Showing posts with label Buffett. Show all posts
Showing posts with label Buffett. Show all posts

Excellent Quotes by Warren Buffett


DOCUMENTRY- WARREN BUFFETT THE WORLDS GREATEST MONEY MAKER

Warren Buffett speaks to UGA students

Should You Bet Like Buffett?

Warren Buffett Investing Secrets.

Why Warren Buffett likes IBM?

Finally, we made two major investments in marketable securities:
  • (1) a $5 billion 6% preferred stock of Bank of America that came with warrants allowing us to buy 700 million common shares at $7.14 per share any time before September 2, 2021; and 
  • (2) 63.9 million shares of IBM that cost us $10.9 billion. (= $170.58 per share)
Counting IBM, we now have large ownership interests in four exceptional companies: 13.0% of American Express, 8.8% of Coca-Cola, 5.5% of IBM and 7.6% of Wells Fargo. (We also, of course, have many smaller, but important, positions.)

This discussion of repurchases offers me the chance to address the irrational reaction of many investors to changes in stock prices. When Berkshire buys stock in a company that is repurchasing shares, we hope for two events:
  • First, we have the normal hope that earnings of the business will increase at a good clip for a long time to come; and 
  • second, we also hope that the stock underperforms in the market for a long time as well. 
A corollary to this second point: “Talking our book” about a stock we own – were that to be effective – would actually be harmful to Berkshire, not helpful as commentators customarily assume.

Let’s use IBM as an example. As all business observers know, CEOs Lou Gerstner and Sam Palmisano did a superb job in moving IBM from near-bankruptcy twenty years ago to its prominence today.
  • Their operational accomplishments were truly extraordinary. 
  • But their financial management was equally brilliant, particularly in recent years as the company’s financial flexibility improved. 
Indeed, I can think of no major company that has had better financial management, a skill that has materially increased the gains enjoyed by IBM shareholders.
  • The company has used debt wisely, 
  • made value-adding acquisitions almost exclusively for cash and 
  • aggressively repurchased its own stock.
Today, IBM has 1.16 billion shares outstanding, of which we own about 63.9 million or 5.5%.
  • Naturally, what happens to the company’s earnings over the next five years is of enormous importance to us.
  • Beyond that, the company will likely spend $50 billion or so in those years to repurchase shares. 
Our quiz for the day: What should a long-term shareholder, such as Berkshire, cheer for during that period?
I won’t keep you in suspense.
  • We should wish for IBM’s stock price to languish throughout the five years.

Let’s do the math.
  • If IBM’s stock price averages, say, $200 during the period, the company will acquire 250 million shares for its $50 billion. There would consequently be 910 million shares outstanding, and we would own about 7% of the company. 
  • If the stock conversely sells for an average of $300 during the five-year period, IBM will acquire only 167 million shares. That would leave about 990 million shares outstanding after five years, of which we would own 6.5%.
If IBM were to earn, say, $20 billion in the fifth year, our share of those earnings would be a full $100 million#  greater under the “disappointing” scenario of a lower stock price than they would have been at the higher price. *At some later point our shares would be worth perhaps $1 1⁄2 billion more than if the “high-price” repurchase scenario had taken place.

The logic is simple: If you are going to be a net buyer of stocks in the future, either directly with your own money or indirectly (through your ownership of a company that is repurchasing shares),
  • you are hurt when stocks rise. 
  • You benefit when stocks swoon. Emotions, however, too often complicate the matter: 
Most people, including those who will be net buyers in the future, take comfort in seeing stock prices advance. These shareholders resemble a commuter who rejoices after the price of gas increases, simply because his tank contains a day’s supply.

