Common sense & Warren E. Buffett

May 2 (Bloomberg) -- Charles Munger, whose Berkshire Hathaway Inc. holds $5 billion of options on Goldman Sachs Group Inc. stock, said the role of investment bankers in helping to mask Greece’s financial troubles was “perfectly disgusting.”

“Wall Street to some extent is deliberately trying to profit from sin, and I think it’s a mistake,” Munger told reporters yesterday after Berkshire’s annual press conference in Omaha, Nebraska. “Why should an investment banker go to Greece to teach them how to pretend their finances are different from what they really are? Why isn’t that a perfectly disgusting bit of human behavior?”

Munger has criticized bankers for greed and said he opposes handouts for distressed borrowers in the U.S. The 87-year-old executive, who helped Warren Buffett build Berkshire, said that the Greek work ethic shares blame with bankers for Europe’s debt crisis. Goldman Sachs helped Greece raise $1 billion of off- balance-sheet funding in 2002 through a currency swap, allowing the government to hide debt.

Greece “cheated on the accounting and the investment banks helped them cheat,” Munger said at the conference. “I don’t see why a bunch of Dutch and Germans should save them.”

Joanna Carss, a Goldman Sachs spokeswoman in London, declined to comment.

Greece, recipient of a 110 billion-euro ($163 billion) bailout from the European Union and International Monetary Fund, is seeking to avoid a debt restructuring after its 2010 budget deficit came in more than a percentage point wider than the government estimated. Ireland followed Greece with a bailout of its own, and last month, Portugal became the third euro-region country to seek an international rescue...


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http://noir.bloomberg.com/apps/news?pid=20601110&sid=aRaUe3Sz0ePY

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2. “I don't look to jump over 7-foot bars: I look around for 1-foot bars that I can step over.”

There seems to be a perverse human tendency to make simple things easy. Why buy a well-branded beverage company like [ xyz ] that brings in regular, steady profits every year when you can buy a foreign derivative from an African tech stock that also sells airplanes in Morocco? Instead of getting caught up looking for the next big thing, look to the blue-chip stocks with growing earnings and dividends that are selling in the 10-13x earnings range.

3. “If a business does well, the stock eventually follows.”

This quote seems to come right out of the Benjamin Graham playbook. Graham famously said of the stock market, “In the short run, the stock market is a voting machine. In the long-run, it is a weighing machine.” We should remember that stocks represent a real ownership stake in companies, not mere blips on the screen. Eventually, the stock will correspond to the earnings growth. Dust off the annual report and see if the stocks you own are doing well and growing as a business and enhancing their competitive positions—if you already own the stock and the business is growing satisfactorily, you might have to wait awhile, but eventually, you’ll get your price.

4. “I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.”

Most people don’t take this quote literally, but in fact, there have been extended periods in American history when the stock market closed for extended periods of time. The most famous example is when the market closed from July 1914-November 1914 during World War I. Of course, these companies managed to pay out dividends during this time frame, but no buying and selling took place. While I don’t anticipate stock market closings anytime in our future, it’s best to get in the habit of only putting aside money in the stock market that you won’t need to touch for at least five years.
[ Trysail note: This approach also has the marvelous side effect of imposing a very strict and healthy discipline on what one chooses to purchase— to wit: is this a business that you believe will endure and that you are willing to own for 20 years? ]

5. “If past history was all there was to the game, the richest people would be librarians.”

General Motors. Eastman Kodak. Sears-Roebuck. All of these companies were once considered blue-chips in the eyes of the American investor. In hindsight, it’s easy to see how companies rise and fall. It’s a lot harder to monitor a company’s competitive position as you’re living it. My best gauge of interpreting the health of a so-called blue-chip stock is by confirming that: on a three-to-five year basis, the earnings are growing. Over the same time frame, the dividend is growing. And I like to see that the payout ratio for dividends is less than 70% of earnings. If a company fails these tests, I’ll put my money elsewhere.

6. “Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.”

This quote, more so than any, seems particularly applicable in today’s investing climate. The same people who were loving stocks when they rose 5% during one week in July are now fearful of them after a 10%-15% correction. If the general outlook or your perception of a company’s earnings don’t change, then you shouldn’t dislike stocks more now than you did in July. If your perception of what [a good business] is going to look like in 2020 hasn’t changed in the last month, then why wouldn’t you be thrilled that you can buy in at around $63 now, compared to $70 in July? As an investor, your job is to buy the greatest amount of future earnings at the lowest price, risk-adjusted.

7. “The investor of today does not profit from yesterday's growth.”

