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Buffett’s Investment Advice: Avoid Losing Money June 4, 2014

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Investment strategies that don’t take Warren Buffett’s advice almost always end up bad for people. Now, that does not mean you will never lose money in an investment, but that your strategy should be one that minimizes that possibility. That is why Buffett’s Berkshire Hathaway will underperform in a strong positive market, but out perform in a negative market. He attempts to avoid losing money. The final result is overall over performance because as mentioned many times, negative numbers hurt more than positive numbers help.

This is pure mathematics. But there is a psychological reason that Buffett, as an investor for others understands. People can’t handle seeing the value of their investments go down. The data for this is pretty succinct and telling. When the market goes down, people sell in mass. That is a fact. [Of course, the opposite is true in that when the market goes up, people don’t want to miss out, and buy]

Understanding this I have structured my investments to minimize loss.

1. I own an EIUL, where the cash value does not go down. No matter what the market does, all gains are locked in from year to year.
2. I invest in dividend growth stocks. The dividends come in no matter what the stock value is that particularly quarter. But, just as important, I only buy when I think the price is fair. And I sell when the price has gotten so high as to be able to replace the dividends with an equally well managed business that pays higher dividends. My attention is on the dividends being produced not the market value of the company on any particular day. This changes the whole emotional component of owning stocks.
3. I own farm land that is cash positive and really have only a general idea of how much I could sell it for.
4. I have about half my stock portfolio in Berkshire Hathaway which as mentioned earlier tends to fall less than the market in bad years. [Note, that percentage is going down as when Berkshire springs up I sell some and move it over to the dividend growth section of my portfolio]

My clients that have followed similar strategies sleep well at night confident that the coming stock market correction will not devastate them either financially or emotionally. I know it has worked for me.

Berkshire Hathaway 2013 March 14, 2014

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Warren Buffett’s letter to stockowners was again insightful as to how Berkshire Hathaway is doing. However, I found it less interesting than previous letters and a little defensive in tone, for which he doesn’t need to do. I will outline the highlights here:

Berkshire made two major purchases [1/2 of Heinz and NV Energy] for a little over $30 Billion.
Mid American had $10.8 B in pre-tax earnings last year up around 8%
Smaller businesses had net earnings up around 20% last year
Berkshire made another underwriting profit [11 years in a row]
Berkshire spent $3.5B to acquire remaining shares of Marmon and Iscar
The two equity manager now invest $7B each and outperformed the S&P 500
Berkhsire increased ownership in American Express, Wells Fargo, Coca-cola and IBM
Investment value increased 13%
Earnings increased 12%
Book Value increased 18%
Float increased to $77B
Over $48B in cash and equivalents

So, it was another good year for Berkshire. Note they spent over $30B in investments and yet still have over $48B in cash. Berkshire produces cash at an amazing pace. This, of course, is both good and bad, good because it it what a business is suppose to do, and bad because it creates so much cash that Buffett has a hard time investing it for outsized returns.

My ownership of this stock goes back to 1997. I added on significantly over the next 12 years. I am pleased with my ownership. It is a very safer place to invest. However, it was such a high percentage of my portfolio [80%] that I am starting to sell some and replace it with dividend paying stocks. My ultimate goal is to live off of the dividends and Berkshire doesn’t pay them. I have now around 55% of my portfolio in Berkshire having sold a few shares when it went up over $124 [B shares]. Once again, this is about my strategy not any problem I see with Berkshire.

In 2013 the price rose 33%. Since the first of the year another 4.6%. I think it is fairly valued to a little low. I would not surprise me if it ran to around $200,000 [A share] or dropped down to the $170,000s again. The market is a little choppy now.

Pre-Snowstorm Musings February 12, 2014

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We are expecting another snowstorm up here starting Thursday so in honor of that, I thought I would type some thoughts.

1. The market correction might be over, or not, but it doesn’t change the fundamental issues for those that assume market risk. If you can see retirement in the windshield coming up, you need to be very careful and unload as much market risk as possible. Don’t let all that Wall Street propaganda fog you to the reality of market losses destroying your retirement income.

2. Once again those that have put their money into an EIUL are sitting pretty. After a great year they have their profits locked in forever. The EIULs are working exactly as designed, the companies [I use] are strong, and my clients with there properly structured EIULs are marching toward success.

3. I continue to be happy with my investment portfolio even though I am breaking all the “rules.” Mainly the diversification rule and ignoring the so-called analyst. Using my own brain has been the best thing that has happened to me.

4. I expect a really good year end report from Berkshire Hathaway. The market will probably ignore it in favor of fear-mongering on his age or some other irrelevant issue.

5. Energy stocks I invest in are all looking solid and I expect increasing dividends to add to my portfolio. Only issue is how to re-invest my dividends on AWILCO, because the foreign stock charge of $70 is a little much for less than $1K of dividends to reinvest from them. Will have to figure that one out.

