Portfolio Management – Page 70

Sorted Weekly Tweets

Posted on 3 March 20123 March 2012 by David Merkel

I am considering making this an end-of-the-week feature as a news recap.? Comments?

Financials

BofA?s Clash With Fannie Intensifies as Insurers Reject More Loan Claims http://t.co/fKgxwcVO Originators need to bear UW error results $$ Mar 03, 2012
Life as Libor Traders Knew It Seen as Abusive http://t.co/H5o5cH3G An inside look at the problems of LIBOR. Collusion & marketless numbers Mar 03, 2012
$AIG Earnings an Illusion of a Bend in US Tax Laws http://t.co/GCZHUKsu IRS gives AIG special treatment by allowing it to use NOLs post-BK Mar 03, 2012
You have a good point, and I may reference it when I write this evening, but valuations have compressed for all insur? http://t.co/BRTuHnvf Mar 01, 2012
Fannie, Freddie and the $180 billion hole http://t.co/Lnoh7VPH F&F transferred wealth to early investors from taxpayers & late investors $$ Feb 25, 2012
Make losses and prosper, AIG edition http://t.co/EYykmbmZ Hey Q: how much $$ will $AIG make in the future in order to not pay taxes? $$ Feb 25, 2012

Berkshire Hathaway

Contra: Warren Buffett on Investing http://t.co/OH0dQxXP Buffett has not been a deep value investor for 30 years; this article misses it $$ Mar 02, 2012
+1 RT @valueprax: Thoughts On Mergers, Acquisitions And Conglomeration From Rothbard And Buffett (@AlephBlog, $BRK) http://t.co/khZH5Uiq Mar 01, 2012
The Truthiness of Berkshire’s Performance http://t.co/5iSsrAHL Don’t think Buffett anticipated the P/B squeeze in insurance stocks. $$ Mar 01, 2012
Buffett Plans More Solar Bonds After Topaz Deal http://t.co/pjrAKQub Buffett doesn’t give suckers an even break, no guarantees on solar $$ Mar 01, 2012
RE: @TheStreet_News When I wrote for RealMoney, I was often critical of Buffett, but I have shifted.? He is a great e? http://t.co/r4z14uUC Feb 29, 2012
When you think you made a great purchase (Warren Buffett edition) http://t.co/ME9RwqFf I was surprised to learn about this $BRKa sub also $$ Feb 28, 2012

Home Schooling

Question of priorities, could conserve RT @ReformedBroker: “How am I supposed to live on $350,000 a year?” – you’re right, kill yourself $$ Mar 01, 2012
@ReformedBroker Have his wife call my wife; can save lots of $$ if u go from private school 2 homeschool, & it is easier than 1 would expect Mar 01, 2012
@ReformedBroker The downside is that it is a lot of work, but not hard work, and the challenge is controlling your children frequently $$ Mar 01, 2012
@merrillmatter I know you’re kidding, but the mothers I know who homeschool would be fearsome in the business world were they redirected $$ Mar 01, 2012

Municipal Finance, or lack thereof

If Stockton Is Broke, Then Why Isn?t San Diego? http://t.co/dzCE9FjX Govt Unions fight to keep benefits govts shouldn’t have granted $$ Mar 03, 2012
Pension Pain Mounts, Low Rates Boost Liabilities http://t.co/NZndpR5g More evil results of Fed policy substituting debt 4 organic growth $$ Mar 01, 2012
To Pay New York Pension Fund, Cities Borrow From It First http://t.co/feOXK8E3 Shell game at best; net contributions needed to DB plans $$ Feb 29, 2012
Raiding the coffers http://t.co/5h2Fx5ZL State pension plans r borrowing from their pension plans 2 fund their own pension contributions Feb 29, 2012

North Korea

@LSilverspar You made me laugh, yes, all of these have impacts on us… but given their counterfeiting, some action should be taken $$ Feb 29, 2012
@dpinsen And access of the Dear Leader to his favorite Scotch… hitting him where it hurts. 😉 $$ Feb 29, 2012
@dpinsen Agree, bigtime. We got them to the bargaining table last time by cutting off their financial access to the rest of the world. $$ Feb 29, 2012
Then once NK starts to counterfeit it, go back to new $50s & $100s; make their life tough. Feb 29, 2012
How the U.S. Could Pressure North Korea Tomorrow: Quit the $100 Bill http://t.co/DkXUZsy7 This is worth doing, and create a $75 bill $$ Feb 29, 2012

Eurozone

Greek PSI exchange summary – an offer you can’t refuse http://t.co/K4OUOqm3 Yes, we all voluntarily give up 70% of the value of r claims $$ Mar 03, 2012
Greek Crisis May Test the Value of Swaps http://t.co/hG27iIak ISDA wimps out and does not declare a credit event; will destroy Sov CDS mkt Mar 03, 2012
A Primer on the Euro Breakup http://t.co/OB2sdwzB Explains why the Euro will break up, at least at the fringe &y this should not surprise $$ Mar 02, 2012
ECB Free Money May Carry a Cost http://t.co/g1bNl281 Makes governments relax & ignore structural problems, & banks arb the ECB $$ Mar 01, 2012
ECB Allots ?529.5 Billion in Long-Term Refinancing Operation http://t.co/8o0OE7XO Higher than anticipated takeup of cheap funding $$ Feb 29, 2012
More signs of Draghi’s “stabilization” http://t.co/zdFol9Vj euro area banks show material tightening conditions in the banking system $$ Feb 28, 2012
On PIGS on Drugs http://t.co/VtOZYdwt European states owe ?12-15 billion to the pharma industry; they stop paying suppliers b4 cutting staff Feb 28, 2012
http://t.co/wQYFVFWH “Amused – Italian banks figured it out. An hour before LTRO results, 5 Italian banks issued & bought their own bonds.” Feb 28, 2012
Europe Gets Ready for Round 2 of Bank Loans http://t.co/N0rpX9O7 Heightening the dependence of stressed banks and govts on the ECB. $$ Feb 28, 2012
You may want to hold off on buying that Italian villa http://t.co/EP92Zd4m 66.5% of agents report a fall in housing prices during 4Q $$ Feb 28, 2012
@japhychron Can’t think of anyone, btw, there is a theory that a decent # of stressed banks used LTRO 2 buy in their own debt… $$ Feb 28, 2012
LTRO programs’ impact on sovereign bond purchases by banks (past and present) http://t.co/ffbNfY3B Indirect way of financing fringe govts $$ Feb 28, 2012
Mario Draghi reveals the Grand Plan http://t.co/Dal4wEDo & http://t.co/KNj9mhgx Good austerity results in freer mkts, more growth $$ Feb 28, 2012
Merkel torn by conflicting pressures in Greek vote http://t.co/0iCZV4kQ Any other Firefox users noticing that Reuters pages format badly? $$ Feb 27, 2012
@moorehn Good piece, I think many will benefit @soberlook has been writing some good stuff also http://t.co/tAlkFpXR & http://t.co/jcLBc04c Feb 24, 2012

China

China?s Billionaire Lawmakers Make US Peers Look Like Paupers http://t.co/d2haqyDc China’s lawmakers r absolutely more wealthy than US peers Mar 01, 2012
China May Double Rare Earth Exports as Demand Rebounds http://t.co/MaDQX4rc Quite a change from prior, makes u wonder why they change… $$ Mar 01, 2012
Why China Will Have an Economic Crisis http://t.co/xn3W2Wxa This is getting very mainstream, makes me think I could be wrong. $$ Feb 29, 2012
Fortress? Michael Novagratz on Lessons from OWS, and China http://t.co/yTSqXqYR Cronyism raises the odds of domestic violence in China $$ Feb 25, 2012
Evil Overlords or Lucky Devils: The Men Who Rule Hong Kong http://t.co/BEqw7Z0Z Long but interesting, re the influential wealthy in HK $$ Feb 25, 2012

Credit

Junk Isn?t http://t.co/olYEeOGe Spreads are down and investor interest is up; this is my biggest intermediate-term concern at present. $$ Mar 02, 2012
Junk vs. Loans http://t.co/JbIHAFtt & http://t.co/tccF8pML Loan participation funds cheap compared 2 junk, but downside still there. Feb 29, 2012
The rating agencies are the farm teams for credit analysts, in the same way that Value Line is for stock analysts.? A? http://t.co/Qfj1lYhu Feb 29, 2012

Upcoming Book of Josh Brown

I invite you to read his website http://t.co/Qom9t2Zy .? He writes a lot of clever stuff there.? One of ? http://t.co/r34pi1pR Feb 29, 2012
Confessions of a Reformed Stockbroker http://t.co/B4dkJ5XI Another preview article 4 @reformedbroker ‘s forthcoming book $$ Feb 29, 2012

Personal Investing

Dividends Rise Again http://t.co/gT6AcZXq Their coffers bulging with cash, companies are increasing the once out-of-favor common dividend $$ Mar 03, 2012
IRAs Get Sexier http://t.co/XVG5u56g All manner of illiquid assets can b crammed in2 an IRA if you have a friendly custodian $$ #beware Mar 03, 2012
Treasury yields and credit spreads divergence is not sustainable http://t.co/LvfHNU4t Ordinary times credit spreads r inverse 2 Tsy yields Mar 02, 2012
The Myth of Commodity Diversification http://t.co/ZoMhgv7M A defense of why gold is a true diversifier of portfolios versus commodities $$ Feb 29, 2012
Conflict of All Conflicts http://t.co/RgZmO3nv from @reformedbroker I rarely get angry, but this one annoyed me; skewed incentives $$ Feb 29, 2012

Accounting rules (yes)

Standard Setters Strain 2 Avert More Revenue-Recognition Angst http://t.co/jRlnmLPa Industry-specific revenue policies r better; reject IFRS Mar 03, 2012
Another “Case” of Terrible Decisions Borne of Terrible Accounting Rules http://t.co/wb2PB5BF Don’t compromise on revenue recognition. $$ Feb 29, 2012
Mark-to-Market Pensions Show Brutal Year http://t.co/NhwMePZG Some companies are biting the bullet and moving pension acctg to mark2mkt $$ Feb 25, 2012

Corporate News

Natural Gas Renaissance Sparks Favorable Chemical Reaction http://t.co/G0QHxkVu Petrochemicals benefit from cheap fracking feedstock $$ Mar 02, 2012
Apple Dividend May Return Part of $98B Cash http://t.co/FzFTTr2X If $AAPL can’t use all of its cash then give it to shareholders $$ Feb 29, 2012
@PlanMaestro Operating profitability is poor, and given their business mix, their P/B is fair for a company with a 5% anticipated ROE. Feb 29, 2012
@ToddSullivan Now if they can achieve a decent ROE, and not have weak reserving… I was wrong regarding Maiden Lane when I wrote about it. Feb 29, 2012
CNA: A P&C Insurance Turnaround Story http://t.co/WRwhf5sV A fair analysis of $CNA, worthy for insurance investors 2 read. O, he cites me $$ Feb 29, 2012
One thing that is not mentioned frequently is that shale gas production profiles tend to peak and decline rapidly. Th? http://t.co/flnQvRwt Feb 28, 2012
?Hope Phase? for Stocks May End in Tears Again http://t.co/z6Sbfu7n Markets anticipate sustained US growth & soft landing for China $$ Feb 28, 2012
Confronting a Law Of Limits http://t.co/kIFgxwk8 How does $AAPL grow into its valuation? Especially where obsolescence moves rapidly? $$ Feb 25, 2012

