Category Archives: Warren Buffett’s thoughts

How Berkshire Hathaway treats company’s new information

In his February 27, 2016, letter to Berkshire Hathaway for FY2015, chairman Warren Buffett said: “While I’m on the subject of our owners’ gaining knowledge, let me remind you that Charlie and I believe all shareholders should simultaneously have access to new information that Berkshire releases and, if possible, should also have adequate time to digest and analyze it before any trading takes place.”

Explaining the reason, he said: “That’s why we try to issue financial data late on Fridays or early on Saturdays and why our annual meeting is always held on a Saturday.”

Berkshire Hathaway is also against giving institutional investors or analysts privileged information, with Warren Buffett saying: “We do not follow the common practice of talking one-on-one with large institutional investors or analysts, treating them instead as we do all other shareholders. There is no one more important to us than the shareholder of limited means who trusts us with a substantial portion of his savings.”

Does Warren Buffett or Berkshire Hathaway hold certain stocks forever?

Does Warren Buffett or Berkshire Hathaway hold certain stocks forever?

To answer this question, one needs to go back to Berkshire Hathaway’s 2016 Annual Report 2016, in which chairman Warren Buffett said:  “Sometimes the comments of shareholders or media imply that we will own certain stocks “forever.” It is true that we own some stocks that I have no intention of selling for as far as the eye can see (and we’re talking 20/20 vision). But we have made no commitment that Berkshire will hold any of its marketable securities forever.”

What could have prompted the implication by shareholders and the media that Warren Buffett holds certain stocks forever?

Warren Buffett said in Berkshire Hathaway’s 2016 Annual Report said: “Confusion about this point may have resulted from a too-casual reading of Economic Principle 11 on pages 110 – 111, which has been included in our annual reports since 1983. That principle covers controlled businesses, not marketable securities. This year I’ve added a final sentence to #11 to ensure that our owners understand that we regard any marketable security as available for sale, however unlikely such a sale now seems.”

What is Warren Buffett’s Economic Principle 11 and what is the final sentence that was added in 2016 to this principle? Let’s explore.

Background: In June 1996, Berkshire’s chairman Warren Buffett  issued a booklet entitled “An Owner’s Manual” to Berkshire’s Class A and Class B shareholders. The purpose of the manual was to explain Berkshire’s broad economic principles of operation.

There were originally 13 economic principles which Warran Buffett set up in 1983. The 2016 Annual Report provided an updated version of “An Owner’s Manual”.

Economic Principle 11 goes like this:

You should be fully aware of one attitude Charlie and I share that hurts our financial performance: Regardless of price, we have no interest at all in selling any good businesses that Berkshire owns. We are also very reluctant to sell sub-par businesses as long as we expect them to generate at least some cash and as long as we feel good about their managers and labor relations. We hope not to repeat the capital-allocation mistakes that led us into such sub-par businesses. And we react with great caution to suggestions that our poor businesses can be restored to satisfactory profitability by major capital expenditures. (The projections will be dazzling and the advocates sincere, but, in the end, major additional investment in a terrible industry usually is about as rewarding as struggling in quicksand.) Nevertheless, gin rummy managerial behavior (discard your least promising business at each turn) is not our style. We would rather have our overall results penalized a bit than engage in that kind of behavior.
“We continue to avoid gin rummy behavior. True, we closed our textile business in the mid-1980’s after 20 years of struggling with it, but only because we felt it was doomed to run never-ending operating losses. We have not, however, given thought to selling operations that would command very fancy prices nor have we dumped our laggards, though we focus hard on curing the problems that cause them to lag. To clean up some confusion voiced in 2016, we emphasize that the comments here refer to businesses we control, not to marketable securities.”

The last sentence in Berkshire Hathaway Economic Principle 11 made it clear that Warren Buffett’s comments refer to businesses that Berkshire Hathaway owns and not to marketable securities.

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.

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?”.

Warren Buffett is set to win this US$500,000 wager

Background on Warren Buffett’s US$500,000 wager: Warren Buffett said in  Berkshire’s 2005 annual report that  active investment management by professionals – in aggregate – would over a period of years underperform the returns achieved by rank amateurs who simply sat still.

Recalling his argument, he said in his FY2016 letter to Berkshire Hathaway shareholders: “I explained that the massive fees levied by a variety of “helpers” would leave their clients – again in aggregate – worse off than if the amateurs simply invested in an unmanaged low-cost index fund. ..

