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Tuesday, June 30, 2009

VIDEO: CNBC FAST MONEY - Bet on Buffett?

29/6/09

Entry Point
Considering shares of Berkshire Hathaway [BRK.A 88700.00 2490.00 (+2.89%) ] are down about 10% year to date, is it still a good idea to bet on Buffet?

At first glance you might think it's not.

In the January-to-March period, Berkshire, which runs close to 80 businesses, reported its first quarterly loss in over 5 years, hurt by losses on derivative contracts, a big investment in the oil company ConocoPhillips [COP 42.21 0.59 (+1.42%) ] and the weakening economy.

However first glances can be deceiving. Take comments from Keefe Bruyette & Woods analyst Cliff Gallant.

He says, with $25 billion in cash, low debt levels and low leverage ratios, billionaire investor Warren Buffett's Berkshire has rather attractive long term growth prospects.

He’s impressed with the strength of Berkshire’s balance sheet and says --considering that some companies desperately needs cash right now -- investment opportunities may be better than they have been in years for Berkshire.

Gallant initiated coverage of Berkshire Hathaway with an "outperform" rating and a price target of $107,000 citing attractive long term growth prospects.

Berkshire Hathaway ...
(BRK.a)
88700.00 2490.00 (+2.89%%)
NYSE

"Paraphrasing a Buffet analogy, the tide has gone out and Berkshire is not just wearing shorts, but a belt and suspenders in the form of financial strength and quality operating businesses," he says.

Looks like the Oracle from Omaha found a new fan!

Is it still a good idea to bet on Warren Buffett?
Yes, there's a reason he's called the Oracle of Omaha.
No, there are better places to put money.

Vote to see results











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WALL STREET JOURNAL: For Buffett, It Was a Very Bad Year

By SCOTT PATTERSON

March 2 2009

The man considered by many to be the greatest investor of all time just had his worst year ever.

But the results released Saturday for Warren Buffett's company, Berkshire Hathaway Inc., also demonstrate how recently, and over time, the investor has positioned his far-flung empire to weather the financial storm.

[Berkshire Hathaway]
Associated Press

Warren Buffett

Mr. Buffett, in his annual letter, read closely by shareholders and nonshareholders alike, reported Berkshire in 2008 lost 9.6% in book value per share, a common metric Berkshire uses to track performance. That marks the biggest decline since Mr. Buffett took over in 1965, when it was a family-run East Coast textile maker.

Mr. Buffett conceded he "did some dumb things." Among them: scooping up shares of oil giant ConocoPhillips when oil prices were near a high and investing $244 million in a pair of Irish banks that hit trouble, resulting in an 89% loss.

Berkshire shares fell nearly as much as the rest of the market last year, indicating that investors are worried about the company's ability to keep growing. In 2008, Berkshire's Class A stock fell 32%. This year, the shares are down nearly 19%, slightly better than the Dow Jones Industrial Average.

Yet many analysts were pleased that the decline in book value per share wasn't steeper. And Mr. Buffett's results also show he has made moves that have paid off and should continue to do so even if economic woes persist, as he predicts.

He limited his exposure to complex and potentially costly derivatives in his reinsurance unit, General Re Corp. He has $24.3 billion in cash that can be used to find bargains in a distressed market. And he's made several investments in preferred stock of firms such as Goldman Sachs Group Inc. that pay out steady income of 10% or more.

"He's done a great job to prepare for this," said Paul Howard, an analyst at Langen McAlenney, a Hartford, Conn., research group, who rates Berkshire a "buy." "He's got good businesses that are generating a lot of cash, and he's going to continue to put that money to work."

Berkshire's substantial insurance holdings haven't needed to take the massive write-downs on toxic subprime securities that have plagued much of the financial industry in the past two years. One reason is Mr. Buffett's longstanding dislike of complex derivatives, which he famously called "financial weapons of mass destruction" in his 2002 shareholder letter and which he railed on again in his latest letter. He pushed General Re, the large reinsurance company Berkshire acquired in 1998, to disentangle itself from a vast web of derivatives -- financial instruments tied to the value of other securities, such as stocks or bonds -- over the course of five years, winding down its book of 23,218 derivatives contracts at a loss of about $400 million, he said in the letter. The losses may have been far more substantial if General Re had held onto to the contracts, Mr. Howard said.

