jay21

I have been discussing the weakening subprime auto market for a few months. There's definitely a place for subprime loans in society. People have credit scores tarnished by non-recurring situations like divorce and medical bills. That is the target market for smart subprime (like NICK). When people are originating to sell and reaching for yield, you usually have perverse incentives and much worse economic lending that leads to booms and busts.

Parsad, give everyone a change. Everyone is trying to figure out how much they can compound at so they can appropriately size their donation. But seriously GL!

Yes, for MSFT, neither Todd or Ted are allowed to buy it - Buffett mentioned that in an interview once. Not sure about the vice stocks. And I don't think that alcohol counts as a vice stock, at least for Buffett. They used to own Anheuser Busch several years ago. And they also own a liquor distributor. I think casinos and tobacco are the two that Buffett avoids. You're right. I also remember him being long Diageo in the 1990s or whoever produced Guinness then.

Yes, that was the biggest driver. I am surprised by how religious he was. He spoke about the church as a community where individuals came together to shake hands and be friends. With regards to Buffet: http://en.wikipedia.org/wiki/Warren_Buffett#Philanthropy In June 2006, he announced a plan to give away his fortune to charity, with 83% of it going to the Bill & Melinda Gates Foundation.[118] He pledged about the equivalent of 10 million Berkshire Hathaway Class B shares to the Bill & Melinda Gates Foundation (worth approximately US$30.7 billion as of June 23, 2006),[119] making it the largest charitable donation in history, and Buffett one of the leaders of philanthrocapitalism.[120] The foundation will receive 5% of the total donation on an annualised basis each July, beginning in 2006. (Significantly, however, the pledge is conditional upon the foundation's giving away each year, beginning in 2009, an amount that is at least equal to the value of the entire previous year's gift from Buffett, in addition to 5% of the foundation's net assets.) Buffett also will join the board of directors of the Gates Foundation, although he does not plan to be actively involved in the foundation's investments.[121][122]

Yes, he started giving more to his family and charity as time progressed. I think sometime in the 90s was when he really started to loosen up. I was reading Titan and noticed how dissimilar this was to Rockerfeller who always gave some money to charity throughout his career. Even when he was just a bookkeeper not making much. Interesting to me.

Question: Do you impose the same investment limitations on Tedd and Todd as yourself? E.g. can one of them invest in MSFT? Didn't Buffet also mention he won't invest in vice stocks like tobacco and alcohol? Curios to see if he imposes that on them as well.

This is on my reading list. Right now I am reading Titan, which is about Rockefeller. It is good so far and may be worth checking out if you enjoy learning about the late 1800s early 1900s.

He was talking about earnings growth being around 6%, no?

People often look at housing starts and US vehicle sales to gauge the housing and auto markets. Is there any equivalent for railroads? Maybe total freight cars moved or something?

I didn't like this as much as others because I don't think the lesson should be do not try too hard. The lesson I got was don't try to predict what is going to happen. Don't listen to "experts," forecasters, etc. That has nothing to do with the due diligence you need to invest. Look at the most successful investors: Warren, Klarman, Einhorn, Ackman, Bruce, etc. All of these investors dedicate 100s of hours to investment ideas. Klarman had one analyst whose 9 to 5 job was to unravel Enron for like 1 to 3 years. Warren reads annual reports of companies he isn't even interested in buying under any circumstance. The most successful people in almost every field are those who commit their lives to their craft. With that being said, investing isn't a "hard skill" that needs practice. I think you can do fine buying a diversified group of cheap securities. But if I am a professional and want to be the best the investor I could be, I would want to commit most of time to investing. The message should be focus on the right questions (e.g. "What is the competitive landscape?') vs. the wrong ones ("What will earnings be next quarter? What are interest rates going to be next year?").