Charlie and I don’t expect to win many of you over to our way of thinking – we’ve observed enough human behavior to know the futility of that – but we do want you to be aware of our personal calculus. And here a confession is in order:
  • In my early days I, too, rejoiced when the market rose. 
  • Then I read Chapter Eight of Ben Graham’s The Intelligent Investor, the chapter dealing with how investors should view fluctuations in stock prices. 
  • Immediately the scales fell from my eyes, and low prices became my friend. Picking up that book was one of the luckiest moments in my life.
In the end, the success of our IBM investment will be determined primarily by its future earnings.
  • But an important secondary factor will be how many shares the company purchases with the substantial sums it is likely to devote to this activity. 
  • And if repurchases ever reduce the IBM shares outstanding to 63.9 million, I will abandon my famed frugality and give Berkshire employees a paid holiday.



#   If IBM were to earn, say, $20 billion in the fifth year,  Berkshire's share of profits in the 2 scenarios are as follows:
  • 7% of $20 billion = $1.4 billion
  • 6.5% of $20 billion = $1.3 billion.
  • The difference due to the sharebuyback at lower prices give an extra $100 million in profit.
*At some later point our shares would be worth perhaps $1 1⁄2 billion more than if the “high-price” repurchase scenario had taken place.

I am having difficulty understanding how Warren Buffett derived this $1 1/2 billion figure.  Thinking Perhaps, my readers can help me here.   Thanks. Handshake

Be a Buffett, don't back the benchmark

Be a Buffett, don't back the benchmark
Warren Buffett’s latest letter to Berkshire Hathaway shareholders is the usual mixture of folksy charm and investment wisdom.


A woman displays playing cards for sale with a picture of Berkshire Hathaway Chairman Warren Buffett in Omaha.
A playing card featuring a picture of Warren Buffett. The investor has beaten the S&P 500 index 39 years out of 47 Photo: Reuters
9:15PM GMT 03 Mar 2012
Comments33 Comments
The part that grabbed the headlines this year was a comparison of equity investing against bonds and gold, which unsurprisingly came down on the side of shares. Having achieved a 19.8pc annual growth rate from stocks over 47 years, it is not hard to see why they should be Buffett’s first love.
For me, there was a more interesting lesson in this year’s letter. It was a thought prompted by its first page on which Buffett compares his performance year by year since 1965 against the S&P 500 index. Last year, the 4.6pc rise in the value of Berkshire Hathaway’s book value compared with 2.1pc growth in the main US benchmark.
It was the 39th year out of 47 in which he has beaten the market, a fantastically consistent performance. But then, as Buffett says, “if our gain over time outstrips the performance of the S&P 500, we have earned our paychecks. If it doesn’t, we are overpaid at any price.”
So once a year, and cumulatively over the half century he has run Berkshire Hathaway, Buffett compares his progress against the S&P 500. It is a convenient benchmark to see if he is earning his corn and, in that regard, he is no different from any other fund manager.
In another important way, however, Buffett is quite different from the majority of professional investors. This is because, although he cares about his overall performance compared with the benchmark, he is indifferent to how his portfolio of investments compares with the make-up of the S&P 500. He is, to use the jargon, unconstrained by the benchmark.
Buffett’s approach is simply to buy companies that he believes are undervalued compared with their intrinsic value and hold them for the very long term. If you think that most investors do something similar you may be disappointed. That is because the fund management industry has increasingly lashed itself to the mast of stock market indices. Its buy and sell decisions are to a greater or lesser extent determined not by the intrinsic merits of individual shares but by their weighting within a relevant price-derived benchmark.
It is an approach which more thoughtful investors believe may not necessarily be in the best interests of their customers. It has led to funds having heavy concentrations in small numbers of very large companies or in particular sectors that dominate and, as such, it may be seen as a significant contributor to the stock market’s booms and busts.
Investment approaches that measure their performance against price-related indices almost by definition encourage the purchase of overvalued shares that have been pushed above fair value. This is a particular problem with passive funds like index trackers but, to the extent that actively-managed funds have become “closet trackers”, it means they too risk being sucked in at the top of the market, contributing to moments of madness like the dot.com bubble a decade or so ago.
What is increasingly happening in the institutional investment world in response to these concerns is a move to alternative indices that try to take the price of a share out of the equation. These new indices focus on different measures such as a company’s sales, the value of its assets, even the size of its workforce. Alternatively, they simply measure themselves against an equally-weighted benchmark, one with a similar exposure to every company in an index. In both cases, there is evidence that these approaches outperform market value-based indices in the long run.
So why doesn’t everyone simply invest according to this new “fundamental” approach? The main reason is that the alternative methods have a tendency to solve one problem but create a new one. For example, equally weighting all the companies in an index gives a fund a relatively greater exposure to small companies. There will be times when this is an advantage and times when it leads to under-performance.
As a consequence of this, some active fund managers are testing a move back towards the unconstrained Buffett approach, freeing up their investors to back their best ideas regardless of a benchmark. Some might say that is what they are paid to do.
Tom Stevenson is an investment director at Fidelity Worldwide Investment. The views expressed are his own.
He tweets at @tomstevenson63.