[Buffett Doesn't Disappoint]

"Upon leaving, our feelings about the business mirrored a line in a country song: 'I liked you better before I got to know you so well,'" Mr. Buffett wrote, referring to General Re's derivatives book.

Separately, Berkshire took a loss of $5.1 billion in the fourth quarter on several derivatives contracts entered into in recent years. The contracts, essentially insurance policies against long-term declines in U.S. and foreign stocks, expire in 15 or 20 years. Berkshire will have to pay out if the indexes are below where they stood when the deals were struck. The derivatives, whose current estimated value has to be reflected on Berkshire's books, are one reason the company reported a grim fourth quarter on Saturday -- its fifth year-over-year quarterly decline.

The $117 million quarterly gain it eked out in the quarter marked a 96% drop from last year's $2.95 billion in fourth-quarter net income.

Beyond commenting on Berkshire, Mr. Buffett shared his views on the broader economy and financial systems. He doesn't expect the economy to improve soon but did expect better times, eventually.

[Berkshire Hathaway daily closing stock price for 2008]

"Our country has faced far worse travails in the past," he said. "Without fail, however, we've overcome them." He declined to draw a correlation between stocks and economics, saying that while he was certain the economy would be "in shambles for 2009," that "does not tell us whether the stock market will rise or fall." He credited the government for stepping in with massive assistance last year, saying the intervention was "essential" to avoiding a total breakdown. But he cautioned there could be "unwelcome aftereffects," such as inflation.

He contended the "investment world has gone from underpricing risk to overpricing it," which he said is reflected by investor appetite for Treasury bonds. Future historians will comment on the Internet bubble of the 1990s and the housing bubble of the early 2000s, he said, but "the U.S. Treasury-bond bubble of late 2008 may be regarded as almost equally extraordinary."

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WALL STREET JOURNAL: Are Berkshire Hathaway Shares Trading Sans ‘Buffett Premium?’

By Matt Phillips

June 29, 2009, 3:08 PM ET

Bloomberg News

We previously noted that some are saying shares in Buffett’s favorite stocks have been looking cheap.

Others are saying shares of the Oracle of Omaha’s beloved Berkshire Hathaway itself are trading at prices that don’t include the vaunted “Buffett Premium.” That’s the difference between the value of Berkshire’s underlying assets and the price of its shares, a gap largely attributed to Warren Buffett’s reputation as one of the world’s greatest investors.

It makes some sense that the Buffett Premium has lost some shine over the last year. After all, unlike Internet stock bubble, which Buffett and Berkshire largely sidestepped thanks to their single-minded focus on companies that produce, uh, profits, Omaha-based Berkshire suffered its worst year ever in 2008, losing 9.6% in book value per share, a common metric Berkshire uses to track performance.

According to The Journal’s Scott Patterson, Buffett himself conceded that he “did some dumb things.” They included scooping up shares of oil giant ConocoPhillips when oil prices were near a high and investing $244 million in a pair of Irish banks that hit trouble, resulting in an 89% loss.

Despite missteps, Keefe, Bruyette & Woods analysts wrote today that they see value in Berkshire thanks to the company’s core insurance and reinsurance business as well as a cash cushion of $25 billion. “At 1.3x March 31, 2009 book value, we believe that investors are no longer paying a ‘Buffett Premium’ at a time when investment opportunities for Berkshire may be better than they
have been in years as financial markets remain tumultuous.” Those analysts put a $107,000 price target on Berkshire shares, a more than 20% premium to the roughly $88,000 where Berkshire A shares are currently trading. And that price includes no Buffett Premium.

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NASDAQ: Berkshire Hathaway Initiated as an Outperform at KBW (BRK-A)

Created by Dividend.com

Jun 29, 2009 | 2:56PM

Warren Buffett’s Berkshire Hathaway Inc. (BRK-A) saw its coverage initiated by analysts at
Keefe Bruyette & Woods as an “Outperform.”

Berkshire Hathaway does not garner much analyst coverage because of its high share price. It is literally the most expensive stock in the world, closing on Friday at a whopping $86,210 per share.

Along with its “Outperform” rating, Keefe Bruyette & Woods, or KBW, set a price target of $107,000.00 for Berkshire’s “A” shares. If the stock could hit this target price, it would represent nearly a 25% appreciation from Friday’s close.

