knew was I was a student activist and all they saw was losses."
His fortunes rebounded as the Asian crisis quickly faded. As 1998 began, so did a huge new bull market. By now, the hedge-fund industry was growing gangbusters, and by the end of 1999, Mr. Li's fund had regained its losses.
In 2002, hedge-fund giant Julian Robertson gave Mr. Li money to invest in his fund on the condition that the fund would make bearish as well as bullish bets on companies.
It wasn't a good fit. Mr. Li says he "hated" betting against stocks, complaining that he had to "trade all the time" to adjust his portfolio. (The remaining parts of the fund now are being unwound.) Mr. Robertson declined to comment on the business relationship.
One of Mr. Li's human-rights contacts was Jane Olson, the wife of Ronald Olson, a Berkshire director and early partner at a Los Angeles law firm Mr. Munger helped found. Mr. Li began spending time at the Olsons' weekend home in Santa Barbara, Calif., and on Thanksgiving 2003 met Mr. Munger, whose home is nearby.
Mr. Munger says Mr. Li made an immediate impression. The two shared a "suspicion of reported earnings of finance companies," Mr. Munger says. "We don't like the bull—."
Mr. Munger gave Mr. Li some of his family's nest egg to invest to open a "value" fund betting on beaten-down stocks.
Two weeks later, Mr. Li says he met again with Mr. Munger to make certain he had heard right. In early 2004, Mr. Li opened a fund, putting in $4 million of his own money and raising an additional $50 million from other investors. Mr. Munger's family put in $50 million, followed by another $38 million. Part of Mr. Li's agreement with Mr. Munger was that the fund would be closed to new investors.
Mr. Li's big hit began in 2002 when he first invested in BYD, then a fledgling Chinese battery company. Its founder came from humble beginnings and started the company in 1995 with $300,000 of borrowed money.
Mr. Li made an initial investment in BYD soon after its initial public offering on the Hong Kong stock exchange. (BYD trades in the U.S. on the Pink Sheets and was recently quoted at $6.90 a share.)
When he opened the fund, he loaded up again on BYD shares, eventually investing a significant share of the $150 million fund with Mr. Munger in BYD, which already was growing quickly and had bought a bankrupt Chinese automaker. "He bought a little early and more later when the stock fell, which is his nature," Mr. Munger says.
In 2008, Mr. Munger persuaded Mr. Sokol to investigate BYD for Berkshire as well. Mr. Sokol went to China and when he returned, he and Mr. Munger convinced Mr. Buffett to load up on BYD. In September, Berkshire invested $230 million in BYD for a 10% stake in the company.
BYD's business has been on fire. It now has close to one-third of the global market for lithium-ion batteries, used in cell phones. Its bigger plans involve the electric and hybrid-vehicle business.
The test for BYD, one of the largest Chinese car makers, will be whether it can deliver on plans to develop the most effective lithium battery on the market that could become an even bigger source of power in the future. Even more promising is the potential to use the lithium battery to store power from other energy sources like solar and wind.
Says Mr. Munger: "The big lithium battery is a game-changer."
BYD is a big roll of the dice for Mr. Li. He is an informal adviser to the company and owns about 2.5% of the company.
Mr. Li's fund's $40 million investment in BYD is now worth about $400 million. Berkshire's $230 million investment in 2008 now is worth about $1.5 billion. Messrs. Buffett, Munger, Sokol, Li and Microsoft founder and Berkshire Director Bill Gates plan to visit China and BYD in September.
Mr. Li is able to travel in China on a limited basis today, but he hopes to regain full travel privileges soon. It isn't clear how he is viewed by the Chinese government.
Mr. Li declined to name his fund's other holdings. Despite this year's losses, the $600 million fund is up 338% since its late 2004 launch, an annualized return of around 30%, compared to less than 1% for the S&P 500 index.
Mr. Li told investors he took a lesson from watching the World Cup, comparing his investment style to soccer. "You may very well work extremely hard and seldom score," he says. "But occasionally—very occasionally—you get one or two great chances and you make decisive strikes that really matter."
To state the matter simply, a shareholder voting "yes" today is authorizing a huge transaction without knowing its cost or the means of payment.
What we know with certainty, however, is that Kraft stock, at its current price of $27, is a very expensive "currency" to be used in an acquisition. In 2007, in fact, Kraft spent $3.6 billion to repurchase shares at about $33 per share, presumably because the directors and management thought the shares to be worth more.
Warren Buffett’s Berkshire Hathaway Inc. offered $1.7 billion in cash to buy Bermuda-based reinsurer IPC Holdings Ltd. earlier this month, said two people with knowledge of the bid.