6. Wonder when the masses will wake up to the lies of Wall Street? It could be ugly when that happens.
7. Have a great Valentines day.

Berkshire Hathaway and my Portfolio January 17, 2014

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As some of you noted, Berkshire Hathaway represents 61% of my portfolio. This is actually a little lower than it has been over the last 5 years. I think over time it will continue to go down as a percentage of my portfolio. But this doesn’t mean I am any less enthusiastic about owning it. Only that as I age, I need to start to think about income, more appropriately dividend income. I have increased my dividend income by 4 times over the last few years. I feel I need to increase it another 10 times between now and when I retire. So far I am on schedule.

Back to Berkshire Hathaway: It’s price has stagnated for about 6 months with the 20% price appreciation happening in the first 6 months of 2013. Despite this it continues to increase its book value every quarter and increase its cash flow each quarter. I have noted over the last year that it is performing well. There are no black clouds on the horizon for that I can see, sans Buffett’s retirement or death.

The price to book has been declining over the last 6 months and is now probably not much higher than the 1.2 ratio that Buffett has said he would buy back shares. Because of that it is unlikely to move much lower.

I recently talked to a new friend that owns an “A.” He says he will probably sell it when it goes above $175,000 because he fears what will happen when Buffett is no longer CEO. He is in his 60s and that is not a bad idea, but I suggested he might want to wait to $180,000- $185,000. I think it is likely to get there next year.

Another note: I have twice thought about selling my Bs to get a couple of As. I am glad I haven’t gone that way because I now have the ability to sell small parts of my Berkshire Hathaway account as I see fit, without having to make the big decision of whether to get out entirely.

Musings on Berkshire Hathaway November 14, 2013

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At the quarter end Berkshire Hathaway was up 11% in book value year on year.
It continues to produce cash flow at an astounding rate.
Operating companies were generally up 5-10% in profits, year on year.
Insurance underwriting was down from the quarter before. [Buffett warned his stockholders that this would happen as hedge funds move into reinsurance and pricing deteriorates. Berkshire does not write business if the price is not adequate. This is a cyclical issue.]
Berkshire is poised for another major purchase with $40B in cash.

So basically, it is status quo for the company.

The stock price went down some but has stabilized at $172,000-$175,000 [B-$112-116]
I think with a P/E of less than 15 and a price/book of 1.36 I think it has some room to run.

I have found with my 15 years of ownership of this stock that when investors react to small issues is the time it is most undervalued. Investors reacted to the decreased underwriting profit. They acted like it was some kind of surprise when Buffett himself predicted it.

I think a reasonable assumption going forward is for slightly above 10% returns on book value for the next decade [with some dramatic ups and downs because of the mark to market issue].

When we have another recession Berkshire will again be in position to pick off some seriously undervalued assets and loan money to solid companies dealing with transient issues in exchange for outsized returns.

I have sold a small portion of my Berkshire Holdings at $117 to invest in other opportunities, but it still remains a core holding for me. There will be no changed for me in that.

Berkshire Hathaway; 2nd Quarter 2013 August 22, 2013

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Berkshire remains by far my biggest holding. Here is a brief description of it’s 2nd quarter.

Ultimately, all companies are judged on profits or earnings:

Net Earnings 2nd Quarter= $4541 an increase of 46% over the year before.
Because of the derivatives owned and the accounting of it individual quarters can vary considerably.
Net Earnings Quarter 1 and 2 2013= $9,433 an increase of 48% over the year before.

Since Berkshire now owns outright many businesses and those wholly owned businesses are now a bigger profit center than the investment portfolio, earnings from operations becomes a more important metric to pay attention to.

Earnings from operations 2nd Quarter= $3,919 an increase of 5% over the year before
Earnings from operations Quarter 1 and 2= $7,701 an increase of 21% over the year before
All three major categories [insurance underwriting, insurance investment income, non-insurance businesses] have improved compared to 2012.

I have commented that Berkshire is a cash flow machine.

For the first 6 months of 2013 net cash flow from operating activities was $12.944B an increase of 36% from the year before.

Warren Buffett has been putting capital to work as the cash/cash equivalents has dropped to $35B from $46B.

Since Berkshire’s investment portfolio still obtains the majority of attention some comments are in order.

The investment portfolio still is highly concentrated:
Even though it owns 42 stocks for an approximate value of $89B, the top 5 stocks make up 72% of the value of its portfolio. These stocks are Well’s Fargo [WFC], Coca-Cola [KO], International Business Machines [IBM], American Express [AXP] and Proctor & Gamble [PG]. The only stock of the big five that any action occurred last quarter was purchasing of more Well’s Fargo.

Also must be noted that 2 of the big five are financial companies. Stocks many “experts” still warn against owning. 2 produce staples that are used by folks around the world and 1 is a tech company.

Given the size of the portfolio it is hard to imagine a more concentrated portfolio is possible.

