Interesting Items for Saturday, October 27th, 2007

John Bethel of Controlled Greed writes about the Malone / Diller dance described in today’s Wall Street Journal. Read John’s post.

Two of Warren Buffett’s earlier letters to Berkshire Hathaway shareholders are now available online (in PDF). You can now find the 1973 and 1976 letters here.

The Berkshire Hathaway site only archives letters going back to 1977.

Note especially page four of the 1976 letter where a table of Berkshire Hathaway’s equity holdings is provided. Below, I’ve reformatted the table to show each position as a percentage of Berkshire’s equity portfolio at cost:

GEICO Convertible Preferred – 25.75%

Washington Post – 14.10%

Kaiser Industries – 10.97%

Interpublic Group – 6.01%

GEICO Common – 5.46%

California Water Service – 4.79%

Munsingwear – 4.51%

Ogilvy & Mather – 3.66%

National Presto – 2.24%

Other – 22.51%

To understand the rationale for each investment, you need to go back in time to look at the businesses as they really were in the 1970s and the prices they traded at when Buffett bought them.

A search through (online) newspaper archives is always a fruitful experience when researching Buffett / Berkshire. For instance, Buffett explains the logic behind his purchase of Kaiser Industries in the 1976 annual letter to shareholders. If you look through newspaper articles from 1976 – 1977 you will find several that fully explain the situation Kaiser found itself in, the large discount the holding company had traded at, and the manner in which the voluntary liquidation (“breakup”) was effected. You’ll also get an excellent feel for the way Buffett saw the situation. Remember, he reads a lot of newspapers.

By the way, there were a couple good contemporary articles on the GEICO debacle and that company’s subsequent resurrection. If I remember correctly, the best article (from an investor’s perspective) appeared in The New York Times.

It’s also fun to read several articles in succession and see how quickly analyst opinions changed on the company – though to be fair, there were some serious unanswered questions throughout much of that period both concerning GEICO’s capitalization and the full extent of its poor underwriting policies.

Buffett was quoted in a few of the GEICO articles, but he was rather tight-lipped except to say at some price he’d be willing to buy a whole lot of GEICO; at another price he’d be unwilling to buy any of it. Thirty years later, he still sounds much the same whenever he discusses a potential investment.

I highly recommend reading both letters – especially if you’ve already read all of the annual letters archived at Berkshire Hathaway’s own site.

Max Olson, who has written several excellent articles for this site – including Warren Buffett and the Washington Post – recently started his own blog. His latest post is entitled “PetroChina: A Look Back“. Max has carved out a niche for himself writing articles that “reverse engineer” great investment decisions. His PetroChina post is well worth reading.

Warren Buffett’s …

Book Review: Active Value Investing

Review by Geoff Gannon

Vitaliy Katsenelson’s “Active Value Investing” is one of the best investing books published in the last few years. The book is both readable and teachable. It focuses on general principles rather than specific strictures. Although “Active Value Investing” is written in an easily approachable manner, it is structured much like a good textbook ought to be. In this way, Katsenelson’s 282-page book captures much of the spirit of Graham and Dodd’s magnum opus without ever losing sight of our modern day market and the unique challenges it presents.

Katsenelson’s thesis is that the U.S. stock market won’t soon return to its old ways, the ever-rising crescendo of the 1982-2000 bull market on which many of today’s investors were weaned:

For the next dozen years or so the U.S. broad stock markets will be a wild roller-coaster ride. The Dow Jones Industrial Average and the S&P; 500 index will go up and down (and in the process will set all-time highs and multi-year lows), stagnate, and trade in a tight range. They’ll do all that, and at the end of this wild ride, when the excitement subsides and the dust settles, index investors and buy-and-hold stock collectors will find themselves not far from where they started in the first decade of this new century.

With this opening salvo, the reader might well expect the book to devolve into a barrage of unabashed bearishness.

Thankfully, it does not.

Instead the book argues that the bull/bear dichotomy is a false one. True, there are long-term bull markets – but, there are really very few long-term bear markets in the sense in which most people understand the term. Rather, unfavorable long-term market trends tend to be of the “cowardly lion” variety, “whose bursts of occasional bravery lead to stock appreciation, but are ultimately overrun by fear that leads to a subsequent descent“.

That’s the crux of Katsenelson’s book – and quite a crux it is. He has the data to support it – and anyone who has spent any time looking at long-term market trends knows that it doesn’t take much to demolish the bull/bear dichotomy which seems to fascinate Wall Street (and infect its literary output). Terms which may make a good deal of sense in the short-term are used as if they applied to long-term trends, when almost all of market history shows they don’t.

I’m sure it’s more fun to be unabashedly bearish – especially when writing a book – than it is to be realistic. But, the facts are the facts – and the facts say that the word “bear” doesn’t really belong in our long-term market vocabulary.