Yes, [a winning] stock had a phenomenal decade. The stock price climbed over 6,000%. They introduced [Product A] in 2003, [Product B] in 2006, [Product C] in 2007, and [Product D] in 2010. That fueled a heck of a decade of growth. [The company] could be a great ‘buy’ at today’s prices, but remember, it was the long-term shareholders who benefited from the stock’s great 2000-2010 run. Once you buy a company’s stock, you are betting on the success of the company to continue moving forward. Don’t let a company’s past glories cloud your judgment of its future. [ Trysail note: In general— for high quality businesses— you pay for what you get; bargains are rare. It is very unlikely that you know something that the "market" doesn't know already. On occasion, there are opportunities to purchase high quality businesses but those occasions tend to occur when there is widespread pessimism about the company's prospects for reasons that are obvious and are known by the "market." ]

8. “We believe that according the name 'investors' to institutions that trade actively is like calling someone who repeatedly engages in one-night stands a 'romantic.'”

Buffett, more so than any other well-known investor, has established a reputation for long-term investing. He even noted once that his favorite holding period is “forever.” If you trade by buying and selling stocks every month, then you’re a speculator, not an investor. You’re just hoping to capitalize on the irrationality of someone else. Meanwhile, an investor has an ownership claim proportional to the number of shares he purchases. If you buy 100 shares of [a good business], then you have a claim to 100/3,500,000,000th of the company’s overall profit. Every time someone walks in the store and buys cereal, soda, beer, soap, or whatever, you own a small portion of the overall profits. And if the company grows over time, then so will the value of your ownership stake.

9. “We're still in a recession. We're not gonna be out of it for a while, but we will get out.”

If you wait for everything in America to get rosy, then you’ll miss out on the gains. It's as simple as that. Historically speaking, the prices of stocks run ahead of the overall economy by about six months. We all know that we should ‘buy low and sell high’, but when it comes to actually executing that strategy, we sometimes fall short. If you can have the discipline to put your own surplus funds into the stock market when all the financial pundits are predicting doom, you will put yourself in a superior position to reap the rewards when the good times return.

10. “Risk comes from not knowing what you're doing.”

A goofy notion that always seems to emerge during a recession is that lower (that is, falling) prices imply increased risk. That’s simply not true if you have the perspective of a business owner when you buy stock. Lower prices give you higher earnings yield, and therefore, entitle you to a greater claim on profits. [A good business] is ‘less risky’ to own at $25 per share than it is at $35 because your shares represent a greater claim to the company’s profits. The real risk is if you buy stocks outside your circle of competency, and have no idea how to judge the company’s future prospects.

http://seekingalpha.com/article/290...to-get-you-through-the-recession?source=yahoo

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trysail said:

The quotations are the words of Warren. The comments are by Tim McAleenan.

None of it is rocket science; the hard part is getting enough experience ( i.e., education— which for most human beings consists of learning the hard way ) to understand that Buffett is correct and doing the actual hard work of thorough research and valuation.

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JackLuis said:

So Warren Buffett is rational, and most of the Wall Street shysters that are only trying to separate you from your money?

Mr. Buffet is an investor, Wall Street Sells Hope. It is wise to heed his advise, innumerate or not.

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islandman said:

Buffett just bought his first technology stock in decades...

Is the end of the world upon us?

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trysail said:

He believes that IBM has evolved and is no longer in the technology business. He might be right. We'll see.

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Stella_Omega said:

Manufacturing and distributing what? That's not a sarcastic question-- I really don't know.

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islandman said:

He's using 'manufacturing' loosely, but essentially they are creating, packaging and distributing mutual funds (their product) to anyone willing to buy. They're not focused on outperforming the broader market - - that's incidental to their business model. For them, it's all about asset accumulation, and the bigger their asset base, the more in fees they collect.

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Investing is often described as the process of laying out money now in the expectation of receiving more money in the future. At Berkshire Hathaway we take a more demanding approach, defining investing as the transfer to others of purchasing power now with the reasoned expectation of receiving more purchasing power -- after taxes have been paid on nominal gains -- in the future. More succinctly, investing is forgoing consumption now in order to have the ability to consume more at a later date.

From our definition there flows an important corollary: The riskiness of an investment is not measured by beta (a Wall Street term encompassing volatility and often used in measuring risk) but rather by the probability -- the reasoned probability -- of that investment causing its owner a loss of purchasing power over his contemplated holding period. Assets can fluctuate greatly in price and not be risky as long as they are reasonably certain to deliver increased purchasing power over their holding period. And as we will see, a nonfluctuating asset can be laden with risk.

