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Berkshire Hathaway ‘A’ and ‘B’ shares

A new release by Berkshire Hathaway dated 10 July 2017 said that chairman Warren Buffett  that day converted 12,500 of his Class A shares into 18,750,000 Class B shares.

“Of these Class B shares, 18,628,189 have been donated to five foundations: Bill & Melinda Gates Foundation, Susan Thompson Buffett Foundation, Sherwood Foundation, Howard G.
Buffett Foundation and NoVo Foundation. These shares have a current value of $3.17 billion.”

The new release said that Mr  Buffett had never sold any shares of Berkshire. “With the current gift, however, more than
40% of his 2006 holdings have been given to the five foundations. Their value at the time of the gifts, including the 2017 gift, totals $27.54 billion.”

“Mr  Buffett intends to have all of his Berkshire shares given to philanthropy through annual gifts that will be completed ten years after his estate is settled. In all cases, his A shares will be
converted into B shares immediately prior to the gift. ”

This post seeks to explain the difference between Berkshire A and B shares. For this, Buffettpedia refers to a post dated 5 December 2014 in which it was said: Berkshire Hathaway chairman Warren Buffett said in a memo dated February 2, 1999 (updated on July 3, 2003 and on January 20, 2010) that Berkshire Hathaway Inc has two classes of common stock designated Class A and Class B.

The memo made  it clear on the differences between the two classes of shares. “A share of Class B common stock has the rights of 1/1,500th of a share of Class A common stock except that a Class B share has 1/10,000th of the voting rights of a Class A share (rather than 1/1,500th of the vote).”
Another point to note in the memo was the “convertible” aspect: “Each share of a Class A common stock is convertible at any time, at the holder’s option, into 1,500 shares of Class B common stock. This conversion privilege does not extend in the opposite direction. That is, holders of Class B shares are not able to convert them into Class A shares.”
“Both Class A & B shareholders are entitled to attend the Berkshire Hathaway Annual Meeting which is held the first Saturday in May,” said the memo.



Warren Buffett: Two things to remember during scary periods

“The years ahead will occasionally deliver major market declines – even panics – that will affect virtually all stocks,” Warren Buffett said in his FY2016 letter to Berkshire Hathaway shareholders.

“No one can tell you when these traumas will occur – not me, not Charlie, not economists, not the media. Meg McConnell of the New York Fed aptly described the reality of panics: “We spend a lot of time looking for systemic risk; in truth, however, it tends to find us,” said Mr Buffett.

What should investors do during such scary periods?

“…you should never forget two things: First, widespread fear is your friend as an investor, because it serves up bargain purchases. Second, personal fear is your enemy. It will also be unwarranted. Investors who avoid high and unnecessary costs and simply sit for an extended period with a collection of large, conservatively-financed American businesses will almost certainly do well,” said Mr Buffett, who is chairman and CEO of Berkshire Hathaway.

Mr Buffett started his thought on this subject by saying: “America’s economic achievements have led to staggering profits for stockholders. During the 20th century the Dow-Jones Industrials advanced from 66 to 11,497, a 17,320% capital gain that was materially boosted by steadily increasing dividends. The trend continues: By yearend 2016, the index had advanced a further 72%, to 19,763.

” American business – and consequently a basket of stocks – is virtually certain to be worth far more in the years ahead. Innovation, productivity gains, entrepreneurial spirit and an abundance of capital will see to that.”

Taking a dig at naysayers, Mr Buffett said: “Ever-present naysayers may prosper by marketing their gloomy forecasts. But heaven help them if they act on the nonsense they peddle. ”

Then driving home a point about reality, Mr Buffett said: “Many companies, of course, will fall behind, and some will fail. Winnowing of that sort is a product of market dynamism. Moreover, the years ahead will occasionally deliver major market declines – even panics – that will affect virtually all stocks. ”

Mr Buffett went on to talk about the two things that investors should not forget during such scary periods.


Why Warren Buffett sold about one-third of stake in IBM

Warren Buffett, who owned about 81 million shares in IBM at the end of 2016, sold off about a third of that stake in the first and second quarters of 2017.

He told CNBC this in a report dated May 4, 2017 (Warren Buffett has sold IBM shares, and ‘revalued’ tech icon downward, cites ‘big strong competitors’).

Mr Buffett’s FY2016 letter to Berkshire Hathaway, of which he is chairman and CEO, showed that at end-2016, the company owned  81,232,303 shares in IBM. The cost was US$13,815 million. “This is our actual purchase price and also our tax basis; GAAP “cost” differs in a few cases because of write-downs that have been required under GAAP rules,” said Mr Buffett in the shareholder letter.

Berkshire Hathaway first bought into IBM in 2011. A Reuters report (Nov 24, 2011) headlined “Buffett sheds tech aversion with big IBM investment” said: “Warren Buffett has always made his distaste for technology investments clear, but on Monday he changed his ways in spectacular fashion. The Berkshire Hathaway chief executive said he has bought nearly $11 billion of International Business Machines Corp (IBM) stock in the last eight months, building a roughly 5.5 percent stake that potentially makes him the largest shareholder in the company.”

At that time in 2011, Mr Buffett was also  quoted as saying in an interview on cable television network CNBC that he was struck by IBM’s ability to retain corporate clients, which made it indispensable in a way that few other services were.

Why then did he slash the stake in 2017? The CNBC May 4, 2017, report on Mr Buffett’s slashing of the IBM stake quoted him as saying: “I don’t value IBM the same way that I did 6 years ago when I started buying… I’ve revalued it somewhat downward.”