Miscellaneous

FDA Warns on Statins http://t.co/7K37iJVe Every drug has side effects, w/statins it may be diabetes. Be wary, & avoid all drugs if u can $$ Mar 01, 2012
Seriously? Any reason to avoid it? RT @kasie: Days since Mitt Romney has taken questions from the national traveling press corps: 17. Feb 25, 2012
Slavery should be an issue where liberals and conservatives could agree for policy, and maybe apply the Palantir technology 2 root it out $$ Feb 25, 2012
Fishing as Slaves on the High Seas http://t.co/0Bakkir5 Another place where slavery still exists; sex trade, Dubai construction & more $$ Feb 25, 2012
Why Doctors Die Differently http://t.co/e3rnOTz8 Careers in medicine taught them the limits of treatment & the need to plan for the end Feb 25, 2012
‘Japanese Madoff’ Flagged http://t.co/U7vgrOap Industry Newsletter Warned in 2009 About Firm’s ‘Unnaturally Stable Returns’ $$ #ponzi Feb 25, 2012
Killer App http://t.co/kUT8X9Ji Have a bunch of Silicon Valley geeks at Palantir Technologies figured out how to stop terrorists? Palantir. Feb 25, 2012
At 35, I was a devoted Husband and Dad of 5 children, with the oldest being 7 years old.? Nominally, I was the invest? http://t.co/AYUuRMsi Feb 25, 2012
War with Iran:Would you go bankrupt for your country? http://t.co/d5rVA9Ww War does not stimulate the economy, contrary 2 popular belief $$ Feb 25, 2012

Economy

Is Japan Doomed? http://t.co/qZev2jSA What? There’s a free lunch where the Govt can borrow indefinitely? NO! Cash flows about 2 shift b wary Mar 02, 2012
Core inflation is once again above expectations http://t.co/uxjbXofE There is inflation coming; stagflation even; bad policy begins to bite Mar 02, 2012
A Wake-Up Call for Japanese Watchdogs http://t.co/r1JMhnM2 Bigger than MF Global, smaller than Madoff; how do you say Ponzi in Japanese? Feb 28, 2012
Oil denominated in EU currencies is at record highs; demand destruction likely http://t.co/KwWkFvJM Wonder where breaking point is? $$ Feb 28, 2012
Gundlach warns U.S. stock market vulnerable http://t.co/g8hKrNSJ Investors concede rally almost over; still expect to earn coupon-> danger Feb 28, 2012
Architecture Billings Index indicated expansion in January http://t.co/nZV1OCdw leading indicator 4 new Commercial Real Estate investment $$ Feb 28, 2012

Difficult Decision

Posted on 2 March 2012 by David Merkel

We would all like our practical decisions to go easily, and bear quick positive results.? That’s not reality.? As for me, I needed to decide whether I would:

borrow against my home at 3% for 15 years.
liquidate a portion of my taxable brokerage account
liquidate shares in best private manufacturer of commercial lawn mowers in the world.

I decided on the flexible and probably low-cost solution, selling some of the taxable brokerage account.? I have two accounts, an IRA and the taxable account.? They were invested differently, but my investors get a blend of the two accounts.? I used to put the higher income names into the IRA, while the taxable account would take the lower income names.

That has been changed. Both portfolios have the same proportion of names (companies). In the process, gains have been realized, but not so much as overwhelm the deferred losses of the past.

But for this exercise, one salient result was that both portfolios, which are the model portfolio in aggregate, would become like the model portfolio.?? They are now clones of each other, as is true of all client portfolios that I manage.? My promise to clients is that they get what I get, so I create a clone of my portfolio for each client.? It certainly aligns my incentives with theirs.? Even after today, my next-largest client is 20% of my aggregate portfolio.? So, yes, I eat my own cooking, and in general, my cooking has been tasty over the last twelve years, even though the last year has been less than inspiring.

On the bright side, with the market up, it has allowed me to harvest an amount that will take care of my family for a year, while leaving my portfolio up considerably from one year ago.? That helps a lot when revenues from managing money are still light.

Hopefully, within a year, I will have enough clients that my revenues support my family.?? We’ll see; but if that doesn’t happen I know there are a number of firms that would like to employ me, so my downside is limited.

One final note: one reason why this was a difficult decision was that the low rates for mortgaging my home were more difficult to obtain while self-employed.? Aside from my investments, I am not earning as much as I used to.? The fixed costs of liquidating part of my portfolio were 6% of the fixed costs of obtaining the mortgage.? Beyond that the question remains as to how well equities will do in the future, a question for which I have no good answer.

I think I made the right move here; I usually do, generally, but we will see whether this was the right decision over the next few years.

Notes on the 2011 Berkshire Hathaway Annual Report, Part 4 (10K Issues)

Posted on 1 March 20123 March 2012 by David Merkel

From the 10K:

BHRG periodically assumes risks under retroactive reinsurance contracts. Retroactive reinsurance contracts afford protection to ceding companies against the adverse development of claims arising under policies issued in prior years. Coverage under such contracts is provided on an excess basis or immediately with respect to losses payable after the inception of the contract. Coverage provided is normally subject to a large aggregate limit of indemnification. Significant amounts of environmental and latent injury claims may arise under the contracts. Under certain contracts written over the last five years, the limits of indemnification provided are exceptionally large. In March 2007, an agreement became effective between NICO and Equitas, a London based entity established to reinsure and manage the 1992 and prior years? non-life liabilities of the Names or Underwriters at Lloyd?s of London. Under the agreement NICO is providing up to $7 billion of new reinsurance to Equitas. In 2009, NICO agreed to provide up to 5 billion Swiss Francs (approximately $5.3 billion as of December?31, 2011) of aggregate excess retroactive protection to Swiss Reinsurance Company Ltd. and its affiliates (?Swiss Re?). In 2010, BHRG entered into a reinsurance agreement with Continental Casualty Company, a subsidiary of CNA Financial Corporation (?CNA?), and several of CNA?s other insurance subsidiaries (collectively the ?CNA Companies?) under which BHRG assumed the asbestos and environmental pollution liabilities of the CNA Companies subject to a maximum limit of indemnification of $4 billion. In 2011, BHRG entered into a contract with Eaglestone Reinsurance Company, a subsidiary of American International Group, Inc. (?AIG?). Under the contract, BHRG agreed to reinsure the bulk of AIG?s U.S. asbestos liabilities up to a maximum limit of indemnification of $3.5 billion.

Retroactive insurance is an interesting business, and one that few insurers have as a core skill.? It is my estimate today that BRK is good at it, unlike most.? With Retroactive insurance, typically you are rescuing another insurer from some claim exposure that threatens their existence.? The insurer needs certainty, or something near it, and so they approach a much large and stronger insurer to absorb some of the risk of an exposure that is already incurred, but uncertain to to ultimate payout.

The rescuing insurer will charge a lot, and insist that the rescued insurer still have some risk on the matter, and probably limit its total payout, after which the rescued insurer is on the hook again.? That limit will likely be so high that the rescued insurer will say, “It’s never going to get that high.”? Fine, and maybe true, but this allows the rescuing insurer to have some certainty itself, that it will never pay an unlimited amount in the rescue.

For BRK, there is another angle, and that is that retroactive insurance produces a lot of float, and in most cases (Asbestos & Environmental) the float lasts a long time.? Thus BRK thinks it has an advantage in investing the float.? Together with their size, and the acumen of Ajit Jain, it makes them a unique place for insurers in trouble to seek shelter, for a tidy fee of course.

That doesn’t mean this can’t go wrong, but if properly managed, since BRK is one of the few companies that can do this, they probably make very good money on this.? (Ugh, they have AIG and Swiss Re as clients, which are large savvy firms.? If they need protection from BRK, and are willing to pay up, guess what — BRK is in the driver’s seat, because there is no one in the private sector capable of doing this.)

Insurance subsidiaries? investments are unusually concentrated and fair values are subject to loss in value.

Compared to other insurers, our insurance subsidiaries may concentrate an unusually high percentage of their investments in equity securities and may diversify their investment portfolios far less than is conventional. A significant decline in the fair values of our larger investments may produce a large decrease in our consolidated shareholders? equity and can have a material adverse effect on our consolidated book value per share. Under certain circumstances, significant declines in the fair values of these investments may require the recognition of losses in the statement of earnings.

This is potentially BRK’s largest weakness, and why I would love to see the statutory books for their insurers.? This goes beyond the large public companies that they have purchased.? Where are all of the private businesses lodged on the BRK balance sheet?? They may be there with really low valuations — I don’t know, because I have never looked — and that is why I want to ask BRK for their statutory statements.? I believe it would be intriguing.

Berkshire Hathaway Inc. has guaranteed debt obligations of certain of its subsidiaries. As of December?31, 2011, the unpaid balance of subsidiary debt guaranteed by Berkshire totaled approximately $16 billion. Berkshire?s guarantee of subsidiary debt is an absolute, unconditional and irrevocable guarantee for the full and prompt payment when due of all present and future payment obligations. Berkshire also provides guarantees in connection with long-term equity index put option and credit default contracts entered into by a subsidiary. The estimated fair value of liabilities recorded under such contracts was approximately $10.0 billion as of December?31, 2011. The amount of subsidiary payments under these contracts, if any, is contingent upon future events. The timing of subsidiary payments, if any, will not be fully known for several decades.

Add in $8 billion of holding company debt, and that is the risk that the holding company faces, which isn’t that much for a company the size of BRK.? BRK has bought a series of businesses that produce consistent cash flow, so don’t worry about holding company debt.

BRK has more debt than that, but Buffett lets bond investors take the risk by not guaranteeing subsidiary debt.? In acquisitions, Buffett never guarantees the debt.? But even with new debt issues, many BRK subsidiaries offer their own non-BRK-guaranteed debt, whether it is Burlington Northern, or a Mid-American sub offering debt to back a solar power plant.? Now bond investors know the BRK would never walk away from a subsidiary’s bonds, right?

No, actually they don’t know that, though Buffett’s record has been good with the debts of non-guaranteed subsidiaries.? Buffett is a better risk than most, but at the subsidiary level, you can’t be sure.? Buffett could save money and take on more risk by borrowing at the holding company, but he typically does not do that.

