Category Archives: Berkshire Hathaway

Why Warren Buffett wants IBM shares to languish…

ibmBerkshire Hathaway’s common stock investments include IBM or International Business Machines Corp. Based on Warren Buffett’s annual letter to shareholders dated February 25, 2012, for FY2011, Berkshire Hathaway has a stake of 5.5% in IBM.

Given this 5.5% IBM stake, why did Warren Buffett said this in his annual letter: “We should wish for IBM’s stock price to languish throughout the five years.”

The answer lies in IBM’s repurchase program.

In Warren Buffett’s own words: “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…

“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.”

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

Recommended reading:

(1) The Essays of Warren Buffett: Lessons for Corporate America, Third Edition

(2) Berkshire Hathaway Letters to Shareholders, 1965-2013

Warren Buffett invests in IBM

ibmIn 2011, in what appeared to be another sign of Warren Buffett triggering his elephant gun, reports said the Berkshire Hathaway chairman had invested over US$10 billion in IBM.

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.”

Mr Buffett was 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.

As to why Mr Buffett triggered the elephant gun could probably be seen in Mr Buffett’s letter to shareholders on February 26, 2011 for Year 2000.

In the letter, Mr Buffett said: “Charlie and I hope that the per-share earnings of our non-insurance businesses continue to increase at a decent rate. But the job gets tougher as the numbers get larger. We will need both good performance from our current businesses and more major acquisitions. We’re prepared. Our elephant gun has been reloaded, and my trigger finger is itchy.”

One can get an insight into the type of businesses that Warren Buffett and Berkshire Hathaway look for from his letter to shareholders (February 2008) for Year 2007.

“Charlie and I look for companies that have a) a business we understand; b) favorable long-term economics; c) able and trustworthy management; and d) a sensible price tag. We like to buy the whole business or, if management is our partner, at least 80%. When control-type purchases of quality aren’t available, though, we are also happy to simply buy small portions of great businesses by way of stockmarket purchases. It’s better to have a part interest in the Hope Diamond than to own all of a rhinestone.”

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

Recommended reading:

(1) The Essays of Warren Buffett: Lessons for Corporate America, Third Edition

(2) Berkshire Hathaway Letters to Shareholders, 1965-2013

Berkshire Hathaway’s Big Four marketable securities

Warren Buffett’s views on Berkshire Hathaway’s Big Four marketable securities can be seen in his annual letter (dated February 25, 2012 for FY2011) to Berkshire Hathaway shareholders: “…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.) 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. 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.”

Recommended reading:

(1) The Essays of Warren Buffett: Lessons for Corporate America, Third Edition

(2) Berkshire Hathaway Letters to Shareholders, 1965-2013

Berkshire Hathaway A and B shares

lettera

What is the difference between Berkshire Hathaway A shares and B shares?

letterb

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 makes 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 is 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.

Recommended reading:

(1) The Essays of Warren Buffett: Lessons for Corporate America, Third Edition

(2) Berkshire Hathaway Letters to Shareholders, 1965-2013

Tracing Berkshire Hathaway’s listing

Warren Buffett’s letter to Berkshire Hathaway shareholders (March 3, 1980) for Year 1999 gave readers a glimpse of Berkshire Hathaway’s listing. Here is a relevant excerpt:
“During 1979, NASDAQ trading was initiated in the stock of Berkshire Hathaway. This means that the stock now is quoted on the Over-the-Counter page of the Wall Street journal under ‘Additional OTC Quotes’. Prior to such listing, the Wall Street journal and the Dow-Jones news ticker would not report our earnings, even though such earnings were one hundred or more times the level of some companies whose reports they regularly picked up. Now, however, the Dow-Jones news ticker reports our quarterly earnings promptly after we release them and, in addition, both the ticker and the Wall Street journal report our annual earnings. This solves a dissemination problem that had bothered us.”

Recommended reading:

(1) The Essays of Warren Buffett: Lessons for Corporate America, Third Edition

(2) Berkshire Hathaway Letters to Shareholders, 1965-2013