jay21

Gio, my favorite quote was "I would have every man a capitalist, every man, woman, and child. I would have everyone save his earnings, not squander it; own the industries, owns the railroads, own the telegraph lines."

Completely agree. I like railroads a far amount right now, but instead of buying them I buy BRK where the railroad throws off cash to WEB who then allocates it. It really is a wonderful structure because it opens up a lot more capital allocation opps. You are not limited to dividends, buybacks, and acquisitions in the same industry, but you are not excluded from those opps either. Also, much easier to get comfort with pensions because i think WEB, Ted, and Tod could actually exceed the actuarial return estimates.

Does Pabrai make his letters available to the public? I would be interested in reading them. In regards to the question, he said privately held so I will have no idea.

Pabrai spilled the beans in this post. You should be able to get it form here.

Has anyone discussed the new risk sharing tranches issued by the GSEs? I would think those would be a bullish point for the thesis, right?

This article was terrific. It sounds like this market is expanding: "Berkshire is likely to be one of the businesses most hurt by the glut of insurance-linked securities (ILS) capacity in the cat markets. As a big writer of post-event cat reinsurance and one of the largest traditional retro markets, its territory is being invaded. And, in contrast to most other risk carriers, there is no way for it to co-opt or take advantage of ILS: with a balance sheet of Berkshire's size it has no need to take in third-party capital and no incentive to purchase even dirt-cheap retro. The cycle-killing quality of ILS and, indeed, the moderating impact of modelling, also deprives Jain of the opportunity to write aggressively into a distressed market that is starved of capacity." Anyone have stats on cat bond issuances and side cars? If this market keeps growing, at some point there will be a blow up and BRK will clean up.

Warren Buffett's Berkshire Hathaway (BRK-A) has acquired the beverage dispensing and merchandising businesses of IMI for $1.1 billion. The U.K.-based engineering firm says it will use the funds to bolster its pension fund and to return £620m to shareholders. The IMI divisions sold, which sell drink cooling equipment and retailing display systems to restaurants and stores, will become part of Marmon, a company owned by Berkshire Hathaway with existing operations in the food service and retail industries. http://finance.yahoo.com/news/buffett-berkshire-hathaway-buys-british-113510601.html

He can find special sits occasionally. By buying quality, he relieves himself of allocating more capital because it can just be reinvested into the businesses and not returned to him. I also think WEB thinks of BRK as a "forever fund" as outlined by Dave Merkel. BNSF/KO/WFC/Geico/Mid American will all still be alive and kicking even when WEB is not.

When starting a business, yes quality is desired, you have a great point. But I don't think it's required when making an investment. Imagine your business is offered an opportunity to invest in a gas station in town. It's not what your company does, but the opportunity is to invest at 50% of book value and 4x FCF, would you take it? What if the manager is lazy and could double FCF if he advertised more? I'm guessing you'd probably take the investment, it's not a long term compounder, and doesn't have a great manager, but it's a decent asset at an excellent price. If they paid the cash as a dividend you could re-allocate it where you like. We often have the choice, invest in someone who's a great allocator, or play the role ourselves. Obviously you would take that investment. The reason why I prefer to invest in great/moated businesses is because usually the fact pattern is not as obvious as the example laid out. Let's take a different example: You notice that most hardware stores in your state/region sell for 10x FCF. You find one put up for sale for 6x and that interests you. What I worry about is Lowe's or Home Depot or someone with a competitive advantage coming into your region and destroying your sales. In other words, you invest in a quantitatively cheap situation, but you are out competed by a moated company or good manager, which leads to significant value impairment. That's not to say this can never be a good investment, like I said your fact pattern looks like a slam dunk. But, I would prefer to align myself with a company that can withstand competitive pressures, which imo provides a little more margin of safety. If I go further down the quality spectrum, I will want the margin of safety to be made up for in different ways such as a lower price, special sit factors, control, etc.