There is in every quarter breathless discussion of what Warren buys and sells, but it is really much about nothing because most of the action in the portfolio is on the tail end [the bottom 20% of value].
To this end it initiated positions in Suncor Energy [SU]and Dish Network [DISH] and continued unwinding positions in Moody’s [MCO] and Kraft, Inc. [KRFT].

The stock price at the end of the 2nd quarter was $169,622 an increase of 27% from the end of 2012.

Currently the stock price is $172,385. At that price the P/E is 15.8.

Given the growth of earnings and cash flow Berkshire still remains undervalued in my opinion.

This is a long term hold for me that was acquired from approximately 1997 until 2009.

Berkshire Hathaway’s 1st Quarter May 7, 2013

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One should never take too much stock into a single quarters results, whether they are good or bad. I caution you on this up front.

Berkshire Hathaway had a blow out quarter. It is really hitting on all cylinders at this point. Only real issue is that Buffett still hasn’t found that big deal for all his cash.

Net earnings came in at $5.017B a 49% increase from the 1st quarter last year. Net cash flow from operations was $6.055B an increase of 30% from the last year. Berkshire now has almost $50B in cash waiting for that correct deal. What this means is what I have been saying about Berkshire for a couple of years now is that the company is a cash flowing machine. Net earnings per share was $2,977 a rise of 51%.

Shareholder equity went up to $198B an increase of 6% for the quarter. A $12B dollar investment in Heinz will close in 2013 as soon as regulatory approval is received.

The price of the stock has risen to $165,000 [$110 for Bs]. This is a 23% rise year to date and a 33% rise over the last year. I no longer consider it severely undervalued, but now just undervalued. Still is a buy in my book with room to run, especially if it continues its earnings power for the next couple quarters.

Warren Buffett sees value in Berkshire Hathaway December 12, 2012

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Warren Buffett and the board of directors of Berkshire Hathaway have raised the mark for repurchasing Berkshire Hathaway shares to 120% of book value from 110%. They purchased a significant amount of “A” level stock [9200 shares] from the estate of a long term holder. For those keeping track at home that is over $1.2B of stock from one estate!

Obviously, he is bullish on this stock at this level. I agree with him. Berkshire continues to produce cash at an alarming rate. Book value continues to increase. However, he has been searching for another blockbuster deal and has not been able to close one in a while. Would expect that to happen at some point in 2013.

Looking forward to analyzing year end data and reading his always fun annual report. As soon as I do, I will report my thoughts for you. I continue to hold substantial amounts of Berkshire in my portfolio.

Berkshire Hathaway 1st Quarter 2011 May 31, 2011

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Before I get into the analysis I want to make it clear that this blog is for amusement only and I have no license to sell securities. This is only an accounting of my investing and the stocks I personally own. Do not take anything I say on this blog as investing advice or a solicitation to purchase or sell securities.

Berkshire’s 1st quarter net income dropped from $3.6B to $1.5 B. Revenue increased 5% over the year before. This is almost solely the result of additional reserves put into the property and casualty insurance business to cover losses from natural disasters [Japan, Australia, New Zealand, etc.] as well as actual payouts for those insurance claims. Buffett has had 7 years of underwriting profit and it is unlikely to get his eighth! There was some additional accounting losses that were required on the equity side even though Buffett has no intention of selling these securities [when it would be a real loss instead of an accounting loss].

BNSF performed very well in the quarter as well as the auto insurance business GEICO [up 6.4%]. Most of the subsidiaries also showed improvement over the year before. For example Marmon net income increased 17%. Shareholder equity increased $2.7B to $160.1B.

There is a major acquisition that should close in the 3rd quarter of 2011 of Lubrizol for $9B.

Bottom line for Berkshire is continued revenue increase, continued shareholder equity increase, and another major acquisition. Some insurance underwriting losses are expected for the year. This is typical in the property and casualty insurance business.

The price of the stock has been beaten down some of late and currently sits at $117,900 for the A’s. I believe this represents a buying opportunity. Berkshire stills throws off much cash every quarter and continues to drive up stockholder value.

Sokol Resigns at Berkshire March 31, 2011

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David Sokol, a key manager at Berkshire resigned. The timing of the resignation makes it clear it was the result of Sokol’s purchase of Lubrizol stock prior to Berkshire’s buyout. This is probably not illegal, but is definitely a breach of ethics. Sokol should have sold his stake in Lubrizol once learning that Buffett was acting on his suggestion to buy the company. The $3m profit he made is most likely a small amount of his personal fortune and hardly worth the trouble he had to know would ensue. Sokol was thought to be a leading candidate for taking over part of Berkshire after Buffett. This is pure speculation and Sokol said he had no interest in the job. His most immediate job at Berkshire was turning around NetJets in which he received much praise from Buffett.
This will probably cause a small short term decline in the value of Berkshire. More concerning long term is who will take over at MidAmerican and NetJets. This does not change my outlook on Berkshire, but does provide an example of how fast and emotionally the market reacts to news.