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I still own some matured series EE bonds from around 1990 when they paid 6%. They still pay 4% until their final maturity in a year or two. As for the I-bonds, I have no doubt they're great but the size cap limits my interest in them.
Bar, BYD was a 'unprofitable foreign startup' when Buffett and Munger took their 10% stake in 2008. So there's nothing inherently wrong with owning small caps. They key is who is doing the stock picking, and you're right that few of us I-Hubbers are really up to the task. Most are busy chasing penny stocks in search of a quick profit.
BYD - >>> 13 years after investing in an obscure Chinese automaker, Warren Buffett’s BYD bet is paying off big
Fortune
BY REY MASHAYEKHI
March 2, 2021
https://fortune.com/2021/03/02/warren-buffett-investments-berkshire-hathaway-byd/
Warren Buffett’s Berkshire Hathaway invested $232 million in Chinese automaker BYD in 2008—a stake that has since swelled to around $6 billion.
This weekend brought the release of Berkshire Hathaway’s 2020 earnings report, which gave the investing world yet another opportunity to track the performance of the Oracle of Omaha himself, Warren Buffett. And though the prodigious 90-year-old investor’s holding company predictably felt the effects of the COVID-19 pandemic on its bottom line, the report shed light on how one of Buffett’s boldest bets to date is paying huge dividends.
Thirteen years ago, on the advice of his famously skeptical lieutenant, Charlie Munger, Buffett made a $232 million investment in a relatively unknown Chinese car company called BYD. As Munger told Fortune in a 2009 cover story, he was enthralled by the vision of BYD’s founder—a chemist-turned-entrepreneur named Wang Chuanfu, who had built one of the world’s largest manufacturers of rechargeable cell phone batteries before pivoting into the automotive sector.
“This guy is a combination of Thomas Edison and Jack Welch—something like Edison in solving technical problems, and something like Welch in getting done what he needs to do,” Munger said of Wang. “I have never seen anything like it.”
By parlaying BYD’s rechargeable battery technology into a fast-growing carmaking operation, Wang had gained a foothold in the fledgling electric vehicle (EV) market—building longer-lasting batteries and cheaper vehicles than American and Japanese manufacturers were managing to do at the time. In BYD, Buffett and Munger believed they had found a company with a shot at one day becoming the largest player in a global automobile market that was inevitably going electric.
In late 2008, Berkshire Hathaway ponied up the aforementioned $232 million for a roughly 10% stake in BYD. As Buffett recalled, Berkshire initially tried to buy 25% of the company, but Wang refused to release more than 10% of BYD’s stock. “This was a man who didn’t want to sell his company,” he told Fortune. “That was a good sign.”
It has proved to be money well spent. As the EV market has exploded in China, BYD has developed into a major player in the world’s largest car market; it sold more than 130,000 electric passenger vehicles last year as it competes for market share with rival EV makers like Wuling, NIO, and, of course, Tesla.
As BYD has grown, so has the value of Berkshire Hathaway’s investment. By late 2018, 10 years after cutting that $232 million check, Berkshire’s stake in the company had swollen to roughly $1.6 billion. Since then, that figure has climbed exponentially amid the Chinese EV market’s rapid expansion and a remarkable fourfold increase in BYD’s Hong Kong–traded shares last year: Berkshire Hathaway’s 8.2% stake in the automaker held a market value of $5.9 billion at the end of 2020, per Buffett’s letter to Berkshire shareholders on Saturday.
That means that BYD was Buffett’s eighth-largest holding by market value at the end of last year, and makes it a more valuable investment for the Oracle of Omaha than his stake in that grand old name of American carmaking, General Motors. (Berkshire’s 3.7% stake in GM was valued at $2.2 billion as of Dec. 31.) Of course, GM is only just accelerating its push into the realm of electric vehicles, whereas BYD has been bracing for an EV-motored future for the past decade and a half—a vision that is now bearing fruit for Buffett, Munger, and their own investors at Berkshire Hathaway.
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>>> Warren Buffett–backed BYD surpasses Tesla in global EV sales a decade after Elon Musk doubted the Chinese company’s technology
Fortune
BY GRADY MCGREGOR
July 6, 2022
https://fortune.com/2022/07/06/warren-buffett-byd-tesla-ev-sales-elon-musk-doubt-technology/
BYD, the Chinese electric vehicle firm partly owned by Warren Buffett's Berkshire Hathaway, became the world’s largest electric vehicle maker in the first half of 2022, wrestling the title from Elon Musk's EV giant Tesla in another sign of the Chinese automaker's resilience in the face of COVID-inflicted disruptions that plagued its rivals this year.
BYD sold 641,350 new electric vehicles in the first half of this year, compared to Tesla's 564,743, company filings show. Sales at BYD are also growing at a faster pace than at its American counterpart. In the first six months of 2022, BYD sold 486,771 more cars than it did in the first half of 2021, representing an increase of 315%. Tesla, meanwhile, sold 178,693 more vehicles in the first half of this year compared to last, a 46% year-on-year bump.
However, the companies' sales don't represent an apples-to-apples comparison. Many of BYD's car sales are plug-in hybrids and use gasoline engines to supplement battery power. Tesla, on the other hand, exclusively sells fully electric cars. China counts both types of vehicles as "zero-emission."
BYD's stock price in Hong Kong has barely budged since the firm released the sales figures earlier this week. But investors have been high on BYD since the start of this year despite the bear market in the U.S. and a challenging environment in China. BYD's stock price has risen nearly 25% since the start of this year. In that same timeframe, Tesla's stock price in New York has dropped 42%.
Buffett's Berkshire Hathaway was an early backer of BYD, pouring $232 million into the company in 2008. Now worth $7.7 billion, the investment is one of Berkshire's most lucrative bets.
Musk, meanwhile, was an early doubter of BYD. “Have you seen their car?” the Tesla CEO told Bloomberg News in 2011. “I don’t think they have a great product.”
Tesla has attributed its sluggish growth early this year to COVID-19 lockdowns in Shanghai that disrupted production at its gigafactory near the city. "We [lost] a lot of important days of production. And there are sort of upstream supplier challenges where a lot of suppliers also lost many days of production," Musk said in a quarterly earnings call in May.
Dan Ives, analyst at Wedbush, recently estimated that Tesla produced 70,000 fewer cars this year due to the lockdown in Shanghai. On the earnings call, Musk also promised that Tesla's Shanghai plant would "come back with a vengeance." After two months of being closed or operating at reduced capacity, Telsa's gigafactory returned to full capacity in early June.
But Tesla's comeback has not arrived fast enough to catch up with BYD's spring surge.
Unlike Tesla, BYD was "totally resilient from the Shanghai City lockdown and [the] sector's supply-chain disruption," Citi analysts wrote in May. BYD's main production base is in China's southern province of Guangdong, a region that did not face lockdowns as severe as the one in Shanghai.
The Citi analysts also said that BYD's supply chain is "vertically integrated," meaning it produces more parts in-house and is less dependent on outside suppliers than its rivals, helping shield the company from supply-chain disruptions. BYD's supply-chain success may be helping turn its competitors into potential customers. BYD plans to sell batteries to Tesla "very soon," Lian Yubo, BYD's executive vice president, told Chinese media last month. Tesla has not confirmed the statement.
BYD's insulation from the Shanghai lockdown helped it leapfrog rivals to become the second largest automaker of any kind this June. It now ranks behind only FAW-Volkswagen in terms of monthly car sales. In January, BYD was China's seventh largest automaker by sales.
BYD's recent tear has also defied a government probe into alleged pollution at its factories in Changsha, China that threatens to tarnish the company's environmental accolades.
“The story of BYD’s resilience throughout lockdowns and the chip shortage outweighed [the probe],” Bridget McCarthy, market research analyst and head of China operations at Boston-based hedge fund Snow Bull Capital recently told Fortune.
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Bar, Just curious if you have been buying I-Bonds? These are phenomenal, currently paying 9.62%. There is a $10 K per year limit, $20 K for married couples, plus up to $5 K per year if you have a Fed tax refund due.
>>> Inflation bonds are earning eye-popping rates: 9.62 percent.
I bonds — low-risk savings bonds indexed to inflation — are earning far more than a typical federally insured savings account or certificate of deposit.
New York Times
By Ann Carrns
May 3, 2022
https://www.nytimes.com/2022/05/03/business/inflation-bonds-rates.html
There’s not much good to say about inflation, with higher prices dogging consumers at the grocery store and the gas pump. But there is one bright spot: Government I bonds are earning eye-popping rates.
New I bonds — low-risk federal savings bonds indexed to inflation — issued through the end of October will earn an annualized rate of 9.62 percent for six months, the Treasury Department announced this week. The rate also applies to older I bonds that are still earning interest...
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>> nothing like BABYF <<
True, but Buffett owned a ton of 'one last puff cigar butt' type stocks, and many of them were smaller caps. So it isn't small caps per se that are the problem, as long as the investor is capable of fully analyzing the stock.
