Category: Warren Buffett

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Acquisitions Warren Buffett

Warren Buffett High on Germany

(BRK.A), (BRK.B)

Warren Buffett’s admiration for the German economy was on full display at the Berkshire Hathaway annual meeting on May 2, 2015.

This past February, Berkshire Hathaway struck a deal to acquire Devlet Louis Motorradvertriebs, a mail-order and retail chain selling motorbike clothing, helmets, leisurewear, add-on parts, and spare parts. The acquisition price was just over 400 million euros. The Hamburg, German-based retailer has 1,600 staff in their Europe-wide mail order business and at 70 retail stores in Germany and Austria.

Buffett likes Germany for a Variety of Reasons

“Germany is a terrific market, lots of people, lots of buying power, productive, it’s got a legal system we feel very good with, it’s got a regulatory system we feel very good with, it’s got people we feel very good with—and customers,” Warren Buffett explained back in February in an interview in German newspaper Handelsblatt.

The Three Ps

Buffett likes Germany because it has lots of people, they are productive, and they have lots of purchasing power.

While there was nothing formal to announce at the annual meeting, Buffett was emphatic that German companies are on Berkshire’s radar.

“I would be very surprised if we do not acquire at least one more company in Germany in the next 5 years,” he said, emphasizing that the euro’s recent plunge against the dollar makes European companies all the more attractive. “We’re far more on the radar screen than we were five years ago.”

© 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.

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Warren Buffett

Derivatives Bring Huge First-Quarter Gains for Berkshire

(BRK.A), (BRK.B)

While derivative contracts were viewed by many analysts as ticking time bombs that exploded with devastating consequences during the 2009 recession, Berkshire Hathaway has used them to book huge financial gains over the past three years.

The use of the phrase “time bombs” comes directly from Warren Buffett, who said in Berkshire’s Hathaway’s 2002 annual report that “I view derivatives as time bombs, both for the parties that deal in them and the economic system.”

This has led some investors to have the false impression that Berkshire does not use derivatives, credit default swaps, or other financial instruments.

Not only does Berkshire use them, but it has been using them to add billions of dollars to Berkshire’s coffers.

1st Quarter Billion Dollar Bounty

During Berkshire’s 2015 first quarter, derivative contracts produced pre-tax gains of approximately $1.3 billion. This compares to just $236 million in 2014. In 2015, the gains were primarily related to equity index put option contracts, while 2014 reflected gains from credit default contract exposures, partially offset by losses under the equity index put option contracts. The company notes that the 2015 gains were from equity index put option contracts, and the gains reflected increased index values and the favorable impact of a stronger U.S. Dollar, which reduced liabilities of contracts denominated in foreign currencies.

For all of 2014, derivative contracts produced pre-tax gains of $506 million, and the change in the fair value of their credit default contract during 2014 produced a pre-tax gain of $397 million.

In addition, equity index put option contracts produced pre-tax gains of $108 million in 2014.

As Berkshire has powered out of the recession, its various bets on the U.S. economy, which included the 2009 acquisition of BNSF Railways, have proven savvy. The purchase of BNSF at a time when others were running for financial cover was touted by Buffett as an “all-in wager on the economic future of the United States,” and has proven to be so.

Buffett’s Use of Derivatives Has Paid off

As the economy and the stock market have gained momentum, Berkshire’s various derivatives, options and other financial instruments have made the company bushels of money. For example, in 2013, derivative contracts generated a pre-tax gain of $2.6 billion, including a $2.8 billion gain from equity index put option contracts.

Deactivating the Time Bombs

Berkshire has significantly reduced its total derivatives exposure, reducing it to just$ 3.5 billion at the end of the first quarter. The amount is less than a quarter of Berkshire’s $15 billion derivatives exposure in 2009.

The lesson is that when used prudently, these financial instruments are useful tools. However, like all future promises to pay, you have to have the means to back them up.

© 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.

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Coca-Cola Warren Buffett

Why Coca-Cola is one of Buffett’s “Forever Stocks”

(BRK.A), (BRK.B)

Berkshire Hathaway’s ownership of 400 million shares of the Coca-Cola Company (9.3%) is impressive, but what’s even more impressive is Berkshire’s annual return on its investment.

In 2014, Berkshire received $518 million in annual dividends on its Coca-Cola holdings, which brought its annual return, excluding unrealized gain, to over 40%.

Speaking of unrealized gain, the cost basis of the shares he purchased in 1988 and 1989 was $1.29 billion, a stake that is now worth a whopping $16.39 billion.

