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Tuesday, July 29, 2008

CNBC: Berkshire's 25% Plunge Has Buffett Bulls Screaming 'Buy'

Warren Buffett: Feeling the Bear's Bite
Warren Buffett's Berkshire Hathaway hit a new milestone today (Monday) in a descent that had already put the stock into a 'bear market.'

The class A shares closed exactly 25 percent below the all-time high set last December.

Today's closing price of $111,900 each is the lowest for the stock since August 15, almost one year ago.

Berkshire is down 21.0 percent in 2008, underperforming the benchmark S&P 500 stock index, which has dropped 15.9 percent this year.

While Doug Kass, who has been vocally shorting Berkshire over the last few months, is presumably celebrating, some long-time Buffett bulls see an increasingly ripe buying opportunity.

This morning on CNBC's Squawk Box, two of them made their case in a segment with Carl Quintanilla.

Andrew Kilpatrick, who wrote the Buffett book Of Permanent Value, concedes that Berkshire is having a "tough year" amid weakness in the housing and insurance markets. But he expects Buffett "will wind up doing better than most" due to the strength of his balance sheet.

Whitney Tilson, of T2 Partners, argues that while there are "short-term headwinds", Buffett will be able to take advantage of the current "weak and choatic" environment. He sees a substantial increase in the liklihood Buffett will use his big cash holdings to do a "transformative" deal. While Tilson would like to see Berkshire buy American Express


35.37 -1.25 -3.41%
[AXP 35.37 -1.25 (-3.41%) ] outright, he doesn't think that particular deal is likely.

Current Berkshire stock prices:

Class A:

Berkshire Hathaway Inc

111900.0 UNCH 0
[US;BRK.A 111900.0 --- UNCH (0) ]

Class B:

Berkshire Hathaway Inc

3730.0 UNCH 0
[US;BRK.B 3730.0 --- UNCH (0) ]

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BLOOMBERG: Moody's McDaniel Fails to Deter Bears as Short Interest Rises

By Caroline Salas

July 29 (Bloomberg) -- Speculators are increasing bets against Moody's Corp. as sales of asset-backed debt evaporate and regulators probe conflicts of interest at credit ratings companies.

Short interest in New York-based Moody's jumped to a record 47 million shares in mid-July, an increase of 10 percent from the end of June and double a year ago, according to data compiled by Bloomberg. Moody's, whose largest shareholder is Warren Buffett, fell 39 percent in the past year in New York Stock Exchange trading.

Chief Executive Officer Raymond McDaniel, 50, has failed to convince investors that the company can rebound from the seizure in credit markets that began in August. Moody's will probably say tomorrow that second-quarter earnings before one-time items fell to 47 cents a share, or about $115 million, from 76 cents, or about $205 million, a year earlier, according to the average estimate of seven analysts surveyed by Bloomberg.

``They're going to have a tough second quarter,'' said Edward Atorino, an analyst at Benchmark Co. in New York who ranks the shares ``outperform'' because he expects demand for ratings to increase. ``The real issue is: When do bonds come back?''

While Moody's exceeded analysts' estimates the past two quarters and its shares outperformed the Standard & Poor's 500 Index so far this year, speculators anticipate more declines. Sales of residential- and commercial-mortgage bonds, asset-backed debt and collateralized debt obligations created by banks fell 66 percent to $510.3 billion in the first half from the same period in 2007, according to newsletter Asset-Backed Alert.

Shares Fall

Moody's fell about 6 percent this year to $33.55, compared with 13 percent for the S&P 500, which tumbled 16 percent. Buffett's Berkshire Hathaway Inc. in Omaha, Nebraska, owns about 20 percent of Moody's. Buffett didn't return a call for comment. McGraw-Hill Cos., the owner of S&P, is down 15 percent to $37.22.

S&P, Moody's and Fitch Ratings, the three-biggest ratings companies, are being investigated by U.S. and European regulators for providing top grades to securities backed by U.S. subprime mortgages that sparked more than $468 billion of writedowns and credit losses at the world's financial institutions.

A 10-month SEC investigation found the companies improperly managed conflicts of interest and violated internal procedures in granting top rankings to mortgage bonds. The SEC said July 8 its probe found analysts contributed to fee discussions and weighed losing clients over certain ratings.

McDaniel's `Optimistic'

``I do remain optimistic about the long-term growth prospects of this business,'' McDaniel said at the annual meeting of shareholders in New York on June 5. ``It's less likely we will have changes that will impact our core business model or operations,'' he said.

Short interest in Moody's rose from 23.1 million shares a year ago, or almost 10 percent of the company's 245 million shares outstanding. Short sellers borrow stock and sell it in the hope of profiting by repurchasing the securities at a lower price later and returning them to the holder. Anthony Mirenda, spokesman for Moody's, declined to comment on the short interest.

Short interest in McGraw-Hill rose to 13.6 million as of July 15, down from 14.3 million at the end of June. New York- based McGraw-Hill may report a 15 percent drop in second-quarter profit today, according to the average of analyst estimates.

Moody's has ``initiated a wide range of reforms to refine our analytical methods, improve transparency and enhance our overall independence,'' Mirenda said. S&P will ``continue to take any additional steps needed to improve our processes,'' spokesman Edward Sweeney said after the SEC released its findings.

Management Changes

McDaniel ousted President Brian Clarkson in May and removed Noel Kirnon as head of structured finance this month. He said employees violated internal rules in assigning ratings to constant proportion debt obligations. Moody's awarded AAA ratings to at least $4 billion of CPDOs, or bonds backed by derivatives, before the securities lost as much as 90 percent of their value.

