treasurehunt

From the 10Q, I see that Heinz had pre-tax income of about 214 million in the 3rd quarter. Expenses included about 138 million of "one-time" items (severance, restructuring charges, asset write-offs etc). If we take out these expenses, pre-tax income was about 352 million. The income tax rate was about 18.7 percent this quarter. I don't know if this is close to their long-term rate, but let's assume a 20% tax rate. Then after-tax income amounts to about 282 million. After paying Buffett 180 million in preferred dividends, that is still 100 million in quarterly earnings that belong to common equity. Since 3G paid 4.25 billion for their 50% share of Heinz common, it looks like they are getting an annual return of about 4.7% on their money at the moment. I think this is pretty impressive progress in just a year or so. I am sure 3G will be wringing out more costs as time goes by. I am not sure how happy the employees are, but the numbers look good. :-)

I don't have any quarrel with the claim that profit margins will probably decline at some point, but James Montier's argument appears dubious. You are talking about the article where he uses the Kalecki profit equation to "prove" that government deficits are the main cause of high profit margins, right? I remember reading this two or three years back and finding it pretty convincing. Unfortunately for Montier, the deficit in the US has declined from about 10% of GDP in 2009 to less than 3% of GDP in the most recent fiscal year, and profit margins have not gone down at all. I think 3% of GDP is a sustainable level, so it doesn't seem to make sense any longer to say that high government deficits are required for high corporate profit margins.

I don't think this is Shilling's original idea; many others have suggested it. Here's a paper that discusses the issue in detail: http://qz.com/88781/after-crunching-reinhart-and-rogoffs-data-weve-concluded-that-high-debt-does-not-cause-low-growth/. The paper contains the following sentence in bold: But the two of us could not find even a shred of evidence in the Reinhart and Rogoff data for a negative effect of government debt on growth. You may also be interested in the paper by Herndon et al that first pointed out some major problems with the analysis done by Reinhardt and Rogoff: http://www.peri.umass.edu/fileadmin/pdf/working_papers/working_papers_301-350/WP322.pdf

Yeah! I agree with you 100%. But this faith in human ingenuity shouldn’t prevent you from seeing the truth. Einstein once said: So, let me ask you: How is all this printing of money and increasing of public debt supposed to solve a debt accumulation problem that started 60 years ago? In other words, to solve a debt problem with even more debt is all that human ingenuity can conceive? ??? Gio Did anyone -- including the folks printing money and issuing public debt -- actually claim that these actions are supposed to solve "a debt accumulation problem that started 60 years ago"? And why would you imagine that issuing more debt is all that human ingenuity can conceive? Also, my point was not that I know how to solve particular economic problems that affect the world; rather, I was pointing out that a solution may exist even if you or I don't know of one. The fact that intelligent, thoughtful and fairly objective observers like Buffett and Munger cannot see the end game clearly tells me that looking at the current economic scenario through a filter like "more debt cannot solve the problem of too much debt" is way too simplistic. Does anyone even know with reasonable certainty what a safe level of total debt is for a diverse economy like that of the US?

My experience is that the pessimists are almost always more persuasive than the optimists. My theory is that pessimism is easily supported by a coherent narrative that shows a path to disaster, but optimism often requires belief in the ability of human ingenuity to solve problems in ways that are not obvious in the present. And I am not just talking about economics; peak oil, the long-term effects of climate change, Malthusian predictions of overpopulation etc are also examples. Of course sometimes the pessimists are right. But in general, I would discount predictions of doom quite heavily.

It seems to be a common assumption that increasing mortgage rates will lead to lower house prices, but recent history does not support this seemingly obvious conclusion. Take a look at the following article from Forbes: http://www.forbes.com/sites/billconerly/2012/12/18/when-mortgage-rates-rise-will-home-prices-fall/. About midway, there is a table that lists the six instances since 1976 when mortgage rates increased by one percent or more; in every case, house prices -- as measured by the FHFA index -- increased during the period of increasing rates. Maybe the next time will be different, but given the historical data, it won't be a surprise if house prices continue rising as mortgage rates increase.