But therein lies the rub, because most investors just don't have the ability to do that sufficiently well. As that article said -- >> know-nothing investors should only buy “large and prosperous market leaders”. Know-something investors should buy any stock they want as long as it’s a bargain. <<
But hardly anyone is in the league of a Buffett or Peter Lynch, or even close. So I mainly stick with index funds and solid large caps, with an occasional small cap thrown in, albeit with a $1000 position limit. Most of the 'micros' I just follow out of general interest, and without having a position, and am increasingly leaning away from large caps too, in favor of the broad index.
Fwiw, my problem is 'staying the course', and holding through the inevitable volatility and bear markets. I just can't sit and watch solid profits evaporate, even knowing that the evaporation is only temporary. So it's a work in progress. As Buffett said, temperament is the key to successful investing - being able to ignore the market swings, sit calmly and 'do nothing'. A lot easier said than done.
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Several *reliable* sources (including WB himself) give Buffett's first stock investment as 6 shares of Cities Service pfd bought at $38 each when he was about 11 years old in 1942.
Early on, much of his money came from what you don't understand. He held numerous JOBS. He published and sold horse race tip sheets at Omaha's race track.
I can assure you he bought nothing like BABYF, an unprofitable foreign startup, in his youth.
Buffett was a microcap investor -
>>> Warren Buffett: How to Make 50% a Year in Micro Cap Stocks
Guru Focus
by Geoff Gannon
Jan 13, 2011
https://www.gurufocus.com/news/119442/warren-buffett-how-to-make-50-a-year-in-micro-cap-stocks
A French individual investor, Pierre, who sent in the wonderful CIFE idea, read the post where I mentioned two French micro caps, Precia and Poujoulat, and emailed me this:
“I own Precia shares since several years. I know Poujoulat, I've not invested in it because I think (maybe wrongly) that FCF generation is too low. Anyway, I'm impressed that you were able to find those 2 stocks which are not very well known. How did you do it? Did you use a screener (which one?) Or found them via a blog?”
I wish.
I’d love to have a good screener for French stocks. And I’d love to read a good French value investing blog.
But no. I started with the A’s.
I’m serious about this. And I say it all the time. But most readers seem to think I’m kind of sort of maybe joking a little about working my way alphabetically through an entire stock exchange.
I’m not.
I came to value investing through Ben Graham.
Here’s Walter Schloss on Ben Graham:
“When Ben was operating in the 1930s and 1940s, there were a lot of companies selling below their net working capital. Ben liked these stocks because they were obviously selling for less than they were worth but in most cases, one couldn’t get control of them and so, since they weren’t very profitable, no one wanted them. Most of the companies were controlled by the founders or their relatives and since the 30s was a poor period for business, the stocks remained depressed. What would bring about a change?
1. If the largest controlling stockholder died, the estate may want to sell control.
2. If business got better, then the company would make money.”
Notice Walter doesn’t say anything about liquidation. This is a common myth about Ben Graham and net/nets. Ben Graham did not buy net/nets because he thought they would liquidate. Ben Graham bought net/nets because he knew the businesses were selling for less than they were worth.
This is obvious with a private business.
If you put your private business up for sale, there will be no discussion of prices below the net current assets of the business. Private businesses are not bought and sold below their net current assets. So why should pieces of public businesses be bought and sold below their net current assets?
We can take this analogy further by looking at lenders. For over 2,000 years, it’s been pretty easy to borrow against net current assets. The character of the business owner and the quality and future prospects of the business itself have mattered very little to lenders who knew their loans were covered by cash, receivables, and inventories free of other obligations.
If buyers are willing to pay more than net current assets for almost any business regardless of its quality, and bankers are willing to lend up to net current assets for almost any business regardless of its quality, why shouldn’t investors buy pieces of every business selling below its net current assets?
Mostly, they do. Very, very few businesses sell for less than their net current assets. Almost all net/nets are micro caps.
Some people assume that means that there’s something peculiar about net/nets.
They’ve got it backwards. There’s something peculiar about micro caps.
Small stocks tend to be undervalued more often than large stocks.
As a rule: one share of a leading public company sells for very close to the pro-rata price a control buyer would pay for the entire business.
That’s not always true of what Ben Graham called secondary companies:
“The chief practical difference between the defensive and the enterprising investor is that the former limits himself to large and leading companies whereas the latter will buy any stock if his judgment and his technique tell him it is sufficiently attractive…The field of secondary stocks cannot be delimited precisely. It includes perhaps two thousand listed issues and many thousands more of unlisted ones which are not generally recognized as belonging in the category of ‘large and prosperous market leaders’…The intelligent investor can operate successfully in secondary common stocks provided he buys them only on a bargain basis.”
In other words, Graham is saying know-nothing investors should only buy “large and prosperous market leaders”. Know-something investors should buy any stock they want as long as it’s a bargain.
Ben Graham, Walter Schloss, and even Warren Buffett during his best years, all invested almost exclusively in secondary companies. They weren’t all micro caps. But almost none were blue chip stocks.
Warren Buffett made 50% plus returns in micro caps in the 1950s for his own account.
The stocks he invested in were extremely small, and extremely unknown.
A University of Kansas student asked Buffett about this in 2005:
“Question: According to a business week report published in 1999, you were quoted as saying: “It's a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that.”…would you say the same thing today?”
Here’s Buffett’s answer:
“Yes, I would still say the same thing today. In fact, we are still earning those types of returns on some of our smaller investments. The best decade was the 1950s; I was earning 50% plus returns with small amounts of capital. I could do the same thing today with smaller amounts. It would perhaps even be easier to make that much money in today's environment because information is easier to access.
You have to turn over a lot of rocks to find those little anomalies. You have to find the companies that are off the map - way off the map. You may find local companies that have nothing wrong with them at all. A company that I found, Western Insurance Securities, was trading for $3/share when it was earning $20/share! I tried to buy up as much of it as possible. No one will tell you about these businesses. You have to find them.
Other examples: Genesee Valley Gas, public utility trading at a P/E of 2, GEICO, Union Street Railway of New Bedford selling at $30 when $100/share is sitting in cash, high yield position in 2002. No one will tell you about these ideas, you have to find them.
The answer is still yes today that you can still earn extraordinary returns on smaller amounts of capital. For example, I wouldn't have had to buy issue after issue of different high yield bonds. Having a lot of money to invest forced Berkshire to buy those that were less attractive. With less capital, I could have put all my money into the most attractive issues and really creamed it.”
Pin that up on your wall.
Seriously.
There’s a lot in there that’s worth remembering. For instance, Buffett says: “it would perhaps even be easier to make that much money in today’s environment because information is easier to access.”
That’s what I mean about starting with the A’s. Buffett flipped through Moody’s Manuals. I’ve heard some people ask about what’s today’s modern day Moody’s Manual.
It’s the internet.
When I link to a foreign stock, I give you everything Buffett had in a Moody’s manual. I give you the company name (and stock exchange page), the Bloomberg symbol and snapshot, and the company’s annual report archive.
What more do you need?
But, the truth is, a lot of people will get to the place in this article where I’ll link to these pages for CIFE and Precia and Poujoulat and they’ll blow right by them. They won’t follow the links.
French micro caps are just too off the map for most people reading this article.
There’s no reason for that. None of these 3 businesses (roads, chimneys, or scales) are super complicated. Warren Buffett , Ben Graham, and Walter Schloss would at least glance at stocks like these.
Except of course: Warren Buffett, Ben Graham, and Walter Schloss didn’t invest abroad. But, then, they didn’t have the internet either.
We live in a time where information is a lot more heavily digested before it gets to us.
Most individual investors subsist on a steady diet of regurgitated data gruel.
You need to learn to forage if you want to be the next Warren Buffett , Ben Graham, or Walter Schloss.
No one told Ben Graham about Northern Pipe Line. He took the train from New York to Washington just so he could read the government reports.
Today, you don’t have to take the train. All you have to do to is click a mouse.
The difference in returns – for truly enterprising investors – comes from two things. One is attitude. That’s hard to teach.
The other is whether or not you click links like these when you see them:
Compagnie Industrielle et Financiere d'Entreprises (INFE:FP) – Reports
Poujoulat (ALPJT:FP) – Reports
Precia (PREC:FP)
The folks who click those links are going to end up with better returns than the folks who don’t. Not just because those are interesting stocks. You can miss out on any 3 interesting stocks. That’s not the end of the world.
But being the kind of investor who can hear me say: “here are 3 really interesting – not so well known – French micro caps” and then just move on to reading another article instead of clicking those links, someone like that isn’t going to be the next Warren Buffett or Ben Graham or Walter Schloss.
It’s like a kid who does a killer job writing in school, but never sits down at a keyboard outside of school.
That kid is never going to write as well as professional writers.