KBW cited Berkshire’s high quality businesses and solid long-term growth prospects for the positive rating. The analyst also pointed to the company’s $25 billion in cash, and relatively strong balance sheet. KBW also feels that Berkshire has extremely good opportunities to grow through acquisition, since valuations plummeted significantly after the financial market meltdown last year.

Berkshire Hathaway “A” shares rose $1,590, or +1.84%, in afternoon trading Monday.

The Bottom Line
Shares of BRK-A are off all-time highs of $147,000, hit in early 2008. The stock has near-term technical support in the $75,000 to $77,500 range. If the shares can firm up, we see initial overhead resistance in the $92,000 to $102,000 price zone. We do not currently rate this non-dividend paying stock, but we do follow the company closely.

Berkshire Hathaway Inc. (BRK-A) does not currently pay a dividend.

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CNBC: Warren Buffett Wearing "Belt and Suspenders" As Tide Went Out - KBW Analyst

Published: Monday, 29 Jun 2009 | 2:11 PM ET

By: Alex Crippen
Executive Producer

Warren Buffett
Warren Buffett likes to say, "It's only when the tide goes out that you know who's been swimming naked." That's his way of saying a downturn exposes those who had been taking on excessive risk when times were good.

In a glowing report on Berkshire Hathaway today from a stock analyst, the other side of the tide:

"Paraphrasing a Buffett analogy, the tide has gone out and Berkshire is not just wearing shorts, but a belt and suspenders in the form of financial strength and quality operating businesses."

Cliff Gallant at Keefe, Bruyette & Woods has started coverage of Berkshire's Class A with an "outperform" rating. His stock price target is $107,000. That offers about a "25% potential upside, which includes no Buffett premium."

Current price:

Berkshire Hathaway Inc
US%3bBRK.A

88100.0 1890.00 +2.19%
NYSE
[US;BRK.A 88100.0 1890.00 (+2.19%) ]

Gallant calls Berkshire "a myriad collection of high quality businesses, particularly in insurance and reinsurance, with attractive long-term growth prospects." He especially likes GEICO, saying it "may have the best business model in the insurance world today."

While noting that while Berkshire has suffered some setbacks from its derivatives positions, the global crisis has left Buffett's company "standing tall as one of the world's few financially sound institutions." Gallant says $25 billion in cash, along with little debt and low leverage ratios, give Berkshire "one of the world's strongest balance sheets."

Gallant is scheduled to speak live to Melissa Lee and the CNBC Fast Money traders later this afternoon (Monday) at around 5:20p ET.

Current Berkshire stock prices:

Berkshire Portfolio

Class A:

Berkshire Hathaway Inc
US%3bBRK.A

88100.0 1890.00 +2.19%
NYSE
[US;BRK.A 88100.0 1890.00 (+2.19%) ]

Class B:

Berkshire Hathaway Inc
US%3bBRK.B

2835.02 34.02 +1.21%
NYSE
[US;BRK.B 2835.02 34.02 (+1.21%) ]


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Monday, June 29, 2009

BLOOMBERG: Berkshire Rated ‘Outperform’ by KBW on Insurance

By Andrew Frye and Erik Holm

June 29 (Bloomberg) -- Warren Buffett’s Berkshire Hathaway Inc. will find opportunities to invest its $25.6 billion in cash as insurance units lead a return to profitability, KBW Inc. said as it began coverage of the stock with an “outperform” rating.

Insurance, which generates about half of Berkshire’s profit, stands out as having “attractive long-term growth prospects,” Cliff Gallant, an analyst with KBW, said in a research note today. “The recent global financial turmoil has left Berkshire standing tall as one of the world’s few financially sound institutions.”

Car insurer Geico Corp. and units selling protection against natural disasters are less vulnerable to the recession than most of Berkshire’s businesses, the billionaire chairman and chief executive officer said in May. The company posted its first loss in two decades in the first quarter on the declining value of stock holdings and derivative bets on corporate debt.

Berkshire shares may rise 24 percent to $107,000 from the June 26 close of $86,210, Gallant said. The Omaha, Nebraska- based firm advanced $790 to $87,000 at 10:27 a.m. in New York Stock Exchange composite trading.

Buffett, Berkshire’s chairman, chief executive officer and head of investing, has been buying debt and preferred shares in firms including Goldman Sachs Group Inc., General Electric Co. and Swiss Reinsurance Co. Berkshire doubled its municipal bond holdings in the nine months ended March 31 and scaled back on stock purchases.