Warren Buffett: Leverage is also a way to get very poor.


Unquestionably, some people have become very rich through the use of borrowed money. However, that’s also been a way to get very poor. When leverage works, it magnifies your gains. Your spouse thinks you’re clever, and your neighbors get envious. But leverage is addictive. Once having profited from its wonders, very few people retreat to more conservative practices. 

  • And as we all learned in third grade – and some relearned in 2008 – any series of positive numbers, however impressive the numbers may be, evaporates when multiplied by a single zero. 
  • History tells us that leverage all too often produces zeroes, even when it is employed by very smart people.


Leverage, of course, can be lethal to businesses as well. Companies with large debts often assume that these obligations can be refinanced as they mature. That assumption is usually valid. Occasionally, though, either because of company-specific problems or a worldwide shortage of credit, maturities must actually be met by payment. For that, only cash will do the job.

Borrowers then learn that credit is like oxygen. When either is abundant, its presence goes unnoticed. When either is missing, that’s all that is noticed.

  • Even a short absence of credit can bring a company to its knees. 
  • In September 2008, in fact, its overnight disappearance in many sectors of the economy came dangerously close to bringing our entire country to its knees.
By being so cautious in respect to leverage, we penalize our returns by a minor amount. Having loads of liquidity, though, lets us sleep well. 
  • Moreover, during the episodes of financial chaos that occasionally erupt in our economy, we will be equipped both financially and emotionally to play offense while others scramble for survival. 
  • That’s what allowed us to invest $15.6 billion in 25 days of panic following the Lehman bankruptcy in 2008.


Buffett: What students should be learning is how to value a business.


John Kenneth Galbraith once slyly observed that economists were most economical with ideas: They made the ones learned in graduate school last a lifetime. University finance departments often behave similarly. Witness the tenacity with which almost all clung to the theory of efficient markets throughout the 1970s and 1980s, dismissively calling powerful facts that refuted it “anomalies.” (I always love explanations of that kind: The Flat Earth Society probably views a ship’s circling of the globe as an annoying, but inconsequential, anomaly.)

Academics’ current practice of teaching Black-Scholes as revealed truth needs re-examination. For that matter, so does the academic’s inclination to dwell on the valuation of options. You can be highly successful as an investor without having the slightest ability to value an option. What students should be learning is how to value a business. That’s what investing is all about.



http://www.berkshirehathaway.com/letters/2010ltr.pdf

Buffett: Ownership of commercial "cows" (first class businesses) over any extended period of time will prove to be rewarding and by far the safest.


Our first two categories, namely cash and gold, enjoy maximum popularity at peaks of fear:

  • Terror over economic collapse drives individuals to currency-based assets, most particularly U.S. obligations, and fear of currency collapse fosters movement to sterile assets such as gold. 
  • We heard “cash is king” in late 2008, just when cash should have been deployed rather than held. 
  • Similarly, we heard “cash is trash” in the early 1980s just when fixed-dollar investments were at their most attractive level in memory. 
  • On those occasions, investors who required a supportive crowd paid dearly for that comfort.