Berkshire is the “Party M” named in a regulatory filing today as making a July 1 bid, according to the people, who asked not to be identified because the offer wasn’t public. The bid was rejected in favor of a lower stock-and-cash offer from Validus Holdings Ltd. because Party M demanded IPC not pay a third-quarter dividend, the filing said. Party M is called “a global insurance and reinsurance company” in the document.
Buffett built Omaha, Nebraska-based Berkshire into a $140 billion company by investing premiums from insurance and reinsurance operations while waiting for claims to emerge. Berkshire’s largest acquisition was the $16 billion purchase of reinsurer General Re in 1998, and Buffett’s firm has invested more than $2 billion in Swiss Reinsurance Co. in the past year as the Zurich-based firm was hobbled by writedowns.
“A deal with IPC could have been a cost-effective way for Berkshire to spread its wings even more” in reinsurance, said Bill Bergman, an analyst at Morningstar Inc. in Chicago. “The environment for deals is getting better every day” amid the recession, he said. IPC’s book value, a measure of assets minus liabilities, was about $1.85 billion as of March 31.
The Berkshire Hathaway annual movie has begun. It started with a cartoon of Warren Buffett, Charlie Munger and other executives acknowledging a difficult year in 2008 and pledging to work hard in 2009. Not even Berkshire escaped the global recession unscathed.
8:45
The Qwest Center Omaha is packed to the rafters. The arena seats more than 18,000 people. About 35,000 shareholders are in Omaha this year, many of them spilling out into the exhibition hall at the adjoining convention center. The annual meeting is piped into the hall and other rooms so people can watch and hear it.
8:52
Late night television and other comedians were highlighted in one snippet of the annual movie, joking about the recession and government efforts to revive the economy. One was David Letterman proclaiming it was a good time to buy stocks, playing off Buffett's advice at one point in the crisis. Letterman suggested that instead of that latte you are accustomed to buying, folks should pick up a few shares of GM.
9:03
Another segment has Buffett in Berkshire-owned Nebraska Furniture Mart taking a nap on a mattress, checking "product quality." A manager steps up and tells him the days of sleeping until the phone rings are over, given the stock plunge for Berkshire in 2008. Buffett agrees and tries to sell a mattress to a customer, saying the board of directors suggested he find something else to do. Buffett told the customer it had something to do with a downgrade in Berkshire's credit rating. He gets her to buy a mattress called the "Nervous Nellie," a big seller since the Dow Jones industrials dropped. The mattress features pockets into which can be placed cash and other valuables. The woman goes off to buy the mattress and Buffett takes out all the cash displayed in the mattress, along with a Nebraska Cornhuskers football, magazines and other items. He calls Charlie Munger to set up delivery.
9:17
Viewers of the annual movie learned the history of Geico auto insurance company's advertising icon Gecko. The lizard was not like other gecko's, the story goes, and hung out with a family cutting out coupons to help save people money. Then the Gecko left a note with the family, saying he wanted to strike out on his own, to bigger and better things. His lonely life changed when he received calls from people confusing him with Geico. He visited Geico's offices and the chief of marketing realized the Gecko wanted to help save people money, just like Geico tries to do with auto insurance. Geico sounds like Gecko, and the advertising legend was born.
9:21
Like last year, a comedy sketch is featured this year, with an investment banker interviewed about the complex financial instruments that backed bad home mortgages. Asked what caused the setup to unravel, the investment banker said people started to ask what the mortgages were actually worth. "Oh for the good old days," the banker sighs.
9:24
The annual movie is over.
9:27
Warren Buffett and Charlie Munger have taken their seats. Buffett says questions and answers will be different this year, with journalists alternating questions e-mailed by shareholders with those posed by shareholders in the audience.
9:33
Buffett notes that U.S. Treasury bonds recently have had negative yields. He said people might not see that phenomenon again in their lifetimes.
9:33
Journalist Carol Loomis says more than 5,000 questions were relayed to three journalists involved.
9:40
Journalist Carol Loomis said more than 5,000 questions were submitted via e-mail. The first question relates to derivatives and whether those financial deals are good for Berkshire. Buffett says over time, Berkshire expects to make money on the current deals. Buffett says the only money that crossed hands in the stock market deals so far has been $4.9 billion given to Berkshire in premiums. Buffett says the company can use that money for the next 15 to 20 years. And the stock markets on which the deals are made are expected to be higher than when the deals were struck.
9:47
tt
9:52
Buffett and Munger said the government's response to the financial crisis has not been perfect but it has been reacting the best it can. Munger said given the emegency the government should be judged with some leniency.