McDaniel eliminated 7.5 percent of its workforce, reduced compensation and lowered operating expenses 17 percent in the first quarter. Moody's reported earnings of 48 cents a share in that period, beating analysts' estimates of 35 cents. Moody's earned 60 cents a share in the fourth quarter, compared with an average estimate of 47 cents.

The Emory University-educated lawyer joined Moody's in 1987 and oversaw its expansion in international markets. He became chief operating officer in January 2004 and CEO in 2005.

Profit rose more than 30 percent in 2005 and 2006 as sales of CDOs soared. CDOs package pools of debt and slice them into pieces of varying risk, requiring ratings for each part. Moody's profit fell 7 percent in 2007 as CDO issuance dropped. McDaniel's compensation declined 10 percent to $7.4 million in 2007, according to company filings.

Second-quarter revenue will drop 26 percent to $480 million, according to analysts' estimates. McDaniel lowered his forecast for annual profit in March to $1.90 to $2, from a February prediction of $2.17 to $2.25.

To contact the reporter on this story: Caroline Salas in New York at

Last Updated: July 29, 2008 00:01 EDT

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BOSTON.COM: Price increases bolster Kraft

July 29, 2008


Kraft Foods Inc. reported earnings that topped analysts' estimates and said full-year profit may be higher than it forecast after increasing cheese, chocolate, and Planters peanut prices to cover rising energy and grain costs.

Profit also benefited on a gain from commodities hedging and the decline in the dollar overseas, Kraft said.

Net income rose for the first time in four quarters after Kraft boosted prices on 90 percent of its foods and beverages and shipments fell less than the company expected. Chief executive Irene Rosenfeld ordered additional price increases and said single-serve pizza, hormone-free cheeses, and other new items will minimize the loss of customers who are seeking less expensive brands.

Second-quarter net income advanced 3.5 percent to $732 million, or 48 cents a share, from $707 million, or 44 cents, a year earlier. Excluding items, profit beat analysts' estimates by 8 cents. Revenue rose 21 percent to $11.2 billion from $9.21 billion, Kraft said in a statement.

The food maker, whose largest shareholder is Warren Buffett's Berkshire Hathaway Inc., expects to earn at least $1.92 a share in 2008 excluding costs, 2 cents higher than its previous forecast and matching analysts' estimates.

Sales excluding acquisitions and divestitures may increase at least 6 percent this year on the higher prices, faster than the previous forecast of at least 5 percent, Kraft said.

Excluding some items, Kraft earned 58 cents a share. Profit was helped by the $150 million hedging gain, or 6 cents, as Kraft locked in prices on the commodities markets to lessen the effect of volatile prices. Foreign currency benefits added 3 cents.

Fifteen analysts surveyed by Bloomberg estimated average profit of 50 cents excluding costs. (Bloomberg)

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CHICAGO TRIBUNE: Foreign sales sweet for Wrigley

and James P. Miller

Wm. Wrigley Jr. Co. posted a strong second quarter Monday, beating Wall Street forecasts in a performance buoyed by surging international sales.

The Chicago-based gum giant posted net earnings of $193.8 million, or 70 cents per share, up 15 percent from the same period last year. Excluding one-time charges, its earnings of 74 cents per share topped by 6 cents the average estimate of analysts polled by Thomson Financial.

Wrigley's sales of $1.57 billion, up 14 percent, topped analysts' estimates of $1.53 billion. "It's more of the same, which is very good numbers," said Matt Arnold, a stock analyst at Edward Jones.

In an overseas region that principally includes Europe, revenue totaled $783 million, up 17 percent over 2007's second quarter. In the United States, sales stood at $474 million, up 5 percent. Still, U.S. sales volume fell about 5 percent, reflecting price increases that began last year.

Wrigley announced in April that it would be bought by Mars Inc. for $23 billion, or $80 per share, a deal partly financed by billionaire investor Warren Buffett. Wrigley's stock closed Monday at $79.10, up 11 cents.

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Saturday, July 26, 2008

The Superinvestors of Graham-and-Doddsville

You can get a physical copy of the book that Warren Buffett is talking about from the Share Investor Bookstore.

Security Analysis: The Classic 1934 Edition

Security Analysis: The Classic 1934 Edition by Benjamin Graham
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By Warren E. Buffett

This article is an edited transcript of a talk given at
Columbia University in 1984 commemorating the fiftieth anniversary of Security Analysis, written by Benjamin Graham and David L. Dodd. This specialized volume first introduced the ideas later popularized in The Intelligent Investor. Buffett’s essay offers a fascinating study of how Graham’s disciples have used Graham’s value investing approach to realize phenomenal success in the stock market.

Is the Graham and Dodd “look for values with a significant margin of safety relative to prices” approach to security analysis out of date? Many of the professors who write textbooks today say yes. They argue that the stock market is efficient; that is, that stock prices reflect everything that is known about a company’s prospects and about the state of the economy.

There are no undervalued stocks, these theorists argue, because there are smart security analysts who utilize all available information to ensure unfailingly appropriate prices. Investors who seem to beat the market year after year are just lucky. “If prices fully reflect available information, this sort of investment adeptness is ruled out,” writes one of today’s textbook authors.

Well, maybe. But I want to present to you a group of investors who have, year in and year out, beaten the Standard & Poor’s 500 stock index. The hypothesis that they do this by pure chance is at least worth examining. Crucial to this examination is the fact that these winners were all well known to me and pre-identified as superior investors, the most recent identification occurring over fifteen years ago.

Absent this condition—that is, if I had just recently searched among thousands of records to select a few names for you this morning—I would advise you to stop reading right here. I should add that all these records have been audited. And I should further add that I have known many of those who have invested with these managers, and the checks received by those participants over the years have matched the stated records.