My own preference – and you knew this was coming – is our third category: investment in productive assets, whether businesses, farms, or real estate. Ideally, these assets should have the ability in inflationary times

-  to deliver output that will retain its purchasing-power value 
- while requiring a minimum of new capital investment. 

  • Farms, real estate, and many businesses such as Coca-Cola, IBM and our own See’s Candy meet that double-barreled test.
  • Certain other companies – think of our regulated utilities, for example – fail it because inflation places heavy capital requirements on them. To earn more, their owners must invest more.
  • Even so, these investments will remain superior to nonproductive or currency-based assets.


Whether the currency a century from now is based on gold, seashells, shark teeth, or a piece of paper (as today), people will be willing to exchange a couple of minutes of their daily labor for a Coca-Cola or some See’s peanut brittle. In the future the U.S. population will move more goods, consume more food, and require more living space than it does now. People will forever exchange what they produce for what others produce.

Our country’s businesses will continue to efficiently deliver goods and services wanted by our citizens. Metaphorically, these commercial “cows” will live for centuries and give ever greater quantities of “milk” to boot. 

  • Their value will be determined not by the medium of exchange but rather by their capacity to deliver milk. 
  • Proceeds from the sale of the milk will compound for the owners of the cows, just as they did during the 20th century when the Dow increased from 66 to 11,497 (and paid loads of dividends as well). 


Berkshire’s goal will be to increase its ownership of first-class businesses.

  • Our first choice will be to own them in their entirety – but we will also be owners by way of holding sizable amounts of marketable stocks.
  •  I believe that over any extended period of time this category of investing will prove to be the runaway winner among the three we’ve examined. 
  • More important, it will be by far the safest.


http://www.berkshirehathaway.com/letters/2011ltr.pdf

Gold: Bubbles blown large enough inevitably pop. “What the wise man does in the beginning, the fool does in the end.”


The second major category of investments involves assets that will never produce anything, but that are purchased in the buyer’s hope that someone else – who also knows that the assets will be forever unproductive – will pay more for them in the future. Tulips, of all things, briefly became a favorite of such buyers in the 17th century.

This type of investment requires an expanding pool of buyers, who, in turn, are enticed because they believe the buying pool will expand still further. Owners are not inspired by what the asset itself can produce – it will remain lifeless forever – but rather by the belief that others will desire it even more avidly in the future.

The major asset in this category is gold, currently a huge favorite of investors who fear almost all other assets, especially paper money (of whose value, as noted, they are right to be fearful). Gold, however, has two significant shortcomings, being neither of much use nor procreative.

  • True, gold has some industrial and decorative utility, but the demand for these purposes is both limited and incapable of soaking up new production. 
  • Meanwhile, if you own one ounce of gold for an eternity, you will still own one ounce at its end.


What motivates most gold purchasers is their belief that the ranks of the fearful will grow. During the past decade that belief has proved correct.

  • Beyond that, the rising price has on its own generated additional buying enthusiasm, attracting purchasers who see the rise as validating an investment thesis. 
  • As “bandwagon” investors join any party, they create their own truth – for a while.


Over the past 15 years, both Internet stocks and houses have demonstrated the extraordinary excesses that can be created by combining an initially sensible thesis with well-publicized rising prices. 

  • In these bubbles, an army of originally skeptical investors succumbed to the “proof” delivered by the market, and the pool of buyers – for a time – expanded sufficiently to keep the bandwagon rolling. 
  • But bubbles blown large enough inevitably pop. 
  • And then the old proverb is confirmed once again: “What the wise man does in the beginning, the fool does in the end.”


Today the world’s gold stock is about 170,000 metric tons.

