Look, Barron’s can say what they want about Warren Buffett, and his company Berkshire Hathaway, but I have just one thing to say here: Berky is the ultimate anti-volatility asset.? When the hurricanes hit in 2005, I told my boss that the easy money, low-risk, low-reward play was to buy Berky.? My boss liked to take risks, so that idea was shelved. Too bad, it was easy money.? After all, who could write retrocessional coverage (Reinsuring reinsurers) except Berky?? Every other writer was broke or disabled…
Now we have a different type of hurricane.? Prior bad lending practices are destroying lending/insurance capacity in mortgages and elsewhere.? This could be an investment opportunity for Berky.? Thing is, outside of the Sovereign Wealth Funds, Berky has one of the biggest cash hoards around, and during times of panic, where assets get sold at a discount, cash is valuable.
So during times of panic, we should expect Berky’s valuation to expand.? This is one of those times.
One final note: suppose Buffett, much as he doesn’t want to be an asset manager, decides to take Ambac private.? How would he do it?? Think of what he has done in other cases: he creates a nonguaranteed downstream holding company, capitalizes it to a level necessary for a AAA rating, and buys Ambac.? Warren never guarantees the debt of subsidiaries that he buys.? Why should he reward bondholders of his target companies?? Isn’t it enough that he pays the debts?
Well, yes, sort of.? Warren has never sent a subsidiary into insolvency, but he clearly reserves the right to do that.? Bondholders have given him that right, and I would not blame him for using that right under extreme circumstances.
That said, Berky’s excess cash offers opportunities at present, because Buffett can use that cash to snap up distressed assets when he chooses to do so, and at minimal risk to Berky if an acquisition fails.
Tickers mentioned: BRK/A, BRK/B, ABK
If he ever does send a subsidiary into insolvency, one candidate would have to be Blue Chip trading stamps (see http://www.berkshirehathaway.com/letters/2006ltr.pdf ):
“Last year, in Berkshire?s $98 billion of revenues, all of $25,920 (no zeros omitted) came from Blue Chip. Ever hopeful, Charlie and I soldier on.”
Berky is the ultimate anti-volatility asset. When the hurricanes hit in 2005, I told my boss that the easy money, low-risk, low-reward play was to buy Berky. My boss liked to take risks, so that idea was shelved. Too bad, it was easy money.
I first purchased Berkshire for myself and client accounts in 2004. I added more in the Sep 05 sell-off, and added even more in 06 as it appeared to be a complete no-brainer the stock price was substantially lagging the business value. Up until just a few weeks ago, it was a 30% portfolio allocation (recently trimmed to 15%). It was such an easily identifiable source of market outperformance which leads me to my point about your comment about your boss.
Presumably, he is a sharp, intelligent individual. Probably a CFA, and maybe a MBA from a good school. So how/why did he miss this when you clearly outlined it for him?
This is a fascinating subject to me as I have worked as an analyst in an institutional environment. I think many pros underperform not because they are dumb, but for some inexplicable reason when a no-brainer opportunity is staring them in the face they choose to pass. I remember absolutely pounding the table for emerging markets back in 2003 to my boss when they were at single-digit multiples. I failed to persuade him to include them in our portfolios. That was a couple hundred percent ago.
I don’t think that Berkshire Hathaway will ever buy Ambac or MBIA, because neither Warren nor Charlie (especially Charlie) think that either firm deserves a AAA rating, and that the business model is flawed.
I thought Blue Chip was now just the holding company for See’s Candies.
My boss was a bright guy, but we all have foreshortening mechanisms, that though they normally help us, can blind us to opportunities. One common one is that you can’t get an edge on really big companies, because they are overanalyzed. True most of the time, but not always.
Also, I did not pound the table on that one. Partly my fault.
I don’t think Buffett would buy Ambac either, but my point (ill-made) was how he would structure such a purchase. He never obligates the top-level holding company.
MIke C; great stories!
MIke C; great stories!
??? Not sure I follow. FWIW, I worked for a bank trust and investment management division. I think somewhere Buffett talks about how basically inept bank trust departments are. From my experience, he is absolutely correct.
During my brief time there (the boss and I didn’t see eye to eye on ALOT of things so I wasn’t there very long) we held Nokia when it dropped to 12-13. The immediate reaction was to sell the position from the boss and the Investment Committee. I thought we should double the position. 3+ years later Nokia is at 36. I think the truth is that many professional investors are just as emotional, irrational, and reactive as individual investors even if they have the education and credentials like MBAs and CFAs, and I think Buffett has it 100% correct that successful investing is more about temperament and wisdom, then raw intelligence.
Not sure about large companies being overanalyzed leading to “no edge” possible. Just off the top of my head, I’m thinking MO and PG in 2000, MCD in early 2003. I think large companies are just as prone as small companies to overreactions to temporary problems or just plain apathy that provide the setup for substantial future outperformance. Right now, I’m looking hard at HOG which is at a 4-year low, 11x earnings, and 3% yield.
David, I understood the point you were making about Buffett, and I hope you get a kick of having excerpts of your blog quoted in publications like the Financial Times, even if they make a hash of it like the rest of the financial media. But since the difference between buying stocks (what most of us do) and buying companies (how Buffett makes most of his money in the modern era) eludes the media, it’s not surprising that a subtle point about how to deal with the downside of losing limited liability for corporate buying went soaring over their head.
Andrew Bary, the author of the Barron’s article about Berkshire Hathaway, proposed AIG as a superior investment to Berky. To me, this is a red flag that the author might not know as much as he claims.
Mike C. I always learn a lot from reading real world experiences and yours are instructive. When the market experienced big sell-offs from 2001 to early 2003 I had several client’s call me literally within an hour or so of the bottom to sell everything and tell me “you’re fired!!”. David’s investment and rebalance approach has really worked well in my client accounts this year and prevented several big mistakes on my part (basically from overreaching and not rebalancing). Thanks to all and Merry Xmas