Before we begin this examination, I would like you to imagine a national coin-flipping contest. Let’s assume we get 225 million Americans up tomorrow morning and we ask them all to wager a dollar. They go out in the morning at sunrise, and they all call the flip of a coin. If they call correctly, they win a dollar from those who called wrong. Each day the losers drop out, and on the subsequent day the stakes build as all previous winnings are put on the line. After ten flips on ten mornings, there will be approximately 220,000 people in the United States who have correctly called ten flips in a row. They each will have won a little over $1,000. Now this group will probably start getting a little puffed up about this, human nature being what it is. They may try to be modest, but at cocktail parties they will occasionally admit to attractive members of the opposite sex what their technique is, and what marvelous insights they bring to the field of flipping.

Assuming that the winners are getting the appropriate rewards from the losers, in another ten days we will have 215 people who have successfully called their coin flips 20 times in a row and who, by this exercise, each have turned one dollar into a little over $1 million. $225 million would have been lost, $225 million would have been won.

By then, this group will really lose their heads. They will probably write books on “How I Turned a Dollar into a Million in Twenty Days Working Thirty Seconds a Morning.” Worse yet, they’ll probably start jetting around the country attending seminars on efficient coin-flipping and tackling skeptical professors with, “If it can’t be done, why are there 215 of us?” But then some business school professor will probably be rude enough to bring up the fact that if 225 million orangutans had engaged in a similar exercise, the results would be much the same—215 egotistical orangutans with 20 straight winning flips.

I would argue, however, that there are some important differences in the examples I am going to present. For one thing, if (a) you had taken 225 million orangutans distributed roughly as the U.S. population is; if (b) 215 winners were left after 20 days; and if (c) you found that 40 came from a particular zoo in Omaha, you would be pretty sure you were on to something. So you would probably go out and ask the zookeeper about what he’s feeding them, whether they had special exercises, what books they read, and who knows what else. That is, if you found any really extraordinary concentrations of success, you might want to see if you could identify concentrations of unusual characteristics that might be causal factors.

Scientific inquiry naturally follows such a pattern. If you were trying to analyze possible causes of a rare type of cancer—with, say, 1,500 cases a year in the United States—and you found that 400 of them occurred in some little mining town in Montana, you would get very interested in the water there, or the occupation of those afflicted, or other variables. You know that it’s not random chance that 400 come from a small area. You would not necessarily know the causal factors, but you would know where to search.

I submit to you that there are ways of defining an origin other than geography. In addition to geographical origins, there can be what I call an intellectual origin. I think you will find that a disproportionate number of successful coin-flippers in the investment world came from a very small intellectual village that could becalled Graham-and-Doddsville. A concentration of winners that simply cannot be explained by chance can be traced to this particular intellectual village.

Conditions could exist that would make even that concentration unimportant. Perhaps 100 people were simply imitating the coin flipping call of some terribly persuasive personality. When he called heads, 100 followers automatically called that coin the same way. If the leader was part of the 215 left at the end, the fact that 100 came from the same intellectual origin would mean nothing. You would simply be identifying one case as a hundred cases. Similarly, let’s assume that you lived in a strongly patriarchal society and every family in the United States conveniently consisted of ten members. Further assume that the patriarchal culture was so strong that, when the 225 million people went out the first day, every member of the family identified with the father’s call. Now, at the end of the 20-day period, you would have 215 winners, and you would find that they came from only 21.5 families. Some naive types might say that this indicates an enormous hereditary factor as an explanation of successful coin-flipping. But, of course, it would have no significance at all because it would simply mean that you didn’t have 215 individual winners, but rather 21.5 randomly distributed families who were winners.

In this group of successful investors that I want to consider, there has been a common intellectual patriarch, Ben Graham. But the children who left the house of this intellectual patriarch have called their “flips” in very different ways. They have gone to different places and bought and sold different stocks and companies, yet they have had a combined record that simply can’t be explained by random chance. It certainly cannot be explained by the fact that they are all calling flips identically because a leader is signaling the calls to make. The patriarch has merely set forth the intellectual theory for making coin-calling decisions, but each student has decided on his own manner of applying the theory.

The common intellectual theme of the investors from Grahamand- Doddsville is this: they search for discrepancies between the value of a business and the price of small pieces of that business in the market. Essentially, they exploit those discrepancies without the efficient market theorist’s concern as to whether the stocks are bought on Monday or Thursday, or whether it is January or July, etc. Incidentally, when businessmen buy businesses—which is just what our Graham & Dodd investors are doing through the medium of marketable stocks—I doubt that many are cranking into their purchase decision the day of the week or the month in which the transaction is going to occur. If it doesn’t make any difference whether all of a business is being bought on a Monday or a Friday, I am baffled why academicians invest extensive time and effort to see whether it makes a difference when buying small pieces of those same businesses. Our Graham & Dodd investors, needless to say, do not discuss beta, the capital asset pricing model, or covariance in returns among securities. These are not subjects of any interest to them. In fact, most of them would have difficulty defining those terms. The investors simply focus on two variables: price and value.

I always find it extraordinary that so many studies are made of price and volume behavior, the stuff of chartists. Can you imagine buying an entire business simply because the price of the business had been marked up substantially last week and the week before? Of course, the reason a lot of studies are made of these price and volume variables is that now, in the age of computers, there are almost endless data available about them. It isn’t necessarily because such studies have any utility; it’s simply that the data are there and academicians have worked hard to learn the mathematical skills needed to manipulate them. Once these skills are acquired, it seems sinful not to use them, even if the usage has no utility or negative utility. As a friend said, to a man with a hammer, everything looks like a nail.

I think the group that we have identified by a common intellectual home is worthy of study. Incidentally, despite all the academic studies of the influence of such variables as price, volume, seasonality, capitalization size, etc., upon stock performance, no interest has been evidenced in studying the methods of this unusual concentration of value-oriented winners.