‘Unparalleled’ Strength

“For an astute investor like Mr. Buffett, opportunities abound,” Gallant wrote, citing Berkshire’s $25.6 billion cash hoard. “Berkshire’s financial strength may be unparalleled in the U.S. today and is a key advantage in a credit-conscious world.”

Berkshire’s operating units include manufactured housing builder Clayton Homes Inc., carpet maker Shaw Industries and confectioner See’s Candies. Buffett has purchased the units with cash generated from insurance operations and investment returns, transforming Berkshire from a failing textile maker to a firm with a market value of more than $130 billion.

“What is truly remarkable about Mr. Buffett’s approach has been his ability to successfully execute a multitude of investment approaches,” Gallant said. “He is like a baseball pitcher with five good pitches, and can throw with either hand.”

Buffett’s Stake

Equity analysts have given less attention to Berkshire than companies with similar market valuation, in part because of the relatively stable base of shareholders led by Buffett, who owns about a third of the stock. Gallant is the third analyst tracked by Bloomberg to release a report in the last year on Berkshire, which employs about 246,000 people and has a bigger market value than GE. More than a dozen analysts cover GE.

Berkshire, whose Class A shares typically trade less than 2,000 times a day, has slipped 28 percent in the last year, matching the decline in the Standard & Poor’s 500 Index. Fairfield, Connecticut-based GE, which often changes hands more than 50 million times a day, dropped 55 percent in the same period.

Citigroup Inc. has a hold rating on Berkshire, and Edward Jones & Co. advises investors to buy the shares.

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Sunday, June 28, 2009

MOTLEY FOOL: The Makings of a Diversified Conglomerate



April 29, 1999

Berkshire Hathaway:
The Makings of a Diversified Conglomerate

by Yi-Hsin Chang (TMF Puck)

Unlike a McDonald's, a Coca-Cola, or a General Motors, Berkshire Hathaway (NYSE: BRK.A and BRK.B) is not involved in one type of business. It's got its hands in a lot of businesses. It is involved in insurance, manufacturing, retailing, and services, and peddles everything from boxed candies, sundaes and shoes, to furniture, diamond rings, and airplanes. (See table at bottom of this post)

Far from its roots as a New England-based textile mill, Warren Buffett's Berkshire Hathaway is a holding company that acquires large, profitable companies irrespective of their actual lines of business. The notable exception, of course, is technology. Keeping to his rule of not investing in something he doesn't understand, Buffett has stayed away from high-tech companies.

But make no mistake about it, Berkshire is very methodical in the way it makes acquisitions and has set criteria for potential candidates. It looks for companies with at least $50 million in pre-tax earnings. The bigger the better -- something with a price tag of $5 billion to $20 billion, preferably payable in cash, not stock. It wants companies with proven and consistent earnings power and good returns on equity using little or no debt, and it will only do friendly takeovers with strong management already in place.

As Buffett puts it: "[Vice Chairman] Charlie [Munger] and I frequently get approached about acquisitions that don't come close to meeting our tests.... A line from a country song expresses our feeling about new ventures, turnarounds, or auction-like sales: 'When the phone don't ring, you'll know it's me.'"

But the phone has rung many times, and Buffett has closed many deals. His most recent and largest-ever purchase was the $22 billion acquisition of General Re Corp. completed in December 1998. General Re owns General Reinsurance Corp., the largest U.S. property-casualty reinsurer, as well as 82% of the world's oldest reinsurance company, Cologne Re. The uncharacteristic all-stock merger helped double the number of Berkshire shareholders to around 250,000.

Despite the size of the company -- it was ranked 112 in terms of 1998 revenues and 32 in terms of profits among Fortune 500 companies prior to factoring in the General Re acquisition -- Berkshire operates more as a partnership than your typical multi-billion-dollar corporation. Buffett has more than 99% of his net worth invested in the company, while Munger has about 90% or more. The two think of themselves as managing partners of the company and shareholders as owner-partners of the company.

In addition, Berkshire takes a hands-off approach when it comes to managing its various subsidiaries, hence the importance of acquiring companies with good managers. Berkshire gives each of its subsidiaries the "freedom to operate in whatever manner will best allow the company to exploit its strengths." As Buffett likes to say, "[W]e subcontract all of the heavy lifting in this business to the managers of our subsidiaries." Of Berkshire's 45,000 employees, only 12 -- yes, that's twelve -- work at the company's headquarters.