What was Warren Buffett’s Secret?

The key was buying Coca-Cola at the right price. An important lesson for any investor.

Buffett, who admired Coca-Cola all the way back to his boyhood days in Omaha, waited until 1988 to start amassing shares. At the time, the company was out of favor with Wall Street, but Buffett believed in the durability of the brand.

“I like wonderful brands,” Buffett explained at the 2013 Coca-Cola annual shareholders meeting. “If you take care of a great brand, it’s forever.”

At the same meeting he also gave insight into his investment philosophy.

“I’m the kind of guy who likes to bet on sure things,” Buffett said. “No business has ever failed with happy customers… and you’re selling happiness.”

Buffett, who drinks five Cokes a day, and recently proclaimed that he is “one quarter Coca-Cola,” is still high on the company. In fact, he played his ukulele and sang a version of Coke’s famous jingle I’d like to teach the world to sing in the film shown at the 2015 Berkshire Hathaway annual meeting.

Setting Your Sights on Forever

Not all stocks can be held forever. It certainly wouldn’t have been a good decision with RadioShack, but that’s where evaluating the quality of the company comes into play.

In Buffett‘s 1988 letter to shareholders, he forecast his long term goal for Berkshire’s new Coca-Cola stake, noting that “when we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.”

That “forever” holding period in the case of Coca-Cola continues to pay huge dividends to Buffett and all of Berkshire’s shareholders.

© 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.

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Warren Buffett

Warren Buffett’s Advice for Chinese Investors

(BRK.A), (BRK.B)

With Chinese stocks having soared in recent years, often fueled more by rumor than earnings, the question of whether value investing has any place in such an environment is a natural one to ask.

In Comes Warren Buffett With His Answer

“Investment principles do not stop at borders,” Buffett told a Chinese investor, who had made the pilgrimage from mainland China to Omaha, Nebraska, for the Berkshire annual meeting.

Buffett, who has put Berkshire Hathaway directly into Chinese equities as a minority owner in BYD Co Ltd, a Chinese manufacturer of automobiles and rechargeable batteries, also has a growing presence in China through Berkshire’s global companies.

Quick-service-restaurant franchisor Dairy Queen International has 600+ franchises in China, and ISCAR, a global manufacturer of precision carbide metalworking tools, maintains eight branch offices in provinces throughout the country, to name just two examples.

Still, speculative fever often appears to leave value investors, who focus on a company’s fundamentals, shaking their heads in disgust.

What should be remembered is that all speculative bubbles eventually burst, leaving all the stocks that are more hot air than substance to evaporate.

The recent tightening of the margin lending requirements in Chinese stock markets are just the first steps that could turn gamblers into paupers.

As economist John Kenneth Galbraith chronicled in The Great Crash 1929.

“That afternoon and evening thousands of speculators decided to get out while – as they mistakenly supposed – the getting was good. Other thousands were told they had no choice but to get out unless they posted more collateral, for as the day’s business came to an end an unprecedented volume of margin calls went out.”

That’s Not Buffett’s Only Advice

Or, as Buffett also has been known to say, “Only when the tide goes out do you discover who’s been swimming naked.”

© 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.

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Berkshire Hathaway Reinsurance Group Berkshire Hathaway Specialty Insurance Warren Buffett

Warren Buffett Downplays Global Warming’s Impact on Insurers

(BRK.A), (BRK.B)

Despite nonstop alarm bells from the media about the future costs of global warming, Warren Buffett downplayed its impact on Berkshire Hathaway’s insurance units during his 5-hour question and answer period at the Berkshire Hathaway annual meeting on May 2, 2015.

It’s not that Buffett thinks that climate change isn’t real, it’s just that its long term impacts are not an immediate concern in the insurance business because prices reset annually, and can always be adjusted upward after a bad year.

“We set it one year at a time. I find nothing on a yearly basis that makes me change my prices,” Buffett noted.

No 50-Year Policies

“That doesn’t mean it isn’t a threat to humanity and isn’t terribly important,” he added. “If I was writing a 50-year windstorm policy in Florida…”

What is of more immediate impact to insurers is the quality of the policyholders. It’s something that insurance companies can’t ignore just to rack great sales figures.

“You insure “Marvin the Torch,” you are going to have a lot more risk than global warming,” Buffett explained. “That building’s going to go!”

© 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.

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Acquisitions Charlie Munger Warren Buffett

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

(BRK.A), (BRK.B)

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.