P/B Multiple Compression

Over the last decade, BRK’s P/B multiple has shrunk, and shrunk to the point where Buffett has drawn a line in the sand saying that subject to liquidity and market conditions, he will buy back stock at levels below 110% of stated book value.? (And, I suspect that is one reason why he spent so much time in the recent letter attempting to explain why the goodwill at BRK represented value.)? I think that means that there is now a limit, a floor to the price of BRK common stock, of course, subject to continued adequate performance.

Book Value and Insurers

Some have criticized Buffett’s growth in Book Value vs. the total return of the S&P 500 table, partly because of the declining P/B multiple.? I would simply say that this is endemic to an insurance mindset, where all we do care about is growth in net worth (book value).? Insurance is a mature, stable business.? No one has a way of obsoleting it, so we suspect.? It’s difficult to start a new insurer of any significant size, so we have protected boundaries to a degree.

Thus the focus on growing book value.? If we grow book value, eventually market value will follow, right? Right?!

Ugh, I think so, but sometimes I wonder, particularly with all of the insurers trading under book when they have little risk of insolvency.? Buffett can draw his line in the sand, but what of other insurers, many of which trade well below book?? Should they draw their own line in the sand, and defend a valuation level?

Personally, I would announce a generalized buyback without a lot of hoopla; make it boring, this is insurance after all so that should not be hard; get some actuaries to toss in big words to aid in obfuscation, so few conclude that the company will buy back significant stock.? Then start nibbling; be the bid or just behind it on days when things are weak. Don’t be a pig; rule #1 here is that the market should doubt that you are there.? But subject to that, buy, buy, BUY!!

The great Buffett after announcing his buyback only bought back 0.03% of all shares so far.? Most insurers can do much more quietly, with far less fanfare.? After all, Assurant bought back 14% of its shares last year.? Wow.? (This was the insurer that was offered in full to Buffett, and he said it was too complex… even the great one can goof.)

Now, maybe Assurant is my extreme case in buying back, and doing it at good valuations, but that in my opinion should be the goal of most public businesses with low valuations that are earning a lot, and not getting the proper respect.? Money talks, but be quiet, not brash, and suck in shares quietly at low valuations.? Let the financial statements do the bragging for you when investors realize that you have been building value doubly through operations and buybacks.

Summary

Even if you don’t invest with him, you can learn a ton from Buffett.? He is a consummate investor, businessman, and insurance executive.? Though I have never met him, I consider myself blessed to have learned from him.

Full disclosure: long AIZ

On Fourth Quarter 13Fs

Posted on 29 February 2012 by David Merkel

I often look through 13F filings to get investment ideas.? The last time I did it, one of my readers asked a question like this:

It?s nice to see how large the positions are of the investors that you track, but wouldn?t it be better to track the changes in positions?? After all, new allocations are more indicative of better value than older holdings.

That?s probably correct, though for my own investing it might not be as accurate, because I rank current positions against challengers ? my current positions have to justify their existence to stay in the portfolio.

But I thought it would be worth trying to do that, and also do it as a percentage of each stock?s market capitalization.

Now, there are difficulties in doing an analysis like this:

CUSIP changes
M&A (takeovers, spinoffs
CUSIP formats (some managers make it difficult to read)
Deliberately difficult formatting
One firm fills out the from wrong, swapping fields
Multiple holders within a given firm
You have to create a CUSIP/ticker database (paid my 13-year old assistant $50 to do that.)
In short, a lot of data scrubbing.

Now the results of looking at 13Fs can be valuable, and there is a small cottage industry doing so.? Mebane Faber has done good work with this, as has Insider Monkey, Manual of Ideas and Street of Walls.? Following the ideas of some of the best investors leads to better returns, even if there is a lag involved.

And the lag doesn?t matter much.? Most of these investors invest for years not months, so if you get a signal it should be valid for some time after it is received.

Anyway, I calculated the positions for 74 investors that I have some respect for (listed at the bottom).? My objective is to look at them as a group.? For the most part, I don?t care which of them is investing in a given company.

Following this are a variety of tables with some commentary on what might be going on.? I think you might find some valuable ideas in the companies where ?there are large additions or holdings as a proportion of market capitalization.

Tables

Stocks with the most new investors:

New	Ticker	Name
9	DLPH	Delphi Automotive PLC
6	LVLT	LEVEL 3 COMMUNICATIONS INC
6	LMCA	LIBERTY MEDIA CORP NEW
5	ORCL	Oracle Corp
4	TRIP	TRIPADVISOR INC
4	KORS	MICHAEL KORS HLDGS LTD
3	BAC	BANK OF AMERICA CORP
3	CVX	CHEVRON CORP NEW
3	DELL	Dell Inc
3	EP	EL PASO CORP
3	VRUS	PHARMASSET INC
3	TDC	TERADATA CORP

Stocks that had the most investors increase positions (including new owners):

Increased	Ticker	Name
15	GOOG	GOOGLE INC.
9	DLPH	Delphi Automotive PLC
9	AAPL	APPLE INC
8	ORCL	Oracle Corp
7	LMCA	LIBERTY MEDIA CORP NEW
7	C	CITIGROUP INC
7	LOW	LOWES COS INC
7	PEP	PEPSICO INC
7	MSFT	MICROSOFT CORP
7	V	Visa Inc-Class A Shares
6	LVLT	LEVEL 3 COMMUNICATIONS INC
6	INTC	Intel Corporation
6	SYY	SYSCO CORP

Stocks that have the most owners at the end of the fourth quarter:

Owned	Ticker	Name
22	GOOG	GOOGLE INC.
21	MSFT	MICROSOFT CORP
17	AAPL	APPLE INC
14	CSCO	CISCO SYS INC COM
14	WMT	WAL-MART STORES INC
14	WFC	WELLS FARGO & CO NEW
13	JNJ	JOHNSON & JOHNSON
12	ORCL	Oracle Corp
12	C	CITIGROUP INC
12	MA	Mastercard Inc – Class A
11	BAC	BANK OF AMERICA CORP
11	BRK.B	BERKSHIRE HATHAWAY INC-CL B
11	BRK.A	BERKSHIRE HATHAWAY INC-CL A

Stocks with the most selling out entirely (including M&A-related):

Sold	Ticker	Name
6	EXPE	Expedia Inc.
6	LVLT	Level 3 Communications
5	C	CITIGROUP INC
5	SINA	SINA CORP
5	Acquired	NALCO HOLDING COMPANY
4	EBAY	EBAY INC
4	CVI	CVR Energy Inc
4	CCE	COCA COLA ENTERPRISES INC NE
3	LINTA	LIBERTY INTERACTIVE CORP-A
3	CVS	CVS CAREMARK CORPORATION
3	AMZN	AMAZON COM INC
3	VIAB	Viacom Inc Cl B
3	EXC	Exelon Corp
3	DVN	DEVON ENERGY CORPORATION
3	COV	COVIDIEN PLC
3	XOM	EXXON MOBIL CORP
3	MOS	The Mosaic Company
3	RL	RALPH LAUREN CORP
3	IRM	IRON MTN INC
3	HFC	HOLLYFRONTIER CORP
3	GR	GOODRICH CORP
3	CTXS	CITRIX SYS INC
3	Acquired	CEPHALON INC
3	ELNK	EARTHLINK INC
3	TIN	TEMPLE INLAND INC

Stocks with the most decreases in positions (including selling out in entire):

Decreased	Ticker	Name
12	MSFT	MICROSOFT CORP
10	WFC	WELLS FARGO & CO NEW
10	C	CITIGROUP INC
8	BAC	BANK OF AMERICA CORP
8	PFE	PFIZER INC
8	EBAY	EBAY INC
8	NWSA	NEWS CORP
8	LINTA	LIBERTY INTERACTIVE CORP-A
7	AAPL	APPLE INC
7	CSCO	CISCO SYS INC COM
7	WMT	WAL-MART STORES INC
7	BRK.B	BERKSHIRE HATHAWAY INC-CL B
7	CVS	CVS CAREMARK CORPORATION
7	DELL	Dell Inc
7	AON	AON CORP
7	AMZN	AMAZON COM INC
7	EXPE	Expedia Inc.

With a few exceptions, the above reads like lists of common large cap stocks, with a few midcaps thrown in.? It doesn?t look that much different when the lists are done by dollar amount of change.? But what if we do this as a fraction of market capitalization?

(Please note, the 13F filings measure as of 12/31/2011, and my market caps are from mid-February.? That induces some distortion, but I don?t think that much.? Also note that large holdings as aproportion of market cap often come from one hedge fund and not necessarily many.

Here is a list of new purchases, in declining order of percentage of market capitalization:

New	Ticker	Name
16.50%	TRGT	TARGACEPT INC
15.02%	DLPH	Delphi Automotive PLC
10.73%	CMVT	COMVERSE TECHNOLOGY INC
10.54%	NTK	NORTEK INC
7.54%	ARO	Aeropostale Inc
6.41%	MTG	MGIC INVT CORP WIS
6.21%	HII	HUNTINGTON INGALLS INDS INC
5.76%	IRE	Bank of Ireland
5.64%	TRIP	TRIPADVISOR INC
5.08%	LMCA	LIBERTY MEDIA CORP NEW
4.75%	AVY	Avery Dennison
4.58%	SEMG	SEMGROUP CORP
4.41%	VPRT	VISTAPRINT N V
4.25%	MPC	MARATHON PETROLEUM CORP
3.92%	CSTR	COINSTAR INC
3.49%	SBH	SALLY BEAUTY HLDGS INC
3.44%	KMT	Kennametal Inc.
3.34%	SIRO	Sirona Dental Systms
3.18%	EP	EL PASO CORP
3.10%	HGG	HHGREGG INC
3.06%	CVI	CVR Energy Inc
3.04%	NTAP	NETAPP INC

Here is a list of position increases, including new purchases, in declining order of percentage of market capitalization:

Increased	Ticker	Name
16.50%	TRGT	TARGACEPT INC
15.02%	DLPH	Delphi Automotive PLC
10.77%	CP	CANADIAN PAC RY LTD
10.73%	CMVT	COMVERSE TECHNOLOGY INC
10.54%	NTK	NORTEK INC
8.55%	WBMD	WEBMD HEALTH CORP
7.54%	ARO	Aeropostale Inc
6.57%	NAV	Navistar International Corp
6.41%	MTG	MGIC INVT CORP WIS
6.21%	HII	HUNTINGTON INGALLS INDS INC
5.76%	IRE	Bank of Ireland
5.74%	AVY	Avery Dennison
5.64%	TRIP	TRIPADVISOR INC
5.19%	LMCA	LIBERTY MEDIA CORP NEW
4.58%	SEMG	SEMGROUP CORP
4.48%	EPAX	Ambassadors Group Inc.
4.44%	CBG	CBRE GROUP INC
4.42%	CSTR	COINSTAR INC
4.41%	VPRT	VISTAPRINT N V
4.25%	MPC	MARATHON PETROLEUM CORP
4.08%	PCLN	PRICELINE COM INC