I don't think this amendment says much about Buffett's opinion on whether GS is undervalued or not. According to the original terms Berkshire would pay 5 billion and get 43 million shares of GS in return. According to the amended terms, Berkshire pays nothing and gets 9 million shares or so (depending on the GS share price in October). I think the article Jay quoted is wrong when it suggests that GS will now be paying in stock rather than in cash; there was never going to be any cash payment from GS, as I understand the warrant terms. If anything, this indicates to me that Buffett would rather own a modest position in GS than a big one. Not so bullish for GS stock, perhaps. But as a GS shareholder, I am happy that the dilution will probably be less than I anticipated (assuming GS is still trading under IV in October). I think this post hits on the biggest points. 1. Buffet is receiving less shares than if he exercised. 2. This probably tax efficient. Not sure what his basis is, but this should be a taxless transaction and he would owe a good chunk of taxes if he converts to cash. 3. The dilution to the common is less than anticipated. #3 I find the most interesting because I am wondering if he will do something similar with BAC. If i were a GS holder, it would say to me, he would rather own $x of GS than receive $(x-y) in cash. y being taxes.

I think so. But notice he did not want to exercise and make it a huge position. He only wants the difference between the strike and market price.

Better article: http://www.forbes.com/sites/steveschaefer/2013/03/26/goldman-sachs-reworks-warrants-held-by-buffetts-berkshire/?partner=yahootix The amended agreement changes the terms of the warrants from cash settlement to net share settlement. Essentially, Buffett had the right to purchase 43.5 million shares of Goldman at $115 apiece until October 1, 2013. Under the new terms, Buffett will receive “the number of shares of common stock equal in value to the difference between the average closing price over the 10 trading days preceding October 1, 2013 and the exercise price of $115 multiplied by the number of shares of common stock covered by the warrant (43,478,260).” The short form: because Goldman Sachs would have to compensate Berkshire for the difference between the stock price and the exercise price, the firm will instead deliver to Berkshire the commensurate amount of shares equivalent to that difference. “We intend to hold a significant investment in Goldman Sachs, a firm that I did my first transaction with more than 50 years ago,” Buffett said in a statement announcing the new terms. “I have been privileged to have known and admired Goldman’s executive leadership team since my first meeting with Sidney Weinberg in 1940.”

A brief: http://www.reuters.com/article/2013/03/26/goldmansachs-brief-idUSWEN0089420130326?type=companyNews&feedType=RSS&feedName=companyNews&rpc=43 Will update when new info comes in. (Reuters) - Goldman Sachs Group Inc and Berkshire Hathaway Inc have amended the warrants Berkshire holds as part of the lifeline it gave Goldman during the financial crisis, a change that Goldman said would ensure Berkshire remains a long-term investor in the bank. Goldman said on Tuesday that in place of the warrants, the firm will give Berkshire a number of shares reflecting the difference between the warrants' original exercise price of $115 and the average closing price of Goldman's stock for the 10 trading days up to Oct. 1 of this year. http://www.reuters.com/article/2013/03/26/goldmansachs-berkshire-idUSL2N0CI0IX20130326?type=companyNews

Other things I thought were interesting were the cash vs. GAAP taxes. Here are the last 3 years expenses: 148, 294, and 198 Here are the effective tax rates: 9%, 18%, 14%. However, the supplemental disclosure shows the company is actually receiving income taxes every year: 1,341, 575, and 305. Also, MidAmerican owns ~600m stake in BYD. So even if the company can't dividend up money to BRK, they can still purchase securities and the money doesn't have to constantly be reinvested in utilities.

Why do you think that CLOs will drive equity prices? Also, I was happy to see JPM went to market with a RMBS recently. Prime credit may be thawing!

I think one of the investing take aways here is that the highest EV isn't necessarily always the best decision. You have to look at a range of outcomes and then compare that to another range of options.

Interesting link I came across: http://m.theatlantic.com/business/archive/2013/03/this-is-the-scariest-statistic-about-the-newspaper-business-today/274125/ Basically, newspapers revenues are getting killed and they aren't making up for it in internet revenue. I'm assuming a lot of that lost revenue went to Google and non-newspaper online ads. Also, I would expect to see more subscription based papers.

