Previous Post on Berkshire Hathaway BuyBack

A few days ago it was reported that Berkshire Hathaway bought back $1.2 Billion dollars worth of CLASS A Berkshire Hathaway(股票代號: BRK-A).  The purchase was not done on the open market, and it was all purchased from a single long time investor.  For comparison purpose, the company has spent only $126 Million dollars for the net purchase of shares the last four quarters combined.

Berkshire Hathaway has announced raising its maximum target price of Class A shares to 120% of Book Value.  Previously the most Berkshire Hathaway was willing to pay was 110% of Book Value.  Obviously Book Value is a number updated at most quarterly because it is a balance sheet item.

There is a speculative possibility that Warren Buffett sees an improving economy through the lens of his collections of businesses.  Aside from insurance and investment, Berkshire has a number of housing related businesses.  I am not sure about the rest of the country, but in the San Francisco bay area, especially the silicon valley, I notice a dramatic positive attitude shift towards housing, and prices are appreciating rapidly.  This could mean the company is becoming even more undervalued.  The Net Present Value of purchasing its own share could be more favorable than many other investment projects that the company has looked at.  Buying a dollar for fifty cents is the primary motive of any value investor.

However, I think, once again, this recent vote of confidence on its own share is just a cover up.  This could be part of the succession transition plan.  By reducing the float in circulation, this move probably serves to further solidify future management and board control of the company through Class A share, which is worth 1500 times a Class B share but 10,000 times the voting rights of a share of Class B.  This large purchase of not-from-the-open market signals the company’s concern of “CONCENTRATION OF POWER” outside the company insiders.  In stead of Buying Back on the open market from a variety of retail investors whose individual proxy impact is negligible(Why? Because each share Class A costs $130,000.00 yeah! More than the average “ANNUAL” salary!), Buy Back from one large shareholder, who has the potential ability to influence proxies against management’s wish, in essence eliminates future troubles such as proxy fight.

This is not an attempt to undermine Berkshire Hathaway as an iconic company.  On the contrary, Berkshire Hathaway will remain an economic powerhouse for years to come.  As long as the management and board serve with the best interest of all the shareholders in mind, shareholders will benefit from the insights and expertise of the managers.  A corporation is rarely a place for democratic rule.

Most traders and investors are short sighted.  We are wrapped up as a whole in the daily price movement of a stock.  It is true that the SHORT TERM RETURN of a stock can come from capturing share price fluctuation.  However, LONG TERM RETURN can only come from the long term actual profit the underlying business generates.

Berkshire takes it one step further whenever it can,  it buys whole business and skip the waiting for the profit reflection on a stock price.  This way Buffett and company have direct access to the profit generated and apply that capital to make more investments that churn out more cash.  The current Free Cash Flow after paying for debt service is about $17 Billion a year.  The company has about $46 Billion on its balance sheet.  That is a lot of ammunition, and the company is yearning for the next big investment.

With Berkshire’s business model and Buffett and company’s sharp investment acumen and unwavering mentality, this is how INTEREST COMPOUNDING can truly work to make people wealthy.

I am long term bullish.  A price floor may have been temporarily established at 120% of current book value due to buyback.  However, always proceed cautiously and buy with a margin of safety.

We welcome comments and thank you for your supports.  Have a Safe and Happy Holidays!



Forming a target list

After a review of my investing plan, I went back and revisited Warren Buffet’s Berkshire Hathaway(股票代號: BRK-A; BRK-B) business acquisition criteria, that help shaped the basis of my investment criteria.  The fact that we at here, on many occasions, advocate traders and investors to generate a list of investment/trading ideas that one should stick to and follow regularly, the criteria that I am going into detail here can help formed your watchlist.

The following is the acquisition criteria that has been in place at Berkshire Hathaway for a long time, it is “succinct and simple”.  The difference between investing and trading is that, investing requires a very long horizon, patience, and does not usually require week in and week out getting in and out of positions.  The idea is to identify excellent businesses that are temporarily trading at depressed market quotational price, preferably much lower than its intrinsic value, as calculated based on its high certainty future cashflows discounted back to the present with an appropriate discount rate.

The essence of trading is basically the pure capturing of the positive market quotational differences by identifying and following some sort of trends.  Underlying businesses characteristics are of little use relative to the issue’s market price behavior.  Trend analysis are usually achieved by technical analysis, which is useful in identifying short term prominent trends, supports and resistances.  The time frame for trading is usually short, from fraction of a second to weeks or months.  Therefore, options(short and especially long when done properly) are excellent vehicle for short term trading because of the capital requires(leverage).