  • If all of this gold were melded together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) 
  • At $1,750 per ounce – gold’s price as I write this – its value would be $9.6 trillion. Call this cube pile A.


Let’s now create a pile B costing an equal amount.

  • For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world’s most profitable company, one earning more than $40 billion annually). 
  • After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). 
Can you imagine an investor with $9.6 trillion selecting pile A over pile B?

Beyond the staggering valuation given the existing stock of gold, current prices make today’s annual production of gold command about $160 billion. 

  • Buyers – whether jewelry and industrial users, frightened individuals, or speculators – must continually absorb this additional supply to merely maintain an equilibrium at present prices.


A century from now

  • the 400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton, and other crops – and will continue to produce that valuable bounty, whatever the currency may be. 
  • Exxon Mobil will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions (and, remember, you get 16 Exxons). 
  • The 170,000 tons of gold will be unchanged in size and still incapable of producing anything. You can fondle the cube, but it will not respond.

Admittedly, when people a century from now are fearful, it’s likely many will still rush to gold. I’m confident, however, that the $9.6 trillion current valuation of pile A will compound over the century at a rate far inferior to that achieved by pile B.

http://www.berkshirehathaway.com/letters/2011ltr.pdf

Volatility is not risk. Risk is the reasoned probability of that investment causing it's owner a loss of purchasing power over his contemplated holding period.


Investing is often described as the process of laying out money now in the expectation of receiving more money in the future.

At Berkshire we take a more demanding approach, defining investing as

  •  the transfer to others of purchasing power now with the reasoned expectation of receiving more purchasing power – after taxes have been paid on nominal gains – in the future. 
  • More succinctly, investing is forgoing consumption now in order to have the ability to consume more at a later date.


From our definition there flows an important corollary: The riskiness of an investment is not measured by beta (a Wall Street term encompassing volatility and often used in measuring risk) but rather by the probability – the reasoned probability – of that investment causing its owner a loss of purchasing-power over his contemplated holding period. 
  • Assets can fluctuate greatly in price and not be risky as long as they are reasonably certain to deliver increased purchasing power over their holding period. 
  • And as we will see, a non-fluctuating asset can be laden with risk.


Investment possibilities are both many and varied.



http://www.berkshirehathaway.com/letters/2011ltr.pdf

Interesting to Note that this is a development that hurts Berkshire Hathaway during 2011


-  Three large and very attractive fixed-income investments were called away from us by their issuers in 2011. Swiss Re, Goldman Sachs and General Electric paid us an aggregate of $12.8 billion to redeem securities that were producing about $1.2 billion of pre-tax earnings for Berkshire. That’s a lot of income to replace, though our Lubrizol purchase did offset most of it.

http://www.berkshirehathaway.com/letters/2011ltr.pdf


Comment:  Buffett emphasizes increasing the aggregate pre-tax earnings and incomes.  He reinvests into or replaces companies, to achieve growth in aggregate pre-tax earnings and incomes.   This is very sound strategy to follow.

Share Buybacks: Mixed Emotions evoked when Berkshire shares sell well below Intrinsic Value


Share Repurchases


Last September, we announced that Berkshire would repurchase its shares at a price of up to 110% of book value. We were in the market for only a few days – buying $67 million of stock – before the price advanced beyond our limit. Nonetheless, the general importance of share repurchases suggests I should focus for a bit on the subject.

Charlie and I favor repurchases when two conditions are met: 
  • first, a company has ample funds to take care of the operational and liquidity needs of its business; 
  • second, its stock is selling at a material discount to the company’s intrinsic business value, conservatively calculated. 

We have witnessed many bouts of repurchasing that failed our second test. Sometimes, of course, infractions – even serious ones – are innocent; many CEOs never stop believing their stock is cheap. In other instances, a less benign conclusion seems warranted.