Katsenelson provides a great service when he demolishes the bull/bear dichotomy and shows his readers the truth – the boring, honest truth – that in the long-run, sometimes markets go up and sometimes markets go sideways; sometimes P/E ratios expand and sometimes P/E ratios contract. These trends can last a long time. …

Interesting Items for Monday, October 01, 2007

Controlled Greed, one of The Eight Best Investing Blogs, has two posts (“life of the blog” and “year-to-date“) discussing the performance of its stock picks.

Value Discipline (another one of The Eight Best Investing Blogs) has several new posts:

The Sub-Prime Crisis and the Hedge Fund Collapse

Is Government Involvement in Energy Worth the Investment Risk?

Nordson and High Quality Capital Goods Companies

Finally, George of Fat Pitch Financials (yes, another one of The Eight Best Investing Blogs) writes about NCAV (net current asset value) bargain Concord Camera (LENS) and its recent 10-K. Even if you don’t like the stock (or the company – and there’s plenty not to like) you might want to read the post, as true net/nets are currently an endangered species.

Over the next week you may notice some changes to this site as I clear away some of the stuff I haven’t been able to update and prepare to resume some other activities on a regular basis. It’ll all make sense in about a week.

For now, please just bear with me – and don’t worry if some of the site suddenly disappears. It’s all part of an effort to improve the site and keep it current.

The blog itself won’t be changing.

Thanks for your understanding.

Visit Controlled Greed

Visit Value Discipline…

Interesting Items for Wednesday, September 26, 2007

Bill Rempel writes about John Hussman.

Nintendo (NTODY) was mentioned in today’s Wall Street Journal, as its soaring stock price has recently given it the second largest market cap in Japan (for now).

You may remember I wrote about Nintendo a little over a year ago. All of the information in that post is out of date – but, if you like opening time capsules, feel free to have a look.

I was generally positive on the company, but (as you’ll see below) I concluded with something far short of a clear endorsement of the stock. You would have done best to disregard my closing remarks; the stock has performed extraordinarily well since I wrote that piece. Here’s how I ended things last year:

So, if you are comfortable with Nintendo’s position in handheld gaming and you truly believe in both the company and the Wii, shares of Nintendo would be a reasonable long-term investment at this price. However, even considering the large amount of cash and securities on the balance sheet relative to Nintendo’s market cap, Nintendo isn’t a “value” style purchase based on past performance alone. Buying shares at the current price is a bet on a brighter future.

While I like Nintendo’s future prospects, it’s usually safer to bet against a revolution. So, I’d have to say Nintendo is a very interesting business that’s priced a bit too high to be a very interesting investment.

Visit Bill Rempel’s Blog…

On Warren Buffett and the Federal Reserve

With the larger than expected Fed rate cut today, I thought it might be appropriate to add some perspective from Warren Buffett. He made these comments to CNBC’s Becky Quick, before the announcement from the Fed:

Warren Buffett: (Laughs strongly.) I represent a different view, maybe, than your other viewers. I don’t think it makes any difference whatsoever to an investor in stocks what they do today. I don’t care, I wouldn’t care whether they raise the rate in terms of what I would do in stocks. If I knew exactly what they were going to do, I would not change a buy or a sell order that I have in…The important thing in stocks is to buy a stock in a good business at a reasonable price. Anybody that is buying or selling stocks based on what the Fed is doing, or what they think they’re going to do at their next meeting, I think is destined to not having a great financial future. It really doesn’t have anything to do with the value of good companies 3, 5 years from now.

WB: I’ve worried about inflation every day since I learned about the phenomenon, 60 years ago. (Laughs.) It’s always a danger, always a danger. It’s never gone. It’s always in remission, and question is how well do you do over time controlling it. But, the purchasing power of the dollar will go down over time.

Read Full Transcript…

Interesting Items for Saturday, September 15th, 2007

Value Blog Review, one of The Eight Best Investing Blogs, has a review of another one of the eight best investing blogs – Controlled Greed.

Value Discipline discusses Janet Lowe’s “Warren Buffett Speaks”.

And, finally, if you haven’t read Max Olson’s two-part series on Warren Buffett’s investment in See’s Candy, please do so now:

Read Quality Without Compromise, Part I

Read Quality Without Compromise Part II…

Guest Column: Quality Without Compromise, Part II

Gannon On Investing guest columnist, Max Olson, has written the second article in a two-part series on Warren Buffett and his investment in See’s Candy.

The article, entitled “Quality Without Compromise, Part II“, is an excellent complement to Max’s earlier article, “Warren Buffett and the Washington Post“.

Read it now…

Guest Column: Quality Without Compromise, Part I

Gannon On Investing guest columnist, Max Olson, has written the first article in a two-part series on Warren Buffett and his investment in See’s Candy.

The article, entitled “Quality Without Compromise, Part I“, is an excellent complement to Max’s earlier article, “Warren Buffett and the Washington Post“.

Read it now…

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

Visit Controlled Greed

See The Eight Best Investing Blogs…

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 Streetinsider.com 13D Tracker: Summary of Berkshire Hathaway’s 13F, GuruFocus: Warren Buffett Buys Bank of America, Dow Jones…, and Bloomberg: Berkshire Bought Stake in Dow Jones.

See the 13F here.…