Ben Graham said investing was most successful when it was most businesslike.
That’s the simple answer to why you should start with the A’s.
It’s the most businesslike thing to do.
If you want to be businesslike about buying stocks, you need to make it your business to know the merchandise. That means looking on your own through foreign and domestic micro caps.
Just to make it clear how ignorant folks are who stick to big caps, I ran a screen on Morningstar to see exactly how much of the merchandise in the stock picking business falls into micro cap territory.
I called anything below $100 million a micro cap.
Morningstar says there are 6,260 domestic U.S. stocks. 2,871 of those are micro caps. That’s 46% of all U.S. stocks.
By ruling out stocks below $100 million, you’re limiting yourself to handicapping just 54% of all races. And you’re playing against probably 90% of professional handicappers.
Yikes.
Wouldn’t you rather bet just the 46% of races that only maybe 10% of professional investors spend their time on?
There’s a lot of talk in academic journals about value effects and size effects. Why do micro caps outperform big caps? Is it just value micro caps that outperform? Things like that.
What I can tell you from my experience – and what Warren Buffett and Ben Graham and Walter Schloss would tell you – is that there are far more obviously undervalued stocks among micro caps. There may be far more obviously overvalued ones too. Does that matter? Are you a growth investor? Are you indexing?
No. You’re a stock picker.
And the best stocks to pick from are secondary stocks. They can be micro caps in the U.S. or overseas. Generally, U.S. stocks of all sizes are more closely followed than foreign stocks of the same size – so it’s easiest to find bargains among foreign micro caps.
And what do I mean by bargains?
You don’t need to focus on just net current assets, or book value, or anything like that. Any appraisal method you use on big caps will work better on micro caps.
Trust me, it’s not like there’s just some strange book value phenomenon surrounding micro caps.
The outperformance of micro cap value stocks can be explained in one word: neglect.
I look for bargains among neglected stocks.
And almost all neglected stocks are micro caps.
If you go around appraising stocks on the basis of their net current assets, book value, enterprise value to EBIT, or enterprise value to free cash flow – trust me, you’ll find the real bargains among micro caps.
My definition of a real bargain is the same as Ben Graham’s. A stock should be selling for at least a 33% discount to what a pessimistic private buyer would pay for the whole business.
Graham liked to use net current assets. But you can apply this rule to any value ratio you like. If you think EV to EBIT is the holy grail of investing and you think 8 times EBIT is what a pessimistic private buyer would normally pay for a business, start by looking at micro caps trading for less than 5 times EBIT.
They’re out there.
In fact, if you clicked the links above, you already found one.
My point is that there’s no isolated low price-to-book phenomenon causing outperformance among micro cap value stocks. There’s a pervasive public value/private value disconnect that infects some micro caps.
It’s been around since Ben Graham’s time. And it means little pieces of micro caps – unlike big caps – sometimes sell for much, much less than a private buyer would pay for the entire business.
All you have to do is turn over rocks – go way off the map as Warren Buffett would say – and then appraise the stocks you find there.
All of this was in the original 1949 edition of Ben Graham’s Intelligent Investor.
That’s where Warren Buffett learned to make 50% a year in micro caps. He read The Intelligent Investor.
And then he applied what he learned to the U.S. stock market of the 1950s.
You have the worldwide stock market to play in. And a Moody’s Manual for every company.
You have the internet.
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Bar, Plant based organic baby food is definitely a promising niche. There are numerous companies already involved (list below), including Gerber (Nestle). So BABYF is in a promising niche, but whether they ultimately succeed as a company is another question,
You're right that investing in larger caps is by far the surer way to invest, but following some microcaps can be interesting and fun as a hobby.
Gerber Organic Baby Food
Beech Nut
Plum Organics
Peter Rabbit Organics
Happy Family Organics
Sprout Organic Baby Food
Ella's Kitchen Organic
Yumi
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A promising niche? LOLOL! Have you noticed that many BABYF fans were vigorously pumping dubious Israeli/Canadian MJ plays not long ago?.
Before baby/infant food there was OWCP... which is now down to .000001
Yes, it's a very lean time for junk stocks.
Bar, Yes, a bad time to be owning microcaps. Most of these tiny companies are not well capitalized, and having to raise money in the current environment can be a disaster. BABYF does occupy a promising niche, but most other aspects are negative right now.
On the stock allocation side, I was moving toward the buy/hold approach last year, using the S+P 500, but ended up selling everything at the end of 2021. Then got back in briefly a few times, but in early April decided to take refuge in cash/T-Bills and some laddered 1-3 year Treasuries. So luckily missed the bear market, but now the question is when to get back into stocks?
Fwiw, I started nibbling this week using SPY and VOO, but only 1 share/day. I figure it's a start, and will try to continue the purchases through the rest of the year, and then if the market really tanks and there is capitulation, will pile in with more. That's the current plan anyway. I'm figuring on a 25-30% stock allocation, but could go up to 50% if things get extremely cheap.
Nouriel Roubini makes the bear case -
>>> Stocks could drop 50%, Nouriel Roubini argues. Things will get much worse before they get better. <<<
https://investorshub.advfn.com/boards/read_msg.aspx?message_id=169308151
More from Roubini on the current economic landscape -
I'm not sure how discounted things are from their true value if interest rates continue to rise. I've bought some IJH, a mid cap index fund lately but that's my only addition. BRK looks tempting, but I already own plenty of it.
Notice how rubbish stock BABYF continues to fall? Off >50% in the past few weeks. It's a perfect example of everything I dislike in a stocks. Nothing redeeming at all.
Bar, Just curious if you have started to add to your long term stock positions, in light of the current market discounts? Seeing Buffett deploying his big cash hoard confirms that good bargains are appearing.
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BRK cash is likely well below $100 billion now with the recent OXY buys. Will be eager to see the next 13-f
Great stuff! Following it closely. Warren, Ted and Todd are having a good year with the overall market being down.
"Berkshire Seems Headed for a 20% Stake in Occidental"
"Berkshire Hathaway BRK.B –0.61% has rapidly increased its stake in Occidental Petroleum OXY –2.22% to 17.4% in recent trading sessions and seems headed toward a 20% interest that would allow Berkshire to reflect a proportional share of the big energy company’s earnings in its profits.
There is speculation that Berkshire Hathaway (Ticker BRK/A, BRK/B) is buying more Occidental Petroleum (OXY) stock Tuesday amid a sharp pullback in energy stocks keyed off a large decline in the price of oil. It held 163.4 million shares of Occidental on Friday."
https://www.barrons.com/articles/berkshire-hathaway-occidental-51657050441
>>> Here Are All 16 Stocks Warren Buffett Has Bought Since 2022 Began
Motley Fool
By Sean Williams
Jun 15, 2022
https://www.fool.com/investing/2022/06/15/16-stocks-warren-buffett-bought-since-2022-began/
KEY POINTS
Warren Buffett has created over $645 billion in value for shareholders since becoming CEO of Berkshire in 1965.
Big declines in the stock market have encouraged Buffett to pick up shares of these 16 companies.
The Oracle of Omaha has put more than $50 billion to work this year.
When Berkshire Hathaway (BRK.A 0.75%) (BRK.B 0.47%) CEO Warren Buffett buys a stock, Wall Street and investors wisely pay close attention. That's because riding the Oracle of Omaha's coattails has been a very profitable strategy for decades.
Since taking the reins as CEO in 1965, Buffett has overseen the creation of more than $645 billion in value for shareholders, as well as delivered an aggregate return on the company's Class A shares (BRK.A) of 3,641,613%. This works out to a 20.1% average annual return over 57 years, and is effectively double the annualized total return of the benchmark S&P 500, including dividends, over the same stretch.
Here's the full rundown of what Buffett has been buying
Aside from Berkshire Hathaway's annual shareholder meeting and the letter Buffett writes to shareholders each year, the most-anticipated event is the company's quarterly 13F filing with the Securities and Exchange Commission (SEC). A 13F gives investors an under-the-hood look at what the most successful money managers bought, sold, and held in the most-recent quarter. It's a required filing by money managers with at least $100 million in assets under management.
With all three of the major U.S. stock indexes entering correction territory or a bear market in the first quarter, Buffett and his investment team were quite busy. More than $50 billion in Berkshire's available capital has been put to work since the year began. Based on the company's mid-May 13F filing, as well as other SEC filings, Buffett has overseen the purchase of the following 16 stocks since 2022 began:
HP (HPQ 1.96%): 120,952,818 shares
Chevron (CVX -1.96%): 120,933,081
Paramount Global (PARA 0.95%): 68,947,760
Citigroup (C 3.52%): 55,155,797
Activision Blizzard (ATVI 0.95%): 49,657,101
Ally Financial (ALLY 2.20%): 8,969,420
Celanese (CE -1.34%): 7,880,998
Occidental Petroleum (OXY -2.92%): 5,887,618
Formula One Group (FWON.K 5.20%): 5,603,705
Floor & Décor (FND 1.65%): 3,936,291
Apple (AAPL 2.01%): 3,787,856
McKesson (MCK 0.38%): 2,921,975
General Motors (GM 2.95%): 2,045,847
Markel (MKL 0.20%): 420,293
RH (RH 2.04%): 353,453
Berkshire Hathaway: 2,005 BRK.A shares and 6,824,671 BRK.B shares
Value stocks are a Buffett specialty
If there's one prevailing theme with the vast majority of Buffett's buying activity through the first five months and change of 2022, it's that value is paramount (no pun intended given the purchase of shares of Paramount). Buying highly profitable, time-tested businesses at a discount has been the Oracle of Omaha's priority.
