jump to navigation

Berkshire Hathaway Q3- 2014 November 18, 2014

Posted by shaferfinancial in Finance.
add a comment

As regular reader know, BRKb has been a large mainstay holding of mine since the mid 1990s. Of recent changes, I have sold BRKbs in order to move into some high yield dividend stocks. But, it still remains over 40% of my portfolio.

The last quarter went well for Berkshire. It now holds over $62B in cash. Operating profits rose substantially to $4.72B a rise of 29%. It lost a little over $100M on derivatives and investments that included writing off almost $700M on an investment in Tesco Plc, a British grocer. I guess everything Buffett touches doesn’t turn to GOLD!

While total earnings for the quarter ran 9% lower than the 3rd quarter of 2013, overall for the first 3 quarters of the year earnings are up 8%. Cash flow from operating activities was up 16% from last year for the 3 quarter. A stunning success.

By any accounts a good quarter and a good first 9 months of the year.

After the quarter was announced BRK bought Duracell from Proctor and Gamble. The net price was $2.9B with the deal giving back $4.7B in P&G stock and P&G recapitalizing Duracell with $1.8B in cash.

By using all its P&G stock in the deal it avoided over $1B in a tax liability. The original stock was part of the Gillette deal years ago and had appreciated tremendously.

However, Buffett still sits on a ton of cash. What to do with it?

In its equity positions in addition to the aforementioned P&G disbursement it upped its GM ownership by 21% to 40M shares. It got rid of its Deere position. Slightly upped its positions in IBM, Wal Mart, Visa and Master Card. Also took a stake in Express Scripts with 449K shares.

Still making me lots of money. Thanks Warren!

Energy into the Future October 27, 2014

Posted by shaferfinancial in Finance.
Tags: , ,
add a comment

Let me start off the post stating two facts:
1. I don’t invest/speculate for short term movement, but take Buffett’s advice to invest as if you are throwing the stock into a drawer for 10 years.
2. No one has ever been able to predict oil prices in the short term [less than 3 years]. Just look at the oil price predictions from 1 year ago if you don’t believe me.


I will start off with a few facts and then go into my opinion. World-wide almost all wells are producing less oil than they were. So we have a world wide per well decrease in production for the last decade that is increasing. This is true if we are talking the Saudi’s, North Sea, or even tight oil which has the highest depletion rate by far. So in order to increase oil production there must be an increase in wells drilled. No getting around that fact.

Over the last years there has been thousands of new oil wells drilled in North America because of the improvement in technology in fracking tight oil. But tight oil wells have a depletion rate as high as 40% for the first year alone, so in order for them to increase production NA shale oil players need to dramatically increase well drilling going forward. This is unsustainable as the best plays are drilled first and the lesser plays are starting to be drilled now. In order for their to be a decade long increase in production in tight oil, there either has to be several major discoveries the size of the Permian Basin and/or a dramatic increase in the technology. Neither are likely in my mind.

There has been much discussion on the majors moving to fracking tight oil, but that is really limited to two domestic majors, Chevron and Exxon with Exxon seemingly waiting to pick up some leases out of bankruptcy. Shell and BP have recently stated that they are ramping up their offshore drilling. And of course the nationals are for the most part dependent on offshore to ramp of their production. The truth is that for oil companies, they need to do everything they can to keep production up whether its onshore, fracking, or offshore. If they don’t then oil production will go down as their existing oil wells deplete.


Worldwide consumption of oil products continues to increase. This is on the back of China/Asia increasing GNP and India increases in GNP. China GNP went up last quarter 7.2% [higher than most predicted], while India went up 5.5% [again higher than expected]. USA went up a little over 4%. Europe stayed flat and might be going into a recession while Japan also remained flat. Worldwide the predictions is for a 3.5% GNP increase for 2015 [again look at how badly prognosticators did last quarter before you put any confidence in that number].

Hear is my prediction: Worldwide consumption of oil will continue to increase for the foreseeable future.

So this is a pretty simple equation for me. Consumption will increase, while production will continue to need more wells drilled to keep up with the world-wide consumption. Can NA shale oil drilling keep up with the increased demand and the lowering production of existing wells world-wide? No not even close.
World wide consumption was 90.4M barrels a day in 2013. Likely to be in excess of 93M in 2014. Increase in USA production from 2013 to 2014 is expected to be around 1.5M barrels a day. OPEC can manipulate its production over a fairly tight range to account for short term variations, but many believe the Saudi’s [largest OPEC producer] is running pretty close to full bore.