I begin this study of results by going back to a group of four of us who worked at Graham-Newman Corporation from 1954 through 1956. There were only four—I have not selected these names from among thousands. I offered to go to work at Graham- Newman for nothing after I took Ben Graham’s class, but he turned me down as overvalued. He took this value stuff very seriously! After much pestering he finally hired me. There were three partners and four of us at the “peasant” level. All four left between 1955 and 1957 when the firm was wound up, and it’s possible to trace the record of three.

The first example is that of Walter Schloss. Walter never went to college, but took a course from Ben Graham at night at the New York Institute of Finance. Walter left Graham-Newman in 1955 and achieved the record shown here over 28 years.

Here is what “Adam Smith”—after I told him about Walter—
wrote about him in Supermoney (1972):

He has no connections or access to useful information. Practically no one in Wall Street knows him and he is not fed any ideas. He looks up the numbers in the manuals and sends for the annual reports, and that’s about it. In introducing me to [Schloss] Warren had also, to my mind, described himself. “He never forgets that he is handling other people’s money and this reinforces his normal strong aversion to loss.” He has total integrity and a realistic picture of himself. Money is real to him and stocks are real—and from this flows an attraction to the “margin of safety” principle.

Walter has diversified enormously, owning well over 100 stocks currently. He knows how to identify securities that sell at considerably less than their value to a private owner. And that’s all he does. He doesn’t worry about whether it’s January, he doesn’t worry about whether it’s Monday, he doesn’t worry about whether it’s an election year. He simply says, if a business is worth a dollar and I can buy it for 40 cents, something good may happen to me. And he does it over and over and over again. He owns many more stocks than I do—and is far less interested in the underlying nature of the business: I don’t seem to have very much influence on Walter. That’s one of his strengths; no one has much influence on him. The second case is Tom Knapp, who also worked at Graham-Newman with me. Tom was a chemistry major at Princeton before the war; when he came back from the war, he was a beach bum. And then one day he read that Dave Dodd was giving a night course in investments at Columbia. Tom took it on a noncredit basis, and he got so interested in the subject from taking that course that he came up and enrolled at Columbia Business School, where he got the MBA degree. He took Dodd’s course again, and took Ben Graham’s course. Incidentally, 35 years later I called Tom to ascertain some of the facts involved here and I found him on the beach again. The only difference is that now he owns the beach!

In 1968 Tom Knapp and Ed Anderson, also a Graham disciple, along with one or two other fellows of similar persuasion, formed Tweedy, Browne Partners, and their investment results appear in Table 2. Tweedy, Browne built that record with very wide diversification. They occasionally bought control of businesses, but the record of the passive investments is equal to the record of the control investments.

Table 3 describes the third member of the group who formed Buffett Partnership in 1957. The best thing he did was to quit in 1969. Since then, in a sense, Berkshire Hathaway has been a continuation of the partnership in some respects. There is no single index I can give you that I would feel would be a fair test of investment management at Berkshire. But I think that any way you figure it, it has been satisfactory.

Table 4 shows the record of the Sequoia Fund, which is managed by a man whom I met in 1951 in Ben Graham’s class, Bill Ruane. After getting out of Harvard Business School, he went to Wall Street. Then he realized that he needed to get a real business education so he came up to take Ben’s course at Columbia, where we met in early 1951. Bill’s record from 1951 to 1970, working with relatively small sums, was far better than average. When I wound up Buffett Partnership I asked Bill if he would set up a fund to handle all our partners, so he set up the Sequoia Fund. He set it up at a terrible time, just when I was quitting. He went right into the two-tier market and all the difficulties that made for comparative performance for value-oriented investors. I am happy to say that my partners, to an amazing degree, not only stayed with him but added money, with the happy result shown. There’s no hindsight involved here. Bill was the only person I recommended to my partners, and I said at the time that if he achieved a four-point-per-annum advantage over the Standard & Poor’s, that would be solid performance. Bill has achieved well over that, working with progressively larger sums of money. That makes things much more difficult. Size is the anchor of performance. There is no question about it. It doesn’t mean you can’t do better than average when you get larger, but the margin shrinks. And if you ever get so you’re managing two trillion dollars, and that happens to be the amount of the total equity evaluation in the economy, don’t think that you’ll do better than average!

I should add that in the records we’ve looked at so far, throughout this whole period there was practically no duplication in these portfolios. These are men who select securities based on discrepancies between price and value, but they make their selections very differently. Walter’s largest holdings have been such stalwarts as Hudson Pulp & Paper and Jeddo Highland Coal and New York Trap Rock Company and all those other names that come instantly to mind to even a casual reader of the business pages. Tweedy Browne’s selections have sunk even well below that level in terms of name recognition. On the other hand, Bill has worked with big companies. The overlap among these portfolios has been very, very low. These records do not reflect one guy calling the flip and fifty people yelling out the same thing after him.

