Tag Archives: Charlie Munger

Buffett Reveals Terms of Failed Unilever Bid

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Berkshire Hathaway and 3G Capital Partners’ recent unsolicited offer for Unilever may have flopped, but it hasn’t soured Warren Buffett on working with 3G on more acquisitions.

The two entities have worked together on the takeover of Kraft to form Kraft Heinz, and Berkshire provided financing for 3G’s merger of Burger King and Tim Hortons that became Restaurant Brands International. The merger made Berkshire a minority owner of the combined company.

At the annual shareholder’s meeting, Buffett detailed that both Berkshire and 3G were prepared to each put $15 billion into the Unilever transaction.

Some in the press have questioned whether 3G’s extreme cost-cutting made the deal unpalatable for Unilever.

While a shareholder questioned whether 3G’s emphasis on layoffs as part of its cost-cutting strategy was in line with Berkshire’s corporate culture, both Buffett and Charlie Munger noted that improvements in productivity have often lead to layoffs.

Munger noted that he doesn’t long for the days of elevator operators, and “We don’t want to go back to the days of subsistence farming.”

While Munger didn’t see a particular “moral fault” in 3G’s strategy, Buffett was clearly sensitive to the impact on displaced workers.

“If you look at any industry, they are trying to get more productive,” Buffett said. Still he noted that society’s improved living standard as a whole can be of little comfort to an individual that has lost their job, and he wishes there could be another way.

Buffett did term 3G’s severance packages at Kraft Heinz “more than fair.”

© 2017 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Berkshire Hathaway Turns Away From Reinsurance Business

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Berkshire Hathaway’s long term love affair with the reinsurance continues to wane. Over the past few years, Warren Buffett, Charlie Munger and Ajit Jain all have spoken about the changes in profitability in the reinsurance market.

The latest proof comes as Berkshire Hathaway has dropped to sixth in A.M. Best’s annual special report on the global reinsurance industry.

“The reinsurance business not as good as it once was and is unlikely to get better,” Charlie Munger said at the 2015 Berkshire Hathaway annual meeting. “Money has come in, not because they want to be in reinsurance, but because it’s an uncorrelated asset class. We’re in it for the long haul.”

“What we’ve seen from Berkshire Hathaway is that they recognize that reinsurance opportunities are not where they need to be from a pricing perspective,” A.M. Best Vice President Robert DeRose said. “They have pulled capacity back from that particular aspect of the market and they are building out insurance strategies.”

DeRose stated that Berkshire Hathaway is specifically building out that capacity through Berkshire Hathaway Specialty Insurance Co. Also, Berkshire Hathaway, through its General Reinsurance Corp. franchise, has entered into a five-year agreement under which Transatlantic Reinsurance Co. will serve as its exclusive underwriter for U.S. and Canadian property/casualty treaty reinsurance business.

© 2016 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Buffett Warm, Munger Cool on Initiating a Stock Buyback

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At the 2016 Berkshire Hathaway Annual Meeting in April, Warren Buffett expressed enthusiasm for a potential stock buyback of Berkshire stock if the share price fell below 120% of book value. He noted that the company would repurchase “a lot” of stock, especially if the amount of cash the company generates “burns a hole in your pocket” and grows to levels over $100-$120 million with no good candidates for acquisition.

In the past, Buffett has been skeptical of shareholder demands for stock buybacks, noting that it’s foolish if the price is too high. All the way back in 2000, Buffett addressed the logic of stock buybacks, noting:

“There is only one combination of facts that makes it advisable for a company to repurchase its shares: First, the company has available funds — cash plus sensible borrowing capacity — beyond the near-term needs of the business and, second, finds its stock selling in the market below its intrinsic value, conservatively calculated.”

However, also at the 2016 Annual Meeting, vice chairman of Berkshire Hathaway Charlie Munger still seemed less than convinced.

“These buyback plans got a life of their own, Munger noted. “It’s gotten quite common to buy back stock at very high prices that really don’t do the shareholders any good at all. I don’t know why people exactly are doing it and I think it gets to be fashionable.

