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Archive for the ‘Warren Buffett’ Category

Rich valuations for the stock market’s global elite

The news that Paul Walsh, the CEO of Diageo, has unloaded a huge amount of stock (£16m) after exercising a raft of share options draws attention to the extent that the prices of high quality companies with strong global business franchises and the ability to generate cash have been bid up to very rich levels. The veteran market-watcher Richard Russell has observed something similar on the other side of the Atlantic.

What do billionaires Warren Buffett, John Paulson, and George Soros know that you and I don’t know?  I don’t have the answer, but I do know what these billionaires are doing.  They, all three, are selling consumer-oriented stocks.  Buffett has been a cheerleader for US stocks all along. But in the latest filing, Buffett has been drastically cutting back on his exposure to consumer stocks.  Berkshire sold roughly 19 million shares of Johnson and Johnson.  Berkshire has reduced his overall stake in consumer product stocks by 21%, including Kraft and Procter and Gamble.  He has also cleared out his entire position in Intel.  He has sold 10,000 shares of GM and 597,000 shares of IBM. Read the rest of this entry »

The word from Warren Buffett

I don’t know how many of you had time to catch up with Warren Buffett’s annual appearance on the TV channel CNBC last week, timed to coincide with the appearance of his widely followed Letter to Shareholders, but I thought it might be useful to note the most important things that struck me from the transcript of his three-hour appearance. (Listening to the video of the show means having to sit through a lot of banter from the presenters, not to mention regular commercial breaks, making it a far too time-consuming way for most people to keep track of what he had to say).

This is my quick and dirty summary of the main things he had to say:

He thinks that the Federal Reserve has done enough monetary stimulus with the QE2 programme of quantitative easing.  US monetary and fiscal stimulus combined will be equal to 10% of GDP this year, a massive amount. Stimulus was important in fending off the banking crisis, but now it is time to trust in the “natural regenerative capacity of capitalism”. Again, in his words: “There is a resiliency to the American system. It does work”.

Read the rest of this entry »

Written by Jonathan Davis

March 9, 2011 at 3:20 PM

Grumpy Old Men Have Their Uses

My latest Last Word column in the Financial Times discussed the views of Charlie Munger, Warren Buffett’s right hand man for many years. For those who don’t know it, the best stuff that Munger has written on the secrets of success in investing (and in life) can be found in Poor Charlie’s Almanack, an expensive and lavishly illustrated tome whose proceeds go to the Munger Foundation. You have to swim your way through a lot of eulogy before you get to the really good material, which is the text of the lectures that Munger has given to graduating university students, but they are more than worth their weight in gold. 

Buffett and Munger first met in Nebraska when they were young men. Charlie was the only other man in Omaha, says Buffett,  who “rolled around on the floor laughing at his own jokes”, which provided an instant bond between the two. Modesty has certainly never been either man’s forte, but as investors, to paraphrase Churchill and others, they don’t have much to be modest about either.

Buffett’s latest succinct view on the markets, as I am sure most of you will have seen, goes as follows:

It’s quite clear that stocks are cheaper than bonds. I can’t imagine anybody having bonds in their portfolio when they can own a diversified group of equities. But people do because the lack the confidence. But that’s what makes for the attractive prices. If they had their confidence back, they wouldn’t be selling at these prices. And believe me, it will come back over time.

To which, having studied them going back nearly 25 years now, I would only add my ritual comment about Buffett’s sayings: he always turns out to be right in the end, although markets often go the other way as soon as he says them (which I call the curse of the value investor).

Written by Jonathan Davis

October 12, 2010 at 2:28 PM

Warren Buffett’s Mea Culpa

Here is an extract from Warren Buffett’s latest Annual Report, in which he admits to a number of mistakes during 2008. One measure of how serious the current crisis has become is that last year Berkshire Hathaway, Buffett’s holding company, had its worst year’s performance since it began life in the late-1960s, with its book value per share falling 9.5% (against the S&P 500′s 37% decline). Shares in Berkshire have taken an even bigger hammering, falling 30% or so.