Investment possibilities are both many and varied. There are three major categories, however, and it's important to understand the characteristics of each. So let's survey the field.

Investments that are denominated in a given currency include money-market funds, bonds, mortgages, bank deposits, and other instruments. Most of these currency-based investments are thought of as "safe." In truth they are among the most dangerous of assets. Their beta may be zero, but their risk is huge.

Over the past century these instruments have destroyed the purchasing power of investors in many countries, even as these holders continued to receive timely payments of interest and principal. This ugly result, moreover, will forever recur. Governments determine the ultimate value of money, and systemic forces will sometimes cause them to gravitate to policies that produce inflation. From time to time such policies spin out of control.

Even in the U.S., where the wish for a stable currency is strong, the dollar has fallen a staggering 86% in value since 1965, when I took over management of Berkshire. It takes no less than $7 today to buy what $1 did at that time. Consequently, a tax-free institution would have needed 4.3% interest annually from bond investments over that period to simply maintain its purchasing power. Its managers would have been kidding themselves if they thought of any portion of that interest as "income."

For taxpaying investors like you and me, the picture has been far worse. During the same 47-year period, continuous rolling of U.S. Treasury bills produced 5.7% annually. That sounds satisfactory. But if an individual investor paid personal income taxes at a rate averaging 25%, this 5.7% return would have yielded nothing in the way of real income. This investor's visible income tax would have stripped him of 1.4 points of the stated yield, and the invisible inflation tax would have devoured the remaining 4.3 points. It's noteworthy that the implicit inflation "tax" was more than triple the explicit income tax that our investor probably thought of as his main burden. "In God We Trust" may be imprinted on our currency, but the hand that activates our government's printing press has been all too human.

High interest rates, of course, can compensate purchasers for the inflation risk they face with currency-based investments -- and indeed, rates in the early 1980s did that job nicely. Current rates, however, do not come close to offsetting the purchasing-power risk that investors assume. Right now bonds should come with a warning label.

Under today's conditions, therefore, I do not like currency-based investments. Even so, Berkshire holds significant amounts of them, primarily of the short-term variety. At Berkshire the need for ample liquidity occupies center stage and will never be slighted, however inadequate rates may be. Accommodating this need, we primarily hold U.S. Treasury bills, the only investment that can be counted on for liquidity under the most chaotic of economic conditions. Our working level for liquidity is $20 billion; $10 billion is our absolute minimum.

Beyond the requirements that liquidity and regulators impose on us, we will purchase currency-related securities only if they offer the possibility of unusual gain -- either because a particular credit is mispriced, as can occur in periodic junk-bond debacles, or because rates rise to a level that offers the possibility of realizing substantial capital gains on high-grade bonds when rates fall. Though we've exploited both opportunities in the past -- and may do so again -- we are now 180 degrees removed from such prospects. Today, a wry comment that Wall Streeter Shelby Cullom Davis made long ago seems apt: "Bonds promoted as offering risk-free returns are now priced to deliver return-free risk."

The second major category of investments involves assets that will never produce anything, but that are purchased in the buyer's hope that someone else -- who also knows that the assets will be forever unproductive -- will pay more for them in the future. Tulips, of all things, briefly became a favorite of such buyers in the 17th century.

This type of investment requires an expanding pool of buyers, who, in turn, are enticed because they believe the buying pool will expand still further. Owners are not inspired by what the asset itself can produce -- it will remain lifeless forever -- but rather by the belief that others will desire it even more avidly in the future.

The major asset in this category is gold, currently a huge favorite of investors who fear almost all other assets, especially paper money (of whose value, as noted, they are right to be fearful). Gold, however, has two significant shortcomings, being neither of much use nor procreative. True, gold has some industrial and decorative utility, but the demand for these purposes is both limited and incapable of soaking up new production. Meanwhile, if you own one ounce of gold for an eternity, you will still own one ounce at its end.

What motivates most gold purchasers is their belief that the ranks of the fearful will grow. During the past decade that belief has proved correct. Beyond that, the rising price has on its own generated additional buying enthusiasm, attracting purchasers who see the rise as validating an investment thesis. As "bandwagon" investors join any party, they create their own truth -- for a while.

Over the past 15 years, both Internet stocks and houses have demonstrated the extraordinary excesses that can be created by combining an initially sensible thesis with well-publicized rising prices. In these bubbles, an army of originally skeptical investors succumbed to the "proof " delivered by the market, and the pool of buyers -- for a time -- expanded sufficiently to keep the bandwagon rolling. But bubbles blown large enough inevitably pop. And then the old proverb is confirmed once again: "What the wise man does in the beginning, the fool does in the end."