  • It doesn’t suffice to say that repurchases are being made to offset the dilution from stock issuances or simply because a company has excess cash. 
  • Continuing shareholders are hurt unless shares are purchased below intrinsic value. 
The first law of capital allocation – whether the money is slated for acquisitions or share repurchases – is that what is smart at one price is dumb at another. (One CEO who always stresses the price/value factor in repurchase decisions is Jamie Dimon at J.P. Morgan; I recommend that you read his annual letter.)

Charlie and I have mixed emotions when Berkshire shares sell well below intrinsic value. We like making money for continuing shareholders, and there is no surer way to do that than by buying an asset – our
own stock – that we know to be worth at least x for less than that – for .9x, .8x or even lower. (As one of our directors says, it’s like shooting fish in a barrel, after the barrel has been drained and the fish have quit flopping.)

Nevertheless, we don’t enjoy cashing out partners at a discount, even though our doing so may give the selling shareholders a slightly higher price than they would receive if our bid was absent. 

  • When we are buying, therefore, we want those exiting partners to be fully informed about the value of the assets they are selling. 
  • At our limit price of 110% of book value, repurchases clearly increase Berkshire’s per-share intrinsic value. 
  • And the more and the cheaper we buy, the greater the gain for continuing shareholders. 
Therefore, if given the opportunity, we will likely repurchase stock aggressively at our price limit or lower.

You should know, however, that

  • we have no interest in supporting the stock and that our bids will fade in particularly weak markets.
  • Nor will we buy shares if our cash-equivalent holdings are below $20 billion. At Berkshire, financial strength that is unquestionable takes precedence over all else.


Boosting Berkshire Hathaway Profits: Through organic growth and through purchasing some large operations.



-  I also included two tables last year that set forth the key quantitative ingredients that will help you estimate our per-share intrinsic value. I won’t repeat the full discussion here; you can find it reproduced on pages 99-100. To update the tables shown there, our per-share investments in 2011 increased 4% to $98,366, and
our pre-tax earnings from businesses other than insurance and investments increased 18% to $6,990 per share.

Charlie and I like to see gains in both areas, but our primary focus is on building operating earnings. Over time, the businesses we currently own should increase their aggregate earnings, and we hope also to purchase some large operations that will give us a further boost. We now have eight subsidiaries that would each be included in the Fortune 500 were they stand-alone companies. That leaves only 492 to go. My task is clear, and I’m on the prowl.


Comment:  In managing Berkshire Hathaway, Buffett's primary focus in on building operating earnings.  He expects his existing companies can increase their aggregate earnings.  He hopes to boost these earnings further through purchasing some large operations.

Intrinsic Business Value - Look for the long term growth in the intrinsic values of your invested businesses.



Intrinsic Business Value


Charlie and I measure our performance by the rate of gain in Berkshire’s per-share intrinsic business value. If our gain over time outstrips the performance of the S&P 500, we have earned our paychecks. If it doesn’t, we are overpaid at any price.

We have no way to pinpoint intrinsic value. But we do have a useful, though considerably understated, proxy for it: per-share book value. This yardstick is meaningless at most companies. At Berkshire, however, book value very roughly tracks business values. That’s because the amount by which Berkshire’s intrinsic value exceeds book value does not swing wildly from year to year, though it increases in most years. Over time, the divergence will likely become ever more substantial in absolute terms, remaining reasonably steady, however, on a percentage basis as both the numerator and denominator of the business-value/book-value equation increase.

Comment:  It is not easy to determine intrinsic value.  The best PROXY for intrinsic value of Berkshire Hathaway is its book value.  Though this closely tracks the intrinsic value of Berkshire Hathaway,  it actually understates the intrinsic value of the company.  Nevertheless, Buffett opines that using book value to denote intrinsic value is meaningless for most other companies.