Here is a list of position decreases, including total sales, in declining order of percentage of market capitalization:

Decreased	Ticker	Name
-17.83%	VGR	VECTOR GROUP LTD
-13.66%	EMMS	EMMIS COMMUNICATIONS CORP
-10.43%	DIOD	DIODES INC
-9.12%	CLX	Clorox Co
-9.02%	NEWP	NEWPORT CORP
-8.93%	IWM	ISHARES TR
-8.61%	EXPE	Expedia Inc.
-6.86%	GEN	GENON ENERGY INC
-6.60%	PANL	UNIVERSAL DISPLAY CORP
-6.43%	LVLT	GLOBAL CROSSING LTD
-6.32%	AAMRQ	AMR Corp
-6.22%	NIHD	NII HLDGS INC
-6.15%	CVI	CVR Energy Inc
-6.03%	AMED	AMEDISYS INC
-5.85%	CIS	CAMELOT INFORMATION
-5.60%	SINA	SINA CORP
-5.46%	CQB	CHIQUITA BRANDS INTL INC
-5.44%	STE	STERIS CORP
-5.37%	CJES	C&J ENERGY SERVICES INC
-5.30%	PDLI	PDL BIOPHARMA INC

Here is a list of positions sold out in entire, in declining order of percentage of market capitalization:

Sold	Ticker	Name
-17.83%	VGR	VECTOR GROUP LTD
-13.66%	EMMS	EMMIS COMMUNICATIONS CORP
-10.43%	DIOD	DIODES INC
-9.08%	CLX	Clorox Co
-9.02%	NEWP	NEWPORT CORP
-7.41%	EXPE	Expedia Inc.
-6.60%	PANL	UNIVERSAL DISPLAY CORP
-6.56%	IWM	ISHARES TR
-6.43%	LVLT	GLOBAL CROSSING LTD
-6.32%	AAMRQ	AMR Corp
-6.22%	NIHD	NII HLDGS INC
-6.03%	AMED	AMEDISYS INC
-5.85%	CIS	CAMELOT INFORMATION
-5.60%	SINA	SINA CORP
-5.27%	CQB	CHIQUITA BRANDS INTL INC
-5.10%	CVI	CVR Energy Inc
-4.97%	IT	GARTNER INC
-4.90%	ACFC	Atlantic Coast Financial Corp
-4.73%	BIDZ	BIDZ.com Inc.
-4.55%	CVC	CABLEVISION SYS CORP
-4.52%	SAFM	SANDERSON FARMS INC
-4.32%	LEA	LEAR CORP
-4.31%	TIN	TEMPLE INLAND INC
-4.05%	WGO	WINNEBAGO INDS INC

Holdings by Total Dollar Amount at the end of the Fourth Quarter

Held	Ticker	Name
? 15,763,863,000	KO	COCA COLA COMPANY
? 13,896,920,000	WFC	WELLS FARGO & CO NEW
? 11,801,570,000	IBM	INTERNATIONAL BUSINESS MACHS
???? 7,498,749,000	AXP	AMERICAN EXPRESS CO
???? 7,124,564,000	PG	PROCTER & GAMBLE CO/THE
???? 5,561,149,000	WMT	WAL-MART STORES INC
???? 4,965,749,000	KFT	KRAFT FOODS INC-CLASS A
???? 4,828,136,000	MSFT	MICROSOFT CORP
???? 4,720,375,000	GOOG	GOOGLE INC.
???? 4,539,055,000	NWSA	NEWS CORP
???? 4,504,224,000	AAPL	APPLE INC
???? 4,007,205,000	HPQ	HEWLETT PACKARD CO
???? 3,387,821,000	MSI	MOTOROLA SOLUTIONS INC
???? 3,285,855,000	GLD	SPDR GOLD TRUST
???? 3,261,413,000	GSK	GLAXOSMITHKLINE PLC-SPON ADR
???? 3,137,451,000	JNJ	JOHNSON & JOHNSON
???? 3,106,083,000	USB	US BANCORP DEL
???? 3,089,445,000	FDX	FEDEX CORP
???? 2,986,973,000	COF	CAPITAL ONE FINANCIAL CORP
???? 2,869,898,000	EP	EL PASO CORP
???? 2,836,729,000	IEP	ICAHN ENTERPRISES LP
???? 2,809,578,000	SLB	Schlumberger Ltd
???? 2,807,657,000	NVS	NOVARTIS AG-ADR
???? 2,776,985,000	BK	BANK OF NEW YORK MELLON CORP
???? 2,762,244,000	COP	CONOCOPHILLIPS
???? 2,704,595,000	PEP	PEPSICO INC
???? 2,620,576,000	CMCSA	COMCAST CORP-CLASS A
???? 2,618,651,000	PFE	PFIZER INC
???? 2,524,873,000	DELL	Dell Inc
???? 2,475,713,000	GE	GENERAL ELECTRIC CO
???? 2,321,383,000	OXY	OCCIDENTAL PETE CORP DEL
???? 2,314,288,000	TWX	TIME WARNER INC
???? 2,290,333,000	MRK	MERCK & CO. INC.
???? 2,252,588,000	AON	AON CORP
???? 2,246,712,000	DTV	DIRECTV-CLASS A
???? 2,205,486,000	PCLN	PRICELINE COM INC
???? 2,166,225,000	MMI	MOTOROLA MOBILITY HLDGS INC
???? 2,124,678,000	SNY	SANOFI-ADR
???? 2,075,367,000	QCOM	QUALCOMM INC

And the greatest holdings by percentage of market capitalization:

Held/MC	Ticker	Name
73.30%	IEP	ICAHN ENTERPRISES LP
71.98%	BAGL	EINSTEIN NOAH REST GROUP INC
69.22%	HRG	HARBINGER GROUP INC
65.92%	FDML	FEDERAL MOGUL CORP
51.38%	SPB	SPECTRUM BRANDS HLDGS INC
46.89%	ARII	AMERICAN RAILCAR INDS INC
40.88%	CDCO	Comdisco Holding
38.77%	NOA	NORTH AMERN ENERGY PARTNERS
37.92%	DYN	DYNEGY INC DEL
36.46%	BFLY	BLUEFLY INC
32.11%	LEAP	LEAP WIRELESS INTL INC
29.37%	QUAD	QUAD / GRAPHICS INC
29.34%	TXI	Texas Industries Inc.
28.92%	BIOF	BIOFUEL ENERGY CORP
27.83%	ENZN	ENZON PHARMACEUTICALS INC
27.56%	HPP	HUDSON PAC PPTYS INC
27.54%	BKU	BANKUNITED INC
27.54%	OSTK	OVERSTOCK COM INC DEL
27.35%	SIX	SIX FLAGS ENTMT CORP NEW
26.41%	DIN	DINEEQUITY INC
26.27%	WPO	Washington Post
26.04%	LORL	LORAL SPACE & COMMUNICATNS INC
25.12%	LGF	LIONS GATE ENTMNT CORP
25.00%	VSAT	VIASAT INC
24.85%	JEF	JEFFERIES GROUP INC NEW
24.71%	INS	INTELLIGENT SYS CORP NEW
24.59%	LVLT	LEVEL 3 COMMUNICATIONS INC
24.21%	ZLC	ZALE CORP NEW
23.40%	ABH	ABITIBIBOWATER INC
23.19%	CTO	Consolidated Tomoka Land Co
22.71%	XCO	EXCO RESOURCES
22.34%	THRX	THERAVANCE INC
22.28%	MLI	MUELLER INDS INC
21.96%	MSI	MOTOROLA SOLUTIONS INC
21.49%	SNBC	Sun Bancorp Inc

I appreciate the analysis as a portion of market capitalization, because it reflects the limitations of what managers can do.? Again, I will look most closely at current holdings and additions as a proportion of market capitalization.

Investor list:

Akre
Altai
Ancient Art
Appaloosa
Atlantic
Bares
Baupost
Blue Ridge
BP Capital (Pickens)
Brave Warrior
Breeden
BRK
Capital Growth
Centaur
Centerbridge
Chou
Coatue
Dodge & Cox
Dreman
Eagle Capital
Eagle Value
Edinburgh
Fairfax
Farallon
Fiduciary
Force
FPA
Gates
Glenview
GoldenTree
Greenhaven
Greenlight
H Partners
Harbinger
Hawkshaw
Hayman
Hound
Hovde
Icahn
Invesco Private
Jana
Jensen
Joho
Lane Five
Leucadia
Lone Pine
M3F
Markel
Matrix
Maverick
MHR
Montag
MSD
Muhlenkamp
PabraI
Parnassus
Passport
Paulson
Pennant
Perry
Pershing Square
Sageview
Scout
Soros
Southeastern
Third Point
Tiger Global
Tweedy Browne
ValueAct
Viking
Weitz
West Coast
Wintergreen
Yacktman

Full disclosure: Long WMT, ORCL, INTC, VOD, HPQ, COP, Short SPY

Notes on the 2011 Berkshire Hathaway Annual Report, Part 3 (On Acquisitions)

Posted on 29 February 20123 March 2012 by David Merkel

Though part of a series, this post is different.? I went back through the last 35 years of shareholder letters to analyze Buffett’s approach to acquisitions.? As Charlie Munger has said, Buffett is scary smart.? I say this because he adjusted through many different eras, while running a business that was part conglomerate, part closed-end fund.

In some ways the early years were different — more arbitrage, public investments take up more time in the shareholder letter.? But what I find fascinating is that from the earliest days, it didn’t matter to Buffett whether he owned whole businesses, or parts of them.

Part of this feeds off of Felix Salmon’s recent piece on acquisition language, where he contrasts tuck-ins and bolt-ons, correctly concluding that the difference is only one of size, even though that is an informal distinction.

But since the ’80s Buffett has always talked about acquisitions. Here’s a graph indicating Buffett’s use of the term acquisition(s):

You will note that his use of phrases like “tuck-in” and “bolt-on” occur only in the 2000s.? But the ideas were there long before that.? There were many cases in the ’90s, and to a lesser extent, the ’80s, where subsidiaries of BRK made acquisitions.? Buffett was always looking for ways to profitably deploy excess capital, and he knew that acquisitions facilitating organic growth was often far more effective than buying something totally new.? Buffett was doing tuck-in and bolt-on acquisitions for 15 years before he mentioned the terms.

Buffett always saw the public and private markets as being complementary.? He doesn’t care where he makes money; he just wants to make money.? Below there is a list of BRK acquisitions by year, with slight commentary.

One thing to understand about BRK is that full and partial ownership of private public businesses was always a part of the plan.? Growing out of a textile manufacturing business as a holding company, that should be obvious, as it should be when considering See’s Candies, BRK’s first acquisition.