Today the world's gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At $1,750 per ounce -- gold's price as I write this -- its value would be about $9.6 trillion. Call this cube pile A.

Let's now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 ExxonMobils (the world's most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B?

Beyond the staggering valuation given the existing stock of gold, current prices make today's annual production of gold command about $160 billion. Buyers -- whether jewelry and industrial users, frightened individuals, or speculators -- must continually absorb this additional supply to merely maintain an equilibrium at present prices.

A century from now the 400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton, and other crops -- and will continue to produce that valuable bounty, whatever the currency may be. Exxon Mobil will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions (and, remember, you get 16 Exxons). The 170,000 tons of gold will be unchanged in size and still incapable of producing anything. You can fondle the cube, but it will not respond.

Admittedly, when people a century from now are fearful, it's likely many will still rush to gold. I'm confident, however, that the $9.6 trillion current valuation of pile A will compound over the century at a rate far inferior to that achieved by pile B.

Our first two categories enjoy maximum popularity at peaks of fear: Terror over economic collapse drives individuals to currency-based assets, most particularly U.S. obligations, and fear of currency collapse fosters movement to sterile assets such as gold. We heard "cash is king" in late 2008, just when cash should have been deployed rather than held. Similarly, we heard "cash is trash" in the early 1980s just when fixed-dollar investments were at their most attractive level in memory. On those occasions, investors who required a supportive crowd paid dearly for that comfort.

My own preference -- and you knew this was coming -- is our third category: investment in productive assets, whether businesses, farms, or real estate. Ideally, these assets should have the ability in inflationary times to deliver output that will retain its purchasing-power value while requiring a minimum of new capital investment. Farms, real estate, and many businesses such as Coca-Cola, IBM, and our own See's Candy meet that double-barreled test. Certain other companies -- think of our regulated utilities, for example -- fail it because inflation places heavy capital requirements on them. To earn more, their owners must invest more. Even so, these investments will remain superior to nonproductive or currency-based assets.

Whether the currency a century from now is based on gold, seashells, shark teeth, or a piece of paper (as today), people will be willing to exchange a couple of minutes of their daily labor for a Coca-Cola or some See's peanut brittle. In the future the U.S. population will move more goods, consume more food, and require more living space than it does now. People will forever exchange what they produce for what others produce.

Our country's businesses will continue to efficiently deliver goods and services wanted by our citizens. Metaphorically, these commercial "cows" will live for centuries and give ever greater quantities of "milk" to boot. Their value will be determined not by the medium of exchange but rather by their capacity to deliver milk. Proceeds from the sale of the milk will compound for the owners of the cows, just as they did during the 20th century when the Dow increased from 66 to 11,497 (and paid loads of dividends as well).

Berkshire's goal will be to increase its ownership of first-class businesses. Our first choice will be to own them in their entirety -- but we will also be owners by way of holding sizable amounts of marketable stocks. I believe that over any extended period of time this category of investing will prove to be the runaway winner among the three we've examined. More important, it will be by far the safest.



http://finance.fortune.cnn.com/2012/02/09/warren-buffett-berkshire-shareholder-letter/

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Walter Schloss, the money manager who earned accolades from Warren Buffett for the steady returns he achieved by applying lessons learned directly from the father of value investing, Benjamin Graham, has died. He was 95.

He died on Feb. 19 at his home in Manhattan, according to his son, Edwin. The cause was leukemia.

From 1955 to 2002, by Schloss’s estimate, his investments returned 16 percent annually on average after fees, compared with 10 percent for the Standard & Poor’s 500 Index. His firm, Walter J. Schloss Associates, became a partnership, Walter & Edwin Schloss Associates, when his son joined him in 1973. Schloss retired in 2002.

Buffett, a Graham disciple whose stewardship of Berkshire Hathaway Inc. has made him one of the world’s richest men and most emulated investors, called Schloss a “superinvestor” in a 1984 speech at Columbia Business School. He again saluted Schloss as “one of the good guys of Wall Street” in his 2006 letter to Berkshire Hathaway shareholders.

“Walter Schloss was a very close friend for 61 years,” Buffett said yesterday in a statement. “He had an extraordinary investment record, but even more important, he set an example for integrity in investment management. Walter never made a dime off of his investors unless they themselves made significant money. He charged no fixed fee at all and merely shared in their profits. His fiduciary sense was every bit the equal of his investment skills.”

Began as ‘Runner’
To Buffett, Schloss’s record disproved the theory of an efficient market -- one that, at any given moment, assigns a reasonably accurate price to a stock. If companies weren’t routinely overvalued and undervalued, Buffett reasoned, long- term results like Schloss’s couldn’t be achieved, except through inside information.