Table 5 is the record of a friend of mine who is a Harvard Law graduate, who set up a major law firm. I ran into him in about 1960 and told him that law was fine as a hobby but he could do better. He set up a partnership quite the opposite of Walter’s. His portfolio was concentrated in very few securities and therefore his record was much more volatile but it was based on the same discount from- value approach. He was willing to accept greater peaks and valleys of performance, and he happens to be a fellow whose whole psyche goes toward concentration, with the results shown. Incidentally, this record belongs to Charlie Munger, my partner for a long time in the operation of Berkshire Hathaway. When he ran his partnership, however, his portfolio holdings were almost completely different from mine and the other fellows mentioned

Table 6 is the record of a fellow who was a pal of Charlie Munger’s—another non–business school type—who was a math major at USC. He went to work for IBM after graduation and was an IBM salesman for a while. After I got to Charlie, Charlie got to him. This happens to be the record of Rick Guerin. Rick, from 1965 to 1983, against a compounded gain of 316 percent for the S&P, came off with 22,200 percent, which, probably because he lacks a business school education, he regards as statistically significant. One sidelight here: it is extraordinary to me that the idea of buying dollar bills for 40 cents takes immediately with people or it doesn’t take at all. It’s like an inoculation. If it doesn’t grab a person right away, I find that you can talk to him for years and show him records, and it doesn’t make any difference. They just don’t seem able to grasp the concept, simple as it is. A fellow like Rick Guerin, who had no formal education in business, understands immediately the value approach to investing and he’s applying it five minutes later. I’ve never seen anyone who became a gradual convert over a ten-year period to this approach. It doesn’t seem to be a matter of IQ or academic training. It’s instant recognition, or it is nothing.

Table 7 is the record of Stan Perlmeter. Stan was a liberal arts major at the University of Michigan who was a partner in the advertising agency of Bozell & Jacobs. We happened to be in the same building in Omaha. In 1965 he figured out I had a better business than he did, so he left advertising. Again, it took five minutes for Stan to embrace the value approach. Perlmeter does not own what Walter Schloss owns. He does not own what Bill Ruane owns. These are records made independently. But every time Perlmeter buys a stock it’s because he’s getting more for his money than he’s paying. That’s the only thing he’s thinking about. He’s not looking at quarterly earnings projections, he’s not looking at next year’s earnings, he’s not thinking about what day of the week it is, he doesn’t care what investment research from any place says, he’s not interested in price momentum, volume, or anything. He’s simply asking: What is the business worth?

Table 8 and Table 9 are the records of two pension funds I’ve been involved in. They are not selected from dozens of pension funds with which I have had involvement; they are the only two I have influenced. In both cases I have steered them toward value-oriented managers. Very, very few pension funds are managed from a value standpoint. Table 8 is the Washington Post Company’s Pension Fund. It was with a large bank some years ago, and I suggested that they would do well to select managers who had a value orientation. As you can see, overall they have been in the top percentile ever since they made the change. The Post told the managers to keep at least 25 percent of these funds in bonds, which would not have been necessarily the choice of these managers. So I’ve included the bond performance simply to illustrate that this group has no particular expertise about bonds. They wouldn’t have said they did. Even with this drag of 25 percent of their fund in an area that was not their game, they were in the top percentile of fund management. The Washington Post experience does not cover a terribly long period but it does represent many investment decisions by three managers who were not identified retroactively.

Table 9 is the record of the FMC Corporation fund. I don’t manage a dime of it myself but I did, in 1974, influence their decision to select value-oriented managers. Prior to that time they had selected managers much the same way as most larger companies. They now rank number one in the Becker survey of pension funds for their size over the period of time subsequent to this “conversion” to the value approach. Last year they had eight equity managers of any duration beyond a year. Seven of them had a cumulative record better than the S&P. All eight had a better record last year than the S&P. The net difference now between a median performance and the actual performance of the FMC fund over this period is $243 million. FMC attributes this to the mindset given to them about the selection of managers. Those managers are not the managers I would necessarily select but they have the common denominator of selecting securities based on value. So these are nine records of “coin-flippers” from Graham-and- Doddsville. I haven’t selected them with hindsight from among thousands. It’s not like I am reciting to you the names of a bunch of lottery winners—people I had never heard of before they won the lottery.

I selected these men years ago based upon their framework for investment decision-making. I knew what they had been taught and additionally I had some personal knowledge of their intellect, character, and temperament. It’s very important to understand that this group has assumed far less risk than average; note their record in years when the general market was weak. While they differ greatly in style, these investors are, mentally, always buying the business, not buying the stock. A few of them sometimes buy whole businesses. Far more often they simply buy small pieces of businesses. Their attitude, whether buying all or a tiny piece of a business, is the same. Some of them hold portfolios with dozens of stocks; others concentrate on a handful. But all exploit the difference between the market price of a business and its intrinsic value.

I’m convinced that there is much inefficiency in the market. These Graham-and-Doddsville investors have successfully exploited gaps between price and value. When the price of a stock can be influenced by a “herd” on Wall Street with prices set at the margin by the most emotional person, or the greediest person, or the most depressed person, it is hard to argue that the market always prices rationally. In fact, market prices are frequently nonsensical. I would like to say one important thing about risk and reward. Sometimes risk and reward are correlated in a positive fashion. If someone were to say to me, “I have here a six-shooter and I have slipped one cartridge into it. Why don’t you just spin it and pull it once? If you survive, I will give you $1 million.” I would decline— perhaps stating that $1 million is not enough. Then he might offer me $5 million to pull the trigger twice—now that would be a positive correlation between risk and reward!

The exact opposite is true with value investing. If you buy a dollar bill for 60 cents, it’s riskier than if you buy a dollar bill for 40 cents, but the expectation of reward is greater in the latter case.The greater the potential for reward in the value portfolio, the less risk there is.

One quick example: The Washington Post Company in 1973 was selling for $80 million in the market. At the time, that day, you could have sold the assets to any one of ten buyers for not less than $400 million, probably appreciably more. The company owned the Post, Newsweek, plus several television stations in major markets.

Those same properties are worth $2 billion now, so the person who would have paid $400 million would not have been crazy. Now, if the stock had declined even further to a price that made the valuation $40 million instead of $80 million, its beta would have been greater. And to people who think beta measures risk, the cheaper price would have made it look riskier. This is truly Alice in Wonderland. I have never been able to figure out why it’s riskier to buy $400 million worth of properties for $40 million than $80 million. And, as a matter of fact, if you buy a group of such securities and you know anything at all about business valuation, there is essentially no risk in buying $400 million for $80 million, particularly if you do it by buying ten $40 million piles for $8 million each. Since you don’t have your hands on the $400 million, you want to be sure you are in with honest and reasonably competent people, but that’s not a difficult job.