Public and private, full and partial did not matter to Buffett.? He was simply interested in what could grow the intrinsic value of the the overall enterprise best, within the concept of a margin of safety.

1987-1989 was kind of an inbetween era for BRK, where Buffett would talk about his Sainted Seven private firms inside BRK, until he bought Borsheim’s in 1989, which gave him no good way to describe his private holdings with a simple moniker.

As it is, when he began doing more acquisitions, the 1991-1993 era included the “Shoe Group,” which was not among his finer moments.? But starting in 1995, with the purchase of the remainder of GEICO, is the start of the modern BRK.? Acquisitions become a regular part of the plan.? What makes that plain, was that post-1990 in years where BRK had no acquisitions, Buffett would discuss his theory on acquisitions for shareholders.? He did this because when there are few promising targets to invest in, it is usually a sign that valuations are stretched.

And in general, Buffett chose wisely with the private businesses.? Yes, there have been some that ended up being losers, or, not big winners, like the “Shoe Group,” and Scott & Fetzer’s untimely purchase of World Book, which was about to be obsoleted by Encarta, and then Wikipedia.

Buffett understood the need for sustainable competitive advantage.? He also knew how much he could afford to risk in acquiring private firms.? His “bite size” increased gradually until he could take down monsters like Burlington Northern.? He bought businesses that would be hard to obsolete.

One thing I found interesting about reading through the older letters of Buffett was that his ideas on acquisitions were developed early, long before BRK ceased to be predominantly a public company value investor, which is the way that many still regard BRK.

And as a result, it should be no surprise that as BRK grew, given Buffett’s desire for owning as much of great businesses as he could, that BRK became a conglomerate, albeit one dominated by its leading insurance businesses.

Though we can look at the different strategies employed by Buffett over the years, and see how some played a larger role early on like arbitrage and distressed investing, Buffett had a singular focus for the investments that offer decent returns in the size range that will make a difference for BRK investors.

Once BRK got big, that meant becoming a conglomerate, albeit a special one, was the logical outcome.? And I could be wrong, but that is the final corporate form for BRK.? There may come a day in a post-Buffett era when it may do many things, such as spin off companies, or centralize functions.? At present that won’t happen because BRK is the acquirer of choice for those that want to cash out, but don’t want the unique character of their organizations to change, which Buffett points at in the present Shareholders’ Letter as a unique competitive advantage.? BRK does not compete on price in acquisitions; it does compete by saying that unless something goes badly wrong, BRK will be more than happy to let the management do its thing.? It’s as if Buffett says, “Just make money, and send us back the excess.? If you have need of cash for promising opportunities, let us know.”

And then, it lets a thousand flowers bloom, and a thousand schools of thought contend, so long as you make money and grow the value of the business.? BRK is a unique business, and reflects the character of its founders (including Munger here).? No other large firm that I know of offers as much latitude to its operating units.

One final note: Buffett has also had a very good nose for sniffing out good insurance enterprises.? That’s the backbone of BRK.? It’s interesting to see over the years how he assembled the various pieces.? It would be interesting to see pre-1977 data on the insurance side, to look at how Buffett initially entered the insurance business, and transisted out of running a textile firm.

Tomorrow should have my final installment on BRK.? I will review the 10-K and provide commentary.

Notes on the 2011 Berkshire Hathaway Annual Report, Part 2

Posted on 28 February 20123 March 2012 by David Merkel

Picking up where the last post left off:

13) So Buffett told us he has a successor lined up, but won’t tell us who, but will tell us that the successor doesn’t know that he is the successor.? Really does not seem like much of an improvement over the past, except that the CIO function is getting better defined with Todd and Ted.

14) Todd & Ted share their performance 80/20 — 80% of their own and 20% of their colleagues performance.? Seems like a fair idea, balancing the team vs the individual.

15) The regulated subsidiaries, and manufacturing, services and retailing did well. That operating income growth is what drove the year.? The turnaround at NetJets was also a help, and that was fast.

16) We are still waiting to see what problems BRK’s decentralized system can develop.? To this point, the flexibility for managers within a structure that oversees reinvestment of cash flow is admirable.

17) The economic spread of BRK businesses is significant, and I would argue, unrivaled in terms of conglomerates.? It almost makes me think that Buffett is aiming for owning an extra-productive slice of US/World GDP.? It makes acquisition criteria #1 less relevant, because if you are small and private, and want to be acquired by BRK, it means that you analyze BRK, identify the portion of it that you are most similar to, and talk to the CEO of that segment, not Buffett.

18) That brings up my view of Buffett at present.? He has changed as the amount of assets under management has grown.? The last phase for Buffett is not large cap value manager, but private equity manager / conglomerateur.? He uses the float that his insurers produce to invest in a wide number of enterprises that will produce excess returns.? He does not run a closed end fund, but runs a conglomerate.

19) Interesting to see Nebraska Furniture Mart open its third store.? Logical to do, if the experience is replicable.

20) ?We do not talk one-on-one to large institutional investors or analysts.? Bravo.? Would that this would be true of more companies.? When I represented a large holder of Safety Insurance, the management asked me what we wanted in terms o market disclosure.? I said that it did not matter to us, and that we would be happy if they never talked to the media/analysts, and only emitted 10-Qs and 10-Ks, even without notifying us as to timing.

21) Buffett notes that a decent number of borrowers that lost their homes did well in the crisis, because of all the money they extracted from loans.? That might be similar to a private equity manager profiting through deals to borrow where he pays himself a dividend.

22) Owning 11% of Munich Re gives Buffett additional influence over the reinsurance market.

23) Because of the need for collateral, BRK will not be making any more significant derivative bets.

24) Buffet repeats his screed that he issued to Fortune regarding bonds and gold.? I repeat my screed.? It’s all logical, Warren, but you have to think more broadly and read about the gold medal gold model.

25) It makes sense that flying to Kansas City is a better strategy than going to Omaha.? But as this becomes widely used, make sure you reserve a car early.

26) If you want to ask Buffett a question at the annual meeting, you can do it by e-mailing the following:

Carol Loomis, of Fortune, who may be e-mailed at cloomis@fortunemail.com
Becky Quick, of CNBC, at BerkshireQuestions@cnbc.com
Andrew Ross Sorkin, of The New York Times, at arsorkin@nytimes.com

(In your e-mail, let the journalist know if you would like your name mentioned if your question is selected.)

27) There will be insurance analysts at the annual meeting, and they are Cliff Gallant of KBW, Jay Gelb of Barclays Capital and Gary Ransom of Dowling and Partners.? I have a lot of respect for Gary Ransom — listen to the questions that he asks.

28) Minus & Plus: Negative change in AOCI & comprehensive income of noncontrolled interests down.? Strong CFO, net of capex, supports goodwill.

29) At for BRK’s big options: BAC in the money, GS at, GE/DOW out of the money.

30) Do parts of all asbestos liabilities eventually go to Berkshire Hathaway for reinsurance?? Who don?t they reinsure?? “The liabilities for environmental, asbestos and latent injury claims and claims expenses net of reinsurance recoverable were approximately $13.9 billion at December 31, 2011.”

I know that Buffett thinks he can earn money off of the float on these claims in excess of the implied interest rate.? But when he begins to become the preferred habitat for reinsurance, he makes BRK more volatile with respect to legal judgments.

31) “Without prior regulatory approval, our principal insurance subsidiaries may declare up to approximately $9.5 billion as ordinary dividends before the end of 2012.” And that is because only 10% of the regulatory surplus of $95 billion can be released.

32) BRK, unlike many firms, has more reasonable assumptions on DB pensions: expected return: 6.9%, discount rate 4.6%.

33) To date, share repurchases have been insignificant.? Looks like $67 million from the Statement of Shareholders Equity.

34) “On January 31, 2012, we issued an additional $1.7 billion of parent company senior unsecured notes, the proceeds of which were used to fund the repayment of $1.7 billion of notes maturing in February 2012.”

Why not pay down short-term debt?? BRK has the cash, and you state that you have an aversion to debt, particularly at the holding company level, but you are not acting like you have an aversion to debt over the last 10 years.

To Buffett: is there a level of debt at which you would be uncomfortable at the parent company, or subsidiaries?? Also, would you ever make an effort to get the AAA rating back?

35) BRK has a very diversified reserving book if you look at page 84 of the annual report — impressive.

36) I appreciate acquisition principle 6, which deal with aspects of value that accounting does not capture.? Buffett takes the right position to value those fully, because you will eventually get that value, and others will not pay up for it.

37) Buffett makes a lot out of the virtues of deferred taxes and float. He argues “they are liabilities without covenants or due dates attached to them.”? This is true, though deferred tax liabilities assume that you will make money, and will continue to grow.? Float is similar, it assumes you will underwrite well, and it would be nice if you grew.

38) Buffett says toward the end of the annual report:

There is a third, more subjective, element to an intrinsic value calculation that can be either positive or negative: the efficacy with which retained earnings will be deployed in the future. We, as well as many other businesses, are likely to retain earnings over the next decade that will equal, or even exceed, the capital we presently employ. Some companies will turn these retained dollars into fifty-cent pieces, others into two-dollar bills.

I’ve written about this before.? Some managements teams with skill should retain all earnings, and not pay a dividend.? Management teams without skill should act like REITs and pay out 90% of taxable income (or free cash flow).

39) Buffett says he was wrong on housing.? I think he is still wrong on housing; it will take a lot longer for this situation to normalize.? The key variable is the proportion of houses with debts exceeding a 90% LTV.? Those houses are illiquid; can’t be sold except in a short sale.

40) One final wild idea: would BRK consider buying out the corpus of AIG?? I have better small insurance acquisition targets than that, but buying out AIG would be delicious given the comments Greenberg made to Buffett back when BRK was smaller.? He was very dismissive of BRK.? Also, Buffett could fold ILFC into NetJets (or vice-versa), sell off the life companies, and impose greater discipline on the P&C underwriting.? Personally, if BRK made a bid for AIG at $32, I think Buffett could make a lot out of it, and he would not have to worry about a lot of fuss, because the major holder is the US Government.

Notes on the 2011 Berkshire Hathaway Annual Report, Part 1

Posted on 25 February 20123 March 2012 by David Merkel

Start with the basics, this is on the Annual Report, not just the shareholder letter.? I may have a second report out after the 10K is released.

1) One thing that was fascinating was the large number of low level acquisitions happening in the subsidiaries, and the desire for more of them.? There is interest at Lubrizol, McLane, TTI, CTB, Marmon, etc.

2) With BRK and IBM, Buffett hopes that public buyers and sellers will be stupid, and sell their shares at levels far below what the eventual prices will be, allowing the remaining shareholders to do better, as management buys in shares at a bargain, benefiting the persisting shareholders.