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Buffett Successors Todd Combs and Ted Weschler Warren Buffett

Are Ajit Jain and Greg Abel the Successors to Warren Buffett and Charlie Munger?

(BRK.A), (BRK.B)

Despite Warren Buffett being a spry age 84, and Charlie Munger a youthful 91, the question of the successor or successors that will lead Berkshire Hathaway continues to be on analysts’ and commentators’ minds.

“Both the board and I believe we now have the right person to succeed me as CEO — a successor ready to assume the job the day after I die or step down,” Buffett has said.

Now, in his letter published in the 2014 Annual Report, Charlie Munger seems to hint that Ajit Jain or Greg Abel could be in line to provide the leadership that will carry Berkshire forward.

“For instance, Ajit Jain and Greg Abel are proven performers who would probably be under-described as “world-class.” “World-leading” would be the description I would choose. In some important ways, each is a better business executive than Buffett.

And I believe neither Jain nor Abel would (1) leave Berkshire, no matter what someone else offered or (2) desire much change in the Berkshire system.”

While neither Buffett nor Munger has officially revealed the next leader or leaders of Berkshire Hathaway, both Jain and Abel would seem to fit the bill.

First, they would be promoted from inside the company, and thus are steeped in Berkshire’s unique corporate culture.

Secondly, they are both young enough to have long reigns at a company that certainly has no interest in a mandatory retirement age, and each of them would bring essential skill sets to the job.

Both have played important leadership roles heading two of Berkshire’s largest units.

Ajit Jain, as the man who has built Berkshire’s insurance and reinsurance empire, is better equipped than almost anyone in the world to take on the important task of making sure Berkshire’s insurance companies don’t try to grow by taking on undue risk.

Greg Abel, as the head of Berkshire Hathaway Energy, certainly knows about capital allocation. Under his leadership, BHE has grown into one of the world’s largest energy providers and a leader in renewable energy generation. He also sits on the Board of Heinz, and BHE includes Berkshire Hathaway Home Services, Berkshire’s rapidly expanding real estate sales unit. Both of these companies give him additional insight into consumer markets.

As for their ages, Jain is age 63, and Abel is only 52, so they hopefully would have many years to put their stamps on Berkshire.

So which one is it?

Why not both of them?

Well, while Buffett spoke in the singular, he has already stated that his replacement would probably see his various roles filled by several people.

The job of managing Berkshire’s $125 billion and growing stock portfolio will almost certainly fall to Ted Weschler and Todd Combs, who Buffett has been grooming by giving each a multi-billion dollar stock portfolio to manage.

Together, Jain and Abel would also be sounding boards and counter balances for each other in much the same way that Buffett has used Munger.

While Warren Buffett rightly gets the lion’s share of credit for Berkshire’s phenomenal growth, Charlie Munger’s sage advice has often been overlooked by the press.

It certainly hasn’t been overlooked by Buffett.

While the latest buzz comes from Munger, Buffett has repeatedly praised both Jain and Abel.

On Jain, Buffett said “It is impossible to overstate how valuable Ajit [Jain] is to Berkshire. Don’t worry about my health; worry about his.”

On Abel, Buffett has highlighted the impact that he and Mathew Rose (CEO of BNSF) have had on Berkshire, stating “I am also both proud and grateful for what they have accomplished for Berkshire shareholders.”

So, if Ajit Jain and Greg Abel are indeed the future leaders of Berkshire, shareholders can look forward to continued smart and capable leadership.

And we shouldn’t forget BNSF’s executive chairman Mathew Rose, who is only in his mid-fifties. He is certainly a prime contender as well.

© 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.

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Acquisitions Warren Buffett

Berkshire Opens Door to Europe with Acquisition of Devlet Louis Motorradvertriebs

(BRK.A), (BRK.B)

“Capital travels,” notes Warren Buffet, and Buffett’s recent comments that he was looking towards Europe for acquisitions has turned into reality with the purchase of Devlet Louis Motorradvertriebs, a mail-order and retail chain selling motorbike clothing, helmets, leisurewear, add-on parts, and spare parts.

The acquisition price was just over 400 million euros, according to the Financial Times.

The Hamburg, German-based retailer has 1,600 staff in their Europe-wide mail order business and at 70 retail stores in Germany and Austria. Its online business reaches 25 countries.

Annual revenues are 270 million euros ($308 million).

The deal was done directly with Ute Louis, the widow of company founder Detlev Louis, who sold all her shares to Berkshire.