“Subsequently, I publicly offered to wager $500,000 that no investment pro could select a set of at least five hedge funds – wildly-popular and high-fee investing vehicles – that would over an extended period match the performance of an unmanaged S&P-500 index fund charging only token fees. I suggested a ten-year bet and named a low-cost Vanguard S&P fund as my contender. I then sat back and waited expectantly for a parade of fund managers – who could include their own fund as one of the five – to come forth and defend their occupation. After all, these managers urged others to bet billions on their abilities. Why should they fear putting a little of their own money on the line?
Mr Buffett went on to say: “What followed was the sound of silence. Though there are thousands of professional investment managers who have amassed staggering fortunes by touting their stock-selecting prowess, only one man – Ted Seides – stepped up to my challenge. Ted was a co-manager of Protégé Partners, an asset manager that had raised money from limited partners to form a fund-of-funds – in other words, a fund that invests in multiple hedge funds.

“I hadn’t known Ted before our wager, but I like him and admire his willingness to put his money where his mouth was. He has been both straight-forward with me and meticulous in supplying all the data that both he and I have needed to monitor the bet.

“For Protégé Partners’ side of our ten-year bet, Ted picked five funds-of-funds whose results were to be averaged and compared against my Vanguard S&P index fund. The five he selected had invested their money in more than 100 hedge funds, which meant that the overall performance of the funds-of-funds would not be distorted by the good or poor results of a single manager.
Each fund-of-funds, of course, operated with a layer of fees that sat above the fees charged by the hedge funds in which it had invested. In this doubling-up arrangement, the larger fees were levied by the underlying hedge funds; each of the fund-of-funds imposed an additional fee for its presumed skills in selecting hedge-fund managers.
“Here are the results for the first nine years of the bet – figures leaving no doubt that Girls Inc. of Omaha, the charitable beneficiary I designated to get any bet winnings I earned, will be the organization eagerly opening the mail next January.
“The compounded annual increase to date for the index fund is 7.1%, which is a return that could easily prove typical for the stock market over time. That’s an important fact: A particularly weak nine years for the market over the lifetime of this bet would have probably helped the relative performance of the hedge funds, because many hold large “short” positions. Conversely, nine years of exceptionally high returns from stocks would have provided a tailwind for index funds.

“Instead we operated in what I would call a “neutral” environment. In it, the five funds-of-funds delivered, through 2016, an average of only 2.2%, compounded annually. That means $1 million invested in those funds would have gained $220,000. The index fund would meanwhile have gained $854,000….”

Mr Buffett summed it up this way: “So that was my argument – and now let me put it into a simple equation. If Group A (active investors) and Group B (do-nothing investors) comprise the total investing universe, and B is destined to achieve average results before costs, so, too, must A. Whichever group has the lower costs will win…”

” The problem simply is that the great majority of managers who attempt to over-perform will fail. The probability is also very high that the person soliciting your funds will not be the exception who does well. Bill Ruane – a truly wonderful human being and a man whom I identified 60 years ago as almost certain to deliver superior investment returns over the long haul – said it well: “In investment management, the progression is from the innovators to the imitators to the swarming incompetents”,” Mr Buffett said.

Mr Buffett’s bottom line: When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients. Both large and small investors should stick with low-cost index funds.

Warren Buffett graces Cherry Coke cans

“It should come as no surprise that iconic investor Warren Buffett is one of the world’s best-known fans of Cherry Coca-Cola. At almost every public appearance for a generation, Buffett has been seen taking a swig of his favorite drink,” says a March 31, 2017 article (Chinese Consumers Do a Double-Take as Warren Buffett Graces Cherry Coke Cans) on the Coca-Cola website.

“What may come as a surprise is that Buffett’s likeness is gracing the front of Cherry Coke cans in China to promote the drink’s official Chinese launch.” said the article.

The article reminds one of Warren Buffett’s love for the Coke company. Berkshire Hathaway, of which Warren Buffett is the chairman, has a stake of 9.3 per cent in The Coca-Cola Company based on the FY2016 letter which Warren Buffett sent to Berkshire Hathaway shareholders.

An April 24, 2013 article ( ‘I Like to Bet on Sure Things’: Warren Buffett On Why He’ll Never Sell a Share of Coke Stock ) on the Coca-Cola website quoted Warren Buffett on why KO (Coca-Cola Company) will always have a “Buy” rating in his book.

“I’m the kind of guy who likes to bet on sure things,” said Buffett, who served on Coke’s board of directors for 17 years. “No business has ever failed with happy customers… and you’re selling happiness,” said Warren Buffett.

“I like wonderful brands,” he added. “If you take care of a great brand, it’s forever.”