3) Buffett makes it clear, though that no matter how much cash has has, if prices are dropping rapidly, he won’t put a floor under the stock.? He’ll let the stock fall, and buy bit-by-bit through the whole process.? Indeed, it might be to his advantage to let the price fall below the 110% of Book level for a time to unnerve those that may be gaming the situation.

4) BRK does not talk its book as a result.? They would rather have the stock cheap for buybacks.? (Eeenh… but wouldn’t they rather have the stock higher to aid acquisitions?)

5) And if they firmly know what the value will be in the long run, they would love it if other investors would be scaredy cats and sell out to management at cheap levels so that they could have more of the value as they do not sell.? (Buffett does not phrase it that way, but this is a zero-sum game as far as trading goes.)

6) Buffett talked a lot about goodwill this year, much more than in prior years.? Goodwill makes up about 30% of BRKs book value.? I appreciated his argument regarding goodwill at the insurance companies — if your underwriting profits over nine years exceed goodwill the goodwill is most secure.

7) That said, partly due to lower interest rates, underwriting profitability has been higher for the P&C industry as a whole.? BRK may be better in aggregate, but some of Buffett’s industry comments are not warranted.? BRK is better in degree, not kind.

8 ) Buffett has the key of good P&C underwriting/management when he says ?be willing to walk away if the appropriate premium can?t be obtained.?? That’s the only way to do it, with the price that your company will shrink when the rest of the industry is nuts.

9) All that said, the insurance lines did not do well this year, particularly not BH Reinsurance Group, which is Ajit Jain’s baby.? Part of that was the large catastrophes this year, some of it seems to come from not knowing how to run a life reinsurer.

10) Retroactive reinsurance showed gains, because losses on Swiss Re’s P&C experience was better than expected.? However, that was wiped out by?Swiss Re Life & Health America’s business doing much worse than expected.

In one sense, a big question for BRK is whether they will spend the money to get the expertise necessary to run a big life reinsurer profitably.? So far, the answer seems to be no.? In my opinion, they need to hire experts, or buy out RGA.? Why buy the line from Sun Life when you could have RGA?

11) On principle 11 — BRK distinguishes itself among private equity buyers by leaving distinctive corporate cultures in place , and not interfering with them.? That may not help the present, but it helps the future, as wealthy people selling out take less, because they know their friends in the business will be left intact.

That won’t attract all sellers, but it will attract some.

And note that BRK will cut their losses on hopeless subsidiaries, or those beset by labor woes.

12) As usual, BRK’s reserve development is good, with releases coming from prior years.

Recent Sorted Tweets

Posted on 24 February 2012 by David Merkel

Finance Business

Breaking Ranks: Former Broker Turns Bomb Thrower http://t.co/q1vpz9dh @reformedbroker interview previews his book: http://t.co/Yigg2sEE $$ Feb 24, 2012
Why CLO managers continue to struggle http://t.co/a13j8jVG Low issuance, warehousing is tough, need more subordination, fewer senior buyers Feb 24, 2012
My Favorite Quote from Baupost’s 2011 Annual Letter http://t.co/VOvbqab3 DIstressed bond mgrs get itchy in bull phase & buy new junk @ par Feb 24, 2012
SEC IFRS Plan Endorsement http://t.co/8xguvs2G IFRS is not worth giving up comparability or sovereignty for. Project is a total loser. $$ Feb 24, 2012
Very cool, congrats RT @Finovate: @AlphaClone to offer Alternative Alpha ETF from U.S. Bancorp http://t.co/srufb3qd Feb 23, 2012
SEC May Ticket Speeding Traders http://t.co/oNCbF7pa Worthy of an experiment like the kind they did to study the “uptick rule” $$ Feb 23, 2012
AQR?s Aaron Brown on Red-Blooded Risk http://t.co/ZM7hn5P4 When I was a bond mgr, could sense some aspects of risk listening 2 broker’s tone Feb 23, 2012
The Volcker Rule is not going to bring your house back http://t.co/ADKMABfE Prop trading was not a leading cause of the financial crisis. $$ Feb 23, 2012
Pimco Said to Quit Mortgage Bond Group http://t.co/YsQZs1IE Feels wrong parties (their clients) r paying 4 bad servicing,instead of banks Feb 23, 2012
?If you want, I can dig up an old research piece on analyst coverage — there are basically 3 factors that explain 70? http://t.co/tBinshJJ Feb 21, 2012
Stressed VAR is still a “protractor in the jungle” http://t.co/GRGgwvsd Risk management sh/not b done w/central measures but stress tests $$ Feb 21, 2012
How One Company Teaches Employees the ABCs of Finance http://t.co/fqO19foq More companies should do this, they would b more profitable. $$ Feb 18, 2012
Gross Fund at 66% Premium Shows Pimco Allure in Quest for Yield http://t.co/LY8Rv4SS Yield illusion distracts many investors. Avoid it. $$ Feb 17, 2012
Read:Which three of DOL’s new 401(k) rules represent the biggest land mines for financial advisors and plan sponsors? http://t.co/ZVoMPmQu Feb 15, 2012
The 400% Man http://t.co/nrRhYIZl Wish I could meet some of his disappointed investors who came to kick the tires and were disappointed. Feb 15, 2012
Contra:Foot-Dragging on IFRS Decision Could Strip SEC of Power http://t.co/VNUFhWD5 The US could lose representation on IASB. Good, drop out Feb 14, 2012
Notes from iGlobal’s Global Distressed Investing Summit: Part 2 http://t.co/9iOty0Iz Leveraged loan market seems to be in decent shape $$ Feb 14, 2012
Pimco: $25 Billion Foreclosure Deal to Hit Pensions Harder Than Banks http://t.co/DKFtMI9B Gives MBS buyers a reason 2 sue originators $$ Feb 13, 2012
Missing at MF: $1.6 Billion http://t.co/QSUMYbNO Included for the 1st time is roughly $700 million in client money residing in the UK $$ Feb 13, 2012
Stockbrokers: A Guide to Private Placement Due Diligence http://t.co/tbwtu6Jy Illiquid investments are ways to cheat average people. $$ Feb 11, 2012
Why illiquid? Can’t recover the commission otherwise.? Can deceive people that their investment is worth more than it? http://t.co/cYjvUhWx Feb 11, 2012

Market Strategy

Jim Stack was right, and he?s still bullish http://t.co/GfEqtTKl Basically a forward P/E plus momentum argument, & lack of sharp falls $$ Feb 24, 2012
S&P 500 Gets 9% Cheaper on Record Profits http://t.co/DWPGz5Y2 Makes a P/E argument; profit mrgns will eventually revert, may take a while Feb 23, 2012
The dangers of dividend-paying stocks http://t.co/FymTmAAi Hint: they are stocks. No maturity date, no certain cash flow, low BK priority $$ Feb 23, 2012
Falkenblog: Low Vol Commodity Timing Strategy http://t.co/M4FFRoCx Low volatility seems to work in a large number of areas, this is one $$ Feb 23, 2012
Retro Investing?Look Back to Get Ahead http://t.co/vYiPCu9J The 50s, w/post-WWII financial repression, recurs as a current investing meme $$ Feb 22, 2012
The Intelligent Investor: Are Index Funds Messing Up the Markets? http://t.co/VAoFtksw May also be traders following each other $$ Feb 21, 2012
If history is any indication, high dividend stock outperformance should continue http://t.co/C5GaWmW8 Uses 40s & 50s as analogy $$ Feb 20, 2012
Breakout or consolidation? http://t.co/GTSkBjIT Many market seem to be at inflection points. Which way will they go? Wildcards: EZone, China Feb 20, 2012
RE: @alea_ Interesting analysis.? I would be wary of teasing too much out of the cluster analysis of sector correlati? http://t.co/zirdOJ8v Feb 18, 2012
MORGAN STANLEY: January Exhibited This Tell-Tale Sign Of A Market Top http://t.co/IQqidpUE When everything rises at once, look out! $$ Feb 18, 2012
Apple Stock May Not Be as Cheap as It Looks http://t.co/2dgfjfPq Earnings quality has declined, and so has the PE multiple $$ Feb 18, 2012
@ampressman Common summary stat 4 acctg quality 4 $AAPL Net Operating Accruals / Assets, has been deteriorating 4 last 7 years + Feb 18, 2012
@ampressman $AAPL acctg used to be very conservative, now modestly liberal by that statistic. It’s a bad direction, not a bad position, yet Feb 18, 2012
Should the Rich Invest Like Colleges? http://t.co/M9OaPEPA Better question: what are your goals? Do you have an infinite horizon? $$ Feb 18, 2012
High Yield Bonds as Equity Indicator | The Reformed Broker http://t.co/OXUtZrWG Meet my friends & former colleagues Ed Meigs & Sean Slein $$ Feb 17, 2012
When Earnings Slow, Focus on Big Cap, Quality http://t.co/zjD3RPKA High quality is the place to be at present, credit cycle shifting some $$ Feb 16, 2012
A Lesser Known Indicator http://t.co/8oivTJFl Cash enters market through IPOs, employee grants, & exits through cash buyouts, buybacks $$ Feb 16, 2012
Parabolas have 2 end somewhere $$ RT @ReformedBroker: $AAPL sold off because people were getting impatient with how slowly it was moving up. Feb 15, 2012
FPA Capital?s Bryan Beats Peers Embracing Oil Volatility http://t.co/7ebuGmrb A clever focus on absolute retruns, w/a long horizon $$ Feb 15, 2012
Paulson Gives Activism a Go http://t.co/dkHb3cht Not as easy as it looks w/ $HIG. Acctg may not fairly capture variable liabilities $$ Feb 15, 2012
RE: @SoberLook DB hedges its bets.? Average years rarely happen in high yield, they are either good or bad. http://t.co/0C51uulu Feb 14, 2012
THE 1987 MYTH?. http://t.co/mHSU4nM3 ?Illusion of stability within disequilibrium? Very well said, in one short phrase. $$ Feb 14, 2012
America Inc. Faces Margin Stall http://t.co/RbqvqbT9 US companies have begun to see rising costs eat into the bottom line. Finally. $$ Feb 13, 2012
Hulbert: Insiders Selling at Heavy Pace http://t.co/qOPk2cbY Just another straw blowing in the wind, but insiders usually have good sense $$ Feb 10, 2012

Greece

Greek PSI outcomes tree: credit event probability at 93% http://t.co/jcLBc04c Clever grraphic shows high likelihood of Gk CDS triggering. $$ Feb 23, 2012
The market is now pricing in Greek sovereign CDS trigger http://t.co/w5vJ42Fa Upfront prices for Greek CDS moving up $$ Feb 22, 2012
Despite Pact, Unease Lingers for Greece http://t.co/Urp7mmag “Many Problems Remain Even Under Best-Case Scenarios” Shrink, shrink… $$ Feb 22, 2012
Greek Rescue Is Not the End of the Story http://t.co/IOCVcCTb Won’t save Greece on its own & there r other fringe nations 2 deal with $$ Feb 20, 2012
ECB Greek Plan May Hurt Bondholders While Triggering Debt Swaps http://t.co/Aya9urfV ECB may get better treaqtment than private holders $$ Feb 20, 2012
So, what would your plan for Greece be? http://t.co/SAd2f28O Play the game, and let Keynes sneer @ u as u attempt 2 solve the impossible $$ Feb 18, 2012
Greek Economy Shrinking Rapidly http://t.co/VzXi375M And it may shrink more rapidly depending on what the rest of Europe does $$ Feb 14, 2012