We’re always behaving a lot like what some might call the Episcopal Prayer. We prayerfully thank the Lord that we’re not like these other religions who are inferior and I’m afraid there’s probably too much of that in Berkshire but we can’t help it.”

© 2016 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Berkshire Gives Mixed Signals on AmEx Stake

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Warren Buffett has long regarded Berkshire Hathaway’s stake in American Express like he views his stake in Coca Cola. It’s one of his “forever stocks.”

With American Express having struggled in recent years, including losing its co-branded relationship with Costco, the question is whether forever is really forever, or just a long time.

Costco’s jump to Visa is expected to take a big bite out of AmEx revenues, as it represented a whopping 8% of total billed credit card charges.

“I personally feel OK about American Express, and I’m happy to own it,” Buffett, said while taking questions at the meeting Berkshire Hathaway annual meeting. He did note AmEx’s problems, stating that it “has been under attack for decades — more intensively lately — and it will continue to be under attack. It’s too big a business, and too interesting a business.”

Buffett acknowledges that banking and finance draw a lot of attention and competitors, and there is always someone trying to knock you off your pedestal.

In that regard, Charlie Munger was less sanguine about AmEx.

“Anybody in payments who’s an established long-time player with an old method has more danger than used to exist,” he said.

Buffett is loath to sell Berkshire’s stake in AmEx and Coca Cola, because the cost basis is very low, and the profits from the sales would incur billions in taxes. The positions are both so large that they would also be hard to unload without affecting share prices.

Buffett also noted that Berkshire’s fund managers Ted Weschler and Todd Combs may not be as wedded to holdings in those companies as he has been when the day comes that they take over the entire $100+ billion portfolio. Each currently manages a $9 billion portfolio.

© 2016 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Berkshire to Live-Stream 2016 Annual Meeting

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Until now, if you wanted to hear Warren Buffett and Charlie Munger answer questions at the Berkshire Hathaway annual meeting you had to make the pilgrimage to Omaha, Nebraska.

Over 40,000 people from all over the world did just that last year and when they got there they heard Buffett and Munger take 5 hours of shareholder and financial reporter questions. Their answers, which contain insight, humor and wisdom, have never been allowed to be audio or video recorded.

Now, Berkshire Hathaway is letting the rest of the world in on the action. The 2016 Berkshire Hathaway annual meeting, which will be held at the CenturyLink Center on April 30, 2016, will be live-streamed over the internet.

Will the move keep people from travelling to Omaha for Berkshire’s event-filled weekend? Unlikely, as hearing Warren Buffett and Charlie Munger in person is always a treat.

And, besides, you can always get your year’s supply of See’s Candies.

© 2016 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Berkshire Rises in Reinsurance Ranks Even as Business Softens

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Berkshire has jumped ahead of SCOR SE into fourth place among the top 50 insurers in A. M. Best’s Global Reinsurance Segment Review.

Ahead of Berkshire are Munich Reinsurance Company, Swiss Re Ltd., and Hannover Rueckversicherung AG, in that order.

Lloyd’s of London’s international casualty reinsurance market dropped from fourth place to sixth. The rankings are based on premiums written in 2014.

Berkshire’s gross written premiums rose from $12.776 billion in 2013 to $14.919 billion in 2014.

Profits Harder to Come By

Through its Berkshire Hathaway Reinsurance Group, Berkshire provides reinsurance to Suncorp and Insurance Australia Group, and in the 2nd quarter of 2015 reported $155 million in losses from April and May storm damage on Australia’s east coast.

Buffett, Munger and Jain Cool on Reinsurance

Storms or no storms, Berkshire is not generating the profits it used to from reinsurance.

“The reinsurance business not as good as it once was and is unlikely to get better,” Charlie Munger said at the 2015 Berkshire Hathaway annual meeting. “Money has come in, not because they want to be in reinsurance, but because it’s an uncorrelated asset class. We’re in it for the long haul.”

“It’s a business whose prospects have turned for the worse and there’s not much we can do about it,” Warren Buffett said.

Uncorrelated (also called non-correlated) asset classes are assets that move in the opposite direction of a particular asset class, thus helping investors reduce risk in exchange for lower upside performance.

