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Berkshire Hathaway Automotive Insurance

The Hidden Float Within Van Tuyl Group

(BRK.A), (BRK.B)

There’s nothing Warren Buffet loves more than float! The huge float from Berkshire Hathaway’s insurance businesses has helped the company build an equity portfolio of over $100 billion.

Here Comes More Float!

With the completion of Berkshire Hathaway’s $4.1 billion acquisition of the Van Tuyl Group (the largest privately owned auto dealership group in the U.S.), Berkshire gets an added kicker, more float.

The float comes because Van Tuyl Group (rechristened Berkshire Hathaway Automotive) owns Old United Casualty Company, which provides extended warranty services and other automotive protection plans to 1.6 million customers. And Van Tuyl also has a life insurance company, Old United Life Insurance Company.

Both companies are now owned by Berkshire Hathaway and will be split off from Berkshire Hathaway Automotive to become part of Berkshire’s wholly-owned National Indemnity Company.

While Van Tuyl has been based in Texas, Old United Casualty Company and Old United Life Insurance Company are both based in Shawnee Mission, Kansas.

Financial Strength Anybody?

There’s nothing like being owned by Berkshire to add to your financial strength, and A.M. Best Company, which issues insurance ratings, has just affirmed the financial strength ratings of A (Excellent) and the issuer credit ratings of “a+” for Old United Casualty Company and Old United Life Insurance Company. It notes that “the outlook for all ratings is stable.”

A.M. Best also noted that it “believes OUL is well-positioned at its current rating level, positive rating action could occur if potential synergies or expansion of its business profile are realized through its affiliation with Berkshire.”

How Much Float?

With 1.6 million cars protected under the extended warranty plans, and additional customers having life insurance, it’s not unreasonable to assume that the Berkshire’s $4.1 billion acquisition actually came with around a billion in insurance float.

Not a bad kicker!

© 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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BNSF Warren Buffett

Warren Buffett’s Scolding of BNSF Brings Results

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“Praise by name and criticize by category,” Warren Buffett is famed for saying, and it was the rare exception when Buffett called out BNSF Railway for its delivery delays over the past year.

“BNSF disappointed many of its customers,” Buffett wrote in his annual letter to shareholders.

BNSF didn’t just disappoint customers, in some cases it lost them to rivals such as Union Pacific, as record crop numbers put the agricultural needs of Midwest farmers on a collision course with crude producers in the Bakken formation.

It’s no small matter, as last year BNSF moved nearly 1 million carloads of grain and other agricultural products.

With the latest over all year-to-date carload numbers showing a very positive 4.39-percent increase, BNSF has clearly taken Buffett’s marching orders seriously. The railroad’s $5.5 billion in infrastructure investments that it made in 2014 has started to pay off. The improvements included $400 million of track improvements in North Dakota alone.

Improvements By the Numbers

It’s in the grain carloads where there is particularly good news. Year-to-date carloads rose 14.8-percent to 191,060 from 166,425 in the 2nd quarter of 2014.

Last week, the news continues to improve, and there were only 144 outstanding grain carloads from May 9-12 in North Dakota versus 7,200 outstanding grain cars during the same period last year.

“We have substantially better AG shuttle turns per month as compared to last year,” a BNSF official told me at the Berkshire Hathaway annual meeting. “Last year we were below 2 turns per month, and now we are over 2.5 turns per month.”

BNSF is continuing to improve its operations, committing a record $6 billion to its Capital Plan for 2015. The amount is the most ever spent by a railroad in a given year.

© 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 Energy Special Report

Special Report: Is the Tesla Battery a Threat to Berkshire Hathaway?

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Elon Musk’s recent announcement of Tesla’s new home and industry battery business, which will enable the storage of solar and wind energy, would seem to directly threaten Berkshire Hathaway Energy’s role as one of the world’s largest energy producers.

But not so fast.