For instance, Berkshire Hathaway took a greater-than-11% stake in personal computing and printing solutions company HP. The growth heyday for HP has long since passed. But it remains exceptionally profitable and is valued at roughly eight times forecast earnings for this year and 2023. Consumer and enterprise demand for PCs doesn't vacillate much, which makes HP a relatively safe bet in a volatile market.
The same can be said for auto giant General Motors, which is trading at just five times Wall Street's forecast earnings for this year. Despite numerous headwinds, such as supply chain disruptions caused by the COVID-19 pandemic, General Motors looks to have a sizable growth runway thanks to the industry's ongoing shift to electric vehicles (EVs). GM plans to invest $35 billion in EVs, autonomous vehicles, and batteries through the midpoint of the decade.
Banks and energy stocks are back in focus
It's no secret that the Buffett aligns Berkshire Hathaway's portfolio to take advantage of cyclical upswings in the U.S. and global economy. After all, economic expansions last disproportionately longer than recessions. This is why banks and energy stocks have been popular buys for Buffett in 2022.
Although it's possibly the least-loved money-center bank, Buffett and his team piled into Citigroup during the first quarter. While Citi does have international headwinds and has faced its fair share of litigation, the company also happens to be one of the cheapest relative to book value among big-bank stocks. With higher interest rates on the horizon, banks are set to enjoy a windfall of added net interest income from outstanding variable-rate loans.
As for energy stocks, Buffett's enormous bets on Chevron and Occidental Petroleum likely signify his expectation that oil and natural gas prices will remain elevated for some time. A lack of upstream investment during the pandemic, coupled with supply disruption tied to Russia's invasion of Ukraine, should allow integrated oil and gas companies like Chevron and Occidental to reap the rewards of multidecade highs for oil and natural gas.
There can never be enough Apple
Buffett's buying activity to begin 2022 also included adding more Apple shares. As of the end of last week, Apple made up a whopping 38.2% of Berkshire's invested assets.
Buffett views Apple as one of Berkshire's pillars and value determinants. It's also a company that checks all the appropriate boxes in his eyes. It has an extremely well-known brand, as well as highly loyal customer base, and its innovation has driven the company to successively higher sales and profits. As of the first quarter, Counterpoint Research notes that the iPhone accounted for half of all smartphone share in the United States.
But Apple is also a company in transition. CEO Tim Cook is overseeing an operating shift that places added emphasis on subscription services. As subscription revenue grows into a larger percentage of total sales, Apple should benefit from higher margins, an even more loyal customer base, and less revenue lumpiness associated with product replacement cycles.
I'd also be remiss if I didn't point out that Apple has repurchased nearly $500 billion worth of its common stock since the beginning of 2013. Having a sizable capital return program is an easy way to get on Buffett's good side.
Buffett's favorite company is, arguably, his own
But perhaps the least surprising Buffett buy of all -- and one you won't find in the 13F filing -- is that of his own company. Berkshire Hathaway's first-quarter results show that Buffett and his right-hand man, Charlie Munger, oversaw the repurchase of 2,005 Class A shares and more than 6.8 million Class B shares.
Following more than a half-decade without any stock buybacks, Buffett and Munger have had a field day since Berkshire's board of directors changed the necessary parameters for share repurchases. Since mid-July 2018, over $61 billion worth of Berkshire Hathaway stock has been bought back.
As a reminder, repurchasing stock often has a positive impact on the value of a company's remaining shares. If a company's net income is steady or growing over time, having fewer shares outstanding should result in higher earnings per share. Thus, share buybacks can make a company appear more attractive on a valuation basis.
<<<
---
What does NEAM own? Mostly AAPL, USB and BAC
"New England Asset Management Limited is regulated by the Central Bank of Ireland. NEAM is a wholly-owned subsidiary of General Re Corporation.
General Re Corporation, a subsidiary of Berkshire Hathaway Inc., is a holding company for global reinsurance and related operations that operates under the brand name of Gen Re."
https://whalewisdom.com/filer/general-re-new-england-asset-management-inc
"Buffett has an under-the-radar $6.3 billion investment portfolio"
"Nearly 24 years ago, on June 19, 1998, Berkshire Hathaway announced its intention to acquire global reinsurance company General Re for $22 billion. While General Re's reinsurance segment was the company's shining star that encouraged Buffett to make the acquisition, it also had a specialized investment services segment known as New England Asset Management (NEAM). "
"At the end of March, NEAM's SEC filing showed that the company had $6.31 billion in managed assets invested across 161 securities. I say "securities" and not stocks because some of these 161 investments include index funds, exchange-traded funds, and preferred stock."
"Although Warren Buffett isn't involved in the investment decision-making process for New England Asset Management, whatever NEAM buys, parent company Berkshire Hathaway ultimately owns. Thus, Warren Buffett has a $6.3 billion "hidden" investment portfolio that, technically, is hanging out in plain view for the world to see."
https://www.fool.com/investing/2022/06/03/warren-buffett-has-a-hidden-63-billion-portfolio/
Barron's calls PARA, "an exceedingly cheap stock in the media industry."
"Buffet Makes Big Bet on Paramount, Giving Stock a Boost"
"Berkshire Hathaway’s Warren Buffett bought a whopping $51 billion of stocks in the first quarter, as the broad stock market tumbled. His contrarian moves included a big bet on Paramount Global, an exceedingly cheap stock in the media industry.
Berkshire Hathaway (ticker: BRK.A, BRK.B) revealed in a regulatory filing on Monday that it owned about 69 million nonvoting shares of Paramount (PARA) at the end of March. That 10.6% stake would be worth about $2.2 billion at Tuesday midday’s $31.90 per share, up 14%."
[note: I own BRK, but not PARA]
https://www.barrons.com/articles/buffet-berkshire-hathaway-paramount-stock-51652806634
...
Very interesting. Still mystified by the exit from most of the Wells Fargo stake prior to the big recovery, and will never understand BRK dumping JP Morgan Chase (JPM) when they did. BAC has been a tremendous investment
"Berkshire takes 2.5% stake in Citi in Q1, exits Wells Fargo"
"Berkshire Hathaway (BRK.B) (BRK.A), the investment giant built by Warren Buffett, disclosed a new stake in Citigroup (NYSE:C) with ~55.2M shares, amounting to ~2.5% of Citi's outstanding shares, it acquired in the first quarter of 2022, according to Berkshire's 13F filing."
https://seekingalpha.com/news/3839678-berkshire-hathaway-takes-25-stake-in-citi-in-q1-exits-wells-fargo
Why are they commenting on bitcoin.. do they think they know enough? I mean the basic rule they follow is don't invest in what you don't understand. So they understand enough to trash it?
I do like the explanation that its not always Buffett making stock picks and at this point some might be picked without them knowing anything about the company. That would explain the small crypto bank investment they have.
A complete guide to everything BRK
Including this gem:
Diet: Likes steaks, and eats candies from See's, which Berkshire owns. Estimates that one-fourth of his caloric intake comes from Coca-Cola Co, a longtime Berkshire investment.
Employees: 371,653
Employees in main office: 26, including Buffett
https://www.reuters.com/business/warren-buffett-berkshire-hathaway-glance-2022-04-28/
What happens to BRK holdings of ATVI if acquisition by MSFT actually closes?
LOL! Hope you caught everything this am on CNBC, including Mario Gabelli. Jimmy Buffett and Bill Murray are there and will be on tomorrow.
PC, You revving up your private jet and heading to Omaha? Last year I watched the entire Q&A session... about 5 hours long. Pre-show starts at 9:45A ET April 30
Click to watch:
https://www.cnbc.com/brklive22/
Main advantage is class A has more voting power which means almost nothing currently, as long as Buffett lives and has control of the company,
I'm not aware that one class gets extra goodies at the SHM, Don't think so.
"How Many Berkshire Hathaway Shares Are There?
"There are 619,940 Class A (BRK.A) shares and 1.3 billion Class B (BRK.B) shares outstanding."
brkA get anything extra? One can dream...
BRK's Nebraska Furniture Mart SH Promo
"Our Berkshire sale will take place this year starting on, Wednesday, April 20 – Tuesday, May 3
Check back soon for additional sale updates and information."
