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Geoff Gannon August 30, 2007

On Uniqueness and Uncertainty

John Bethel of Controlled Greed (one of The Eight Best Investing Blogs) directs his readers to Jim Grant’s piece in The New York Times, and I will do the same to my own readers:

The shocking fragility of recently issued debt is another singular feature of the 2007 downturn — alarming numbers of defaults despite high employment and reasonably strong economic growth. Hundreds of billions of dollars of mortgage-backed securities would, by now, have had to be recalled if Wall Street did business as Detroit does.

Benjamin Graham and David L. Dodd, in the 1940 edition of their seminal volume “Security Analysis,” held that the acid test of a bond or a mortgage issuer is its ability to discharge its financial obligations “under conditions of depression rather than prosperity.” Today’s mortgage market can’t seem to weather prosperity.

If my selection of the above quote seems to suggest that either Grant’s piece or my blog is focused on the extraordinary nature of this credit crisis, I must assure you that I mean to say precisely the opposite.

How severe is this problem? That’s a question best left to others – I have no special competence in that area – but, speaking of special, the question of just how special this crisis is can be answered quite easily. It’s not unique; it’s not unprecedented – and it is consistent with much of human history.

Have you ever noticed how frequently the word “unprecedented” is used when discussing matters financial and economic, and how rarely it is used in most other fields – fields where the experts are, by longstanding custom, less given to overexcitement?

I don’t mean to say that everything is surely safe, certain, and normal; rather I mean to say that insecurity, uncertainty, and abnormality are the historical norm. People who tell you otherwise (including those who say such swings in price and sentiment are “entirely unprecedented”, “a one in a million occurrence”, etc., etc.) know too much statistics and too little history – and by history I mean history properly read, which is to say history read as the participants lived it, not history read through the eyes of a modern man who knows how everything ends before it begins. History is only inevitable when read in reverse.

It’s often said (by experts no less) that now is not the time to act because so much is unknown – because so much is uncertain. Humanity has not been blessed with certainty; but even mere mortals are capable of computing the odds on a quote and making a good bet when given the chance.

There may be good reasons to stand on the sidelines, and I welcome their enumeration – but neither uniqueness nor uncertainty ought to be listed among them.

Read Jim Grant’s Piece

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Geoff Gannon August 15, 2007

On Berkshire Hathaway’s Holdings

Warren Buffett’s Berkshire Hathaway (BRK.B) has filed a 13F disclosing most (but not all) of its holdings. Information regarding two railroads, Norfolk Southern (NSC) and Union Pacific (UNP), was omitted from the public report and filed separately with the SEC (according to the public 13F).

Changes getting a lot of attention online and in print include:

Dow Jones & Company (DJ): This is a new position. Berkshire held 2,781,800 shares of Dow Jones as of June 30th, 2007. Some people seem confused by this one. They shouldn’t be. It’s simple arbitrage. Shares of Dow Jones have traded below Murdoch’s offer for some time allowing Berkshire to accumulate an arbitrage position in the stock. Buffett felt he knew Murdoch well enough to know he was determined to get the deal done. His comments on the deal reflect this fact. He would never have bought shares of Dow Jones absent the offer from Murdoch. For more on this, see Mohnish Pabrai’s quote in a Bloomberg article on Berkshire’s 13F.

Bank of America (BAC): This is also a new position. Let’s see what might interest Buffett here. We have a very large bank that has had an ROE of about 15% or greater for sometime now while achieving an ROA of over 1% for the past several years. The company is basically a nationwide bank with a lot of customers, but it doesn’t cross-sell very well and certainly hasn’t exploited its customers to the fullest extent possible. Bank customers are surprisingly sticky and thus banking (in the U.S.) is a surprisingly good business.

The company has a huge branch network; it is the closest thing to a national bank you can find in the United States. The retail business is probably what attracted Buffett. This company has a lot of branches and ATMs scattered throughout the United States and thus has daily contact with a great many Americans.

In terms of valuation, it does not appear to be priced higher than U.S. banks as a whole. You also get a cash yield that’s comparable to holding a U.S. Government bond.

Most importantly, the company’s tremendous size (market cap around $200 billion) offers the (now) extremely rare possibility of putting a meaningful amount of Berkshire’s cash hoard to work in this stock. Of course, whether that happens or not will depend on the price of the stock. We’ve seen plenty of “elephants” move out of Buffett’s price range after he acquired the initial stake – at the very least, we haven’t seen a lot come down sharply in price – something which would greatly encourage putting a meaningful amount of Berkshire’s cash to work in a single stock.

For full details on Berkshire’s holdings please see 13D Tracker: Summary of Berkshire Hathaway’s 13FGuruFocus: Warren Buffett Buys Bank of America, Dow Jones…, and Bloomberg: Berkshire Bought Stake in Dow Jones.

See the 13F here.…

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Geoff Gannon August 8, 2007

Interesting Items for Thursday, August 9th, 2007

One of The Eight Best Investing BlogsCheap Stocks, has a good discussion of St. Joe (JOE). Highly recommended.

Fat Pitch Financials reports the results of a poll conducted at Value Investing News, which asked “As a shareholder, would you rather have buybacks or dividends?”

Consuelo Mack Wealth Track had Bruce Berkowitz of Fairholme Fund as one of its guests last week. Here’s the video; here’s thetranscript.

GuruFocus is reporting that Warren Buffett’s Berkshire Hathaway added 1.6 million shares to its Burlington Northern (BNI) stake between August 3rd and August 7th. The purchases were made around $80 a share. As of August 7th, 2007 Berkshire held 40,647,730 shares of Burlington Northern – or about 11.5% of the company. Berkshire’s stake in the railroad is worth approximately $3.2 billion at the current market price.

By the way, GuruFocus (an excellent website) has added a fair value voting feature where – when viewing information about any stock – you can provide your view of the fair value of that stock. You can also see the average, minimum, and maximum fair value estimates provided by other visitors to the site. GuruFocus is beginning to use this feature in more interesting ways such as providing a list of the most overvalued/undervalued stocks as voted by visitors to the site and a list of the most frequently voted on stocks.

I thought some readers might be interested in this sort of thing – if you are, go to and check it out.

Finally, the Motley Fool has an interview with Sardar Biglari of Western Sizzlin (WSZL).…

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