Let’s Look at the Big Picture

First, Tesla’s leading-edge automobiles have done a lot to popularize plug-in electric vehicles. These vehicles draw their power primarily from electric utilities, and as the technology takes hold with more mainstream automobile producers, such as Toyota, GM, and Ford, the total demand for electric power will skyrocket. Sure, some of the power may come from home-based electric generation through solar panels, but the total demand for electric power will rise as consumers switch from gas and diesel powered vehicles.

Secondly, for home and industry battery applications, Berkshire may benefit in multiple ways. Its minority ownership in Chinese battery maker BYD Co Ltd could prove a very wise investment, as the company adds 6 gigawatts per year of battery production capability over the next 3 years.

The End of the Utility?

Will solar panels linked to a Tesla Powerwall mean that the centralized distribution offered by utilities will be irrelevant? Maybe for someone living in the backwoods, or far out in the desert, but not for anyone still hooked up to the grid.

Net metering, which feeds excess electricity consumers produce back into the grid, and creates a billing mechanism that credits consumers, makes the batteries irrelevant, as they produce no cost-saving or other advantage.

Berkshire Hathaway Energy’s CEO Greg Abel thinks that Tesla’s storage technology would have to drop greatly in price for it to be applicable to BHE’s transmission business.

Abel called the technology, “not game-changing, and it’s because of the cost structure,” during a panel discussion put on by the Calgary Chamber of Commerce. “Is there an opportunity to now implement that into our systems, into our transmission and distribution systems? Absolutely. And is it completely cost-effective, no. It’s got to get cheaper.”

Don’t Forget Duracell

Berkshire’s acquisition of P&G’s Duracell unit, may shake things up if it can get Duracell to transition from the alkaline battery business to newer battery technologies, the company might be in just the right place to market products similar to Tesla. It certainly has the resources to do it, as the P&G deal includes $1.8 billion in cash.

Lastly, large-scale battery storage is just what Berkshire Hathaway Energy’s solar and wind farms need, be it the 550-megawatt photovoltaic Topaz Solar Farm in San Luis Obispo County, California, or the just announced 400-megawatt Grande Prairie Wind Farm in Holt County, Nebraska. The ability to store energy for the times that the sun isn’t shining and the wind isn’t blowing is just what utilities need to fully pull away from fossil fuel based energy generation.

In summary, new home and industry storage battery technology will give Berkshire Hathaway new competition for its existing companies, but it will also bring new opportunities.

(This article contains updated information)

© 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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Charlie Munger Warren Buffett

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.

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Acquisitions Warren Buffett

Warren Buffett High on Germany

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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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Dairy Queen

McDonald’s Discovers Dairy Queen’s Secret to Success

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As McDonald’s continues to battle slumping sales, it is turning to Dairy Queen’s winning formula as a key part of its just announced turnaround plan.

McDonald’s announced it will be selling off half of its company owned stores, turning them over to franchisees.

In a similar move, Wendy’s is selling 640 restaurants in the U.S. and Canada to franchisees.

Reducing the number of corporate owned locations was a big part of Burger King’s turnaround when 3G Capital’s partner Daniel Schwartz took the helm as the Chief Executive Officer and a Director of the company. He quickly put the Burger Kings where they belonged, in the hands of more motivated franchisees.

Fortunately for Berkshire Hathaway’s Dairy Queen System, they already knew that franchisees are highly motivated, hard-working people motivated by the ultimate incentive, ownership.

A Winning Formula

Dairy Queen, which has 6,400+ locations worldwide, may be smaller than McDonald’s or Burger King, but to its advantage it has only three company owned stores. The cost of the bricks and mortar are born by the franchisees, and Dairy Queen makes its money from franchise fees and a percentage of the sales.

Each franchise pays a $35,000 franchise fee, a royalty fee of 4%, and a marketing fee of 5% – 6%.

In the aggregate the franchises net Berkshire hundreds of millions a year on its investment of only $585 million.

That’s a sweet formula indeed.

For more information read a Mazor’sEdge special report on Dairy Queen.

© 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”

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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

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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

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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.