txlaw

Disagree here, Carl. Insurance companies are trading at cyclical lows. Some on the board have proposed that a big reinsurer will be the target of Berkshire's excess cash. Many also believe there will be further financial freak outs fairly soon, whether in the muni markets, in the developed country markets, in the emerging markets, etc. Nice chance to deploy there. It's also clear that there are a lot of companies in the US and in the developed world that still need to be recapitalized, which will result in huge returns to the guys who can provide the large wads of cash. Finally, WEB is now able to scour the world to search for great businesses in countries that will diversify Berkshire's earnings streams into currencies that have more attractive futures than the dollar. I wouldn't mind Berkshire paying a dividend, but not yet. Let's allow him to deploy capital and diversify our earnings stream into different currencies while the environment is good.

Well, not everyone can manage their money as well as you can in order to avoid the tax hit. I think we've had this discussion before about your tax arbitrage strategy and how you borrow against part of your securities portfolio in order to avoid taking a tax hit. Most of us, who won't ever have to worry about paying $700K to the IRS in one year, are better off with cash in hand. And anyways, there's no guaranty that that tax arbitrage -- realizing value at the capital gains rate rather than at the ordinary income rate -- will be available in a decade or so. As Buffett always points out, why should income from labor be taxed at higher rates than capital gains? I'll agree with you on this though: I hope to never be caught holding an overvalued stock. I also hope I'm complaining about paying $700K to the IRS in one year at some point. ;D

It was a great letter this year. Interesting to see him lay out so much of the numbers for valuing Berkshire. And how about those unrealized gains on the derivative contracts? Not bad at all.

You guys are the ones making this overly complicated. Look, the whole point of a public company retaining "owner earnings," rather than distributing them, is to reinvest those earnings on behalf of the shareholders, who benefit, get hurt or stay the same from reinvestment on a pro rata basis. Whether or not we're in a tax free world, if management cannot turn each $1 of retained owner earnings into more than $1, then all owner earnings should be returned to shareholders. I would go further and argue that unless management can do substantially better than shareholders, as a class, could do by investing that capital on their own, those owner earnings should be distributed to shareholders to do what they wish with it (consume or invest). Some, like Packer, would institute a bright line rule requiring that 70% of owner earnings must be distributed to shareholders unless shareholders affirmatively agree to allow more reinvestment by management. The economic argument for buybacks versus dividends cannot rest solely on the tax consequences of dividends. In a tax free world, when a company declares a dividend, shareholders actually get capital in their hands which they can use to either consume or invest. With company-instituted buybacks, on the other hand, the non-selling shareholders have been forced to reinvest in the company by buying out selling shareholders. The price paid to cash out the selling shareholders will affect whether non-selling shareholders are better or worse off for having distributed company cash to the selling shareholders. Only in an academic fantasy world, where shares of a firm are always bought and sold at "fair value," are buybacks equivalent to dividends. The only valid reason for company management to institute a buyback is to arrange a cash out transaction between selling and non-selling shareholders that benefits non-selling shareholders in a way that would be superior to using company cash for real investment.

Latest BAM shareholder letter: http://www.brookfield.com/_Global/1/documents/relatedlinks/3048.pdf Anyone who owns FAIRX will want to read since we own about 4.5% of the company.

He is pretty wordy. Definitely not as enjoyable as a Buffett letter.

Does anybody else think that they really need to change the name of their pick up service from mygofer to something else?

Just read the SHLD annual letter. I like the way the guy thinks about capital allocation, but I can't stand when he starts preaching about job growth, the evils of regulation, and Friedrich Hayek and whatnot.

We take lower returns so that others can have more? This reminds me of my tax bill. Well, I'm sure we have differences of opinion on the way that the government allocates/redistributes wealth. ;)

Just read the SHLD letter. An excerpt on buybacks: At Sears Holdings, we seek to create long-term value for our shareholders. Like Apple, we seek to do so by improving our operating performance, innovating, and delighting customers. In this area, we have fallen far short of our goals and what we aspire to do in the future. On the second dimension of capital allocation, I believe that our behavior and focus has served our shareholders well over the past eight years and will magnify the value creation when our operating performance improves. We built cash when we felt that it was the right decision for our shareholders, and we delivered cash to those who elected to sell their shares when we felt that it was the right thing to do. Share repurchases are not a panacea, nor are they a singular strategy. Yet, they are more than just the return of capital to shareholders. They represent an investment by the non-selling shareholders in the future of the business and the company. By repurchasing shares from selling shareholders, the remaining shareholders increase their ownership stake, thereby taking the additional risk and additional upside potential based upon future performance. When coupled with outstanding operating performance, share repurchases magnify returns. When the price paid is attractive relative to future performance, share repurchases magnify returns. As a form of discipline on alternative capital allocation strategies, share repurchases can magnify returns. But, at the wrong price, with poor future performance, share repurchases can harm returns.

Yes, in some cases buybacks would make sense over dividends even with a 0% dividend tax. Why? Because when good management is in place, they are in a better position to know whether reinvesting in the company at current prices would be optimal for the average non-selling investor. It's a question of the competency of the investor who has his hands on the cash. In the case of Berkshire, shareholders have WEB acting as our agent, so it only makes sense that all excess cash at the various businesses be directed into his hands. Someone was complaining about Buffett sitting on cash a couple of weeks ago, but it would be monumentally stupid for Berkshire to raise cash at low interest rates and then dividend the proceeds out to shareholders when WEB can easily deploy that cash at high rates of return with very little risk.