Take Nebraska Furniture Mart, the largest home furnishings store in the country, which was bought by Berkshire in 1983. Buffett decided to buy 90% of the business -- leaving 10% to founder Rose Blumkin ("Mrs. B") and family -- after concluding that he'd "rather wrestle grizzlies than compete with Mrs. B and her progeny. They buy brilliantly, they operate at expense ratios competitors don't even dream about, and they then pass on to their customers much of the savings."

Mrs. B, who was 89 years old when she struck the deal with Buffett, remained chairman of the Furniture Mart and on the sales floor seven days a week. Louie Blumkin, Mrs. B's son, was the company's president and widely regarded as one of the country's shrewdest buyers of furniture and appliances.

Incidentally, Mrs. B quit the business in May 1989 after disagreeing with her son and grandsons about the remodeling and operation of the carpet department, making her the first and only manager ever to run out on Buffett. After taking a few months off, Mrs. B opened a competing store right by the Furniture Mart, though a few years later she publicly admitted that she had been wrong and agreed to allow Berkshire to buy out her new store for $5 million.

Chairman Buffett speaks highly of all of the managers of his businesses. "Most of these managers have no need to work for a living; they show up at the ballpark because they like to hit home runs. And that's exactly what they do," Buffett brags in one of his insightful letters to shareholders. "When I call off the names of our managers... I feel the same glow that Miller Huggins must have experienced when he announced the lineup of his 1927 New York Yankees."

Buffett is also a big fan of the businesses themselves. He unabashedly does a sales pitch for just about every line of Berkshire's businesses in his annual letter to shareholders. In his latest masterpiece, he writes jokingly: "Last year I spent more than nine times my salary at Borsheim's [jewelry store] and EJA [Executive Jet Aviation]. Just think how Berkshire's business would boom if you'd only spring for a raise." (Buffett's salary? A modest $100,000 a year -- a fraction of that of most CEOs of Fortune 500 companies.)

Buffett is also big on auto insurer GEICO, of which Buffett mentor Benjamin Graham was chairman. Because of the Graham connection, Buffett decided to visit GEICO's headquarters in Washington D.C. while he was a 20-year-old student at Columbia Business School in New York, where Graham taught. He took a train down on a Saturday and found the door locked, but was able to talk to Lorimer Davidson, the financial vice president and lone executive working that day, for four hours on the ins and outs of GEICO's auto-insurance business.

Today, Buffett says of GEICO: "Combine a great idea with a great manager, and you're certain to obtain a great result.... Here's an impartial scorecard on how we shape up: In New York, our largest-volume state, the Insurance Department recently reported that GEICO's complaint ratio in 1997 was not only the lowest of the five largest auto insurers but was also less than half the average of the other four."

Other Berkshire holdings, be they wholly owned subsidiaries or large stock holdings, also reflect Buffett's tastes as well as his brand loyalty. "Regardless of price, we have no interest at all in selling any good businesses that Berkshire owns," he explains. "We are also very reluctant to sell sub-par businesses as long as we expect them to generate at least some cash and as long as we feel good about their managers and labor relations."

A long-time drinker of Pepsi, preferably spiked with cherry syrup, Buffett converted to Cherry Coke after former neighbor and then president of Coca-Cola, Don Keough, gave him samples of the new product still undergoing testing. Buffett began accumulating shares of Coke in 1988, and Berkshire now holds an 8% stake in the soft-drink giant.

Berkshire started buying shares in The Washington Post Co. in 1973 and quickly became its largest outside shareholder. As a kid growing up in D.C. while his father served in the House of Representatives, Buffett had been a paper boy for The Post. Of course, the precocious Buffett turned his paper routes into a well-oiled business -- he was making $175 a month, comparable to what many young men were earning in full-time jobs.

In outlining Berkshire's acquisition of International Dairy Queen, Buffett characteristically praised the management and added that he and Munger bring a "modicum of product expertise" to the transaction -- both had long patronized the fast-food restaurant chain. "We have put our money where our mouth is," Buffett said.

Lest you get the impression that Buffett invests solely in brands he happens to like, the most important factor to him is without question a company's financial statements. When he got a call to see if he was interested in buying See's Candy Shops, a California chocolate chain, his initial response: "The candy business. I don't think we want to be in the candy business." But after quickly looking up See's numbers, he said, "Yeah, I'd be willing to buy See's at a price." That price ended up being $25 million, at the time his largest investment by far.