Schloss, who never attended college, began working on Wall Street in 1935 as a securities-delivery “runner” at Carl M. Loeb & Co. He said Armand Erpf, the partner in charge of the statistical department, recommended that he read “Security Analysis” by Graham and David Dodd, published a year earlier. The book became a classic in the field. The firm then paid for Schloss to take two courses with Graham sponsored by the New York Stock Exchange Institute.

Schloss stayed in touch with Graham while serving four years in the U.S. Army during World War II, then went to work for Graham before striking out on his own.

The Schloss theory of investing, passed from father to son, involved minimal contact with analysts and company management and maximum scrutiny of financial statements, with particular attention to footnotes.

Focus on Statements
“The Schlosses would rather trust their own analysis and their longstanding commitment to buying cheap stocks,” Bruce Greenwald, Judd Kahn, Paul Sonkin and Michael van Biema wrote in “Value Investing: From Graham to Buffett and Beyond,” their 2001 book.

“This approach,” the authors wrote, “leads them to focus almost exclusively on the published financial statements that public firms must produce each quarter. They start by looking at the balance sheet. Can they buy the company for less than the value of the assets, net of all debt? If so, the stock is a candidate for purchase.”

An example was copper company Asarco Inc. The Schlosses bought shares in 1999 as the stock bottomed out around $13. In November of that year, Grupo Mexico SA bought Asarco for $2.25 billion in cash and assumed debt, paying almost $30 a share.

‘Guts to Buy’
“Basically we like to buy stocks which we feel are undervalued, and then we have to have the guts to buy more when they go down,” Schloss said at a 1998 conference sponsored by Grant’s Interest Rate Observer. “And that’s really the history of Ben Graham.”

Buffett, in his 2006 letter to shareholders, said Schloss took “no real risk, defined as permanent loss of capital” and invested “in about 1,000 securities, mostly of a lackluster type. A few big winners did not account for his success.”

Edwin Schloss, now retired, said yesterday in an interview that his father’s investing philosophy and longevity were probably related.

“A lot of money managers today worry about quarterly comparisons in earnings,” he said. “They’re up biting their fingernails until 5 in the morning. My dad never worried about quarterly comparisons. He slept well.”

Walter Jerome Schloss was born on Aug. 28, 1916, in New York City, the son of Jerome H. Schloss and the former Evelyn Gomprecht, according to a paid notice in the New York Times. He attended the Franklin School in Manhattan, now part of the Dwight School.

Early Lessons
Schloss learned lessons about earning and saving from his father, whose radio factory warehouse burned down before a single unit was sold, and from his mother, who lost her family inheritance in the 1929 market crash, Alice Schroeder wrote in her 2009 book, “The Snowball: Warren Buffett and the Business of Life.”

He enlisted in the Army on Dec. 8, 1941, the day after Japan’s surprise attack on Pearl Harbor, and rose to the rank of second lieutenant. He served in Iran as part of the Signal Corps, then moved to the Pentagon in Washington to complete his fours of duty.

During this period, he stayed in touch with Graham, who was looking for a securities analyst just as Schloss was finishing up his wartime service. Schloss joined Graham-Newman in 1946.

Schloss first met Buffett at an annual meeting of wholesaler Marshall Wells, which drew both investors because it was trading at a discount to net working capital, according to a 2008 article in Forbes magazine. When Buffett joined Graham- Newman, he and Schloss shared an office.

While Buffett became a star inside the firm, Schloss was “pigeonholed as a journeyman employee who would never rise to partnership,” Schroeder, a Bloomberg News columnist, wrote in her book.

Schloss left Graham-Newman in 1955 and, with $100,000 from an initial 19 investors, began buying stocks on his own.

His wife, Louise, died in 2000. They also had a daughter, Stephanie. In 2001, Schloss married the former Ann Pearson.


http://www.bloomberg.com/news/2012-...r-who-earned-buffett-s-praise-dies-at-95.html

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Gov. Christie: Warren Buffett should just ‘shut up’

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New Jersey Gov. Chris Christie (R) said Tuesday that he was tired of hearing about billionaire investor Warren Buffett, who has lamented the fact that he paid a lower tax rate than his secretary.

“He should just write a check and shut up,” Christie said during an appearance on CNN. “I’m tired of hearing about it. If he wants to give the government more money, he’s got the ability to write a check — go ahead and write it.”

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from pp. 20-21:

...And that brings us to dividends. Here we have to make a few assumptions and use some math. The numbers will require careful reading, but they are essential to understanding the case for and against dividends. So bear with me.