Now add in that companies have to plan out 5-10 years in advance to create production level. So they need to have big drilling projects starting now to maintain their production. Where will they get this oil? They have to go to the biggest reserves which are mostly offshore.

Nothing I have seen over the last year has changed any of that analysis. Not the drop in oil prices over the last few months, not the increase in production in NA tight oil.

What we are seeing is folks trying to predict something that they can’t [oil production and consumption and oil price]. It is all just noise. Barring a world-wide depression consumption will increase. The oil has to be drilled to produce. The major oil companies will drill where there is oil whether it is in NA or offshore.

Buffett’s Investment Philosophy Simplified September 30, 2014

Posted by shaferfinancial in Finance, Uncategorized.
Tags: , ,
add a comment

When the market is going up, every one is a genius. But, to really understand how great investors do it, you need to look at their long term strategies.

Warren Buffett’s Strategy is simple to understand and very difficult to do:

1. Identify well managed companies;
2. Analyze their medium term outlook by understanding if they have a “moat,” meaning an enduring advantage over others in their same business;
3. Look at their books to make sure they have a business model that makes sense for the business they are in;
4. Calculate a fair price for that business;
5. When the price is at or below that fair price buy; and
6. Hold until the moat is gone, management disappoints, or some fundamental change in the economic environment causes you to reevaluate the business.

Easy as pie!

Here is the kicker, the vast majority of people will react to price movements, especially extreme price movement. If the companies stock starts to tank they will panic and sell. Buffett has the psychological makeup to stick to his analysis ignoring the market emotion. Since he has done his own due diligence he has the confidence to ignore the chatter out there. He also knows that most of the analyst that work for the major brokerage firms are relatively young and inexperienced. There is also the reality that in some incidences the brokerages own accounts tend to work opposite what their own analyst are saying, so they are buying up cheap stock as their own analyst are saying sell and they are selling when their own analyst are saying buy [with an appropriate short time lapse to not be too obvious about it].

Due to technical reasons the market is even more volatile than it was back in the day which puts even more pressure on folks who think they are missing the real reason a stock is going down that the insider’s know.

Bottom line, for me, is that I have found having stocks that pay a good to great dividend gives me the ability to ignore the market chatter [along with re-reading Buffett!]. That dividend carries me through a stock drop or a general bear market. Understanding how one of the greatest investor in history thinks about investing is a gift that continues to give.

Changes in Family Finances Outlined in Federal Reserve Report September 17, 2014

Posted by shaferfinancial in Finance.
Tags: ,
1 comment so far

The Federal Reserve’s report of changes in Family Finances 2010-2013 documents the continuing startling financial condition of families in the US. Here are the top line numbers:
Median Family Income Fell 5% to $46,700. That is on top of a 8% decline in the previous 3 year period. So median family income has fallen 13% in the last 6 years.  Mean family income rose in the latest period 4% indicating a widening of the income differential between the top tier and the balance. This differential has been consistent over the last decade.
Median Net Worth also fell 2% to $81,200. Interestingly, is the median amount of net worth for those with income in the 80-90% category is only $288,000 a drop of 11%. For comparison the upper 10% has a median net with of $1,126,000 and the 70%-80% income group had a net worth of $161,300. So in reality the only folks who have a total net worth of over $1M are the ones making the top 10% of income [$223,000 of family income]. This is really bad news for the country as only 10% have the means to retire with a decent retirement income. Further driving home this point is the median net worth of 55-64 year olds of $165,900. Families in the upper middle class or between 75th and 90th percentile had a median net worth of $505,800 a 3% drop. For comparison the top 10% median net worth is $1.8M while the 50-75% grouping has a median net worth of $168K. Most of this net worth is in principal residences not retirement savings.

Roughly half of US families have retirement accounts and the median value is $49,200 [remember that the market just had a +32% year which should have pushed up 401K values significantly]. Roughly 15% of families own individual stocks with a median value of $27,000 and about 9% have mutual funds outside their retirement accounts with a median value of $80,000. About 20% have cash value life insurance with a median value of $8,000.