Buffett’s and Munger’s words were echoed by Ajit Jain, who is the head of Berkshire Hathaway Reinsurance.

“What was a very lucrative business is no longer a very lucrative business going forward,” Jain was quoted in early July in The Wall Street Journal.

Remaining Disciplined

Traditionally Berkshire has been a disciplined underwriter. Warren Buffett has always stressed that it is better to write fewer premiums in a given year than to give in to chasing short-term revenues that lead to long-term losses.

A recent survey of the Lloyd’s Market Association’s reinsurers found that 95% of survey respondents indicated a relaxation of reinsurance contract terms and conditions in the international casualty market. Additionally, 39% felt the loosening of contract terms was having a material impact on the amount of underwriter’s exposure.

Hopefully, Berkshire will remain disciplined and not fall into that trap.

© 2015 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Reinsurance Losses Swamps Berkshire in Australia

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The old saying is “when it rains, it pours,” and boy did it rain in Australia this April and May.

It’s no secret that Charlie Munger has cooled on the reinsurance business, and recent losses in Australia only add to a situation where profits are hard to come by due to increased competition.

In the 2nd quarter of 2015, Berkshire reported $155 million in losses from storm damage on Australia’s east coast.

Through its Berkshire Hathaway Reinsurance Group, Berkshire provides reinsurance to Suncorp and Insurance Australia Group.

A Double-Whammy Brings Billion-Dollar Losses

A severe late-April storm that hit Sidney cut off roads, washed away houses and brought 13,000 calls for help. A second severe storm in the beginning of May hit south east Queensland. The storm gave Brisbane its wettest day in 175 years.

The combined storms brought $1.55 billion in claims from more than 20,000 policy holders.

Munger Cool on Reinsurance

Storms or no storms, Berkshire is not generating the profits it used to from reinsurance.

“The reinsurance business not as good as it once was and is unlikely to get better,” Charlie Munger said at the 2015 Berkshire Hathaway annual meeting. “Money has come in, not because they want to be in reinsurance, but because it’s an uncorrelated asset class. We’re in it for the long haul.”

Uncorrelated (also called non-correlated) asset classes are assets that move in the opposite direction of a particular asset class, thus helping investors reduce risk in exchange for lower upside performance.

Munger’s words were echoed by Ajit Jain, who is the head of Berkshire Hathaway Reinsurance. “What was a very lucrative business is no longer a very lucrative business going forward” Jain was quoted in The Wall Street Journal.

© 2015 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Charlie Munger Cools on Reinsurance Business

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Charlie Munger is less than excited about the reinsurance business these days, as Berkshire Hathaway’s reinsurance business, Gen Re, suffered an aggregate pretax underwriting losses of $14 million in the first quarter of 2015. The loss compares to a $101 million gain during the first quarter of 2014.

The company’s combined ratio deteriorated to 103.0% from 94.6%, and the total underwriting losses included $9 million in workers’ compensation.

Gen Re has $14 billion in capital and $6 billion in premiums.

More Competition Brings Lower Returns

The losses reflect increased competition for reinsurance underwriting.

“It’s a business whose prospects have turned for the worse and there’s not much we can do about it,” Warren Buffett said at the 2015 Berkshire Hathaway annual meeting.

“The reinsurance business not as good as it once was and is unlikely to get better,” Charlie Munger noted. “Money has come in, not because they want to be in reinsurance, but because it’s an uncorrelated asset class. We’re in it for the long haul.”

Uncorrelated (also called non-correlated) asset classes are assets that move in the opposite direction of a particular asset class, thus helping investors reduce risk in exchange for lower upside performance.

Munger’s words were in line with those of Ajit Jain, who is the head of Berkshire Hathaway Reinsurance. “What was a very lucrative business is no longer a very lucrative business going forward” Jain was recently quoted in the Wall Street Journal.

Meyer Shields, managing director at Keefe, Bruyette & Woods Inc., is also pessimistic about Gen Re’s near-term prospects.

“We expect Gen Re and (Berkshire Hathaway Reinsurance Group’s) premium volumes and margins to generally decline in the remainder of 2015 and beyond, reflecting enduring reinsurance price competition and some fallout from Berkshire’s increasing pursuit of primary premium volumes at the likely expense of some former cedents.”