We’ll start by assuming that you and I are the equal owners of a business with $2 million of net worth. The business earns 12% on tangible net worth – $240,000 – and can reasonably expect to earn the same 12% on reinvested earnings. Furthermore, there are outsiders who always wish to buy into our business at 125% of net worth. Therefore, the value of what we each own is now $1.25 million.


You would like to have the two of us shareholders receive one-third of our company’s annual earnings and have two-thirds be reinvested. That plan, you feel, will nicely balance your needs for both current income and capital growth. So you suggest that we pay out $80,000 of current earnings and retain $160,000 to increase the future earnings of the business. In the first year, your dividend would be $40,000, and as earnings grew and the one third payout was maintained, so too would your dividend. In total, dividends and stock value would increase 8% each year (12% earned on net worth less 4% of net worth paid out).


After ten years our company would have a net worth of $4,317,850 (the original $2 million compounded at 8%) and your dividend in the upcoming year would be $86,357. Each of us would have shares worth $2,698,656 (125% of our half of the company’s net worth). And we would live happily ever after – with dividends and the value of our stock continuing to grow at 8% annually.


There is an alternative approach, however, that would leave us even happier. Under this scenario, we would leave all earnings in the company and each sell 3.2% of our shares annually. Since the shares would be sold at 125% of book value, this approach would produce the same $40,000 of cash initially, a sum that would grow annually. Call this option the “sell-off” approach.


Under this “sell-off” scenario, the net worth of our company increases to $6,211,696 after ten years ($2 million compounded at 12%). Because we would be selling shares each year, our percentage ownership would have declined, and, after ten years, we would each own 36.12% of the business. Even so, your share of the net worth of the company at that time would be $2,243,540. And, remember, every dollar of net worth attributable to each of us can be sold for $1.25. Therefore, the market value of your remaining shares would be $2,804,425, about 4% greater than the value of your shares if we had followed the dividend approach.


Moreover, your annual cash receipts from the sell-off policy would now be running 4% more than you would have received under the dividend scenario. Voila! – you would have both more cash to spend annually and more capital value.


This calculation, of course, assumes that our hypothetical company can earn an average of 12% annually on net worth and that its shareholders can sell their shares for an average of 125% of book value. To that point, the S&P 500 earns considerably more than 12% on net worth and sells at a price far above 125% of that net worth. Both assumptions also seem reasonable for Berkshire, though certainly not assured.


Moreover, on the plus side, there also is a possibility that the assumptions will be exceeded. If they are, the argument for the sell-off policy becomes even stronger. Over Berkshire’s history – admittedly one that won’t come close to being repeated – the sell-off policy would have produced results for shareholders dramatically superior to the dividend policy.


Aside from the favorable math, there are two further – and important – arguments for a sell-off policy. First, dividends impose a specific cash-out policy upon all shareholders. If, say, 40% of earnings is the policy, those who wish 30% or 50% will be thwarted. Our 600,000 shareholders cover the waterfront in their desires for cash. It is safe to say, however, that a great many of them – perhaps even most of them – are in a net-savings mode and logically should prefer no payment at all.


The sell-off alternative, on the other hand, lets each shareholder make his own choice between cash receipts and capital build-up. One shareholder can elect to cash out, say, 60% of annual earnings while other shareholders elect 20% or nothing at all. Of course, a shareholder in our dividend-paying scenario could turn around and use his dividends to purchase more shares. But he would take a beating in doing so: He would both incur taxes and also pay a 25% premium to get his dividend reinvested. (Keep remembering, open-market purchases of the stock take place at 125% of book value.)


The second disadvantage of the dividend approach is of equal importance: The tax consequences for all taxpaying shareholders are inferior – usually far inferior – to those under the sell-off program. Under the dividend program, all of the cash received by shareholders each year is taxed whereas the sell-off program results in tax on only the gain portion of the cash receipts...

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from pp. 5-6:

...A thought for my fellow CEOs: Of course, the immediate future is uncertain; America has faced the unknown since 1776. It’s just that sometimes people focus on the myriad of uncertainties that always exist while at other times they ignore them (usually because the recent past has been uneventful).


American business will do fine over time. And stocks will do well just as certainly, since their fate is tied to business performance. Periodic setbacks will occur, yes, but investors and managers are in a game that is heavily stacked in their favor. (The Dow Jones Industrials advanced from 66 to 11,497 in the 20th Century, a staggering 17,320% increase that materialized despite four costly wars, a Great Depression and many recessions. And don’t forget that shareholders received substantial dividends throughout the century as well.)