You also have to have the knowledge to enable you to make a very general estimate about the value of the underlying businesses. But you do not cut it close. That is what Ben Graham meant by having a margin of safety. You don’t try and buy businesses worth $83 million for $80 million. You leave yourself an enormous margin. When you build a bridge, you insist it can carry 30,000 pounds, but you only drive 10,000-pound trucks across it. And that same principle works in investing. In conclusion, some of the more commercially minded among you may wonder why I am writing this article. Adding many converts to the value approach will perforce narrow the spreads between price and value. I can only tell you that the secret has been out for 50 years, ever since Ben Graham and Dave Dodd wrote Security Analysis, yet I have seen no trend toward value investing in the 35 years that I’ve practiced it. There seems to be some perverse human characteristic that likes to make easy things difficult. The academic world, if anything, has actually backed away from the teaching of value investing over the last 30 years. It’s likely to continue that way.

Ships will sail around the world but the Flat Earth Society will flourish. There will continue to be wide discrepancies between price and value in the marketplace, and those who read their Graham & Dodd will continue to prosper.

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FORTUNE: Buffett vs. Bernanke: The inflation showdown

The billionaire investor says inflation is 'exploding,' but the Fed believes commodity price shocks should subside.

By Colin Barr, senior writer
June 26, 2008: 8:08 AM EDT
Warren Buffett (left) and Ben Bernanke don't see eye to eye on the risks of inflation to the U.S. economy.

NEW YORK (Fortune) -- Even Warren Buffett is wrong some of the time. Federal Reserve chairman Ben Bernanke is hoping this is one of them.

Buffett, the billionaire investor behind Berkshire Hathaway (BRKA, Fortune 500), fingered "exploding" inflation Wednesday as the biggest risk to the economy. "I think inflation is really picking up," Buffett said on CNBC. "It's huge right now, whether it's steel or oil," he continued. "We see it everywhere."

Indeed, the prices of gasoline and milk have shot past $4 a gallon, and Dow Chemical (DOW, Fortune 500) has announced twice in the past month that it's raising prices to offset soaring commodity costs.

Yet Bernanke's Fed signaled Wednesday that, after nine months of interest rate cuts and expansive lending to the financial sector, it isn't eager to reverse course and push rates higher to try to tamp down rising prices.

Why? Because the Fed remains skeptical that high commodity prices will ripple through the economy, leading to broad price hikes and big wage increases.

"The committee expects inflation to moderate later this year and next year," the Federal Open Market Committee said in holding the fed funds rate steady at 2%, though it did note that "uncertainty" remains high and suggested inflation concerns could rise.

Depends on what you mean by 'inflation'

In part, the Fed's decision turns on a distinction economists make between inflation and "relative-price changes." The former is a general loss of purchasing power that's caused, or at least exacerbated by, overly lax monetary policy (such as keeping interest rates too low for too long). The latter are price hikes driven primarily by fundamental shifts in supply and demand.

If demand for commodities is spiking because of strong worldwide growth, the thinking goes, prices should rise accordingly, until consumers react by reducing consumption - a process that isn't apt to be influenced by interest rate changes.

The Fed is betting that rising prices won't feed through to higher general inflation expectations unless workers start demanding raises and companies start raising prices.

But wages haven't been rising sharply, and declining unionization means workers have less bargaining power than they did during the inflationary 1970s, economists say. And while some processors of commodities, like Dow, are charging more, their customers in turn have generally been unable to pass along those costs to consumers.

So even as some members of the Fed's policymaking body, such as Dallas Fed President Richard Fisher, warn of the need to take quick action against inflation - Fisher dissented for the third straight meeting in Wednesday's vote, this time advocating a rate increase - committee members' inflation forecast for 2010 has risen only slightly since October, despite surging oil prices.

"Oil prices have ratcheted up over the past nine years and the dollar has depreciated for more than six years. Nevertheless, as long as a central bank is not creating an excessive amount of money, these relative price pressures ought to be transitory," Sandra Pianalto, president of the Federal Reserve Bank of Cleveland and a voting member this year of the Federal Open Market Committee, explained in a speech last month.

"As consumers spend more money for higher-priced petroleum and agricultural goods," she continued, "they eventually have less money to spend on other goods and services. Other relative prices must then fall."


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CNN MONEY: Wrigley seen posting solid 2Q

NEW YORK (Associated Press) - Chewing-gum maker Wm. Wrigley Jr. Co., reports earnings for the second quarter on Monday, before the market opens. The following is a summary of key developments and analyst opinion related to the period.

OVERVIEW: Wrigley's shares are approaching their 52-week high as the company prepares to be purchased by candy maker Mars Inc.

The Chicago-based maker of gum brands like Juicy Fruit, Orbit, Extra and Big Red, announced in April it would be purchased by Mars for in a deal worth $23 billion, or $80 per share. The deal has financing from billionaire Warren Buffett. Wrigley's brands will be blended with Mars' brands, which include Snickers and M&Ms.

BY THE NUMBERS: Analysts polled by Thomson Financial expect Wrigley to post earnings, excluding items, of 68 cents per share on $1.53 billion in revenue.

ANALYST TAKE: Citi analyst David Driscoll projected a strong quarter given sales growth of more than 13 percent.

He said international operations _ especially in developing markets like China, India and Russia _ are a key driver.

Domestically, Driscoll said he expected 5 percent sales growth, and driven primarily by pricing. He said last year the company implemented a 10 percent price increase that went into effect in the third quarter.