The mean level of retirement accounts [for some reason they don't report median level on this measure] for folks in the 50-90% income level is $147K. No doubt the median level would be much lower. The top 10% of income earners have a mean retirement account level of $446K.

Some quick comments on debt; the debt to income level decreased to 107% from 118% indicating lower level of overall debt. The one area of debt that is increasing, and doing so dramatically is student loan debt.

Overall we see stagnating incomes outside the top 10%, and extremely low levels of retirement savings and assets among all those in the below 75% of income. And even up to the 90% income level strikingly unprepared folks for retirement.

Musings on oil since the price dropped September 16, 2014

Posted by shaferfinancial in Finance.
Tags: , ,
add a comment

I have seen folks around the internet saying that we have a glut of oil now. Many are predicting that tight oil [North American Shale for the most part] production has created a situation where deep sea exploration/drilling will drop significantly. Since I am invested in a couple of UW drillers [SDRL, AWLCF] I thought I would re-examine my original investment thesis.

Prediction is usually a tough business but I did find some consensus on future demand. Most folks think the long term demand in the US, Europe and Japan will go down slightly. While the demand in China, India and the Middle East will increase dramatically.


Overall the prediction is for a 19 million barrel a day increase. So if they are correct, where is this 19 million barrel a day habit going to come from? Many are assuming tight oil. But, how much shale oil is there being produced now? Less than 4 million barrels. So over the next 20 years can we assume that the amount of shale oil produced will go up by a ratio of 5 times?

The most successful company in the shale oil space is currently EOG. Here is what their CEO, Mark Papa has been saying. The most productive shale plays have already been picked over and we are close to our peak production for shale oil. He is not alone in saying this. But for the time being let’s pretend over the next 10 years we can double the increase in production that has happened over the last 5. The CEOs of companies already into shale oil production would call that unlikely, but let us keep with that prediction. So we increase production by 3 million barrels. And let’s say that shale oil finds lucrative areas in the rest of the world that mimic North America’s increase in production. So we are up to 6 million barrels. Where is the other 13 million barrels coming from?

Now let’s talk price. That is the other myth being thrown around. That shale oil production is cheap. The truth of the matter is that NA shale oil costs about $65 barrel to produce. That compares to $52 for deepwater and $56 for ultra deepwater production. So we see that overall costs favor going underwater except for the Arctic which costs $75. Of course, getting shale oil has proved to be faster than underwater which can take up to 3 years for exploration and drilling. But, for the most part current shale oil is not cheaper than going deep into the oceans. As to the economics at least two of the major oil service companies’ CEOs have commented on the bad economics of shale oil [Shell, BP]. Bottom line is that oil has gotten very expensive to get out of the earth and is getting more expensive by the day. Shale oil has no particular advantage over drilling under the water even at huge depths.

Now let’s talk politics. We know that spills in the ocean are devastating and create all sorts of risk. But,the shale oil fans simply aren’t dealing with the risks of transporting these tight oils. Every month of late we have had a railroad car issue transporting oil and pipelines have their own dangers. This is already driving up costs as the US government applies more stringent regulations on rail cars.

Getting oil of the ground to market is a dangerous dirty business that creates environmental disasters all over the globe. But, there are no practical alternatives on the horizon yet, and no political will to deploy alternative energy at a high rate anywhere but Germany.

Until we see both advancements in alternative energy and the political will to deploy them we are stuck with oil.

Given all this, does anyone really think we see the price of oil plunge?

Here’s a Deal For YOU! September 2, 2014

Posted by shaferfinancial in Finance.

I got an investment for you.
First you are going to invest in a strategy that has failed for 2 generations.
That strategy will have you investing in things you don’t have the time to possibly understand the details of.
You are going to be locked out of getting your money from that investment for as long as you work at your job or perhaps they will let you get at it and only charge you 10%.
You will defer taxes, but if you have any success at all with this investment you will end up paying more taxes than you deferred.

So are you ready to sign up?
You probably already are; its your 401K at work!

The truth falls on its sword in the face of the Wall Street Hype Machine September 2, 2014

Posted by shaferfinancial in Finance.
Tags: ,
add a comment

Sometimes I go out into the internet world to see what others are saying and advising. It’s interesting that the Wall Street hype machine, regardless of what people really feel about Wall Street gets reiterated all over the net. Now that we are 5 years into a bull stock market, and last year we saw over 32% rise, everyone thinks they know how to become a millionaire retiree. Yep, just keep putting money into that 401K and you will retire wealthy.