Only if the company is repurchasing at prices below fair value. You should think of it as a dividend. Why is the stock valuation of any relevancy? It's the total amount of cash returned to investors that matters. Proof: each shareholder can sell an offsetting amount of shares at any price that the company buys it from them. Like a tender offer for example. The company can offer to buy out each investor's fractional ownership at a billion times IV. It won't matter, they'll each get exactly the same amount of cash as they would have received if instead a cash dividend had been paid. After the transaction, they will each own exactly the same % of the business as beforehand. Cash is the same as dividend. Ownership is the same as with the dividend. The only key here is that they need to do their part and sell some shares to offset the buyback. This whole thing about high priced buybacks destroying value is a hoax -- the shareholders are the ones destroying value by holding their shares instead of selling them. They're the ones making the bad capital allocation decisions, but ain't it convenient to blame management? Management is at least helping them with tax efficiency. Skimming the thread and I both disagree and agree. Yes, shareholders are making a mistake holding overvalued shares. But, mgmt is also making a mistake buying overpriced shares. If their options were limited to buy shares or dividend, your point would be more valid. But there are many other options.

The article listed quite a few things: "The idea is that we would have the ability to make investments that I could not make in the mutual fund, or larger investments that would not be possible," he said. Investment possibilities include real estate, larger stakes in companies than mutual funds are allowed to buy under U.S. rules, and even acquisitions, with his clients' blessing. The hedge fund has some positions that the mutual funds couldn't hold, a Fairholme spokesman said, declining to elaborate. Institutional investors in Fairholme Partnership LP hedge fund must put in at least $5 million and agree to lock up their money for one, three or five years. Retail investors can't get a piece of Mr. Berkowitz's hedge fund, which was up 23% as of Sept. 30. Unlike almost all other hedge funds, Mr. Berkowitz isn't charging a management fee, instead taking performance fees tied to how long investors agree to lock up their money. Fairholme collects 15% performance fees on money locked up for five years, 20% for three years and 25% for one year, subject to high-water marks.

Thanks for this. I know that mortgage products differed a lot between countries, but for some reason always assumed that they would be non-recourse. Not sure what the answer would be then.

I have a question on these deals. Looking back at the crisis, one of the biggest risks of common stock was that you get heavily diluted through a very expensive capital raise. Equity raises help prefs right? Because you only hurt the common holders correct? Also, did his warrants have anti dilution clauses? If so, this is probably an even better strategy than I thought because then he is removing one of the biggest risks in investing during the crisis. Also, did anyone calculate his IRR on these? If not, I can probably do it.

Wait, wouldn't you want to put less down then? Say house is $100 and you put $25 down and get a $75 mortgages. Prices decline 80% so now a $80 house with a $75 mortgage gives you $5 equity which is a $20 MTM loss. If you put $5 down, you would only lose the money you put down and wouldn't sink more money into a depreciating asset. Let the banks make the bad decision of financing an overvalued asset. Agree or disagree?

Interesting comment on Kmart. I think he discussed that investment in one of his books as a good investment. I think I also remember him saying Kmart was a good buy because it was distressed and had some interesting assets (e.g. assignable leases) but that the merger with Sears was dumb. That might summarize his view on Kmart, the price and assets were good but the business is bad, and explain why he didn't stick with Eddy and invest in Sears.

http://online.wsj.com/article/SB10001424127887323665504579032934293143524.html?mod=WSJ__MIDDLENexttoWhatsNewsForth "The investment implications are, of course, own stock in the ground, own great resources, reserves of phosphorous, potash, oil, copper, tin, zinc—you name it. I'd be less enthusiastic about aluminum and iron ore just because there is so much. And I wouldn't own coal, and I wouldn't own tar sands. It's hugely expensive to build coal utilities, and the plants they have to build for tar sands are massive, and before they get their money back I suspect that the price of solar and wind will have come down so much. So I wouldn't use that, but I think oil, the metals and particularly the fertilizers, I would own—and the most important of all is food. The pressures on food are worse than anything else, and therefore, what is the solution? Very good farming, which can be done. The emphasis from an investor's point of view is on very good farmland. It's had a big run. You can never afford to ignore price and value, but from time to time you can get good investments in farmland, and if you're prepared to go abroad, you can do it today. I wouldn't be too risky. I would stay with distinctly stable countries—Australia, New Zealand, Uruguay, Brazil, Canada, of course, and the U.S. But I would look around, in what I call the nooks and crannies. And forestry is the same. Forestry is not a bad bargain, a little overpriced maybe, but it's in a world where everything is overpriced today, once again, courtesy of incredibly low interest rates that push people into investing. A wicked plot of the Federal Reserve."