10:08
Journalist Andrew Ross Sorkin of the New York Times says about 300 shareholders had a similar question: Why does Berkshire keep a high investment in Moody's at a time that credit agencies are being criticized for conflict of interest and using flawed history based models? And why not use Berkshire's clout to change the behavior of the credit agencies. Buffett says the big mistake ratings agencies, Congress, bankers and buyers of homes made was thinking housing prices would continue to rise _ and then they collapsed. Buffett says ratings agencies continue to be a good business because there are not many of them and they deal with a large part of the capital markets. Buffett said Berkshire also does not buy stocks in companies to change their behavior. Buffett says in fact he has tried to influence behavior in the past, and never has been very successful.
10:17
Buffett is asked how the four investment managers chosen as possible successors to him did in 2008, a very difficult year. Buffett says there are three candidates as CEO, all are internal candidates. There are four possible investment successors, and one or more could be chosen. They are from inside and outside Berkshire. The four investment managers did no better than match the S&P 500. In 2008 they did not cover themselves with glory, Buffett says, but neither did he, so he is tolerant. Munger says any investment manager he knows who is regarded as intelligent and the rest, they all got creamed last year. Buffett says the investment managers over 10 years have done better. Buffett says he has not changed the list of four possible investment managers, either. Buffett says the CEO job is different, that person needs to step right in if something happens to Buffett. But Buffett says one or more investment managers do not have to actions right away. Buffett says an announcement should not be expected right away on investment managers if something happens to him. But within a month or so, an announcement might be made.
10:24
Becky Quick of CNBC says a question about three candidates for CEO successor: What are benefits of bringing in CEO early to give that person a chance to get used to the job? Buffett says he has heard that question before. Buffett says if there was a good way to inject someone into a role that would that person a better CEO for Berkshire, they would do that. But he says the three CEOs are running major businesses right now, and to sit in the office while Buffett is reading or on the telephone -- there is really nothing to do. He says "it would be a waste of talent." Buffett says the three candidates are 100 percent ready for the job right now. He says the biggest job they will have is developing relationships with potential buyers of businesss, with the world at large, with the shareholders. He says that will take time, though not a great deal of time. He says they know how to run businesses, and they probably would do some things better than he would. Munger says a lot of models that have worked well in the world, like Johnson and Johnson, work something like Berkshire and these talents pop up in the subsidiaries.
10:32
A shareholder asks Buffett to explain his investment strategies, like value investing, and how teach young people. Buffett says he brings in college students to talk with them each year. Buffett says he tells them it is important to know how to value a business and to know how to judge the markets. He says there would be nothing about modern portfolio theory or anything like that. He says it is important to know your circle of competence, start small and learn as you go along. Buffett says some accounting principles also are important. And then learn about market fluctuations and learn that the market is there to serve you. And that is not an issue of a high IQ, but rather an emotional stability and inner peace about the decisions you have made. Munger says there is the basic problem of always having half the future investors in the world in the bottom 50 percent. Munger says largely people should reduce the nonsense. Buffett and Munger agree that emotional makeup is more important than a high IQ. Buffett says he is asked by college students, "what are we being taught that is wrong?" Munger asks how Buffett can handle that question in just one session.
10:36
Buffett is asked how he would replace someone like Ajit Jain in the insurance division. Buffett says you don't, that Jain is unique. But authority does not go to the position -- it goes to the person.
10:46
A shareholder asks how Buffett views the markets' valuation of Berkshire shares. The market has it down 30 percent, while earnings were not down that far. Buffett says the shareholder put his finger on something there. Buffett says the investments are what they are in the stock market, so he does not have a problem with that side of the equation. Buffett says the earning power of businesses were down last year and will not do as well this year. But they are by and large good businesses. He says a few of them have problems, others will do very well. Buffett says Berkshire was cheaper in the stock market last year than its intrinsic value would indicate, but most companies were in the same boat. Buffett says over time, both stock price and intrinsic value will increase. And he hopes the operating companies over time will do better. Munger says last year was a bad year for a float business, making the owner of the float (insurance premiums held by Berkshire that can be invested) appear to be worth less than the owner will be worth over time. Munger says Berkshire's casualty insurance business is probably the best in the world. He says other companies in Berkshire's holdings also rank high in the world. Munger says if you think it is easy to get in the position that Berkshire occupies, you are living in a different world than the one that I occupy. Buffett says Berkshire's insurance business is remarkable, with remarkable managers. Buffett says with the economic meltdown, like the China Syndrome or something, it hurt jewerly and NetJets and other businesses, American Express, etc. But the meltdown also caused the phones to ring more at Geico. Buffett says all of a sudden saving money became very important. Buffett says that builds a lot of value over time. Buffett says Geico is now the third largest auto insurer in the country this year and the fundamentals are in place to take Geico much higher.