WHAT'S AHEAD: The combination of Wrigley with Mars will create the world's largest confection maker, bumping Britain's Cadbury PLC from the slot.

Wrigley estimated that regulatory and shareholder approval for the deal would take between six months and a year from the announcement of the sale. That would mean the closing would come as soon as this fall.

STOCK PERFORMANCE: Wrigley's shares gained more than 22 percent during the quarter to finish at $77.78. Top of page

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Wednesday, July 23, 2008

ATLANTA JOURNAL:Coke stock up 3 percent after SunTrust announcement

The Atlanta Journal-Constitution
Published on: 07/22/08

UPDATED: 5:43 p.m. July 22, 2008

SunTrust Banks stepped into the spotlight Tuesday as it reported second-quarter earnings, but key details in the report also gave Coca-Cola Co. stock a boost.

In its earnings report, SunTrust, a major Coke shareholder, announced actions that affect more than 40 million shares of its Coke stock. The disclosure removed a measure of uncertainty that had been hanging over Coke stock.

SunTrust 2Q earnings down 20 percent

Latest Headlines:
More Coke News

Coke stock, traded under the ticker symbol KO, had fallen Monday to a 52-week low, closing at $49.60 a share. It rose 3.5 percent Tuesday to close at $51.35 on the SunTrust news.

In the release, SunTrust said it had sold 10 million shares of Coke stock in June and donated 3.6 million shares to its charitable trust. It also had set up a process to sell another 30 million Coke shares over the next seven years.

SunTrust officials said last year they were reviewing how best to handle the company's Coke stock, leading analyst to speculate a sale was imminent. The details released Tuesday may have cleared up investor concerns about how such a large number of Coke shares would be put into the market.

"The final resolution of SunTrust's planned disposition of KO's shares should be a positive for the stock," Morgan Stanley analyst Bill Pecoriello wrote Tuesday in a note to investors. "There has been concern from investors about buying ahead of a large share sale."

SunTrust and Coke, both Atlanta-based companies, have been tied together for more than 100 years. SunTrust's predecessor, Trust Company of Georgia, helped take Coke public in 1919. Atlanta businessman Ernest Woodruff was a key figure in both firms.

At the end of the first quarter, SunTrust owned 85 million shares of Coke stock, or 3.7 percent of all outstanding shares, according to a filing with the Securities and Exchange Commission. That made it the second-largest Coke shareholder behind Warren Buffett-led Berkshire Hathaway, which owns 200 million shares.

SunTrust's Coke holdings include about 40 million shares in trust and retirement accounts. These shares were not affected by the actions announced Tuesday.

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Tuesday, July 22, 2008

BLOOMBERG: American Express Declines as Earnings Fall

By Hugh Son

July 22 (Bloomberg) -- American Express Co., the biggest U.S. credit card company by purchases, dropped as much as 12 percent after second-quarter earnings fell more than analysts estimated and Chief Executive Officer Kenneth Chenault withdrew his 2008 forecast.

American Express declined $4.81 to $36.09 in early German trading, the biggest drop since the terrorist attacks of Sept. 11, 2001. Futures contracts indicate the Standard & Poor's 500 Index may fall 0.6 percent today.

Chenault said yesterday on a conference call that New York- based American Express was hurt by the increase in U.S. unemployment and the decline in house prices and consumer confidence. The business climate is ``much weaker'' than earlier assumptions, he said.

``I don't think the environment's going to be helpful to the company over the next nine to 12 months,'' said Craig Maurer, an analyst at New York-based Calyon Securities, who has a ``buy'' rating on American Express, in a Bloomberg Television interview.

American Express's profit from continuing operations dropped 37 percent to $655 million, or 56 cents a share, falling short of analysts' estimates of 82 cents. The company also said it added $600 million before taxes to reserves for loan losses in the U.S.

The economic slowdown worsened in June, affecting American Express's wealthier cardholders with high credit scores, Chenault, 57, said on the call. Late and uncollectible loans exceeded expectations in the quarter and will rise as the year progresses, Chenault said. The U.S. lost 62,000 jobs in June, the sixth straight period of shrinking payrolls.

Dropping Forecast

American Express is ``no longer tracking'' to a prior forecast for 4 percent to 6 percent earnings per share growth for this year, Chenault said in a statement. The company won't meet longer-term targets until the economy improves, he said.

Second-quarter profit at the U.S. credit card unit dropped 96 percent to $21 million, as provisions for losses more than doubled to $1.5 billion. Uncollectible debt in the division rose to 5.3 percent of loans from 2.9 percent a year earlier.

``We are seeing very affluent people who have had historically very, very strong spending history with us cutting back,'' Chenault said.

American Express, Capital One Financial Corp. and Discover Financial Services lost more than 33 percent of market value in the past year as consumers struggled to repay debt of all types.

Moody's Investors Service has a negative outlook on credit- card lenders and said defaults ``will most certainly'' rise this year. Stressed consumers are tapping plastic as access to home- equity loans falls, New York-based Moody's said in a report published in February.

Buffett's Holding

Delinquent credit-card accounts rose more than 1 percentage point from a year earlier to 3.99 percent in May, according to data compiled by Bloomberg.

Some of American Express's loan losses will be cushioned by about $4 billion in settlement payments from Visa Inc. and MasterCard Inc. American Express said last month it settled an antitrust suit against MasterCard for $1.8 billion. Visa and bank partners settled in November for $2.25 billion.

American Express ranked first by the total value of purchases and cash advances to U.S. cardholders in the first half of 2007, according to the Carpinteria, California-based Nilson Report, a trade publication. JPMorgan Chase & Co. and Bank of America Corp. placed second and third, respectively.

