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Geoff Gannon March 27, 2007

On Buffett, Berkshire, and You

At the end of my post “On Billionaires, Their Buys, and Buffett“, I said “I will follow up with another post on this topic tomorrow. Hopefully, I can give you some idea of what you should and shouldn’t do based on news of Berkshire’s activities in specific stocks.”

This is that post. Unfortunately, before sitting down to write this post, a piece by James Altucher (author of “Trade Like Warren Buffett“) was brought to my attention. I’ll link through Value Investing News, because you should be visiting that site regularly – here’s Altucher’s article.

It’s good. However, there are still some things left for me to cover.

Altucher is right in stressing that Berkshire holds many positions that aren’t presently of interest, because the business has changed (or more usually) the stock price has changed. A rare example of the former is the Washington Post Company (WPO). If you want some idea of what the Washington Post (the stock and the business) looked like back when Buffett bought it, see Max Olson’s excellent article “Warren Buffett and the Washington Post“.

Buffett Holds

The Washington Post is a rare example of a Berkshire position that is no longer attractive because of changes in the business. In most cases, it’s a change in the stock price that disqualifies a Berkshire position from inclusion in your own portfolio. Several years ago, it was painfully obvious that Coca-Cola (KO) was one such stock.

During the Millennium Bubble, shares of Coke were priced for pluperfection. Buffett didn’t sell because he intends Coke to be a permanent holding for Berkshire. If he had been running his partnership, he would have sold. He has a different attitude at Berkshire – one he has made clear to shareholders countless times. As a result, he sometimes sacrifices better returns for Berkshire by sticking with a permanent position he knows is overpriced. Coke is probably the biggest and best known example of Buffett holding a stock he knew Berkshire would be better off selling.

But He Sells Too

However, Berkshire has many lesser known positions that it’s held for a long time. That sometimes leads people to believe that Berkshire never sells. Not true. Berkshire does sell; in fact, it has even gone as far as completely eliminating some large positions.

One recent example of such selling is H&R; Block (HRB). The company, which Berkshire once owned more than 8% of, became badly distracted with operations outside of its core tax preparation franchise. It seems clear Berkshire has eliminated its stake in H&R; Block. The company’s single minded pursuit of diversification and cross-selling is probably what turned Buffett off the stock – since Buffett bought in 2001, management has done a remarkable job of shrinking the company’s moat and scattering its eggs across many different, less secure baskets.

So, how can you avoid having a bad experience in a Berkshire stock? Don’t overpay. Even in some situations where Berkshire has …

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Geoff Gannon March 25, 2007

Book Review: Supermoney

Gannon On Investing’s contributing writer, Steven Rosales, reviews Adam Smith’s Supermoney.

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Geoff Gannon March 24, 2007

Book Review: Trade Like Warren Buffett

Gannon On Investing’s contributing writer, Steven Rosales, reviews James Altucher’s Trade Like Warren Buffett.

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Geoff Gannon March 24, 2007

On Barron’s Top 30 CEOs – Bob Simpson, XTO Energy

The latest issue of Barron’s includes a list of the world’s 30 best CEOs. The names are organized alphabetically (i.e., there’s no #1, #17, or #30). Of the 30 CEOs on this year’s list, 21 were also on last year’s list. One of those “returnees” is Bob Simpson.

It’s hard to argue against including the head of XTO Energy (XTO). The company’s long-term performance has been spectacular. Furthermore, XTO employs a strategy that relies heavily on excellent decision making at the top. In fact, very few companies have a clearer history of being shaped by the major capital allocation decisions of top management.

One of the criteria for making Barron’s list was the expectation that the CEO would be missed by investors if he unexpectedly departed. I don’t know if Bob Simpson’s departure would send XTO shares spiraling; but, I do know that XTO’s strategy requires remarkable management at the top.

The company was founded in 1986 by Steve Palko, Jon Brumley, and Bob Simpson. Brumley left in 1996; Palko left in 2005. This is how Simpson described his company’s founding in a 1999 interview with The Wall Street Transcript:

“We brought to the company the best of the philosophy we learned at Southland, which is to buy quality production and make it better. We started with six folks and no reserves, and we’ve used that strategy to build the company to what it is today a buyer of long-lived, quality properties in areas we understand. We then make the properties better.”


The Barron’s article mentions that XTO’s share price has increased nearly fifty fold since the company went public in 1993.

Such share price performance isn’t surprising when you consider XTO’s business performance. Over both the last five and ten years, XTO’s revenues, earnings, and cash flow per share have grown by double digits – and none of the first digits is a one!

While the entire energy sector has performed well over the last few years, the gap in growth and value creation between XTO and its competitors is real. The longer the period of comparison, the better XTO looks.

Improving acquired properties has been the key to XTO’s business growth and share price growth.

Later in the same TWST interview, Simpson explained why it has been possible for XTO to improve the properties it purchases from major oil companies.

“Of course, they are intelligent organizations doing what is logical for their strategy focusing their best people on their main assets. Ironically, this is what we do on a step-down basis. What was considered a small project with junior talent at a major will be a major project with major-league talent at (XTO).”


Unlike most energy companies, XTO’s future is explicitly dependent upon acquisitions. The company has grown through acquiring and improving properties. While XTO can plow a lot of its free cash flow back into the business through investments in already owned properties, it won’t be able …

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Geoff Gannon March 24, 2007

On Billionaires, Their Buys, and Buffett

I recently read a post by Barry Ritholtz over at “The Big Picture“. It’s called “Investing Advice: If you are NOT a billionaire“. Ritholtz starts with a good premise: don’t try to “tag along” on stock market investments made by billionaires simply because they’re billionaires.