We’ve regularly emphasized that our book-value performance is almost certain to outpace the S&P 500 in a bad year for the stock market and just as certainly will fall short in a strong up-year. The test is how we do over time. Last year’s annual report included a table laying out results for the 42 five-year periods since we took over at Berkshire in 1965 (i.e., 1965-69, 1966-70, etc.). All showed our book value beating the S&P, and our string held for 2007-11. It will almost certainly snap, though, if the S&P 500 should put together a five-year winning streak (which it may well be on its way to doing as I write this)

Comment:  Psychological forces trump the fundamental forces in the short term.  In the long term, the fundamental forces always trump the psychological forces that affect the stock price of a company.  Buffett looks at long term performances.  He highlighted that in any given 5 year period, the percentage gains in book value of Berkshire Hathaway have beaten those offered by the S&P 500.

http://www.berkshirehathaway.com/letters/2011ltr.pdf

Buffett's Big 4 Investments in Marketable Securities - American Express, Coca Cola, IBM and Wells Fargo


-  Finally, we made two major investments in marketable securities:

  • (1) a $5 billion 6% preferred stock of Bank of America that came with warrants allowing us to buy 700 million common shares at $7.14 per share any time before September 2, 2021; and 
  • (2) 63.9 million shares of IBM that cost us $10.9 billion. 
Counting IBM, we now have large ownership interests in four exceptional companies:

  • 13.0% of American Express, 
  • 8.8% of Coca-Cola, 
  • 5.5% of IBM and 
  • 7.6% of Wells Fargo. 
  • (We also, of course, have many smaller, but important, positions.)


Comment:  "Buying wonderful company at fair price" and "holding period is forever".   This is classically Buffett's style.


We view these holdings as partnership interests in wonderful businesses, not as marketable securities to be bought or sold based on their near-term prospects. Our share of their earnings, however, are far from fully reflected in our earnings; only the dividends we receive from these businesses show up in our financial reports. Over time, though, the undistributed earnings of these companies that are attributable to our ownership are of huge importance to us. That’s because they will be used in a variety of ways to increase future earnings and dividends of the investee. They may also be devoted to stock repurchases, which will increase our share of the company’s future earnings.

Comment:  Buffett buys and holds for the long term.  He keeps these companies for their long-term prospects, knowing that he will obtain good returns from these companies, either through the dividends they distribute or through the undistributed growing earnings attributable to the owners from its reinvested retained earnings.


-  Had we owned our present positions throughout last year, our dividends from the “Big Four” would have been $862 million. That’s all that would have been reported in Berkshire’s income statement. Our share of this quartet’s earnings, however, would have been far greater: $3.3 billion. Charlie and I believe that the $2.4 billion that goes unreported on our books creates at least that amount of value for Berkshire as it fuels earnings gains in future years. We expect the combined earnings of the four – and their dividends as well – to increase in 2012 and, for that matter, almost every year for a long time to come. A decade from now, our current holdings of the four companies might well account for earnings of $7 billion, of which $2 billion in dividends would come to us.


Comment:  Only the dividends received are reported in Berkshire Hathaways account.  This is only a fraction (36%) of the actual earnings of $3.3 billion.  Buffett opines that these dividends will continue to grow as the retained earnings fuel earnings gains in future years.  I like the way Buffett projects the future earnings of these companies.

  • For present earnings of $3 billion to grow to $7 billion in 10 years, he is projecting a CAG of 8.84%.  
  • Projecting the dividends of $862 million growing to $2 billion in a decade is the equivalent of the dividends growing at a CAG of  8.77% for the same period.  
  • The growth rates used in his projections are very conservative (8.84% and 8.77%).  Maybe Buffett just uses his simple rule of thumb of doubling the earnings or dividends every 10 years.
  • Once again, he reiterates that $1 retained earnings by the company should deliver at least $1 value to the shareholder.

Buffett Loves The Insurance Operations that deliver "float" or costless capital of $70 BILLION .



• Our insurance operations continued their delivery of costless capital that funds a myriad of other opportunities.