There's no question that Buffett is Berkshire Hathaway, and Berkshire Hathaway is Buffett. It's his life's work. But at 68 (he'll be 69 at the end of August), Buffett realizes the importance of reassuring investors about the future of the company. In the company's Owner's Manual, he says that upon his death, his job will be divided into two positions, with one executive responsible for investments and the other for operations. The two people he would now pick to fill the positions work for Berkshire, and their names are known to Buffett's family and a few key individuals.

Buffett jokes that his commitment to Berkshire is like the "loyal Democrat in Fort Wayne who asked to be buried in Chicago so that he could stay active in the party." On a more serious note, Buffett says, "You can be equally sure that the principles we have employed to date in running Berkshire will continue to guide the managers who succeed me."

Judging by Buffett's latest letter to shareholders and recent media interviews, the Oracle of Omaha appears as nimble and sharp-witted as he was a decade or two ago. Don't be surprised to see him at Berkshire's helm for many more years to come.

Operating Segments *

Description of Business

1998 Revenues
(millions)

Pre-Tax
Operating
Profit
(millions)

GEICO Corp.

Car insurance

$4,033

$269

Berkshire Hathaway Reinsurance Group

Reinsurance for property and casualty insurers and reinsurers

$939

$(21)

Berkshire Hathaway Direct Insurance Group

Commercial property and casualty insurance

$328

$17

Buffalo News

Daily newspaper in western New York

$157

$53

FlightSafety and Executive Jet

Flight training and aircraft fractional ownership programs

$858

$181

Nebraska Furniture Mart, R.C. Willey Home Furnishings and Star Furniture Co.

Retail sales of home furnishings, appliances and electronics

$793

$72

International Dairy Queen

Licensing and servicing 5,900 stores

$420

$58

Borsheim's and Helzberg's Diamond Shops

Retailing of fine jewelry

$440

$39

Scott Fetzer Cos.

Diversified manufacturing of consumer and commercial products

$1,002

$137

See's Candies

Making and distribution of boxed chocolates

$288

$62

H.H. Brown Shoe Co., Lowell Shoe Inc. and Dexter Shoe Co.

Manufacture of shoes

$500

$33

Other

Reconciliation of segment amounts

$4,074

$3,414

TOTAL

$13,832

$4,314

* Segments don't include the reinsurance business of General Re Corp., which Berkshire acquired on December 21, 1998.

Significant Investments

Percentage of Interest

American Express Co.

11%

Coca-Cola Co.

8%

Federal Home Loan Mortgage Corp. (Freddie Mac)

9%

Gillette Co.

8.5%

The Washington Post Co.

17%



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Saturday, June 27, 2009

WEBWIRE: Warren Buffett’s Lunch Collects $1.6 Million… Selling On Ebay

WEBWIRE – Friday, June 26, 2009

A winning eBay bidder and (up to) 7 of their friends will be spending 3 hours with Warren Buffett at the Smith & Wollensky Restaurant in New York. The price $351,000 does not include travel, accommodations, or gratuity… But, some still think this years lunch (with Warren) winner got a bargain.

While the most expensive lunch item on Smith & Wollensky’s menu is only $59, for the Australian lobster tail. The $1.6 Million winning bid, which is donated to charity, appears to be a real deal compared to last years price.

According to James Massey, publisher of www.WhatSellsBest.com, a website which tracks the current Top 20 best selling eBay items. “Last years (Buffett) lunch winner paid $2.1 Million, so it appears this years winner got a discount"

All proceeds (From the winning bid) are being donated to The Glide Foundation a San Francisco based charity.

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WARREN BUFFETT EXAMINER: $2.1 million lunch with Berkshire Hathaway chief: 'Warren will give him his money's worth'

Examiner - June 26, 2009

By William Freehling - Warren Buffett Examiner

$2.1 million is a lot to pay for lunch with anyone, even if it is with the world's second-richest man -- Berkshire Hathaway's Warren Buffett -- and even if it is for charity.

But Janet Tavakoli says Zhao Danyang of Hong Kong will get his money's worth from the charity lunch he had with Buffett this week at the Smith and Wollensky restaurant in New York City. Proceeds from the lunch went to the Glide Foundation, which helps the underprivileged in San Francisco.