"What can I use to prove shareholder status?
* A statement from an investment account showing you own Berkshire stock
* Stock certificate
* A copy of an e-mail or direct mail from us about this* year's sale
* Any previous years' shareholder badge
https://www.nfm.com/berkshire/?utm_source=DoubleClick&utm_content=BerkshireV1-Q2-22&utm_medium=display&utm_campaign=Remarketing
With BRK up 31% in past 12 months vs 9% for the S&P, its SHM will be a joyous party. Perhaps too crowded.
Not this year but always looking for good trip ideas. BRK SHM sounds like it could be fun. Thanks good advice
Not like a raffle, but it may be nearly too late to get tickets. Are you thinking of attending in Omaha? I've never gone mainly because it's not easy to get to Omaha from where I live.
Besides, it's easy to watch all or part of the SHM online live or afterwards. https://www.cnbc.com/brklive22/
As a geezer myself, I'm impressed with ability of both "boys" to sit and talk -- and drink Coke products -- for hours with nary a potty break. Munger, at 98, can hold a scowl for hours, especially when bitcoins and gamified trading apps are discussed.
The SHM meeting always includes a lengthy Q&A session with Buffett and Munger. You'll become a better investor by seeing it. And there will be some surprises.
Is like a raffle where I have better odds of getting invited if I have more shares? Omaha could be a fun trip
Be aware that owning even one share of either BRK stock class can get you tickets to the upcoming SHM in Omaha on April 30. (check on the deadline for that) There are also some shareholder discounts on products. Perhaps even from Geico Insurance and Nebraska Furniture Mart. Haven't checked on that lately. The deals come and go.
Ha ha! Don't think you'll get a discount at DQ. That's one I'd use often.
My concern was mostly that those two people won't be managing for next few decades. I started accumulating some BRK.B for holding
What a brilliant holding BRK has been for several years. I have about 17 individual stocks, plus index funds. BRK has been the best performer over most recent time frames. YTD, which includes the Ukraine war and the supply/chip bottlenecks, BRK is roughly tied for first place with fellow insurer, TRV.
I'll be watching the SHM from beginning to end.
My guess is that his one came from one of the super "T's", either Ted Weschler or Todd Combs. Buffett's decision to bring both of them on and move them to Omaha (they both profess to absolutely love Omaha) was brilliant. And when Buffett is gone they will keep right on going after being there with him for so many years. The best modern day buy on BRK shares may come on an ill-advised sell down of BRK shares when Warren passes, as BRK will not skip a beat in terms of core intrinsic value.
Full WSJ article on HP deal:
"Warren Buffett’s Berkshire Hathaway Inc. BRK.B -0.32% has built a stake of more than 11% in computer-and-printer maker HP Inc., HPQ +15.37% marking another foray into computing by the once technology-averse billionaire investor.
At Wednesday’s closing share price the holding, of nearly 121 million shares, was worth about $4.2 billion. The share purchases were disclosed in two securities filings Wednesday.
After long expressing wariness about investing in tech, the 91-year-old Mr. Buffett has taken big positions in two other storied tech brands in recent years, starting with an ill-fated bet on International Business Machines Corp. before making a far more successful investment in Apple Inc. AAPL -0.40%
Berkshire began betting on IBM IBM -1.65% in 2011 but within a few years had reversed course and had sold out most of its stake by early 2018. Mr. Buffett’s colleagues first took a $1 billion toehold in Apple in 2016, and since then Berkshire has increased its stake, to nearly 5.6% as of the end of 2021. The Apple position was worth some $161 billion at the end of last year and is among Berkshire’s biggest holdings.
HP shares rose 11% in early premarket trading Thursday. Berkshire’s Class B shares were down 0.4%.
The purchase makes Berkshire the single largest shareholder in HP. Before this, HP’s biggest investors were Vanguard Group and BlackRock Inc., with stakes of nearly 11% and slightly more than 10%, respectively, according to S&P Global Market Intelligence data.
The Omaha, Neb.-based conglomerate has made a string of investments this year in more traditional sectors of the economy. It agreed to buy the insurer Alleghany Corp. for about $11.6 billion last month, and recently boosted its position in Occidental Petroleum Corp. to nearly 15%.
The deals add to Berkshire’s array of railroad, energy and consumer businesses, among other holdings. It reported $90 billion in net earnings for 2021, a record.
“Whatever our form of ownership, our goal is to have meaningful investments in businesses with both durable economic advantages and a first-class CEO,” Mr. Buffett said in a letter to shareholders in February. “We own stocks based upon our expectations about their long-term business performance and not because we view them as vehicles for timely market moves.”
Palo Alto, Calif.-based HP lifted its annual profit outlook in late February. It reported strong sales of computers to businesses in the first three months of its financial year but warned that Russia’s invasion of Ukraine would dent its second quarter.
Last month, the company agreed to buy Poly, a maker of workplace communications products, for $1.7 billion in a bet on the rise of hybrid work.
While HP is synonymous with Silicon Valley, the company looks more like a classic Buffett investment than many tech startups. Although HP’s share price hit a record close last month, the stock remains modestly valued when set against its expected earnings. It trades at a price of about eight times expected earnings for the next 12 months, Refinitiv data shows.
HP also has a long history, dating back to 1939 when predecessor Hewlett-Packard Co. was founded in a Palo Alto garage. That company split in two in 2015, with its business-focused division becoming the separately traded Hewlett Packard Enterprise Co."
https://www.wsj.com/articles/warren-buffetts-berkshire-hathaway-reveals-4-billion-stake-in-hp-11649324639
Had to research HP which split in two in 2015. You are correct that BRK is buying HPQ, not the HPE company. HPQ is the consumer hardware portion of the old company, PCs and printers; HPE is more enterprise and cloud focused.
HPQ (market cap 45 b) sells at 7.4 PE while HPE (market cap 20 billion) has a PE of 5.6. Both pay dividends of around 3.0%.
Got anything to add? I know very little about both firms.
This is a "wow" move for Buffett and BRK. HPQ has a 3% divi and trades at very favorable PE of 6.4 prior to the announcement and runup this am..
Consistent? Like with the same two people running it for decades, and the same core business, Insurance? And with the two execs making the same wage... $100,000 a year.
They could pay dividends TODAY but their internal surveys have always shown that about 90% of BRK shareholders -- often rich old geezers -- prefer if the firm's considerable profits are manifested as lower taxed long term capital gains (the taxation of which can be wiped out at death).
Watch the BRK SHM in a few weeks and see 40,000 utterly thrilled shareholders. Or go to the Omaha airport and see all the private jets lined up.
--
What's with BRK buying a considerable chunk of HP? Will he seek full or partial control of it? That will be interesting to see.
Woohoo now they just need to stay consistent for a few decades and I'll be happy. What stops them from issuing dividends once Munger and Buffett are no longer on the board?
Maybe he doesn't know but he is investing in photonics (silicon photonics)
"Berkshire Hathaway Builds New $4.2B HP Stake"
"(Bloomberg) -- Warren Buffett’s Berkshire Hathaway Inc. bought a stake in HP Inc. valued at more than $4.2 billion. Shares of the laptop maker surged as much as 10%."
"Berkshire bought some of the stock earlier this week in multiple transactions and now holds an investment of about 121 million shares in the computer company, according to a regulatory filing Wednesday.
Berkshire has increasingly been finding ways to put its money to work, "
https://finance.yahoo.com/news/buffett-berkshire-hathaway-builds-4-002931676.html
Damn brilliant visualization of BRK's passive investment portfolio since 1994. Wholly owned subs, like the BNSF and Geico, aren't shown. Click on video to get it moving. Thanks go to Ferda for posting it first on IHUB.
https://www.reddit.com/r/dataisbeautiful/comments/tou7v2/oc_warren_buffetts_2022_portfolio_update_at/
>>> Here's the secret message from Warren Buffett's newest big deals
Yahoo Finance
by Brian Sozzi
March 21, 2022
https://finance.yahoo.com/news/heres-the-secret-message-from-warren-buffetts-newest-big-deals-155340753.html
Warren Buffett has come out of hibernation in March to make some eye-popping deals, sending a clear sign to investors more broadly, says Baird strategist Michael Antonelli.
"Buffett [is] doing Buffett things. I think it reminds me and should remind [everyone] that the world is still spinning. Companies are still planning for the future, and they are still doing the things that make them great companies," Antonelli said on Yahoo Finance Live.
Indeed, Buffett's brain appears to be spinning overtime right now.
The 91-year-old billionaire investor revealed Monday that his Berkshire Hathaway will spend $11.6 billion to buy insurance company Alleghany. The deal will expand Buffett's insurance empire further beyond auto insurance player Geico and reinsurance beast Gen Re (General Reinsurance Corporation).
“Berkshire will be the perfect permanent home for Alleghany, a company that I have closely observed for 60 years," Buffett said in a statement.