Every CFP or whatever letters they have by their name, almost every newspaper or magazine finance writer, all the mutual fund companies, etc. are out in force telling people just to keep buying those mutual funds. And that is repeated as gospel by folks on the various websites. You can’t go wrong!

Yet, the studies don’t change that illuminate that people aren’t becoming millionaires with their 401ks. No, they are just putting money into their 401ks/mutual funds now that they are at a high value. Guarantee, that will reverse itself after we get a correction. Happens every time, when the stock market goes down, people start to sell [many because they need the money when they lose their job].

And Wall Street loves it all the way to the bank. Never mind those pesky Dalbar Studies, never mind the government studies, never mind that people are having to work longer because they have few, if any savings. No, just stay on the program. Don’t know if this is “Alice in Wonderland” or “The Wonderful Wizard of Oz,” but folks who believe in the impossible will pay the price.

New EIUL from Minnesota Life August 14, 2014

Posted by shaferfinancial in Finance.
Tags: ,
add a comment

On Monday, Minnesota Life will introduce a new EIUL product, the Omega Builder. At first, I did not think it was going to be something my clients would benefit from. But, after an in-service this week, it is clear that for many of my clients this will be a great product.

It functions the same way as the existing Eclipse EIUL, with one difference. There is an income protection agreement. The agreement locks in a death settlement that is not simply a pay-out of the death benefit to beneficiaries. Instead the client chooses what percentage of the death benefit is paid out upon the death and the remaining amount is paid out over time [between 10 and 30 years]. There is a fixed interest rate paid on the un-paid out amount which adds to the overall total payment. Now, when I first saw this, I was not impressed that my clients would benefit as most of them are planning to use the cash value for living benefits in their retirement years.

But here is the kicker. Because the death benefit is not paid out entirely at death, the insurance costs that run in the policy are radically reduced [up to 50%]. This reduced insurance expense means that more of your premium is put into the savings side of the policy annually. And with more money getting interest credits every year, your cash value increases and the amount of cash you can pull out increases. The best part of this is that nothing changes on the top end. In other words, I can still minimize the death benefit down the same amount and stay within IRS regulations. The end result is up to 30% more distributable cash.

Minnesota Life has again placed itself on top of the EIUL ratings with this product. While, the Eclipse still remains one of the top performing products, a couple of other companies had products that had just as good of performance over the last couple years. With the Omega Builder, ML has created a space between it and the rest of the EIULs again.

More on Energy; Should you invest in NA Tight Oil? July 15, 2014

Posted by shaferfinancial in Finance.
Tags: , ,
add a comment

I have received some inquiries about my contrarian views on the North American Tight Oil industry. I think this easily found white paper is a good primer to my views: http://www.oxfordenergy.org/wpcms/wp-content/uploads/2014/03/US-shale-gas-and-tight-oil-industry-performance-challenges-and-opportunities.pdf

Here are a couple of key points from the paper:

The evidence so far suggests that the industry has been able to create new opportunities, manage and innovate around the operational aspects (i.e., drill more wells per pad, longer laterals, faster drilling, more hydraulic fracturing/wells, micro seismic, synchronized logistics, etc.) and deal with or address the environmental challenges, despite a rough start and evolving government policies and public acceptance issues. What is not clear from higher-level company data is: if the industry (both large players and independents) can run a cash flow -positive business in both top-quality and in more marginal plays and whether the positive cash flow could be maintained when the industry scales up its operations.
Among all the data and evidence at hand, this comment focuses around the following pieces of industry data that capture a vast amount of relevant context (technical and commercial) and decision- making: (1) recent announcements by large and small industry players, such as write-downs, and (2) financial performance analysis of select US shale gas and tight oil independents.

With regard to the financial performance of companies in this sector, a recent analysis covering 35 independent shale gas- and tight oil-focused companies active across the major US plays and accounting for 3 million barrels of oil equivalent (mboe) per day of production (40% of the total unconventional production in the US at 3Q2013), shows that over the past six years their financial performance has progressively worsened.11 This is despite showing production growth and shifting a large portion of their activity to oil since 2010, presumably to chase a higher margin business.
The analysis shows that capex nearly matches total revenues every year, and net cash flow is becoming negative while debt keeps rising. There are other factors, such as the close link between rising debt and production, the rising cost of debt to total revenues and negative cash flow, which add to concerns about the sustainability of the business. Company data also shows that the cash flow per share of US independents, many of which are investing in shale and tight oil prospects, is negative and has been trending more negative with time.
However, although the market (and some industrial investors) may be wrong, or unable to distinguish profitable from unprofitable opportunities, there remain a large number of investors who have made substantial investment as well as many that believe that these companies will eventually make money, especially from M&A activity.