Since the basic game is so favorable, Charlie and I believe it’s a terrible mistake to try to dance in and out of it based upon the turn of tarot cards, the predictions of “experts,” or the ebb and flow of business activity. The risks of being out of the game are huge compared to the risks of being in it.


My own history provides a dramatic example: I made my first stock purchase in the spring of 1942 when the U.S. was suffering major losses throughout the Pacific war zone. Each day’s headlines told of more setbacks. Even so, there was no talk about uncertainty; every American I knew believed we would prevail.


The country’s success since that perilous time boggles the mind: On an inflation-adjusted basis, GDP per capita more than quadrupled between 1941 and 2012. Throughout that period, every tomorrow has been uncertain. America’s destiny, however, has always been clear: ever-increasing abundance...

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...Buffett told Berkshire shareholders in May that there will be more opportunities for investors. Munger, Berkshire’s vice chairman, added a caveat: You need cash to act. Buffett’s problem when they met in 1959 was that he had plenty of ideas and not enough money, Munger said.

“Now we’re drowning in money,” Buffett replied. “And we’ve got no ideas.”

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Warren Buffett, who has criticized businesses for complaining about tax rates, showed last week how adept he is at lowering his company’s payments to the U.S.

Berkshire Hathaway Inc. plans to limit taxes on more than $1 billion of gains in Graham Holdings Co. stock by swapping the shares for assets owned by the former Washington Post publisher, according to a March 12 regulatory filing outlining terms. Either side can cancel the agreement if lawyers determine it doesn’t qualify for the intended tax treatment.

The deal highlights how Buffett works to reduce obligations to the government at Omaha, Nebraska-based Berkshire. The billionaire chairman and chief executive officer used Internal Revenue Service rules to benefit his shareholders in transactions including a swap with White Mountains Insurance Group Ltd. and the sale of ConocoPhillips stock.

“He has been a student of the tax code really all his adult life,” said Jeff Matthews, a Berkshire shareholder and author of books on the company. “His knowledge is encyclopedic, and he’s always used it to his financial advantage.”

Buffett has cited Berkshire’s tax bill as a point of pride. The billionaire wrote a decade ago that he hopes “the rest of Corporate America antes up along with us” and he continued his critique as his company’s contribution climbed. Its effective tax rate was 31 percent last year, according to data in the most recent annual filing.

‘Complaining Enormously’

“American business is complaining enormously about the level of the corporate income tax,” Buffett said at Berkshire’s annual meeting in Omaha last year. “I would have you take that with a grain of salt.”

In the Graham deal, known as a cash-rich split-off, Berkshire agreed to hand over about $1.09 billion in shares of Graham, which rose more than 100-fold since Buffett bought the stake in the 1970s. Graham will give up a Miami television station, stock it holds in Buffett’s company and about $328 million in cash.

Berkshire owns 1.7 million shares in Graham’s publicly traded Class B stock, more than triple the stake of any other investor. Selling the holding on the open market would trigger capital gains taxes at a 35 percent rate.

Assets Package

Instead, Graham is putting together a package of assets in a new subsidiary that it could trade for its own shares. By including WPLG, the TV station valued at $364 million, the companies plan to meet a requirement that at least one-third of the value be contained in an active business.

Graham also will give Buffett’s company about $400 million in Berkshire stock. Either company may terminate the deal if it doesn’t qualify for “non-recognition of gain and loss,” the filing shows. Buffett, 83, didn’t return a message left with an assistant seeking comment.

Graham is focusing on businesses including its Kaplan education unit and a cable provider after selling the Washington Post last year to Amazon.com Inc. CEO Jeff Bezos. Rima Calderon, a spokeswoman for Washington-based Graham, declined to comment.

The asset swap will scale back an investment that Buffett had pledged would be a permanent holding. It will also recast his relationship with a business to which he has had deep personal ties. He served on the company’s board twice and was a confidant of longtime CEO Katharine Graham, who died in 2001. Don Graham, Katharine’s son and the company’s current CEO, is one of Buffett’s friends.

‘Tax-Efficient Manner’

“It allows Berkshire to reduce its holdings in Graham in a tax-efficient manner, and it also allows Graham Holdings to reduce its position in Berkshire Hathaway in an equally tax-efficient manner,” said Joshua Brady, a partner at Bingham McCutchen LLP in Washington who advises companies on split-off transactions. He wasn’t involved in the Berkshire deal.

Last year, Berkshire and Phillips 66 announced a similar transaction in which Buffett’s firm received a pipeline flow-improver business and cash in exchange for more than $1.3 billion of stock in the energy company. The shares had climbed since Phillips 66 was spun off from ConocoPhillips in 2012.