Eurozone

ECB’s Mario Draghi magic corrupts bond markets http://t.co/r0ZCmYpb Banks become dependent on ECB, bank bondholders more subordinated $$ Feb 24, 2012
European Banks May Tap ECB for $629 Billion Cash http://t.co/Re5TjLR5 ?There is a ?lose-lose? air around the ECB?s auction next week,? $$ Feb 24, 2012
The Eurozone should be prepared for a new government in France http://t.co/qGFPC20S And that govt will be more hostile to current actions $$ Feb 22, 2012
Spain Sinks Deeper Into Periphery on Debt Rise http://t.co/wkuef6tS As debts grow higher, the probability of escape gets lower. $$ Feb 22, 2012
Iron Lady Merkel Bucks German Street on Greek Aid http://t.co/Wc95xI47 Strategy working 4 now, but what if colleagues lose their seats? $$ Feb 20, 2012
Moody?s Cuts European Sovereigns http://t.co/GvJuES7t Spain, Italy, Portugal, Slovakia, Slovenia & Malta all cut. France & UK -> neg outlook Feb 15, 2012
Unlisted in euroland http://t.co/AQQrJMUf Didn’t catch this in Jan. Private bonds can offered 2 ECB as collateral; helps French banks $$ Feb 13, 2012

The Well-off Fringe Nations

Icelandic Anger Brings Debt Forgiveness http://t.co/P4BH8HKN If the debt problem is not severe, austerity. If it is severe (Iceland) default Feb 22, 2012
Nordic Currencies Stung in Crisis http://t.co/teorxG1P Much of the world, looking for a store of value, drive fringe currencies up $$ Feb 21, 2012
Canada housing market: poised 4 ‘severe correction,’ George Athanassakos says http://t.co/05kaVIAD Canada is used to the boom/bust cycle $$ Feb 21, 2012
@joshuademasi You’re right, but most of the fringe currencies are facing the same dilemma; who to favor, consumers vs exporters, etc… $$ Feb 21, 2012
Israel Safest as Investors Discount War Threat http://t.co/3oXTlILj Well-capitalized banks & balanced economy w/much high tech $$ #warrisk Feb 20, 2012
A hedge fund bets big on a Canadian mega quarry http://t.co/k7OZBC9u Property rights r tough here. What if an existing farmer tried this? $$ Feb 18, 2012
Australia?s Gillard Urged to Increase Mortgage Purchases http://t.co/ylsCuvq4 A mistake, far better to let the market fail. $$ Feb 17, 2012
You’re right, reminds me of an old piece I wrote: http://t.co/XkgO7z7A Thanks $$ RT @joshuademasi: The 5 stages of USD grieving ! Feb 15, 2012
Norway?s Rate Policy Dilemma Pits Household Debt Against Krone ?Headache? http://t.co/Ud4FCOsI Cut rates, asset bubble grows, Krone weakens Feb 15, 2012

China

Plan B for China’s Wealthy: Moving to the U.S., Europe http://t.co/X9jRPy6q Wealthy Chinese know their govt, thus the need for flight $$ Feb 22, 2012
China?s FDI and Trade Outlook Horrible Says Commerce Spokesperson http://t.co/LIlvmxIL Hard 4 Comm Party 2command domestic consumption up $$ Feb 18, 2012
‘Mother of all bubbles’ will pop China stocks: GMO http://t.co/OMENKZOI Low prob: China successfully navigating soft landing out of a bubble Feb 18, 2012
China’s excess exports turn negative http://t.co/CiLgTKqC Key Q: how will China grow its economy by stimulating domestic consumption? $$ #uh Feb 18, 2012
Too many bearish on China, but I’m bearish also.? What to do? Seek out China bulls.? If their arguments sound dumb, d? http://t.co/vrhUIdsh Feb 17, 2012
The Silent Victims of the U.S.-China Currency War http://t.co/6DXAnE3m Smaller nations get caught in crossfire of competitive devaluation $$ Feb 17, 2012
China’s Military Spending to Double by 2015 http://t.co/5Va8kiLr I think it take some losses before DC takes this seriously. $$ Feb 17, 2012
China?s Tenuous Hold on Peace http://t.co/dOFr68tL Tibet is restive, China blames its problems on the economic mismanagement of foreigners Feb 14, 2012
Glimpses of a Chinese Town Under Lockdown http://t.co/AFoW0zsM some reporters managed to get there to document the heavy security presence Feb 14, 2012
Liu Mingkang Outlines the Reforms China needs to Undertake http://t.co/L0cXMoIf Will the communist party willingly reduce its power in China Feb 13, 2012

Japan

Japanese Equities Herald Return to Inflation http://t.co/rxlt5OhI If Japan bond market breaks, ructions will be felt the world over. $$ Feb 23, 2012
Energy imports will pressure Japan’s trade deficit http://t.co/lieDm3T4 But, Japan has a current account surplus from its net foreign assets Feb 23, 2012
Japan Suggests No Quick G-20 Deal on IMF Funding http://t.co/RZYF5EB2 non-European members of the IMF waiting on the Europeans to act $$ Feb 22, 2012
Tokyo Small-Caps Set for Longest Win Streak http://t.co/mD3ySrzh Unnoticed but true, look @ this CEF: http://t.co/VcdMQDxL FD: long $JOF Feb 22, 2012
Yen Slumps After Japan Expands Bond Buying http://t.co/L6yImwzC Competitive currency devaluations driving Forex $$ #beggarthyneighbor Feb 15, 2012

Iran

Japan Refiners Said to Stall on Iran Deals http://t.co/uEq1DYtb Life is harder on those that need Iranian oil, like India, China, Japan $$ Feb 21, 2012
Iran Says It Loaded Locally Made Fuel to Nuke http://t.co/6HkMaEFj Not sure I believe this, but if it’s true, the Israelis will know 😉 $$ Feb 15, 2012
Iran presses ahead with dollar attack http://t.co/Hd4Qtnvz Unlikely to work, but it’s all they can do w/oil transport shut down $$ Feb 14, 2012
Letter Writers Break Iranian Taboo http://t.co/M3NMfmk1 They are so desperate that they write the Ayatollah and criticize conditions. $$ Feb 14, 2012
Iran Sanctions Tighten as Shippers Stop Loading http://t.co/ubEtI6om Risk goes up, shipping insurance premiums rise, shipping stops $$ Feb 13, 2012

Rest of the World

Record Redemptions Loom Amid Akbank $1.3 Billion Loan Talks http://t.co/x5iDTSwE Never knew Turkish firms financed w/so much Short debt $$ Feb 18, 2012
Chavez Missing $10 Billion a Month by Curbing State Oil Investment http://t.co/uTG1Z8d8 PDVSA falls behind Pemex? How low can you go? $$ Feb 15, 2012
Ch?vez Opposition Faces Hard Election http://t.co/YBWi9PaW Chavez controls media & oil wealth; tough for Capriles, but he can still win. Feb 14, 2012
Gunfights in Saudi Arabia Show Spread of Tensions http://t.co/dNxhg2ij Shia in Saudi Arabia fight the govt. Biggest split in Mideast $$ Feb 14, 2012
The Real Reasons the Rich Are Moving Cash to the Caymans http://t.co/gh7d85ZA Litigation risk, and US political risk; diversify yr govts Feb 13, 2012

Federal Reserve / Monetary Policy / Fiscal Policy

Those believing the Fed is on hold for the next 3 years will be in for a rude awakening http://t.co/VYggm431 FF futures & TIPS betray mkt $$ Feb 24, 2012
Exported Inflation to Return Home, but When and in What Form http://t.co/UHT61w4Y The Fed will find it hard to shrink its balance sheet $$ Feb 24, 2012
Healthcare expenses will overwhelm the US federal budget http://t.co/lLUABMYy Suspect a deal will b driven 2 reduce benefits somehow $$ Feb 23, 2012
?Fiat Money and Collective Corruption? http://t.co/lRAa2xnG Hard money would help, the bigger problem is light regulation of banks/credit $$ Feb 23, 2012
Fed Writes Sweeping Rules From Behind Closed Doors http://t.co/UtozNgly Q: Why? 2 avoid bank influence, or 2 hide bank influence? $$ Feb 21, 2012
The Race To Debase In All Its Glory http://t.co/rPtS9EqD Balance sheets of major central banks expand rapidly $$ #racetothebottom Feb 21, 2012
Wealthy Enriched by Double-Dipping U.S. Plan http://t.co/YtGTfakC Long article describing unethical use of SBA $$ . #eliminatetheSBA Feb 21, 2012
Over-regulated America http://t.co/uMKtg2W0 The home of laissez-faire is being suffocated by excessive and badly written regulation $$ Feb 18, 2012
Geithner: GOP Walked Away From Tax Overhaul – Bloomberg http://t.co/yupPqVeO Articles like this indicate another stalemate in the making $$ Feb 17, 2012
Potomac Divide Shows Foreclosures Thru Courts Slow Home-Price Recovery http://t.co/kilW75GM MD has slow foreclosures, housing mkt lags VA Feb 16, 2012
Sober Look: Regulate it all, ask questions later http://t.co/qnpfakfJ New regulations reduce the liquidity of the corporate bond market $$ Feb 16, 2012
FHA is almost broke. What will DC do when it goes critical? RT @HousingWire: FHA defaults up for ninth straight month http://t.co/TSZFHCeD Feb 15, 2012
Pentagon May Oust Troops Involuntarily to Meet Reductions in Budget Plan http://t.co/VnY4At7J Tough time 2b let go if you r a veteran $$ Feb 14, 2012
What a surprise! $$ RT @pdacosta: Bernanke’s big housing speech makes no mention of the Fed’s regulatory laxity in run-up to the crisis. Feb 10, 2012

Bonds

Contra: Should Mortgage Rates Even Be Lower? http://t.co/lODEFb1P Mortgages do not price off of Tsys, but swaps and bank bond yields $$ Feb 22, 2012
Wall Street Crowds Into Trader Joe?s http://t.co/dHZT83VK CMBS mkt getting heated; loans linked 2 retail rose to 45% 4 bonds sold in 2011 Feb 22, 2012
?Have a lot of friends who have lost a lot of money waiting for $TLT to break. FD: long TLT http://t.co/Lw6Rqn02 Feb 21, 2012
A $360 trillion confidence trick http://t.co/Kar0f3Cz I have argued that LIBOR should be based off of binding offers to borrow/lend $$ Feb 14, 2012
http://t.co/VOIG2gUk W/TIPS NY Fed concentrates on the long on-the-run & nearby, w/nominals opposite. Makes implied inflation look higher $$ Feb 10, 2012