Billionaire Warren Buffett's Berkshire Hathaway Inc. is American Express's largest shareholder with 151.6 million shares, equal to a 13 percent stake at the end of March, according to regulatory filings compiled by Bloomberg.

To contact the reporter on this story: Hugh Son in New York at

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SWI NEWS: Breaking ground at Gate's foundation

Buffett is busy and won't be among the 500 guests expected at Tuesday's groundbreaking at the Bill & Melinda Gates Foundation's new headquarters in downtown Seattle, his office said.

The foundation, due to be headed by Ashland, Neb., native Jeff Raikes starting Sept. 2, has ramped up its activities and employment, to about 550 employees, thanks in part to Buffett's pledge to donate most of his wealth to the foundation over a period of years.

The design includes a visitor center and buildings with "sweeping, outward-reaching curves,'' the foundation said, plus extensive landscaping. The groundbreaking will mark the first office phase of the 15-year project.

A five-level parking garage, owned and operated by the Seattle Center, site of the city's 1962 World's Fair, opened recently near the city's skyline signature Space Needle.

So far there's no official cost estimate for the 12-acre campus and 1 million square feet of office space, built on a former city parking lot, although the land alone cost $50.4 million.

Links to past

A new jewelry line produced by a Berkshire company lets customers trace their gold and silver back to its origins to ensure "responsibly produced'' rings, pendants, bracelets, earrings and necklaces.

The new Love,Earth jewelry is by the Richline Group's Aurafin brand, which Berkshire purchased in May 2007.

Mining and manufacturing practices in some countries have come under fire for human rights violations and pollution.
Aurafin, based in Fort Lauderdale, Fla., will sell Love,Earth jewelry at Wal-Mart and WalMart's Sam's Club warehouse stores.

Customers can go online, enter batch numbers from their jewelry and see maps of mine and manufacturing locations, plus information such as how a mine "manages its cyanide or waste dumps to ensure there are less adverse long-term impacts to ecosystems.''

Richline said Wal-Mart's "environmental and social sourcing criteria'' match Aurafin's corporate goals, which include "being responsible to ethical, social and environmental practices'' through the Council for Responsible Jewelry Practices.

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Sunday, July 20, 2008

WHARTON UNI: Buffett on investing & leadership

by Mukul Pandya, Senior Editor, The Wharton School

April, 1999 - Volume 3, Number 7

If you were asked to select a person and told that you could retain 10 percent of his or her earnings for the rest of your life, whom would you choose? Someone with the highest SAT or IQ test scores? Probably not. Chances are that you would pick someone with a steadfast character, whom you could trust to function well through life. Conversely, what kind of person would you shun? Most likely, the type who cuts corners and is generally undependable. Each of these qualities is a characteristic of choice and can make the difference between success and failure. That insight into the link between character and success comes from Warren Buffett, CEO of Berkshire-Hathaway, the world's second richest man after Microsoft CEO Bill Gates and arguably the most successful investor the world has known.

Developing characteristics such as trustworthiness and integrity, Buffett believes, is a matter of forming the right habits. "The chains of habit are too light to be noticed until they are too heavy to be broken," he says. People who stray from these values often show up on Wall Street; they may initially even shine; but eventually they self-destruct. "That is sad, because it does not need to happen," says Buffett. "You need integrity, intelligence and energy to succeed. Integrity is totally a matter of choice — and it is habit-forming."

Speaking to a packed audience of students, faculty members and staff at the Wharton School on April 21, Buffett offered insights into the investment philosophy that has turned Berkshire-Hathaway into a $120 billion powerhouse, with holdings in industries ranging from soft drinks to insurance. Jeremy Siegel, a professor of finance at Wharton, reckons that a person who had invested $1,000 with Buffett when he was starting out four decades ago would have turned that investment into $61 million today. In contrast, had that $1,000 been invested in S&P 500 stocks, it would have grown to $100,000.

Asked what advice he could provide to young people on the verge of careers in managing investments, Buffett boiled down his principles into four cardinal rules:

1. Understand the business in which you are investing. "You can't make money in stocks unless you understand the business," he said. "I look for businesses within my circle of competence." Having a large circle of competence is less important than having one with a well-defined perimeter.

2. Look for sound fundamental economics. Investors should seek out companies that have a sustainable economic advantage — a phenomenon Buffett called "a castle with a moat around it." Consider Coca Cola, for example. The company's brand name has represented enjoyment for generations, which no competitor can buy for millions of dollars. "Share of market follows share of mind," noted Buffett.

3. Find competent leadership. Companies with a sustainable economic advantage need honest, capable and hardworking leaders to retain their lead. Berkshire-Hathaway's managers have one instruction: Widen the moat. That keeps the castle valuable.

4. Buy at the right price. Purchases must be made at the right price if they are to pay off.

Buffett cited example after example to show how he had used these principles to make investment decisions during his career. As a young investment manager, he took Moody's manuals and went through them page by page until he found the companies he sought. A bus company in Bedford, for example, had $100 a share in cash, but its stock was being traded at $40 a share. Buffett found such deals because he went looking for them. "No one will tell you about them," he said. "You only get told about things someone is pushing for some reason." Buffett invested in companies like Coca Cola and The Washington Post for similar reasons. Berkshire-Hathaway built its empire on the success of these investments.

Asked why he has not retired despite his phenomenal wealth, Buffett said the reason is that he has more fun doing what he does than anything else. "The fundamental thing is that the process should be fun," he said. "I had just as much fun when I had $10,000 to invest as I do now. It's crazy to do things for your resume. It's like saving up sex for your old age. You should do what you enjoy as you go along, and work with people you admire. I look forward every day to the next day. I'm wired for this game."

Mukul Pandya can be contacted at

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