“When it got above $180 we actually sold a reasonable amount of stock,” said Mr Buffett.

According to Mr Buffett, IBM hadn’t performed the way he had expected — or the way IBM’s management had expected — when he first started buying the shares six years ago.

“IBM is a big strong company, but they’ve got big strong competitors too,” said Mr Buffett.

Mr Buffett also said he had stopped selling. At that point, IBM shares were trading below US$160.

What stocks to buy: 15 points to look for

“What are the matters about which the investor should learn if he is to obtain the type of investment which in a few years might show a gain of several hundred per cent, or over a longer period of time might show a correspondingly greater increase?

” In other words, what attributes should a company have to give it the greatest likelihood of attaining this kind of results for its shareholders?”

Common Sense And Uncommon Profits by Philip A. Fisher, in answering these questions, gives the fifteen points to look for in a common stock:

1. Does the company have products or services with sufficient market potential to make possible a sizable increase in sales for at least several years?

Companies which decade by decade have consistently shown spectacular growth might be divided into two groups:  “fortunate and able” and “fortunate because they are able”.  A high order of management ability is a must for both groups as no company grows for a long period of years just because it is lucky.

An example of the “fortunate and able” group is The Aluminium Company of America, says Philip Fisher.  The founders of this company were men with great vision. They correctly foresaw important commercial uses for their new product. However, neither they nor anyone else at that time could foresee anything like the future size of the market for aluminium products that was to develop over the next seventy years.

Du Pont is an example of the other group of growth stocks – the “fortunate because they are able” group –  says Philip Fisher.

This company was not originally in the business of making nylon,  cellophane, Lucite, neoprene, orlon, milar or any of the many other glamorous products with which it is frequently associated  in the public mind and which have proven so spectacularly profitable to the investor.

“Applying the skills and knowledge learned in its original powder business, the company has successfully launched product after product to make one of the great success stories of American stories,” says Common Stocks And Uncommon Profits.


2. Does the management have a determination to continue to develop products or processes that will still further increase total sales potentials when the growth potentials of currently attractive product lines have largely been exploited?

The investor usually obtains the best results in companies whose engineering or research is to a considerable extent devoted to products having some business relationship to those already within the scope of company activities, says Philip Fisher. “This does not mean that a desirable company may not have a number of divisions, some of which have product lines quite different from others.”

3. How effective are the company’s research and development (R&D) efforts in relation to its size?

4. Does the company have an above-average sales organization?

5. Does the company have a worthwhile profit margin?

6. What is the company doing to maintain or improve profit margins?

7. Does the company have outstanding labor and personnel relations?

8. Does the company have outstanding executive relations?

9. Does the company have depth to its management?

10. How good are the company’s cost analysis and accounting controls? .

11. Are there other aspects of the business, somewhat peculiar to the industry involved, which will give the investor important clues as to how outstanding the company may be in relation to its competition?

12. Does the company have a short-range or long-range outlook in regard to profits?

13. In the foreseeable future will the growth of the company require sufficient equity financing so that the larger number of shares then outstanding will largely cancel the existing stockholders’ benefit from this anticipated growth?

14. Does management talk freely to investors about its affairs when things are going well but “clam up” when troubles and disappointments occur?

15. Does the company have a management of unquestionable integrity?



Who is Ray DeVoe?

The name Ray DeVoe was mentioned by Warren Buffett in his FY2010 letter to Berkshire Hathaway shareholders.

Warren Buffett said: “We keep our cash largely in U.S. Treasury bills and avoid other short-term securities yielding a few more basis points, a policy we adhered to long before the frailties of commercial paper and money market funds became apparent in September 2008.”

Then touching on a Ray DeVoe view, he said: ” We agree with investment writer Ray DeVoe’s observation, “More money has been lost reaching for yield than at the point of a gun.” At Berkshire, we don’t rely on bank lines, and we don’t enter into contracts that could require postings of collateral except for amounts that are tiny in relation to our liquid assets.””

So who is investment writer Ray DeVoe ?

According to an obituary, Ray DeVoe was Raymond F. DeVoe Jr (1929-2014). He died on Sept 27, 2014, at the age of 85.

A Sept 30, 2014, Bloomberg report (Raymond DeVoe Jr, Newsletter Writer for 35 Years, Dies) said: “In a Wall Street career dating to 1955, DeVoe was a voice for investors looking for long-term stakes in undervalued companies. He said in a 2011 interview with Bloomberg News that David Dodd, co-author with Benjamin Graham of the value investing classic “Securities Analysis” (1934),  “was my finance professor and guidance counselor” at Columbia University’s business school.”

The investment writer wrote the DeVoe Report, a financial newsletter, for 35 years.

Warning investors to beware “the dead cat bounce”, Roy DeVoe once said: “If  you threw a dead cat off a 50-story building, it might bounce when it hit the sidewalk. But don’t confuse that bounce with renewed life. It is still a dead cat.”

Investopedia describes the dead cat bounce as “a temporary recovery from a prolonged decline or a bear market that is followed by the continuation of the downtrend”. 

The Fourth Law of Motion that Sir Isaac Newton failed to discover

“Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius,” Warren Buffett  said in a comment in Berkshire Hathaway’s FY2016 annual report.

” But Sir Isaac’s talents didn’t extend to investing: He lost a bundle in the South Sea Bubble, explaining later, “I can calculate the movement of the stars, but not the madness of men.”

“If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases.”

To understand better why Sir Isaac Newton said “I can calculate the movement of the starts, but not the madness of men”,  read Buffettpedia’s post “Are you an intelligent investor?”.