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How am I doing? July 1, 2009

Posted by shaferfinancial in Finance.
Tags: ,

Every six months I post on how my investments are doing and any changes in strategy or investments I am considering.  I will start off with my largest investment today and work my way through the others in future posts.  As regular readers know, I am diversified by asset class not by amount of stocks owned.  I own three stocks currently with the majority in Berkshire Hathaway.

I analyze fundamentally and believe the current stock price does not necessarily reflect the intrinsic value of a company.  Over time stock prices will vary around the intrinsic stock price [sometimes above, sometimes below].  So I pay attention to cash flow, return on equity, debt ratio’s, etc.  Since BRK employs essentially four strategies; long term stock ownership, wholly owned companies, derivative/currency bets and insurance float I will try my best to outline how these strategies have done.

The stock price only rose 3% in the last quarter.  Let’s compare that to performance of its portfolio.

1. The long  term stock ownership caused massive mark to market accounting write downs over 2008 and the first quarter of 2009.  However the second quarter was much kinder to the company.  Just as these ‘pretend’ losses hurt when the equities go down, they are helpful when the opposite occurs.  Last quarter there were some real losses when Buffett sold huge blocks of COP at a loss.  We will have to wait until the quarterly report comes out to see any real losses or gains from selling this quarter.

Here are the results from the largest holdings from the last quarter:

American Express +61%, Burlington Northern +21%, CocaCola +10%, ConocoPhillips +6%, Eaton +21%, GE +16%, Johnson & Johnson +7%, Kraft +16%, MT Bank +5%, Moody’s +26%, NRG Energy +49%, Nalco +23%, Norfolk Southern +11%,  Proctor/Gamble + 8%, US Bankcorp +20%, Union Pacific +27%, Wells Fargo +68%, WestCo Financial +6%.

Preferred stock and debt deals:  GE—$3Billion@10% with warrants [strike price $22.25 for five years].  Warrants currently worthless.  Return this quarter 2.5% [10% /4].  Goldman Sach’s $5 Billion@10% with warrants [Strike Price $115].   Current price $147.  Total quarterly return 30.5% [warrants plus interest].  Harley Davidson $300M@15%. Total return this quarter 3.75%.   Tiffany $250M@10%. 2.5% this quarter.

Now let’s remember most of those stocks were coming off extreme lows.  However, one can definitely say the stock portfolio went up several times the amount of Berkshire’s increase. The mark to market results from the last quarter will no doubt increase the book value of the company significantly.

The wholly owned companies represent a large cross-section of businesses and have undoubtedly been hurt by the overall recession.  But we know that 2008 the return on tangible equity was almost 18%.  Most of these companies produce great cash flow and we can be sure last quarter was no exception.  As to the particulars we have to wait.

There is some derivative  exposure.  From what we know the largest exposure is tied to the various market indexes values in 2016-2019.  Since all the major indexes have gone up over the last quarter the mark to market values will go up accordingly [for example the S &P 500 index is up 14% for the quarter].  Berkshire also has over $18B in cash for liquidity.  Some of the smaller derivatives have not done well as Buffett has pointed out, but make up such a small amount that will not hurt performance.

The insurance float has probably reached $60Billion.  The higher the float the more money can be put to work earning more money.  The insurance underwriting should remain consistent allowing all the profits from that float to end up as Berkshire profits over the  long run.

Bottom line is the intrinsic value increase of Berkshire has more than likely made up for the 1st quarter losses and is starting to eat into the 2008 losses.  Cash flow should remain steady as the 63 non-insurance/energy companies owned by BRK continue to perform admirably in this recession.  Total income should be higher than last quarter.  Insurance float continues to increase and underwriting discipline should continue to give long term free access to the float [no doubt any single year can demonstrate underwriting losses like after 9-11 and hurricanes in 2006].  Cash positions are still more than adequate and there is little long term debt.

I only wish I had the funds to dramatically increase my ownership in BRK as there is little doubt in my mind that it is currently priced at bargain basement rates!  I will continue to add to my position as possible at these prices.  Despite the 27% annual drop in market value, I remain heavily invested in this stock.

NOTE********This blog is for entertainment purposes only and represents only my opinion and what I invest in.  Before investing in anything, do your own analysis and due diligence and NEVER invest on the basis of what someone says in a blog.********************



1. Joshua - July 1, 2009

Thanks for the details on your investments and reasoning in which you’ve decided to invest and keep investing. Very helpful to us newbies who aren’t yet good at analyzing such things.

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