That followed a deal in 2008 in which Berkshire swapped stock it held in White Mountains in return for insurance businesses and more than $700 million in cash. The agreement was structured to avoid a taxable gain for both companies, according to a statement at the time.

One-Third Standard

In 2006, the U.S. Congress loosened rules that define active businesses, and lawmakers also set the one-third standard. Those changes followed complaints from businesses, and concerns that companies such as Janus Capital Group Inc. were structuring deals that were effectively disguised sales.

The revision was estimated to raise $65 million for the government over a decade.

Split-offs are a mainstay of corporate tax practice, and allowing companies to break apart makes sense as policy, said Lawrence Zelenak, a tax law professor at Duke University in Durham, North Carolina. Liberty Media Corp. used this structure in a 2007 deal to acquire the Atlanta Braves baseball team.

Transactions like the Berkshire-Graham deal don’t push the envelope, Zelenak said.

“It’s more the avoidance of a bad result than getting a wonderful result,” he said. “I don’t think he’s ever suggested that he’s not going to take advantage of things that work under current law because he thinks they’re bad policy.”

Second Richest

Buffett, the second-richest person in the U.S. with a net worth of about $63 billion, has been vocal about tax policy and lent his name to a proposal by President Barack Obama to require a minimum rate on the highest earners. In 2011, Buffett wrote in the New York Times that he paid 17.4 percent of his taxable income to the U.S., the lowest rate in his office.

A year later he said in the newspaper that it was “sickening that a Cayman Islands mail drop can be central to tax maneuvering by wealthy individuals and corporations.”

Buffett’s personal tax bill reflects U.S. policies that provide preferential rates on investment income compared with wages, and his choice to take a $100,000 base salary from Berkshire, a fraction of the compensation received by CEOs of similar-sized companies. He has pledged to donate most of his wealth, which is in Berkshire stock, to charity.

Berkshire slipped 0.5 percent to $183,860 at 4:15 p.m. in New York, lowering its gain to about 21 percent in the past year. Graham Holdings has advanced 62 percent in that period.

Full Ownership

Buffett has said taxes are one reason he prefers full ownership of companies, rather than investing in equities. Stockholders have to pay taxes on dividends disbursed by businesses that have already sent a portion of their profits to the government.

In 2009, Berkshire emphasized tax advantages it received when it sold ConocoPhillips shares for less than what Buffett paid, even as he expected the stock to rebound. The losses would help recover about $690 million in capital gains taxes that Buffett’s company paid in 2006, according to a statement discussing the sales.

Robert Willens, an independent tax consultant, said the Graham deal is consistent with Buffett’s other efforts.

“He does do things that are tax efficient for the corporation,” Willens said. “No question.”

While companies typically seek to limit their tax burden on deals, Berkshire stands out because of Buffett’s public posture on paying one’s fair share of taxes, Matthews said.

“If it were anybody but Warren Buffett, there’d be no story,” Matthews said. “But this is a guy who takes companies to task for going to great lengths to minimize their tax burdens, and he’s been doing it all his career.”




http://www.bloomberg.com/news/2014-...wap-is-latest-deal-to-limit-u-s-tax-take.html

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robertreams said:

Go ahead if you like, send a letter 1 oz or less to Calfornia for 47 cents, I dare you. Warren Buffet is right on! When one sells a house, one hires a realator who works against you and for the buyer, yet earns his cut. The real estate world is built upon value without backing. Your house is valued at whatever the real estate person says your house is worth. and that is usally twice its actual value. If you bought a house in MN on a lake 15 years ago for 20,000 do you really believe its actual value is now 2.000.000? If you buy a piece of land for 100,000 and build a 100,00 house on it, the total value is 100,000. Wher the hell did the other 100,00 0 go? The answer is it was never there to begin with. land with nothing on it is worth nothing! Millions of farmers in the midwest believed their land was worth what it was evaluated at in possible redevelopment dollars as opposed to farm dollars. They were encouraged by their banks to borrow for seed, equipment, etc, at the development level. Then they were foreclosed on when the land could not deliver on the banks estimated vaue. The the banks developed the land and made trillions. It happened all ovr the midwest, Now ther are scarcely any family farms, because the value of their land for farming is less because they are being squeezed out of the market. IT HAS NOTHING to do with any inherent value in the land!

Why don't we see common sense very often? Because there is no such thing. Having sense is very uncommon. If you don't believe me, look at all the people in the US who vote against their own financial interests. "What's the Matter With Kansas?"

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