Alleghany hauled in more than $12 billion in sales last year and $1.1 billion in net earnings.
Shares of Alleghany skyrocketed 25% on the news. The stock was among the top three trending tickers on Yahoo Finance.
While dipping into the insurance space, Buffett has also gone shopping for energy names amid soaring crude oil prices in the wake of the Russia-Ukraine crisis.
Buffett scooped up another 18.1 million shares of Occidental for close to $1 billion last week. The latest purchases come hot on the heels of Berkshire spending $6 billion or so in the prior two weeks to buy up Occidental shares.
Berkshire now owns nearly 14.6% of Occidental Petroleum through his roughly 140 million shares.
"What these deals tell me is that animal spirits are still alive," Antonelli adds.
<<<
>>> Here's what Warren Buffett's favorite stock market indicator is saying now
Yahoo Finance
by Brian Sozzi
March 17, 2022
https://finance.yahoo.com/news/heres-what-warren-buffetts-favorite-stock-market-indicator-is-saying-now-174656238.html
Stocks have endured a terrible start to the year as investors fret about soaring inflation and the Russia-Ukraine war — but the pullback still doesn't look like a great buying opportunity per a tried and true measure used by legendary investor Warren Buffett.
The “Buffett Indicator” as it’s called by legions of devotees — which takes the Wilshire 5000 Index (viewed as the total stock market) and divides it by the annual U.S. GDP — is still hovering around a record high even as stock prices are well off their record levels.
In looking at the numbers, the Buffett Indicator stands at about 168.1% — down sharply from highs above 202% in August 2021, per data from GuruFocus.
“The stock market is significantly overvalued according to the Buffett Indicator,” said researchers at GuruFocus. “Based on the historical ratio of total market cap over GDP (currently at 168.1%), it is likely to return 0% a year from this level of valuation, including dividends.”
The Buffett Indicator rose to fame after a 2001 Fortune Magazine article written by Buffett and long-time Fortune writer and Buffett insider Carol Loomis.
“The ratio has certain limitations in telling you what you need to know. Still, it is probably the best single measure of where valuations stand at any given moment,” explained Buffett in the article.
Seeing the Buffett Indicator still in significantly overvalued territory is interesting for a few reasons.
First, stocks have been walloped in 2022.
The S&P 500 entered Thursday's session down 10.6% for the year. That is the sixth worst start to a year for the S&P 500 ever, says strategists at LPL Financial. Further, household names such as Meta (down 39%) and Netflix (down 40%) have been pummeled.
And secondarily, Buffett himself is out there buying shares during this potential period of overvaluation.
The billionaire investor has been adding to his stake in oil giant Occidental Petroleum this month ahead of a key analyst day next week. Buffett just scooped up 18.1 million additional shares of Occidental, giving him a 14.6% stake in the company.
Shares of Occidental are up 98% year-to-date in part fueled by Buffett's involvement.
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Buffett Indicator - >>> Warren Buffett On The Stock Market
What's in the future for investors--another roaring bull market or more upset stomach? Amazingly, the answer may come down to three simple factors. Here, the world's most celebrated investor talks about what really makes the market tick--and whether that ticking should make you nervous.
Fortune Magazine
By Warren Buffett; Carol Loomis
December 10, 2001
https://archive.fortune.com/magazines/fortune/fortune_archive/2001/12/10/314691/index.htm
(FORTUNE Magazine) – Two years ago, following a July 1999 speech by Warren Buffett, chairman of Berkshire Hathaway, on the stock market--a rare subject for him to discuss publicly--FORTUNE ran what he had to say under the title "Mr. Buffett on the Stock Market" (Nov. 22, 1999). His main points then concerned two consecutive and amazing periods that American investors had experienced, and his belief that returns from stocks were due to fall dramatically. Since the Dow Jones Industrial Average was 11194 when he gave his speech and recently was about 9900, no one yet has the goods to argue with him.
So where do we stand now--with the stock market seeming to reflect a dismal profit outlook, an unfamiliar war, and rattled consumer confidence? Who better to supply perspective on that question than Buffett?
The thoughts that follow come from a second Buffett speech, given last July at the site of the first talk, Allen & Co.'s annual Sun Valley bash for corporate executives. There, the renowned stockpicker returned to the themes he'd discussed before, bringing new data and insights to the subject. Working with FORTUNE's Carol Loomis, Buffett distilled that speech into this essay, a fitting opening for this year's Investor's Guide. Here again is Mr. Buffett on the Stock Market.
The last time I tackled this subject, in 1999, I broke down the previous 34 years into two 17-year periods, which in the sense of lean years and fat were astonishingly symmetrical. Here's the first period. As you can see, over 17 years the Dow gained exactly one-tenth of one percent.
Dow Jones Industrial Average
ï Dec. 31, 1964: 874.12
ï Dec. 31, 1981: 875.00
And here's the second, marked by an incredible bull market that, as I laid out my thoughts, was about to end (though I didn't know that).
Dow Jones Industrial Average
ï Dec. 31, 1981: 875.00
ï Dec. 31, 1998: 9181.43
Now, you couldn't explain this remarkable divergence in markets by, say, differences in the growth of gross national product. In the first period--that dismal time for the market--GNP actually grew more than twice as fast as it did in the second period.
Gain in Gross National Product
ï 1964-1981: 373%
ï 1981-1988: 177%
So what was the explanation? I concluded that the market's contrasting moves were caused by extraordinary changes in two critical economic variables--and by a related psychological force that eventually came into play.
Here I need to remind you about the definition of "investing," which though simple is often forgotten. Investing is laying out money today to receive more money tomorrow.
That gets to the first of the economic variables that affected stock prices in the two periods--interest rates. In economics, interest rates act as gravity behaves in the physical world. At all times, in all markets, in all parts of the world, the tiniest change in rates changes the value of every financial asset. You see that clearly with the fluctuating prices of bonds. But the rule applies as well to farmland, oil reserves, stocks, and every other financial asset. And the effects can be huge on values. If interest rates are, say, 13%, the present value of a dollar that you're going to receive in the future from an investment is not nearly as high as the present value of a dollar if rates are 4%.
So here's the record on interest rates at key dates in our 34-year span. They moved dramatically up--that was bad for investors--in the first half of that period and dramatically down--a boon for investors--in the second half.
Interest rates, Long-term government bonds
ï Dec. 31, 1964: 4.20%
ï Dec. 31, 1981: 13.65%
ï Dec. 31, 1998: 5.09%
The other critical variable here is how many dollars investors expected to get from the companies in which they invested. During the first period expectations fell significantly because corporate profits weren't looking good. By the early 1980s Fed Chairman Paul Volcker's economic sledgehammer had, in fact, driven corporate profitability to a level that people hadn't seen since the 1930s.
The upshot is that investors lost their confidence in the American economy: They were looking at a future they believed would be plagued by two negatives. First, they didn't see much good coming in the way of corporate profits. Second, the sky-high interest rates prevailing caused them to discount those meager profits further. These two factors, working together, caused stagnation in the stock market from 1964 to 1981, even though those years featured huge improvements in GNP. The business of the country grew while investors' valuation of that business shrank!
And then the reversal of those factors created a period during which much lower GNP gains were accompanied by a bonanza for the market. First, you got a major increase in the rate of profitability. Second, you got an enormous drop in interest rates, which made a dollar of future profit that much more valuable. Both phenomena were real and powerful fuels for a major bull market. And in time the psychological factor I mentioned was added to the equation: Speculative trading exploded, simply because of the market action that people had seen. Later, we'll look at the pathology of this dangerous and oft-recurring malady.
Two years ago I believed the favorable fundamental trends had largely run their course. For the market to go dramatically up from where it was then would have required long-term interest rates to drop much further (which is always possible) or for there to be a major improvement in corporate profitability (which seemed, at the time, considerably less possible). If you take a look at a 50-year chart of after-tax profits as a percent of gross domestic product, you find that the rate normally falls between 4%--that was its neighborhood in the bad year of 1981, for example--and 6.5%. For the rate to go above 6.5% is rare. In the very good profit years of 1999 and 2000, the rate was under 6% and this year it may well fall below 5%.
So there you have my explanation of those two wildly different 17-year periods. The question is, How much do those periods of the past for the market say about its future?
To suggest an answer, I'd like to look back over the 20th century. As you know, this was really the American century. We had the advent of autos, we had aircraft, we had radio, TV, and computers. It was an incredible period. Indeed, the per capita growth in U.S. output, measured in real dollars (that is, with no impact from inflation), was a breathtaking 702%.
The century included some very tough years, of course--like the Depression years of 1929 to 1933. But a decade-by-decade look at per capita GNP shows something remarkable: As a nation, we made relatively consistent progress throughout the century. So you might think that the economic value of the U.S.--at least as measured by its securities markets--would have grown at a reasonably consistent pace as well.