Actually AMEX depends less on interest income from folks not paying their balances on time than other card issuers such as the big banks. Here's some data from their latest 10-Q. Note that discount revenue -- the fees charged to merchants for the privilege of accepting the AMEX card -- is the biggest contributor to revenue. So as long as you charge a lot of stuff on your card, AMEX should be perfectly happy with you. Revenues Discount revenue 4,945 Net card fees 687 Travel commissions and fees 500 Other commissions and fees 624 Other 585 Total non-interest revenues 7,341 Interest income 1,759 Total Revenues 9,100 Expenses Marketing, promotion, rewards and Card Member services 2,950 Salaries and employee benefits 1,658 Interest Expense 443 Provisions for Losses 489 Other, Net 1,248 Total Expenses 6,788

Interesting article. Thanks. Buffett is quoted as saying this: "If you go back to the mid-1930s, Packard was an aspirational auto brand. It was above Cadillac. Around 1936 they came out with a considerably lower-priced model. It did wonders for them immediately, but they destroyed the brand over time. If you’re a high-end brand, you can always pick up a lot of sales by dropping down. I’m not saying that’s what Valspar does; they probably have a bunch of different brands that are doing that. But it would be a big mistake for Benjamin Moore to try and take the Benjamin Moore name downscale and have a cheaper paint.” Hmm, I wonder if there is some company that is often discussed on this forum to which this quote applies... :-)

I spent a good amount of time this weekend reading Buffett's old letters to shareholders and it struck me that it would be interesting to compare Berkshire's performance after its first 28 years to that of Fairfax (which just completed its 28th year). Annual Increase in Book Value Per Share Berkshire: 23.6%, Fairfax: 21.3% Shareholders' Equity Berkshire: $8,926 million, Fairfax: $7,187 million Total Assets Berkshire: $17,132 million, Fairfax: $35,959 million Debt Berkshire: $1,155 million, Fairfax: $2,969 million Total Dividends Declared Per Share Berkshire: 0, Fairfax: $70 (roughly) Annual Increase In Shares Outstanding Berkshire: 0.05%, Fairfax: 5.3% Number Of Years With Declining Book Value Per Share Berkshire: 1, Fairfax: 6 Berkshire's insurance operations did not look too good at the end of 1992; they had had underwriting losses for the previous ten years or so. Fairfax's insurance operations look just fine in comparison, I think. Overall, Fairfax's performance doesn't quite measure up to Berkshire's but it is not very far off. One big difference is that Berkshire had an annual increase in book value per share of 27.1% between 1978 and 1992 -- the last 14 years of the 28 year period. Fairfax, on the other hand, increased book value per share by only 5.7% per year in the last 14 years. Perhaps size has become an anchor for Fairfax much faster than it did for Berkshire? And one final thing -- Prem writes pretty good letters, but Buffett's old ones are brilliant!

That is a very impressive checklist, indeed! Thank you for this contribution, Pedro.

Buffett wouldn't be the one doing the buying; his wife would be, after his death. Presumably Buffett thinks she shouldn't invest in Berkshire unless she is willing and able to make a rough estimate of Berkshire's future earnings. After all, this is what he recommends for valuing any asset in the article. Buffett suggests that investors buy an S&P index fund if they cannot value assets; he's just putting this advice into practice for this wife, I think.

FRFHF is compared to canadian GDP as it is domiciled in Canada. At 0.4% of the GDP, it is already the big gorilla of Canada. If it reaches 2-3% of the GDP, it will have enough power to control the government and if it reaches higher, it will be more powerful than the government. It has to be broken up or become a regulated monopoly then. In the U.S, this happened with standard oil initially and Microsoft in the late nineties. There are examples from Asia where this is happening now... Very questionable. According to the Globe and Mail, Fairfax is only 50th among Canadian companies by market cap: http://www.theglobeandmail.com/report-on-business/top-1000/article12832687/. Most of the biggest companies are banks and energy companies, but I don't think they qualify as regulated monopolies. Also, Nortel had a market cap of almost $400 billion (Canadian dollars) back in the late nineties. They did not get broken up. Well, not by the government anyway. Blackberry had a market cap of around $80 billion at its peak. I don't remember any calls to break them up either.

Great post, alwaysinvert. A couple of my biggest mistakes made me money as well, through sheer luck (for instance, one company went bankrupt within two years of my selling out at a profit). There are many good stories in this thread but there also a few that basically boil down to "I bought stock XYZ and later it went down a lot." I don't think that this says much about whether the initial decision was a bad mistake or not. So I find your post especially valuable. Thanks.

Hmm, which of my many whoppers should I pick? Choices, choices... :-) I think I will go with my repeated purchases of Level 3 stock, an affliction that started in 2001, continued intermittently for several years and only ended early last year when I sold the last of the shares I owned. There were quite a few lessons here, such as (i) pay a lot of attention to debt levels; (ii) do not pay too much attention to smart and articulate CEOs; (iii) confirmation from smart investors such as Mason Hawkins and Prem Watsa is no guarantee of investment success; (iv) a compelling story does not necessarily make for a good investment; and (v) huge overcapacity in an industry can throttle even good companies in that industry. But the most fundamental lesson for me was that I should focus on companies with a track record of making money in industries that are not undergoing rapid change. On the plus side, I feel much cleaner now that I no longer own LVLT. And the stock hasn't tripled since I sold. Not yet, anyway...