  • This business produces “float” – money that doesn’t belong to us, but that we get to invest for Berkshire’s benefit. 
  • And if we pay out less in losses and expenses than we receive in premiums, we additionally earn an underwriting profit, meaning the float costs us less than nothing. 
  • Though we are sure to have underwriting losses from time to time, we’ve now had nine consecutive years of underwriting profits, totaling about $17 billion. 
  • Over the same nine years our float increased from $41 billion to its current record of $70 billion. Insurance has been good to us


http://www.berkshirehathaway.com/letters/2011ltr.pdf

Growth Investing Examples from Berkshire Hathaway



-  On September 16th we acquired Lubrizol, a worldwide producer of additives and other specialty chemicals. The company has had an outstanding record since James Hambrick became CEO in 2004, with pre-tax profits increasing from $147 million to $1,085 million. Lubrizol will have many opportunities for “bolt-on” acquisitions in the specialty chemical field. Indeed, we’ve already agreed to three, costing $493 million. James is a disciplined buyer and a superb operator. Charlie and I are eager to expand his managerial domain.

Comment:  Lubrizol grew its pre-tax profits from $147 million from 2004 to $1,085 million.   Thus its pre-tax profit has grown at the compound annual growth rate of 33.05% over 7 years.

  • Buffett likes this company for its good earnings growth.  
  • The good earnings growth rate also is reflective of the good business fundamentals of this company.
  • Buffett loves buying / owning wonderful company (that are growing).


-  Our major businesses did well last year. In fact, each of our five largest non-insurance companies – BNSF, Iscar, Lubrizol, Marmon Group and MidAmerican Energy – delivered record operating earnings. In aggregate these businesses earned more than $9 billion pre-tax in 2011. Contrast that to seven years ago, when we owned only one of the five, MidAmerican, whose pre-tax earnings were $393 million. Unless the economy weakens in 2012, each of our fabulous five should again set a record, with aggregate earnings comfortably topping $10 billion.

Comment:  
1994:  Mid American contributed pre-tax earnings of $393 million.
2011:  BSNF, Iscar, Lubrizol, Marmon Group and MidAmerican Energy earned $9 billion pre-tax.

  • BSNF and Lubrizol are recent acquisitions of Buffett.  
  • Buffett likes these companies for their earnings and growth.  
  • Buffett even projected that their aggregate earnings will top $10 billion next year, 2012 (a growth rate of 11%).

    -   In total, our entire string of operating companies spent $8.2 billion for property, plant and equipment in 2011, smashing our previous record by more than $2 billion. About 95% of these outlays were made in the U.S., a fact that may surprise those who believe our country lacks investment opportunities. We welcome projects abroad, but expect the overwhelming majority of Berkshire’s future capital commitments to be in America. In 2012, these expenditures will again set a record.

    Comment:  
    Yes, to grow one has to re-invest.  Looks like Buffett reinvest all the free cash flows ($8.2 billion capital expenditure) for future growth.



    The latest edition of Buffett's annual letter,

    http://www.berkshirehathaway.com/letters/2011ltr.pdf



    The per-share book value of both our Class A and Class B stock increased by 4.6% in 2011. Over the last 47 years (that is, since present management took over), book value has grown from $19 to $99,860, a rate of 19.8% compounded annually.



    Change in Per-Share Book Value of Berkshire
    Compounded Annual Gain – 1965-2011 . . . . . . . . . . . . . . . . . . . . . . . . . 19.8%
    Overall Gain – 1964-2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . 513,055%

    Percentage Change in S&P 500 with Dividends Included
    Compounded Annual Gain – 1965-2011 . . . . . . . . . . . . . . . . . . . . . . . . . 9.2%
    Overall Gain – 1964-2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,397%

    Berkshire Hathaway showed losses in only 2 years for this long period, namely 2001 (-6.2%) and 2008 (-9.6%).

    By ensuring that losses are few and small, the gains in all the years compounded into a very huge value.

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