Like many of Berkshire’s acquisitions, such as carbide metalworking tool manufacturer ISCAR, Berkshire was approached directly by Detlev Louis Motorradvertriebs with the acquisition proposal. Berkshire is an attractive option for owners to cash out without their companies being sold off piecemeal.

High Customer Satisfaction

Devlet Louis Motorradvertriebs has drawn praise for its high customer satisfaction. The readers of Europe’s biggest motorbike magazine, Motorrad, have voted them “Best Brand” in the retail chain category for nine straight years.

Room for Growth

Motorcycles are a very popular form of transportation throughout Europe with 33 million PTWs (Powered Two Wheelers) registered in the 27 EU member states, according to the U.S. Department of Commerce. They project that the number of two-wheeled vehicles will increase to 37 million by 2020.

“Germany is a terrific market, lots of people, lots of buying power, productive, it’s got a legal system we feel very good with, it’s got a regulatory system we feel very good with, it’s got people we feel very good with—and customers,” Warren Buffett explained in an interview in German newspaper Handelsblatt.

Buffett characterized the acquisition as a “door-opener,” and noted that while the 400 million euros size of the acquisition was smaller than Berkshire usually looks for (except for bolt-on acquisitions), this certainly serves notice on European companies that Berkshire has its eye on Europe as it hunts for ways to invest its over $30 billion in cash.

(This article has been updated from when it was first published.)

© 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.

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Warren Buffett

Berkshire Hathaway Saves Billions With Capital Gains Tax Strategy

(BRK.A), (BRK.B)

Investing in Berkshire Hathaway is often compared to investing in a mutual fund. Yes, Berkshire’s ownership of GEICO, BNSF, McLane, Lubrizol, Berkshire Hathaway Energy, Dairy Queen, Fruit of the Loom, and a host of other companies certainly give it a lot of diversification. Its ownership of the Marmon Group, which alone encompasses 160 separate companies, means that people almost on a daily basis come in contact with Berkshire’s products, often without knowing it.

However, there is an interesting difference between Berkshire Hathaway and a mutual fund, which directly impacts its shareholders. The difference is Berkshire’s ability to avoid capital gains taxes through asset acquisitions.

Berkshire Hathaway, unlike a mutual fund, is all about the buying and owning of whole companies. And while a mutual fund can own a portion of a company, its later sale of appreciated shares in that company generates a capital gain that is passed through to the mutual fund’s shareholders.

It is in this area that Berkshire has demonstrated a key advantage. In 2014 alone, Berkshire avoided capital gain taxes on $2.357 billion of appreciated stock by swapping its shares of appreciated stock for business units to add to its conglomerate.

Berkshire’s acquisition of Graham Holding’s WPLG-TV, Phillips 66’s pipeline-services business, and Procter & Gamble’s Duracell battery unit all enabled it to cash in billions of dollars of appreciated stock without capital gains taxes.

There’s More to the Story

While these acquisitions added new units to Berkshire’s portfolio, they also served as a conduit for bringing in cash tax free, because the companies that were acquired had sizable cash positions on their books.

In the case of Duracell, Berkshire’s $4.7 billion stake in Procter & Gamble came from an original investment in Gillette of only $600 million. In cashing out its position, Berkshire not only gets control of Duracell, but Duracell has been recapitalized by P&G with $1.7 billion in cash. This equivalent of leaving a very large bag of cash in the desk drawer in Duracell’s president’s office, allows Berkshire a transfer of cash that is three times its original investment in Gillette, and the entire $4.7 billion transaction incurs no capital gains taxes.

Similarly, the acquisition of Phillips Specialty Products Inc. from Phillips 66 included approximately $450 million in cash. Berkshire’s acquisition of WPLG-TV, which was part of the unwinding of Berkshire’s position as a shareholder in the Washington Post, also brought to the company roughly $328 million in cash and $444 million Berkshire shares that had been owned by Graham Holdings. In this case, Berkshire avoided substantial capital gains that would have been owed on its original $11 million investment in the Washington Post.

Over the years, Warren Buffett has been shrewd in getting into stock positions that have generated amazing appreciation. Berkshire’s $16 billion stake in Coca Cola, on a cost basis of only $1.29 billion, is just one example. And it should be recognized that his ability to liquidate positions without capital gains consequences has been equally shrewd.

So, the next time you are looking at your end-of-year mutual fund statement and wondering why you have to pay capital gains, even though you didn’t redeem any shares, just think of the tax free acquisitions that have saved Berkshire’s shareholders billions.

© 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.