Catalysts are very important in affecting a significant market quotational change.  Investment at depressed price requires catalysts, also known as the generosity and subsequent agreement of the masses to bring prices back to the appropriate level.  It is similar with trading in this regards that most traders are buying or shorting in anticipation of some catalysts kicking in to realize the significant price  change, it’s just that technical analysts hope to shorten the time horizon with their fantastic tools.  More importantly, it is the “right catalyst” that propel a stock price to behave the way traders expected them to behave.  In this case, that’s why it is important for traders to “stop loss” if the catalyst(s) were wrong or fail to stimulate the price the way the traders envisioned from their technical analysis.  On a more depressing note, the biggest whales such as Buffett, Icahn, Soros and big name fund managers can provide their own catalysts simply because they can make a lot of noises and are watched and followed religiously, while you and I, until we become whales, are at the mercy of others seeing what we saw in an issue.  Please don’t forget about tradeoptions4living when any of you become a whale.

While this idea is not advocated by most financial planner and/or money manager, because investing(the Warren Buffett fundamental/value way) is different from speculation, legendary investor Warren Buffett is very comfortable putting the majority of his fund in one or a few companies.  That is because he does not put a time line in his investments, he simply sits and waits, and lets the price runs its course.  The duration is usually much longer than what traders have in mind, but because he purchased at a price so good that the annual return of his investments usually outperform the broadmarket index.  Long term value investors, after doing their homeworks, do not stop loss simply because of daily market quotation loss, or sell because of a quick gain.  They incorporate the criteria I am detailing here to ensure the investments, or more clearly, the underlying businesses, perform above average for a very long time with high return on capital.  Make sure you do not mix trading with investing by not stopping loss with your long options.  Long options lose time value everyday, and if the anticipated price movement do not occur within your “time frame”, or the movement go against your expectation, one must stop loss.  Because intelligent investing is to avoid permanent capital loss, trading long options by definition is not investing buffett style(due to time value degradation), you must exercise cautions when determining what portion of your capital you should commit for long options speculation.


We are eager to hear from principals or their representatives about businesses that meet all of the following criteria:
(1) Large purchases (at least $75 million of pre-tax earnings unless the business will fit into one of our existing units),
(2) Demonstrated consistent earning power (future projections are of no interest to us, nor are “turnaround” situations),
(3) Businesses earning good returns on equity while employing little or no debt,
(4) Management in place (we can’t supply it),
(5) Simple businesses (if there’s lots of technology, we won’t understand it),
(6) An offering price (we don’t want to waste our time or that of the seller by talking, even preliminarily, about a transaction when price is unknown).

The larger the company, the greater will be our interest: We would like to make an acquisition in the $5-20 billion range.

Criteria #2 is what defines an excellent business.  The crust of investing is defined at Berkshire Hathaway, the transfer of purchasing power to others now with the reasoned expectation of receiving more purchasing power-after taxes have been paid on nominal gain- in the future.

Consistent earning power-A trait only the very best businesses with a certain moat or moats protecting them from competition can demonstrate consistently, simply because in economics above average return on capital attracts competitions, and this tends to reduce the return back to around average.  The very best businesses have characteristics either tangible and/or intangible that help them overcome their competitions.

The fact that future projection is of no interest to Buffett demonstrates the idea that his style on investing only allow this whale to swim in established businesses with great business models, and criteria #5 only stipulate that the business is easy to understand.

Criteria #3 is the definition of good return.  During good time, debt tends to magnify the return earned on equity capital, but debt also enhance the inherent business financial risk.  Do not be fooled by above average return utilizing a large amount of debt, one must check to see if this is a common characteristics among its industry, but even then, beware of high leverage as when the tide of good time is gone, you don’t want to be revealed as swimming naked.

Criteria #5 is very important for the average long term investors.  A simple business that does not require constant innovation can usually operate with lesser working capital than technology intensive businesses.  Or simply put, boring simple business protected by some form of moats that are easy to understand allows long term investor to assess, with relative ease, the long term performance of this business.  This resonates with the idea of circle of competence.  The average joe has a small circle of competence meaning they can understand the simplest businesses the best.  As your investing and business intelligence increase, one can increase his or her circle of competence.  For example, an engineer may know why the technologies at certain high tech firms help contributed to their dominance, and how these scenarios of market dominance may evolve, such idea of business projection may be out of the scope of the average joe but crucial in determining the business future if one can decipher such complications.

Master these concepts, and you are on your way to enhance the quality of the business names you will be following, and actually understand what makes you want to follow these names.



Many of us know that American Express(股票代號: AXP) has been a long time holding in Berkshire Hathaway(股票代號: BRK-A, BRK-B)’s equity portfolio, but did you know the story behind the purchase?

In the 60′s, American Express through a third party verified the $60 million collateral used for a  loan in excess of $175 million(close to $2 Billion in nominal term) for the then salad oil king.  When the salad oil king defaulted on the loan, the creditor moved in to seize the tanks full of salad oil, but to their surprise the salad oil were never there.  American Express was ultimately found responsible for the creditor’s loss, as a result, the market hammered the share price of American Express, ruthlessly.

The then young Warren Buffett saw this, and reasoned that, the other business segments of American Express were fully intact, the beat down of the share price was excessive on an isolated event.  American Express had the ability to absorb such loss, there was no difference from the company paying out a one time dividend the amount of the total liability owed.  Buffett consequently began amassing the shares while the world was selling.  Needless to say what happend afterward.