© 2015 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

No Threat of Activist Investors Attacking Berkshire

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Activist investors have been giving companies a hard time lately, accumulating large blocks of stock as a way of forcing their way onto corporate boards, and often forcing companies to “raise shareholder value” through spin-offs and special dividends as their price to go away. Just this week, DuPont defeated activist investor Nelson Peltz, and his Trian Fund Management, L.P.

Some consultants even advise corporations to settle with activist investors early, rather than trying to fight them.

Is Berkshire Hathaway vulnerable to what used to be called “greenmail”?

Not according to Warren Buffett and Charlie Munger. They both scoffed at the idea while answering questions at the Berkshire Hathaway annual meeting on May 2, 2015.

As Buffett sees it, at a valuation of over a third of a trillion dollars, Berkshire is too big to be threatened by activist investors.

“The market value of Berkshire is going to be so great that, even if all the activists got together, they couldn’t do much about it,” Buffett explained. He added that he would invite them in, as their attempts to attack Berkshire would merely drive up the stock price.

“We should be a place where people dump their activists, because there not going to get anywhere,” Buffett said wryly.

While activist investors bill themselves as needed financial warriors that shake up hidebound companies to unlock value for all shareholders, Charlie Munger wasn’t having any of it.

“I don’t think it’s a great age, this age of activism,” Munger said. “It’s hard for me to think of many activists I want to marry into the family.”

© 2015 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Buffett and Munger Defend 3G Capital’s Aggressive Lay-Offs

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Questions about Brazil-based 3G Capital were much on the minds of Berkshire Hathaway shareholders at Berkshire’s annual meeting on May 2. Warren Buffett defended 3G’s cost-cutting methods as necessary to bring complacent century-old companies into the modern age.

“3G has been buying businesses that have too many people,” Buffett explained.

Over the past year, Berkshire and 3G went in together on two major deals.

On December 14, 2014, Berkshire provided key financing for the combining of Burger King International with the Tim Horton’s chain. The move was a merger that created a new company, Restaurant Brands International (QSR), one of the world’s largest quick service restaurant companies with more than $23 billion in system sales and over 19,000 restaurants in nearly 100 countries and U.S. territories.

3G Capital ended up owning 51% of the combined company and quickly installed 3G’s partner Daniel Schwartz as the Chief Executive Officer and a Director of the company.

Berkshire came out of the deal owning 68,530,939 Class A 9.00% Cumulative Compounding Perpetual Preferred Shares, and warrants to purchase 8,438,225 shares of Common Stock for a penny a piece. Berkshire later exercised those warrants for a modest 354,000% paper profit on its money.

On March 25, 2015, 3G and Berkshire announced the merger of their jointly-owned H.J. Heinz Company with Kraft Foods Group. The combined Kraft Heinz will be 51 percent owned by 3G Capital and Berkshire Hathaway. Kraft shareholders will own the remaining 49 percent. 3G partner Alex Behring will become the Chairman of Kraft Heinz. Berkshire will be the largest shareholder in Kraft Heinz.

In its growing partnership with 3G Capital, Berkshire Hathaway has found an aggressive partner that is looking to own major brands, and most importantly, to “right-size” them in the words of Charlie Munger.

Right-sizing refers to ruthless cost-cutting that cuts expenses in all areas, including laying off employees.

It’s the laying off of employees that drew questions at this year’s Berkshire annual meeting.

Counter to the Berkshire Ethos?

While some may mistakenly think Warren Buffett’s folksy persona might make him a softie when it comes to the management of companies, cost-cutting clearly is not just on the minds of 3G’s partners.

“You will have never found a statement from Charlie or me saying that a business should have more people than needed,” Buffett said at the meeting.

Charlie Munger compared the employment of excess personnel to the full employment guarantees in the former Soviet Union, where, as he quoted the old Russian saying, “We pretended to work, they pretended to pay us.”

Buffett went on to point out that Berkshire’s own strategy is to make sure its companies do not have excess employees, and as he joked about companies in general, “Any company that employs an economist has one employee too many!”

© 2015 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.