That's not what happened. We know from our earlier examination of the 1964-98 period that parallelism broke down completely in that era. But the whole century makes this point as well. At its beginning, for example, between 1900 and 1920, the country was chugging ahead, explosively expanding its use of electricity, autos, and the telephone. Yet the market barely moved, recording a 0.4% annual increase that was roughly analogous to the slim pickings between 1964 and 1981.
Dow Industrials
ï Dec. 31, 1899: 66.08
ï Dec. 31, 1920: 71.95
In the next period, we had the market boom of the '20s, when the Dow jumped 430% to 381 in September 1929. Then we go 19 years--19 years--and there is the Dow at 177, half the level where it began. That's true even though the 1940s displayed by far the largest gain in per capita GDP (50%) of any 20th-century decade. Following that came a 17-year period when stocks finally took off--making a great five-to-one gain. And then the two periods discussed at the start: stagnation until 1981, and the roaring boom that wrapped up this amazing century.
To break things down another way, we had three huge, secular bull markets that covered about 44 years, during which the Dow gained more than 11,000 points. And we had three periods of stagnation, covering some 56 years. During those 56 years the country made major economic progress and yet the Dow actually lost 292 points.
How could this have happened? In a flourishing country in which people are focused on making money, how could you have had three extended and anguishing periods of stagnation that in aggregate--leaving aside dividends--would have lost you money? The answer lies in the mistake that investors repeatedly make--that psychological force I mentioned above: People are habitually guided by the rear-view mirror and, for the most part, by the vistas immediately behind them.
The first part of the century offers a vivid illustration of that myopia. In the century's first 20 years, stocks normally yielded more than high-grade bonds. That relationship now seems quaint, but it was then almost axiomatic. Stocks were known to be riskier, so why buy them unless you were paid a premium?
And then came along a 1924 book--slim and initially unheralded, but destined to move markets as never before--written by a man named Edgar Lawrence Smith. The book, called Common Stocks as Long Term Investments, chronicled a study Smith had done of security price movements in the 56 years ended in 1922. Smith had started off his study with a hypothesis: Stocks would do better in times of inflation, and bonds would do better in times of deflation. It was a perfectly reasonable hypothesis.
But consider the first words in the book: "These studies are the record of a failure--the failure of facts to sustain a preconceived theory." Smith went on: "The facts assembled, however, seemed worthy of further examination. If they would not prove what we had hoped to have them prove, it seemed desirable to turn them loose and to follow them to whatever end they might lead."
Now, there was a smart man, who did just about the hardest thing in the world to do. Charles Darwin used to say that whenever he ran into something that contradicted a conclusion he cherished, he was obliged to write the new finding down within 30 minutes. Otherwise his mind would work to reject the discordant information, much as the body rejects transplants. Man's natural inclination is to cling to his beliefs, particularly if they are reinforced by recent experience--a flaw in our makeup that bears on what happens during secular bull markets and extended periods of stagnation.
To report what Edgar Lawrence Smith discovered, I will quote a legendary thinker--John Maynard Keynes, who in 1925 reviewed the book, thereby putting it on the map. In his review, Keynes described "perhaps Mr. Smith's most important point ... and certainly his most novel point. Well-managed industrial companies do not, as a rule, distribute to the shareholders the whole of their earned profits. In good years, if not in all years, they retain a part of their profits and put them back in the business. Thus there is an element of compound interest (Keynes' italics) operating in favor of a sound industrial investment."
It was that simple. It wasn't even news. People certainly knew that companies were not paying out 100% of their earnings. But investors hadn't thought through the implications of the point. Here, though, was this guy Smith saying, "Why do stocks typically outperform bonds? A major reason is that businesses retain earnings, with these going on to generate still more earnings--and dividends, too."
That finding ignited an unprecedented bull market. Galvanized by Smith's insight, investors piled into stocks, anticipating a double dip: their higher initial yield over bonds, and growth to boot. For the American public, this new understanding was like the discovery of fire.
But before long that same public was burned. Stocks were driven to prices that first pushed down their yield to that on bonds and ultimately drove their yield far lower. What happened then should strike readers as eerily familiar: The mere fact that share prices were rising so quickly became the main impetus for people to rush into stocks. What the few bought for the right reason in 1925, the many bought for the wrong reason in 1929.
Astutely, Keynes anticipated a perversity of this kind in his 1925 review. He wrote: "It is dangerous...to apply to the future inductive arguments based on past experience, unless one can distinguish the broad reasons why past experience was what it was." If you can't do that, he said, you may fall into the trap of expecting results in the future that will materialize only if conditions are exactly the same as they were in the past. The special conditions he had in mind, of course, stemmed from the fact that Smith's study covered a half century during which stocks generally yielded more than high-grade bonds.
The colossal miscalculation that investors made in the 1920s has recurred in one form or another several times since. The public's monumental hangover from its stock binge of the 1920s lasted, as we have seen, through 1948. The country was then intrinsically far more valuable than it had been 20 years before; dividend yields were more than double the yield on bonds; and yet stock prices were at less than half their 1929 peak. The conditions that had produced Smith's wondrous results had reappeared--in spades. But rather than seeing what was in plain sight in the late 1940s, investors were transfixed by the frightening market of the early 1930s and were avoiding re-exposure to pain.
Don't think for a moment that small investors are the only ones guilty of too much attention to the rear-view mirror. Let's look at the behavior of professionally managed pension funds in recent decades. In 1971--this was Nifty Fifty time--pension managers, feeling great about the market, put more than 90% of their net cash flow into stocks, a record commitment at the time. And then, in a couple of years, the roof fell in and stocks got way cheaper. So what did the pension fund managers do? They quit buying because stocks got cheaper!
Private Pension Funds % of cash flow put into equities
ï 1971: 91% (record high)
ï 1974: 13%
This is the one thing I can never understand. To refer to a personal taste of mine, I'm going to buy hamburgers the rest of my life. When hamburgers go down in price, we sing the "Hallelujah Chorus" in the Buffett household. When hamburgers go up, we weep. For most people, it's the same way with everything in life they will be buying--except stocks. When stocks go down and you can get more for your money, people don't like them anymore.
That sort of behavior is especially puzzling when engaged in by pension fund managers, who by all rights should have the longest time horizon of any investors. These managers are not going to need the money in their funds tomorrow, not next year, nor even next decade. So they have total freedom to sit back and relax. Since they are not operating with their own funds, moreover, raw greed should not distort their decisions. They should simply think about what makes the most sense. Yet they behave just like rank amateurs (getting paid, though, as if they had special expertise).
In 1979, when I felt stocks were a screaming buy, I wrote in an article, "Pension fund managers continue to make investment decisions with their eyes firmly fixed on the rear-view mirror. This generals-fighting-the-last-war approach has proved costly in the past and will likely prove equally costly this time around." That's true, I said, because "stocks now sell at levels that should produce long-term returns far superior to bonds."
Consider the circumstances in 1972, when pension fund managers were still loading up on stocks: The Dow ended the year at 1020, had an average book value of 625, and earned 11% on book. Six years later, the Dow was 20% cheaper, its book value had gained nearly 40%, and it had earned 13% on book. Or as I wrote then, "Stocks were demonstrably cheaper in 1978 when pension fund managers wouldn't buy them than they were in 1972, when they bought them at record rates."
At the time of the article, long-term corporate bonds were yielding about 9.5%. So I asked this seemingly obvious question: "Can better results be obtained, over 20 years, from a group of 9.5% bonds of leading American companies maturing in 1999 than from a group of Dow-type equities purchased, in aggregate, around book value and likely to earn, in aggregate, about 13% on that book value?" The question answered itself.
Now, if you had read that article in 1979, you would have suffered--oh, how you would have suffered!--for about three years. I was no good then at forecasting the near-term movements of stock prices, and I'm no good now. I never have the faintest idea what the stock market is going to do in the next six months, or the next year, or the next two.
But I think it is very easy to see what is likely to happen over the long term. Ben Graham told us why: "Though the stock market functions as a voting machine in the short run, it acts as a weighing machine in the long run." Fear and greed play important roles when votes are being cast, but they don't register on the scale.
By my thinking, it was not hard to say that, over a 20-year period, a 9.5% bond wasn't going to do as well as this disguised bond called the Dow that you could buy below par--that's book value--and that was earning 13% on par.
Let me explain what I mean by that term I slipped in there, "disguised bond." A bond, as most of you know, comes with a certain maturity and with a string of little coupons. A 6% bond, for example, pays a 3% coupon every six months.
A stock, in contrast, is a financial instrument that has a claim on future distributions made by a given business, whether they are paid out as dividends or to repurchase stock or to settle up after sale or liquidation. These payments are in effect "coupons." The set of owners getting them will change as shareholders come and go. But the financial outcome for the business' owners as a whole will be determined by the size and timing of these coupons. Estimating those particulars is what investment analysis is all about.