Unfortunately, his argument goes off the tracks pretty quickly. He singles out three billionaires: Kirk Kerkorian, Michael Dell, and Warren Buffett. Ritholtz has a point with Michael Dell, but the same point is applicable to an awful lot of insider buying at large, public companies.

As for Kerkorian and Buffett, I’m afraid I can’t find anything to agree with in those arguments. Regarding Kerkorian he writes:

He has a long and storied history as a corporate raider, greenmailer, etc. When one gets closer to the long dirt nap, one thinks of their legacy. For all we know, this GM bid was an attempt to improve his reputation.

I have to admit smiling when I read this, because about a year ago I wrote a post on some notable billionaires (from the Forbes list) that included a fairly long digression on comments made by bloggers about Kerkorian’s advanced age:

There’s been more than enough written about General Motors (GM) over the past year; so, I won’t add anything here. I will, however, mention that one point made by some blogs (and even some “mainstream” media sources) is nonsensical. It’s been written (presumably with a straight face) that Kerkorian can’t possibly be making a long-term investment in GM, because (at 89) he simply doesn’t have enough time left to see such an investment through.

The strongest argument against this line of reasoning is that making investment decisions based on your anticipation of imminent death is akin to making life choices based on the belief that you don’t have free will and all future events are predestined. In both cases, if your assumption is correct, you gain little or nothing. If your assumption is incorrect, you lose a lot.

Besides, all of this assumes you have no interest in leaving greater wealth behind (whether to charity or your family), which seems rather absurd. Kerkorian isn’t exactly forgoing his own enjoyment; he already has far more money than he could ever spend on himself (that would be true even if he were 29 instead of 89).

Also, it’s worth noting that Phil Carret lived to be 101. I don’t mean to suggest Kerkorian may live just as long; rather, I mean to suggest even at 89, you could be hanging up your cleats twelve years too early. To put that in perspective, if the average American male expected to die twelve years before he actually did, he would be planning to die around the time he would start collecting Social Security.

As a rule, investors who are as passionate as Kerkorian usually die long before they retire.

I don’t have anything more to say about Kerkorian. I do, however, have quite a lot to say …

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Geoff Gannon March 23, 2007

Column: Tweeter Home Entertainment

Guest Columnist Max Olson’s latest article is entitled “Tweeter Home Entertainment“. In this article, Max discusses Tweeter (TWTR) and its recently announced plans to close many of its stores.

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Geoff Gannon March 23, 2007

Value Investing News: Top Stories – Week of Monday, March 19th

1. Sherwin Williams: No Lead Threat
2. Use Sites Like Yahoo! Finance With Caution
3. Tweeter Home Entertainment
4. Value Delusions and Strategic Thinking
5. On the Risk of Settling
6. On Rex Stores, Real Estate, and Ethanol
7. Chou 2006 Annual Report
8. Festival of Stocks #28
9. Profit With Split-Offs
10. Marty Whitman: Letter to Shareholders

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Geoff Gannon March 23, 2007

Book Review: Value Investing

Gannon On Investing’s contributing writer, Steven Rosales, reviews Bruce Greenwald’s Value Investing: From Graham to Buffett and Beyond.

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Geoff Gannon March 22, 2007

20 Questions for Todd Sullivan of ValuePlays

Todd Sullivan is a value investor who writes the ValuePlays blog. ValuePlays is a value investing site focusing on individual stock analysis, investing concepts, and market commentary.

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1. Are you a value investor?


2. What is value investing?

Purchasing a piece of a company at a price that is below a reasonable valuation.

3. What is your approach to investing?

Look for the current “red headed step children” and pick out the gems.

4. How do you evaluate a stock?

I look for industry leading companies who:

– Have a valuation that is equal to or at a small premium to other shares with a comparable earnings growth rate.

– Have a total return yield greater than the current corp. bond rates.

– Are buying back shares.

– Are increasing the dividend.

– And are increasing cash flow from operations.

All that takes about 20 minutes, if it passes those tests, I begin to dig deeper into SEC filings, annual reports, etc. Earnings call transcripts on Seeking Alpha recently have been providing me a ton of insight, not necessarily for the details, but the general “tone” of management.

5. Why do you buy a stock?

To own a piece of a company.

6. Why do you sell a stock?

The business deteriorates or its valuation becomes irrationally high.

7. What investment decision are you most proud of?

MO at the height of the litigation woes in 2003 and MCD during the “mad cow” scare of Jan 2003.

8. What investment decision do you most regret?

Selling USG in June of that year.

9. Why do you blog?

I love the market and love to write. It also makes me a better investor by forcing more detailed analysis and making me stick to my guns.

10. What’s your best post?

Did SBUX’s Donald Really say that?

Picked up in the WSJ Online

11. What’s your worst post?

SHLD: What Will Eddy Do? Just guess work. Of course if I turn out right, pure genius. 🙂

12. What financial publications do you read?

WSJ, Barons.

13. What investing blogs do you read?

Value Investing NewsThe StockmastersSeeking AlphaFat Pitch, Gannon, PeridotInteractive Investor.

14. What’s the best investment book you’ve read?

“Buffett: The Making Of An American Capitalist”

15. What’s the last investment book you’ve read?

“The Intelligent Investor” – I try to read it at least once a year.

16. When did you start investing?

At 19. I’ve always loved the idea of being able to buy a piece of a company and “go along for the ride”.

17. How have you improved as an investor?

One word: Patience.

18. How do you need to improve as an investor?

Believe in my choices more, my biggest mistakes have not been picking the wrong companies but getting out too soon or not buying at all because I doubted my reasoning…. (see USG, CHD).

19. Where are the bargains in today’s

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Geoff Gannon March 22, 2007

Book Review: The Rediscovered Benjamin Graham

Gannon On Investing’s contributing writer, Steven Rosales, reviews Janet Lowe’s The Rediscovered Benjamin Graham.

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