As far as JP Morgan Chase(股票代號: JPM) is concerned, a long term investor should start paying attention and judge for yourself if a repeat of the salad oil scandal is about to surface.  The initially reported net loss was $800 milliion, and then it was later revealed the mark-to-market loss on that specific instrument was $2 Billion.  Some analysts estimated that by the time the synthetic credit derivative position is completely unwinded, the total loss would be as much as $4 Billion.  My view is, even if the net loss is equivalent to the bank’s total one year net income, which is $17 Billion plus, more than four times the estimated largest loss, and wiped out the bank’s earning for the entire year, it should not affect the rest of the business units, which have been extremely robust.  In my opinion, the core of the bank’s business is very strong, the market has short term memory, the bank’s reputation will prevail, and JPM remains one of the best banks, if not the best, in the entire world.  

So far the market has punished the company by pushing down the stock 10%, I would really start paying attentiion, if the margin of safety continues to expand much further.  If the company can make $17 billion dollars a year, without absolutely any kind of future growth, I would still value this company today at $170 Billion, which is already higher than the current market cap JPM is trading at.  Obviously, the regulator’s view of this incident will impact the implementation of Dodd Frank and especially the Volcker rule, this is going to negatively effect money center banks’ future propsects.  Nonetheless, when the market over zealously takes down an otherwise healthy company, it is time to unleash one’s ability to think with your head, and not with your heart attitude, and position yourself to benefit from market turmoil.

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In Buffett’s own word, ” I am 15% Fisher, and 85% Benjamin Graham”. Benjamin Graham, cowrote with David Dodd the two books, security analysis and the intelligent investor, which Buffett read as a teenager and it made a big impression on him.  The methodological approach to valuing security appealed to the mathematically minded young Warren Buffett.  Buffett sought out  and studied under his future mentor at Columbia Business School, and earned the only A Graham had ever given out to his class of security analysis.  Buffett later worked for Graham and continued to immerse in his teaching and approach to investing.

If Graham is the father of value investing, then Philip Fisher, a pioneer in growth investing, is largely responsible for any complimentary refinement to Buffett’s investment philosophy.  In Fisher’s book, common stock and uncommon profit, he proposed the best time to sell a stock is never, thus contributing to Buffett’s buy and hold forever preference, and Fisher stressed that to only buy the very best business, thus helping Buffett to refine his selection of only the best securities representing the greatest businesses. This has contributed to, I would say the extra 5-6% in annualized compounded rate of return in Berkshire Hathaway’s book value, in comparison to Ben Graham’s own value only portfolio of about 15% annualized compounded return.


“Price is what you pay, and value is what you get!”  ~~Benjamin Graham, Warren Buffett’s teacher


Last week, we got a preview of the long anticipated letter to the shareholders of Berkshire Hathaway by the legen-wait-for-it-dary investor Warren Buffett. Allow me to summarize it, and hopefully share with our readers the wisdom of the Oracle of Omaha. (BTW, I would suggest everyone who considers him or herself a serious value investor, to at least buy one Brk-B share so that you are eligible to attend the annual shareholder meeting in the city of Omaha, Nebraska, and witness Mr Buffett’s midas touch on value investing.(Mr. Charlie Munger comes with purchase:-)!)

From Warren Buffett’s point of view as a “simple buy and hold value investor”

Buy productive assets.  Assets that keep on giving in terms of earnings, dividend crops,offsprings, rent, etc. During
any extended period, the overall performance of such asset always outperform currency based asset such as u.s. treasuries right now, and lifeless asset such as gold, especially right now. The class of assets he prefers “now” is equity, and he calls it “pile 1″ in his article.

It does not mean that he does not invest in “pile 2″ in his article such as gold, silver, treasury bonds, junk bonds, or financial derivatives such as options. Buffett will only invest if such assets are “mispriced“(價格因某種原因(inefficiency of the market or excessive fear)而沒有達到它真正的巿場價值). One must first, however, be educated well to see such opportunity, and ones’ emotion must not be led by the herd(不能有羊群心理). To seize opportunity, one must strike while fear is prevalent, and refrain from acting on greed when everyone else is most 大膽(not afraid). He is not claiming that the U.S. treasury or gold is in a bubble or the bubble will soon burst, he just simply would rather not guess when the music stops for this game of musical chair, “bond and gold price speculation 2012 edition”, while at the same time, there is a great asset class of quality U.S. equity out there that is relatively cheaper than treasuries or gold.

Return is measured by him based on purchasing power(nominal的購買能力,意即如果昨天他投一元,他隔天要的回報並非1.5 or 2元,而是昨天一元能買到的東西如果今天值二元,他要的回報一定要遠遠超過今天的二元). 換一句話就是我們blog 一直強調的high net present value. 另外一點,to buy productive assets 也是邁向真正財富自由的正途.

Conclusion: choose pile 1 over pile 2 to outperform long term, and invest in pile 2 only if mispriced.

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