I don't disagree with most of what you said in your last post. I also hate it when companies sit on hoards of cash for no good reason. And I think that the majority of people on this board would not want buybacks to occur except on rare occasions, and that most board members are quite distrusting of management to allocate capital properly. Also, there has to be a distinction between people who are good investors (e.g., Ericopoly) -- or who have sound investing principles -- and the average Joe. The average Joe can't expect to outperform the market for the most part, and he can't be expected to pick quality money managers who won't rip him off over time. If a high quality company is trading at fair value, let's say at a 7% earnings yield, but can deploy incoming cash earnings at substantially higher rates of return than the market, the company should consider retaining a good part of those earnings and deploying on behalf of its investors. Sometimes, but not often, the proper form of deployment will be in the form of buybacks. There are certain companies that are undervalued for long periods of time because the market is simply not properly analyzing the companies. The best managements opportunistically buy back stock at these times as an alternative to deploying capital in other ways -- including dividending out cash earnings and excess cash on the balance sheet -- but only because the rates of return to non-selling shareholders are very high. An example of such a company is WRB, which is using the bottom of the insurance cycle to cash out selling shareholders in a way that will substantially benefit non-selling shareholders when the cycle turns.

Haven't read it yet, but it should be interesting. http://images.businessweek.com/mz/11/10/1110_mz_49meekerusainc.pdf

In other words, so long as an inordinate wealth transfer is on the table because of a stupidly selling shareholder, the CEO should sign up all non-selling shareholders to accrue the benefits (as long as all the information required to determine intrinsic value is disclosed).

I take it you don't think he's right about the following: But there is an important difference from the investor’s standpoint. With a dividend, all investors are treated equally. When a company buys back its shares when they are overvalued, on the other hand, there is a wealth transfer from the continuing shareholders to the selling shareholders. Symmetrically, when a company buys back undervalued shares there’s a wealth transfer from the selling shareholders to the ongoing shareholders. While the company may return the same amount of cash to shareholders through a buyback or a dividend, how value is distributed can be very different. He isn't saying anything wrong here. It could be restated as "automatic dividend reinvestment plans are a wealth transfer to selling shareholders from buying shareholders". I'd completely agree with that, if the shares are overvalued. If undervalued the wealth transfer would flow in reverse. So he is correct once more. The trick is to become one of the sellers. That's obvious, we already knew that. Right, but I think the point is that the CEO does a good job of capital allocation by buying back undervalued shares from willful sellers when the positive value transfer (not creation) that accrues to remaining shareholders is greater than what they could get by investing themselves on average. Essentially, the CEO/CFO is saying to the selling shareholder: "As long as you are trying to transfer your economic stake in the company at X price, which would result in a 15% return over time to the prospective buyer, you might as well let remaining shareholders buy you out on a prorata basis rather than potentially selling to a person who does not currently own a stake in the business."

I take it you don't think he's right about the following: But there is an important difference from the investor’s standpoint. With a dividend, all investors are treated equally. When a company buys back its shares when they are overvalued, on the other hand, there is a wealth transfer from the continuing shareholders to the selling shareholders. Symmetrically, when a company buys back undervalued shares there’s a wealth transfer from the selling shareholders to the ongoing shareholders. While the company may return the same amount of cash to shareholders through a buyback or a dividend, how value is distributed can be very different.

Damn! Accredited investors get to have all the fun.

Found off of Value Investing World: http://lmcm.com/pdf/TheRealRoleofDividends.pdf

Can you let us read your quarterly letters for the last two years? ;D

I almost got the Nexus S because my iPhone 3g was pretty much unusable after updating the OS. But, unfortunately, you only get 3G if you use T-Mobile. On any other carrier in the US, the Nexus S does not work at 3G speeds. So I got an iPhone 4 instead.

I believe the folks at HWIC are huge admirers of Jeremy Grantham. So it's worth taking a look at GMO's 7-year asset class return forecast, which was posted on gurufocus earlier today: http://www.scribd.com/doc/49350845/GMO-7-Year-Forecasts-January-2011 GMO believes that at January 31, 2011 prices, large cap US equities and small cap US equities will return between 0.2% and -2.1%. Forget about the specificity of those numbers -- the basic thesis is that the US market's valuation is fair to overvalued at current prices. FFH has hedged its equity portfolio against the market. But I believe that even with a 100% hedged portfolio, the "messy equity" positions that FFH has (e.g., LVLT, DELL, FBK) will generate a nice spread in their hedged equity portfolio because these companies are deeply undervalued. And if the market does correct, they get to redeploy the unwound hedges into either "messy equity" positions or high quality positions. Even though they may have been a little early with their hedges, I like FFH's positioning at this time. Although I do not own any FFH at the moment, if the next quarter gets hit by the earthquake and further bond declines, I will likely get back in.

Good to hear. Too bad he doesn't post anymore.

Cardboard, if it were me, I'd go for the iPhone. It's just a beautiful piece of hardware with an outstanding screen for reading and with a user interface that can't be beat. I own GOOG, but Android has a ways to go before it can compete from a usability standpoint. I definitely would not go with the Windows phone. I can't stand the tile interface -- I think it sucks, big time.

Whatever happened to dengyu the nugget? I seem to recall enjoying reading his posts before I joined the board as a member.

Congress is definitely broken. But you're absolutely right that people tend to pick and choose facts in a way that confirms their own philosophical/ideological beliefs, often unconsciously.