Muni Bonds

Stockton, CA, to Weigh First Steps Toward Bankruptcy http://t.co/d2lsCmx8 Start of negotiations to reduce emplyee pensions & healthcare $$ Feb 24, 2012
Good piece, thx RT @munilass: Evaluating Chapter 9 Bankruptcy for City of Detroit: Reality Check or Turnaround Option? http://t.co/PxWo5qHA Feb 21, 2012
Yes. http://t.co/4DUVVTKi $$ RT @BarbarianCap: @munilass isn’t this the muni book that @AlephBlog reviewed very favorably a few days ago? Feb 20, 2012

Pensions

New Rules Wreak Havoc forRetirement-Plan Sponsors http://t.co/HzHWTTtL I would expect rules to be modified, else headaches 4 DC plans $$ Feb 24, 2012
@BarbarianCap Looking at the RFP, that is one of the few things *not* under consideration, pity too, because it is more important. #DumbOCPP Feb 23, 2012
@BarbarianCap The audit is a test of methods and data, not assumptions. That’s actually pretty normal unless you an assumptions outlier $$ Feb 23, 2012
@BarbarianCap I’ve said it many times b4, if life insurers have 2b conservative in accounting, DB plans s/b more so, but they r less so $$ Feb 23, 2012
@BarbarianCap Some cases, deals will be driven to reduce benefits, depends on state/muni laws, Ch 9 allowable; not protected by ERISA/PBGC Feb 23, 2012

Stocks

The Capabilities Premium in M&A http://t.co/9CdZIugk Long piece that explains why some mergers work; they aid organic growth & r small $$ Feb 22, 2012
Elemental to Raise $1.7 Billion Next Year to Mine Potash http://t.co/w7GNsA2H Potash pricing has been volatile lately, cross-currents $$ Feb 22, 2012
Gamestop to J.C. Penney Shut Facebook Stores: Retail http://t.co/zSui0fCf $FB may have a more difficult time w/retail than some expect $$ Feb 20, 2012
Hewlett-Packard’s Message: We’ve Been Here All Along http://t.co/vU8piGMt Note: long $HPQ . HPQ definitely sounds more certain now. $$ Feb 16, 2012
Icahn Pushing CVR?s Sale Means $1 Billion Gain for Shareholders http://t.co/TfBKGErf What refiner wants more capacity now & fertilizer? $$ Feb 16, 2012
Hedge Funds Switch Positions, While Paulson Switches Investing Style http://t.co/MznmLhci Issue w/ $HIG is value of Variable product biz $$ Feb 15, 2012

Miscellaneous

The Control Revolution And Its Discontents http://t.co/FY4XgPde There is a “sweet spot” for market efficiency, too much & things get chaotic Feb 24, 2012
The Decline In Inventory Right Now is NOT a Good Sign http://t.co/Ra1Iz65H Fall in seller confidence & decline in new distressed inventory Feb 23, 2012
Spring Lambing in UK Turns Deadly as New Virus Kills Young http://t.co/PrO4neT1 Infects pregnant sheep, cows and goats, 5% infection rate Feb 22, 2012
Midwest Farmland Prices Update for the Year 2011 http://t.co/se9DbEgB Good discussion after a good article; things r getting a little bubbly Feb 22, 2012
Finding Treasures Among Insurer’s Wreckage http://t.co/jiFZiydE Never bot Atl Mutual’s Surplus Notes, but historical curiosities, wow $$ Feb 18, 2012
@StockTwits Insurance is boring, but antiquities at the oldest companies are fascinating. Wonder what Nationwide did w/Provident Mutuals? $$ Feb 18, 2012
@StockTwits I would hold meetings every now and then in Provident Mutual’s underused antiquities room; would start good conversations $$ Feb 18, 2012
Why Is Violent Crime Declining in US Cities? http://t.co/SLgD8bEL & http://t.co/RRRI2m8X Smarter law enforcement makes DC safer. Wow! $$ Feb 18, 2012
Thanks, liked it. RT @onwrdnupwrd: you will like this one from this weeks economist http://t.co/DMqhgXBB Feb 18, 2012
Interracial Marriages in US Reach a Record http://t.co/RJjWnTso Interesting that it is more prevalent with college educated people. $$ Feb 18, 2012
Harvard Mapping My DNA Turns Scary http://t.co/m5stl0d2 Journalist learns hard things about his DNA. Would he be better off not knowing? $$ Feb 18, 2012
Groupthink: The brainstorming myth http://t.co/7VBlhzKC People do better solving problems on their own, and sharing ideas w/the group $$ Feb 18, 2012
Fear, Submission, and Authoritarianism; a Disturbing Trend http://t.co/0lb32tOw Negative social mood leads to loss of liberties $$ Feb 16, 2012
Santorum?s Electability Pitch Undermined by 2006 Senate Re-Election Loss – Bloomberg http://t.co/8xglQQPJ Shouldn’t be an issue, here’s why: Feb 15, 2012
As the late Bob Casey said, “You can’t lose if you are a pro-life Democrat.” This is true, and it is why Santorum lost to his son. $$ Feb 15, 2012
Cracking the Long-Jump Code http://t.co/MN9d9EdJ Fascinating science applied; the key seems 2b2 jump higher, not just longer $$ Feb 15, 2012
The Best Foods for Thought, Literally http://t.co/tMyLW9E2 Perhaps the Mediterranean diet can aid brain function, or a lowcal diet $$ Feb 14, 2012
Contra: Almost Half the Price of Oil is Speculative Premium http://t.co/z8t51JOl It should be impossible to so overprice such a large mkt $$ Feb 14, 2012
The Hunt Brothers thought they could corner a much smaller silver market, and were not able to do it.? The oil compan? http://t.co/MLYVH5w3 Feb 14, 2012
So, What’s Your Algorithm? http://t.co/lC4voWCI Being able 2 crunch large amounts of data can lead to more objective decisions $$ #ornot Feb 13, 2012

Individual Investing Can Be Tough, Redux

Posted on 21 February 2012 by David Merkel

I have many software robots that scan for responses to what I write.? Most come directly to me.? Some do not like this one at Seeking Alpha:

Merkel’s reasons are, to be blunt, stupid.

1: Its too crowded and there is too much competition: While his goals may be to outperform many of us just want to build wealth.
2: Too much information: Just ignore the stuff that is unimportant. More information the better it certainly beats how things were decades ago.
3: “We are in a macroeconomic environment where we are delevering. That is not the best environment for making money”
For someone claiming 20 years of experience that is incredible naive.

First, we build wealth in competition with others, and the competition has grown, not shrunk.? The anomalies the allowed smaller investors to prosper are for the most part well-known.? Whether they are over-fished is another matter.? I think that previously profitable strategies still have value to the degree that they are ignored as no longer valuable.

Second, yes there is way too much noise, and I even create some of it.? Yes, I try to filter the information I receive, but I receive a ton of it, and filters are not perfect.? Please tell me how to construct a perfect filter, because mine are imperfect.? If we could create perfect filters we would be very, very rich, unlike me and the commenter.

Third, I don’t get the last comment, except that the person does not understand that periods where lending is expanding usually offers the highest returns for risk assets.? Presently we are contracting.

If I am naive, it is that I am an idealist.? I want better economic policy, and see lousy governance at the Fed, Treasury, and State levels.? As a result, on average, I see low real returns for assets over the next 5-10 years, unless policy changes dramatically.

Musings on the “400% Man”

Posted on 17 February 201217 February 2012 by David Merkel

When I read the following article at SmartMoney, I said to myself. “I have done almost as well, I am more diversified, and I am willing to explain more of what I do.”

Truth is, clever investors, or lucky investors can get an attitude, saying that they don’t have to explain themselves to outsiders.??? Not a good place to be. I am not saying that the performance is due to luck but there is a certain amount of respect due to investors for investing with you.

Before I write more, let me state that I respect Allan Mecham.? He manages more money than I do, and has a better track record.? If I were in the shoes of the investors who were analyzing him, I probably would have placed $5 million with him, and would have watched what he did carefully.

Why would I take the risk?? It’s tough to find non-consensus views that make significant money.? I wouldn’t want to make it a huge allocation initially, but I would put a toe in the water to see what he would actually do.? If it didn’t work over 5 years, I would pull the plug.

All that said, when you run a very concentrated portfolio, it is possible for a few decisions to drive a lot of performance.? I would feel more confident regarding someone who had made more correct decisions, because it would indicate a higher likelihood of a repeatable process.

Let me give you an example from my own portfolio.? I own SABESP [SBS], one of the largest water utilities in the world, which provides water and other services for the city of Sao Paulo in Brazil.? I got the idea from Cramer.? It’s the only idea I have ever gotten from Cramer and acted on.? I have held it for eight years, and the stock has quintupled.? Beyond that, I have made trading gains, because it has been somewhat volatile, as most Brazilian stocks have been.? And what proportion has this been in my portfolio?? Around 3%.? The largest position in my portfolio over the last 12 years has been 8%, and it has been rare to have a position larger than 4%.

One strength of what I do in asset management is that I don’t force trades.? I’m patient.? I trade 3-4 times a year, swapping out 2-6 companies each time.? The portfolio turns over once every three years.?? But that means that roughly one-third of the portfolio I have held more than three years.? It’s not that those companies are old friends, but they continue to survive the tests that I give the whole portfolio.? That said, when I sell one of those held longer, I do feel a slight sense of loss; it’s like losing a close friend.? I know I contradicted myself here, but that’s because my views are ambiguous here.? My summary would be that I love the companies that I have held for a long time, but they have to pass the test 3-4 times a year.? There are no free passes, and no sentimentality.

I know more about my own processes than I do of Mecham’s.? But I have felt the cold appraisals from institutional managers over the last five years, with the implicit complaint — “you have done well, but you don’t manage enough money, so we are not going to invest with you.”? This is the same response as “we don’t buy anything other than IBM.”

I can talk about my own processes until my face turns blue.??? They will still work in most environments.? But the article tells a story of investors that are risk-averse, but without any good sense of what true risk is.

For those that are looking for the next great investor, he does not look like the next great investor, but he looks odd, like Buffett did in the 50s and 60s.? Take the chance, and invest with the odd value investor.? Invest with several of them, diversify.

If I were managing assets for a pension fund, I would assemble a stable of new-ish value managers, and that would be 70% of my portfolio, with 30% investment grade bonds.? Boring and beautiful.

Without reviewing Allan’s trades, I can’t say how certain I am of his abilities.? But I would have a bias in favor of small value managers with good track records, particularly those who have been diversified.

Full disclosure: long SBS