Not sure it's out there, know a lawyer who had some insight on the deal, said the proposal submitted to regulators only included cost cutting as a benefit. On the flip side, I'm familiar with some people who were at Heinz corporate, and there is a lot of fat that needed to be cut, so it isn't unwarranted. Looks like this is a slash their way to profits story. Interesting. I remember reading about 3G having international expertise and might be able to increase growth in emerging markets. Also, that this could be a roll up vehicle. Probably just the press not knowing what they are talking about and making up some link to emerging markets because Lemann is from Brazil.

http://www.bloomberg.com/news/2013-09-18/buffett-s-9-heinz-dividend-means-3g-cutting-jobs-mini-fridges.html?cmpid=yhoo We are hearing a lot about cost cuts. I'd like to hear more about growth strategy and any other tactical decisions.

One other benefit of this idea and another reason why Kelly is more applicable than in other investment cases is that the outcome should largely be uncorrelated to the market/economy/etc.

Short recap of the video: http://finance.yahoo.com/news/tarp-didnt-save-banks-ruined-150828386.html

This is great. Thanks

Here's a good recap of and outlook for the mortgage market: https://www.economy.com/mark-zandi/documents/2013-06-26-Resurrection-of-RMBS.pdf "It would not take much of an increase in g-fees to significantly change the arithmetic in the mortgage market. At the government-sponsored enterprises’ current g-fees, the cost of issuing private RMBS is competitive only for securities backed by very high-quality loans with LTVs of below 70% and credit scores of more than 740. This includes no more than 15% of the purchase mortgage loans currently being bought by the GSEs. But if the g-fees were increased by only an additional 20 basis points, then private RMBS would be competitive to fund mortgage loans up to an 80% LTV and down to a 700 credit score. This would include two-thirds of the GSE’s current lending (see Table 2)." "A less likely but helpful reform would be a national, nonjudicial foreclosure process. Foreclosure is currently governed by state laws, which vary considerably. Approximately half the states have nonjudicial foreclosure processes, while the other half send foreclosures through the courts. During the housing crash, this discrepancy severely complicated loan modification efforts by both the federal government and by national mortgage companies. The process lengthened in judicial states as the volume of foreclosures surged, stretching beyond 800 days on average in Florida, and beyond 1,000 days in New York (see Chart 5). The lengthy process significantly increased the cost of foreclosure to all parties." "Mortgage credit is not nearly as tight as it was during the recession or in the early years of the recovery, but it remains tight by historical standards. Among first mortgage loans originated in the first quarter of 2013, nearly 90% went to borrowers with credit scores above 700, the national average. Only about 5% went to subprime borrowers with scores below 660 (see Chart 6). At the peak of the housing bubble, closer to half of all loans went to borrowers with scores above 700; more than a third went to borrowers with subprime scores. Underwriting standards were clearly too easy during the bubble, but they are clearly too tight now." "With trend mortgage origination volume of $900 billion, and the private RMBS market expected to provide funding for 10% to 15% of originations, private RMBS issuance should be $90 billion to $135 billion per year. It will take a few years for issuance to ramp up, given the issues that need to be ironed out. Private RMBS issuance is expected to slowly but steadily increase from $15 billion this year to $40 billion in 2014, $90 billion in 2015, and $125 billion in 2016 (see Chart 8).12 This is nowhere near the pre-crash volumes that topped $1 trillion annually, but it constitutes a rebirth nonetheless." Few comments: Mortgages are still very tight with almost no exotic mortgages being issued. Bank's RE portfolios should be in great shape. PL RMBS are getting competitive with agencies and a slight increases in g fees can cause the market to come back. More available credit can mean home prices increase even more than people are expecting. Liquidation timelines are much longer than I think people anticipated due to the involvement of the courts in judicious states. I think people need to consider this when reviewing BAC's progress on their legacy portfolio.

Nice little article. Always enjoy seeing board members in the press.

Students generally don't have income. The problem, imo, is increasing demand for college causing prices to rise. People don't look at college as an investment and do an ROI analysis. At some price, it doesn't make sense to go to college.

Good article. I think it's important to start young and early. However: "When I came back from the meeting, I told my friends I was surrounded by rich people and I got to eat Dairy Queen bars for a dollar and lots of candy – Berkshire Hathaway also owns Mars. I also got a set of headsets at a shareholder discount of 40 per cent off. Even my friends who don’t understand why I like investing thought the cheap treats would have been awesome. They’re not calling my interests “messed up” any more." I am pretty sure BRK doesn't own Mars.