Now, gauging the size of those "coupons" gets very difficult for individual stocks. It's easier, though, for groups of stocks. Back in 1978, as I mentioned, we had the Dow earning 13% on its average book value of $850. The 13% could only be a benchmark, not a guarantee. Still, if you'd been willing then to invest for a period of time in stocks, you were in effect buying a bond--at prices that in 1979 seldom inched above par--with a principal value of $891 and a quite possible 13% coupon on the principal.
How could that not be better than a 9.5% bond? From that starting point, stocks had to outperform bonds over the long term. That, incidentally, has been true during most of my business lifetime. But as Keynes would remind us, the superiority of stocks isn't inevitable. They own the advantage only when certain conditions prevail.
Let me show you another point about the herd mentality among pension funds--a point perhaps accentuated by a little self-interest on the part of those who oversee the funds. In the table below are four well-known companies--typical of many others I could have selected--and the expected returns on their pension fund assets that they used in calculating what charge (or credit) they should make annually for pensions.
Now, the higher the expectation rate that a company uses for pensions, the higher its reported earnings will be. That's just the way that pension accounting works--and I hope, for the sake of relative brevity, that you'll just take my word for it.
As the table shows, expectations in 1975 were modest: 7% for Exxon, 6% for GE and GM, and under 5% for IBM. The oddity of these assumptions is that investors could then buy long-term government noncallable bonds that paid 8%. In other words, these companies could have loaded up their entire portfolio with 8% no-risk bonds, but they nevertheless used lower assumptions. By 1982, as you can see, they had moved up their assumptions a little bit, most to around 7%. But now you could buy long-term governments at 10.4%. You could in fact have locked in that yield for decades by buying so-called strips that guaranteed you a 10.4% reinvestment rate. In effect, your idiot nephew could have managed the fund and achieved returns far higher than the investment assumptions corporations were using.
Why in the world would a company be assuming 7.5% when it could get nearly 10.5% on government bonds? The answer is that rear-view mirror again: Investors who'd been through the collapse of the Nifty Fifty in the early 1970s were still feeling the pain of the period and were out of date in their thinking about returns. They couldn't make the necessary mental adjustment.
Now fast-forward to 2000, when we had long-term governments at 5.4%. And what were the four companies saying in their 2000 annual reports about expectations for their pension funds? They were using assumptions of 9.5% and even 10%.
I'm a sporting type, and I would love to make a large bet with the chief financial officer of any one of those four companies, or with their actuaries or auditors, that over the next 15 years they will not average the rates they've postulated. Just look at the math, for one thing. A fund's portfolio is very likely to be one-third bonds, on which--assuming a conservative mix of issues with an appropriate range of maturities--the fund cannot today expect to earn much more than 5%. It's simple to see then that the fund will need to average more than 11% on the two-thirds that's in stocks to earn about 9.5% overall. That's a pretty heroic assumption, particularly given the substantial investment expenses that a typical fund incurs.
Heroic assumptions do wonders, however, for the bottom line. By embracing those expectation rates shown in the far right column, these companies report much higher earnings--much higher--than if they were using lower rates. And that's certainly not lost on the people who set the rates. The actuaries who have roles in this game know nothing special about future investment returns. What they do know, however, is that their clients desire rates that are high. And a happy client is a continuing client.
Are we talking big numbers here? Let's take a look at General Electric, the country's most valuable and most admired company. I'm a huge admirer myself. GE has run its pension fund extraordinarily well for decades, and its assumptions about returns are typical of the crowd. I use the company as an example simply because of its prominence.
If we may retreat to 1982 again, GE recorded a pension charge of $570 million. That amount cost the company 20% of its pretax earnings. Last year GE recorded a $1.74 billion pension credit. That was 9% of the company's pretax earnings. And it was 2 1/2 times the appliance division's profit of $684 million. A $1.74 billion credit is simply a lot of money. Reduce that pension assumption enough and you wipe out most of the credit.
GE's pension credit, and that of many another corporation, owes its existence to a rule of the Financial Accounting Standards Board that went into effect in 1987. From that point on, companies equipped with the right assumptions and getting the fund performance they needed could start crediting pension income to their income statements. Last year, according to Goldman Sachs, 35 companies in the S&P 500 got more than 10% of their earnings from pension credits, even as, in many cases, the value of their pension investments shrank.
Unfortunately, the subject of pension assumptions, critically important though it is, almost never comes up in corporate board meetings. (I myself have been on 19 boards, and I've never heard a serious discussion of this subject.) And now, of course, the need for discussion is paramount because these assumptions that are being made, with all eyes looking backward at the glories of the 1990s, are so extreme. I invite you to ask the CFO of a company having a large defined-benefit pension fund what adjustment would need to be made to the company's earnings if its pension assumption was lowered to 6.5%. And then, if you want to be mean, ask what the company's assumptions were back in 1975 when both stocks and bonds had far higher prospective returns than they do now.
With 2001 annual reports soon to arrive, it will be interesting to see whether companies have reduced their assumptions about future pension returns. Considering how poor returns have been recently and the reprises that probably lie ahead, I think that anyone choosing not to lower assumptions--CEOs, auditors, and actuaries all--is risking litigation for misleading investors. And directors who don't question the optimism thus displayed simply won't be doing their job.
The tour we've taken through the last century proves that market irrationality of an extreme kind periodically erupts--and compellingly suggests that investors wanting to do well had better learn how to deal with the next outbreak. What's needed is an antidote, and in my opinion that's quantification. If you quantify, you won't necessarily rise to brilliance, but neither will you sink into craziness.
On a macro basis, quantification doesn't have to be complicated at all. Below is a chart, starting almost 80 years ago and really quite fundamental in what it says. The chart shows the market value of all publicly traded securities as a percentage of the country's business--that is, as a percentage of GNP. The ratio has certain limitations in telling you what you need to know. Still, it is probably the best single measure of where valuations stand at any given moment. And as you can see, nearly two years ago the ratio rose to an unprecedented level. That should have been a very strong warning signal.
For investors to gain wealth at a rate that exceeds the growth of U.S. business, the percentage relationship line on the chart must keep going up and up. If GNP is going to grow 5% a year and you want market values to go up 10%, then you need to have the line go straight off the top of the chart. That won't happen.
For me, the message of that chart is this: If the percentage relationship falls to the 70% or 80% area, buying stocks is likely to work very well for you. If the ratio approaches 200%--as it did in 1999 and a part of 2000--you are playing with fire. As you can see, the ratio was recently 133%.
Even so, that is a good-sized drop from when I was talking about the market in 1999. I ventured then that the American public should expect equity returns over the next decade or two (with dividends included and 2% inflation assumed) of perhaps 7%. That was a gross figure, not counting frictional costs, such as commissions and fees. Net, I thought returns might be 6%.
Today stock market "hamburgers," so to speak, are cheaper. The country's economy has grown and stocks are lower, which means that investors are getting more for their money. I would expect now to see long-term returns run somewhat higher, in the neighborhood of 7% after costs. Not bad at all--that is, unless you're still deriving your expectations from the 1990s.
<<<
Ha! Swearing allegiance to a stock isn't required for my sake. This isn't one of IHUB's scammy stock boards. But it's amazing how many "players" pass thru here expressing their love for BRK... and then disappear. There's so much about these players I don't understand. Mostly gambling addiction, I assume.
BTW, some claim to own the class A shares. If that's true I think many of them just own fractional shares.
Anyway, nice to see yet another record high this morning. $339.
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BERKSHIRE HATHAWAY INC.
Charles Munger (Charlie), BRK Vice Chairman Warren Buffett, BRK Chairman/CEO Photo circa 1970
Berkshire Hathaway, Inc NYSE Symbols: BRK-A Class A shares BRK-B Class B shares | Berkshire Hathaway, which began in 1839 as a textile mill, neared collapse in 1962 when 32-year old Warren Buffett started buying control in the belief the company could be saved. Buffett initially maintained Berkshire’s textile business, but by 1967, he was expanding into other investments. Berkshire bought stock in the Government Employees Insurance Company (GEICO) that now forms the core of its colossal insurance operations. Other early acquisitions included See's Candies, Blue Chip Trading Stamps and Dairy Queen. BRK moved from the OTC to the NYSE in 1988. Today Berkshire is a combination of 66 wholly owned subsidiaries such as the BNSF Railroad and 47 passive minority investments, notably its huge stake in Apple. As of 2021, BRK has a market cap of >$600 billion and 360,000 employees. Berkshire Hathaway is the nation's 7th largest business. |
Useful Links Berkshire Subsidiary Companies Buffett's Famous Annual Letters BRK Portfolio Tracker CNBC Buffett Archive http://www.BerkshireHathaway.com/ Buffett's office in Omaha. His desk has no computer Headquarters Address:: 3555 Farnam Street Omaha, NE 68131 b | |
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