As someone who has followed this great investor’s doings for 18 years, my advice is simple: beware of those who try to write him off as over the hill, or out of touch, or any similar comments. it is true that Buffett is no longer a young man – he is approaching 80 – but bear in mind two things. One is that he is virtually alone among profesional investors in admitting to mistakes of any kind. Such honesty is a refreshing contrast to the self-serving excuses that you will find in the average fund manager’s report to the fundholders.

The second is that his rare errors of judgment – of which buying shares in two Irish banks last year must surely rank as one of the most extraordinary – are invariably more than cancelled out by successes on the other side of the equation. His self-disparaging remarks have always to be seen in the context of his extraordinarily succesful long term track record. The earnings performance of Berkshire’s operating businesses last year was remarkably good in the context of the year’s deteriorating economic backcloth.

“I told you in an earlier part of this report that last year I made a major mistake of commission (and maybe more; this one sticks out). Without urging from Charlie or anyone else, I bought a large amount of ConocoPhillips stock when oil and gas prices were near their peak. I in no way anticipated the dramatic fall in energy prices that occurred in the last half of the year. I still believe the odds are good that oil sells far higher in the future than the current $40-$50 price. But so far I have been dead wrong. Even if prices should rise, moreover, the terrible timing of my purchase has cost Berkshire several billion dollars”.

“I made some other already-recognizable errors as well. They were smaller, but unfortunately not that small. During 2008, I spent $244 million for shares of two Irish banks that appeared cheap to me. At yearend we wrote these holdings down to market: $27 million, for an 89% loss. Since then, the two stocks have declined even further. The tennis crowd would call my mistakes “unforced errors.”

“On the plus side last year, we made purchases totaling $14.5 billion in fixed-income securities issued by Wrigley, Goldman Sachs and General Electric. We very much like these commitments, which carry high current yields that, in themselves, make the investments more than satisfactory. But in each of these three purchases, we also acquired a substantial equity participation as a bonus. To fund these large purchases, I had to sell portions of some holdings that I would have preferred to keep (primarily Johnson & Johnson, Procter & Gamble and ConocoPhillips)”.

“However, I have pledged – to you, the rating agencies and myself – to always run Berkshire with more than ample cash. We never want to count on the kindness of strangers in order to meet tomorrow’s obligations. When forced to choose, I will not trade even a night’s sleep for the chance of extra profits”.

“The investment world has gone from underpricing risk to overpricing it. This change has not been minor; the pendulum has covered an extraordinary arc. A few years ago, it would have seemed unthinkable that yields like today’s could have been obtained on good-grade municipal or corporate bonds even while risk-free governments offered near-zero returns on short-term bonds and no better than a pittance on long-terms. When the financial history of this decade is written, it will surely speak of the Internet bubble of the late 1990s and the housing bubble of the early 2000s. But the U.S. Treasury bond bubble of late 2008 may be regarded as almost equally extraordinary”.

“Clinging to cash equivalents or long-term government bonds at present yields is almost certainly a terrible policy if continued for long. Holders of these instruments, of course, have felt increasingly comfortable – in fact, almost smug – in following this policy as financial turmoil has mounted. They regard their judgment confirmed when they hear commentators proclaim “cash is king,” even though that wonderful cash is earning close to nothing and will surely find its purchasing power eroded over time”.

“Approval, though, is not the goal of investing. In fact, approval is often counter-productive because it sedates the brain and makes it less receptive to new facts or a re-examination of conclusions formed earlier. Beware the investment activity that produces applause; the great moves are usually greeted by yawns”.

This is the kind of warning that any investor tempted to go into cash or government bonds at today’s prices should take seriously. Sure, bond yields could well go lower, and those who bet on that outcome stand a chance of looking wise for at least a week or two. But as with any kind of bubble, you will only come out ahead if you are content to operate on the basis of the Greater Fool theory.

Written by Jonathan Davis

March 1, 2009 at 11:18 PM