Found this interesting in the 10-K Other investments: Preferred stocks $ 11,860 Expected duration 10 years Discount for transferability restrictions and subordination 97 basis points Common stock warrants 3,890 Discount for transferability and hedging restrictions 19% So BRK is valuing the preferred with a ~1% discount which would compound over 10 years and marked down their warrants by 19%. So that's some extra value imo.

Sure can. Note that the HoldCo owns stakes in all those companies were I was pointing out the ROE. The ROE is based upon the entity's/investee company's balance sheet. So that ETA project has a specified debt to equity ratio with an ROE of 9.96%. The HoldCo accounts for the equity as an investment on their balance sheet, which may look something like this. Assets: 20b of equity investments in the investee utilities. Liabilities: 4b of debt Equity: 16b In the example, the 20b equity investments have a regulated ROE of 10% to 12%. Using 10% as a base, the assets earn $2b. The HoldCo gets the $2b and pays $200m in interest (based on a hypo after tax borrowing of 5%). That leaves the HoldCo with $1.8b of earnings on $16b of equity for an ROE of 11.25%. Even though the regulated business earned 10% ROE, the HoldCo could lever that return into a higher ROE.

I can't remember who it was, but some famous RE guy was asked why he did so well in the 70s and/or 80s. He said it's hard to do poorly when you borrowed at 5% and then had a period of double digit inflation. Wouldn't that be the best time to invest for real estate? If you think inflation is coming shouldn't you borrow now at low single digits and buy an inflationary resistant asset like RE? I guess what you are saying make sense if we are buying in all cash.

Going off memory: MTB, USG, LEE, Media General, Verisk Analytics Phillips 66 was dumped by Buffet I believe, and then Tedd and Tod both picked it up.

I went through Mid-American primarily to look at what the ROE of the business is. Most people are probably already aware that utilities' profits are regulated as either cost plus or on the ROE. Here are the mentions of ROE I found in the report: Pursuant to ratemaking principles approved by the UB, all of MidAmerican Energy's wind-powered generating facilities in service at December 31, 2012 are authorized to earn a fixed rate of return on equity over their useful lives ranging from 11.7% to 12.2% in any future Iowa rate proceeding. The Company indirectly owns a 50% interest in ETT, along with subsidiaries of American Electric Power Company, Inc. ("AEP"). ETT owns and operates electric transmission assets in the ERCOT and, as of December 31, 2012, had total assets of $2.0 billion. ETT is regulated by the Public Utility Commission of Texas, which has approved rates based on a 9.96% after tax rate of return on equity and a debt to equity capital structure of 60:40. Electric Transmission America, LLC ("ETA") is a company owned equally with subsidiaries of AEP to pursue transmission opportunities outside of ERCOT. ETA has a 50:50 joint venture with Westar Energy, Inc. to build transmission assets in Kansas. Construction began in 2012 and has received the necessary approvals from the FERC, including a return on equity, inclusive of incentives, of 12.8%. The project is expected to cost approximately $180 million and be in service on or before December 31, 2014 As of December 31, 2012, $3.7 billion, or 43%, of MidAmerican Energy's property, plant and equipment, net, was subject to these ratemaking principles at a weighted average return on equity of 12.0%. So it looks like the ROE should fall between 10% and 12%. Also, it should be worth noting that MidAmerican is a holding company and there is some debt at the HoldCo level. I am trying to get some clarity on the HoldCo balance sheet, but can't seem to find much. We know there is ~4.6b of debt there. My point is the ROE is not solely based on the OpCos but also the amount and cost of debt at the HoldCo level.

This was good, thanks. I missed one the links between housing and autos. Obviously they are correlated because they are both tied to the economy, but as housing and construction increase people will buy more pickups which are higher margin products.

What happened to Rick? http://www.fool.com/investing/general/2013/01/10/mohnish-pabrai-what-ive-learned-from-warren-and-ch.aspx#.UP_nEWT2L04.twitter