A key finding of a broader US E&P benchmark study carried out by Ernst & Young in 2013 was that both exploration and development costs are increasing rapidly – by more than 20 per cent in 2012 alone. The oil and gas industry has experienced falling net income margins over the past few years, and shale gas has played a significant part in this trend. It is a complex system, and not the subject of this paper, but it is important to note that, returns and cash flow are all under pressure even at these current high prices and a significant capex and cost reduction is needed. Additionally, production and revenue increases are needed to rebalance the industry’s financial and strategic model. The impact of shale gas and tight oil business activity on these trends is a subject of much debate.

No doubt the industry is bringing more oil to the market. But as an investor the real question is if they are making a profit doing this? As of now, the question has no definitive answer. So for now, investing in these companies is really more about speculating than about purchasing an asset that is creating significant cash flow and income to its owners. Perhaps in the future, but for now it is an open question about profits.

The 401K Scam July 14, 2014

Posted by shaferfinancial in Finance.
Tags: , , ,

Most people prefer to play it safe in life. And that makes sense, in the past there were enough real risks to just living to 30, that our brains become hard wired to avoid risk. However, there have always been a small select group that could ignore that. They were the risk takers, the entrepreneurs in modern parlance. From a political perspective, you want to enable the risk takers to do their thing, at the same time allow for the vast majority to live their lives in safety.

Let’s bring these thoughts into the field of investing and retirement income. After WW II we established a nice mix of rewarding entrepreneurship and having a safety net for the majority. But, beginning in the 1980s and accelerating of late, we have gone off into a different direction. Most concerning to this conversation is the death of the pension, and the replacement of pensions with 401ks/IRAs, etc. Why is this concerning? Clearly, when you are forcing people who have no acumen and are hardwired to avoid risk to invest on their own to provide for their old age, that is a recipe for disaster. That would be fine, if the consequences for our society weren’t so devastating. In 1 generation, we will have over 80% of retirees totally dependent upon social security and their own investing acumen.

What we know from the studies is that the average investor in these 401K/IRA schemes are getting almost no return on investment. They are falling behind our inflation rate. We also know that the vast majority of folks aren’t saving enough in real dollars to retire even if they were receiving decent returns on their savings.

So that means in 1 generation our society is going to be dealing with some really poor senior citizens. And that is a problem for our whole society.

Right now we see a stock market going up every year. And we see more and more people putting their savings back into the stock market. This is consistent with how people are hardwired. Fear of not being on the gravy train has trumped fear of the stock market. So they are buying now. When we have our next stock market swoon, they will panic and sell. This is a sure thing. And that will drive down the market even more. And if you are holding stock into this, you better not need to use that value, because if you need it for retirement or emergencies, then you will never be able to make up for those losses. Your retirement will be damaged severely.

Now that you know this, what are you going to do about it? You have two choices, learn to be a very good investor taking advantage of opportunities as they come along, or find a way to passively invest without the risk of huge negative variability. For most folks, that just don’t have the ability to be an investing entrepreneur. They should be putting their savings into vehicles like an EIUL or if in their 50s or 60s an indexed annuity. These vehicles will give you solid overall returns without the risk of huge negative movements. Some of the annuities even guarantee you a 7-8% annual return until you take out guaranteed income for life.

It simply doesn’t make sense for folks who have no experience or acumen in the investment world to try to become an investor as a hobby. It rarely works, yet the vast majority of folks out there don’t understand this basic point [admittedly Wall Street has spent $Billions hiding this basic point]. Don’t fall for this 401K scam. Mutual funds don’t make sense in investing for retirement income. Delaying taxes until your family is out of the home and you have little legitimate tax write offs doesn’t make sense. Believe the research that indicates the poor returns from individuals following the Wall Street advice on investing.


Get every new post delivered to your Inbox.

Join 38 other followers