It might be best not to impute arbitrary formulas to Buffett. :-) Using globalfinancepartners' math on Buffett's example shows an IV increase of about .51%, I believe. Buffett probably just approximated this to 1/2 percent.

Thanks, Rabbit. To summarize, Dube's paper shows that high debt-to-GDP is much better correlated with past low GDP growth than future low GDP growth, indicating that low growth likely causes high debt rather than the other way around, right? The Reinhart-Rogoff result is looking shakier and shakier...

I thought somebody would have posted about this here already, but I don't see anything, so here goes. Most of you must know about the paper titled "Growth in a Time of Debt" by Carmen Reinhart and Ken Rogoff, published in Jan 2010. A main conclusion of this work is that when government debt goes over 90% of GDP, growth slows down significantly (on average growth goes negative at this point, according to the paper). This Reinhart-Rogoff paper has been a main pillar of austerity advocates, since it shows that really bad things are likely to happen once debt-to-GDP goes over 90%. Well, it turns out that there are serious problems with the paper, including basic errors in the Excel spreadsheet that Reinhart and Rogoff used for their calculations. The problems were discovered mainly by Thomas Herndon, a graduate student at the University of Massachusetts, who was trying to replicate the Reinhart-Rogoff results. Recent austerity measures all across Europe may have been based at least partly on flawed research! Some related links: Critique of Reinhart-Rogoff by Herndon, Ash and Pollin: http://www.peri.umass.edu/236/hash/31e2ff374b6377b2ddec04deaa6388b1/publication/566/ A summary by Mike Konczal: http://www.nextnewdeal.net/rortybomb/researchers-finally-replicated-reinhart-rogoff-and-there-are-serious-problems Response from Reinhart and Rogoff claiming that their conclusion still holds: http://blogs.wsj.com/economics/2013/04/16/reinhart-rogoff-response-to-critique/ A response to the response from James Kwak: http://baselinescenario.com/2013/04/18/are-reinhart-and-rogoff-right-anyway/

I too thought that Buffett would use 8 billion to exercise the GS and GE warrants, but it doesn't look like he is very keen to do that. Might be a good question to ask at the annual: why did Berkshire settle for small positions in both GS and GE? I can see why GS and GE might want to avoid issuing shares; they probably have no great need for more cash right now.

The GE warrants have also been amended similarly. From GE's 10K: "The terms of the warrants were amended in January 2013 to allow for net share settlement where the total number of issued shares is based on the amount by which the average market price of GE common stock over the 20 trading days preceding the date of exercise exceeds the exercise price of $22.25." Berkshire will end up with an insignificant stake in GE at current prices.

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).

Minimum Tier 1 common ratios according to the 2012 and 2013 stress tests. 2012 2013 BofA 5.7% 6.8% Citi 5.9% 8.3% JPM 6.3% 6.3% Goldman 5.8% 5.8% MS 5.4% 5.7% Wells 6.6% 7.0% Big improvements for BofA and Citi. These two should be returning large amounts of capital soon, perhaps starting in 2014. JPM and Goldman have identical numbers in 2012 and 2013. But both were allowed to return a lot of capital last year, and presumably a similar capital return will be permitted this year as well.

Thank you Parsad, for creating this amazing community of value investors. This is by far the best board I have been a part of. Oh yes, it's helped make me some money as well. :)

Here's the press release from Cigna: http://www.businesswire.com/news/home/20130204006406/en/Cigna-Announces-Transaction-Exit-Run-off-Operations My reading of the press release is that Berkshire gets 1.8 billion in investments and some cash in return for assuming up to 4 billion in liabilities. 4 billion is the cap; actual liabilities could turn out to be less. I couldn't quite figure out exactly how much cash Berkshire is getting. Perhaps as much as 500 million?

JP Morgan's guide to the markets as of Dec 31, 2012: https://www.jpmorganfunds.com/cm/BlobServer/jp-littlebook.pdf?blobcol=urldata&blobtable=MungoBlobs&blobkey=id&blobwhere=1321497800924&blobheader=application%2Fpdf&blobheadername1=Content-Disposition&ssbinary=true&blobheadervalue1=attachment;filename=jp-littlebook.pdf I hope the gigantic URL works. There is a lot of good stuff in this guide.

What exactly do you mean by "nearly $1 billion in profit from the $3 billion loan"? GE stock is trading at $21.20 or so, which is well under the strike price of the warrants.