Tavakoli should know a thing or two about the value of lunch with Buffett. She dined with the Berkshire chief in 2005 and wrote a book, "Dear Mr. Buffett," partly about the experience. Tavakoli, who still communicates with Buffett periodically and was in Omaha, Neb., for this year's annual meeting, is founder and president of Chicago-based Tavakoli Structured Finance, a financial consulting firm.


As the bidding for this year's charity lunch auction wound down (it was at about $500,000 as of this writing but is expected to shoot higher in the next several hours as the deadline approaches), Tavakoli agreed to answer our questions about her lunch and experiences with Warren Buffett.


Examiner: When and where did the luncheon occur?

JT: Warren and I had lunch on a hot summer day--August 25, 2005, five days before his 75th birthday, and on the eve of the global financial meltdown. We had roast beef and mashed potatoes at Gorat's in Omaha. Warren asked me to lunch, and he picked up the check.

Examiner: How did it come about?

JT: Years before, I had sent Warren a copy of Credit Derivatives, one of the technical finance books I had written. Warren had called derivatives "financial weapons of mass destruction" in his 2002 shareholder letter after an accounting restatement showed losses -- chiefly in his GenRe Securities credit derivatives unit -- of around $173 million.

I had tucked a forgotten note between the pages of the book. Warren wrote me a letter saying he had been looking at the book again and found the note. He invited me to stop in to talk about credit derivatives the next time I came to Omaha. When I responded, Warren invited me to lunch.

Examiner: Were you exceptionally nervous about meeting him?

JT: Of course I was nervous about meeting Warren Buffett. He is the greatest investor who ever lived. I am no slouch when it comes to finance, but I am not in Warren Buffett's league. I felt like a new freshman starter invited by the captain of the varsity team for a game of one-on-one.

Examiner: How did he set you at ease?

JT: I was nervous I would make a faux pas. I couldn't find a coaster for my sweaty water glass, and Warren wanted to make me comfortable. He took his Wall Street Journal from his desk and put it on the coffee table for me to use as a coaster. He showed some nervousness himself about being a good host. He wouldn't feel comfortable until he had made me feel welcome. His gesture of hospitality broke the ice, and was a reminder that good human relations are about making the other guy feel comfortable. Warren is a very down-to-earth person and has no interest in lording his wealth or position over others. I got the impression he would also have no patience with people who have something to prove. Warren takes pride in his accomplishments, but he is not a proud man. You quickly realize his only agenda was to explore new ideas and quickly relax.

Examiner: What was your first impression of him?

JT: I had only seen a few Internet photos of him. My first impression was that he was taller and trimmer than I expected, and he seemed scrubbed and well-groomed. Many executives dress to impress. Warren was well-dressed, but I got the impression that he dresses to be appropriate, not to overwhelm others.

Examiner: How long did you spend with him? Have you seen him since?

JT: I spent over four hours with Warren. I arrived early and he took me into the meeting right away. After lunch Warren gave me a tour of his offices and discussed some of his business trophies.

I haven't met with Warren since, but we have exchanged some phone calls and e-mails. He is on my distribution list and asked me to keep him on it. He reads what I write and sometimes forwards it to Ajit Jain at GenRe or may send a brief comment. We haven't had reason to interact recently, but last week I sent him Caro Sr. Buffett, the Portuguese translation for Brazil.

Examiner: What did you two talk about during the lunch?

JT: We covered dozens of topics. Warren is a highly intelligent polymath, and he has a fabulous memory. His wide base of general knowledge and life experience enable him to add interesting color to almost any topic. He switches topics quickly, and he picked up speed as the afternoon progressed. It is mental work to keep up with Warren. He will go as fast as you can handle.

Warren is proud of the fact that he has created wealth for his shareholders, his long-term partners. By the time Donald Othmer, a chemical engineer, died in 1995, his investment in Berkshire Hathaway was worth around $750 million. He has a keen sense of the enormous responsibility of managing the hard earned money shareholder entrusted to him. The idea of building value is not only wholesome, it is life-affirming. During our meeting, I got the sense of what a totally decent person Warren is. The blow-up in the global financial markets that was just starting to occur, and it was partly due to malicious mischief. Contrasting Warren Buffett's philosophy with the shenanigans of phony assets combined with inexcusable leverage and cover-ups was all the more poignant as the crisis unfolded.

I mention some of the many topics we discussed in my book, but my personal take-aways have to do with Warren's sane approach to the markets. We hear a lot of black swan quackery making claims that Warren Buffett's investment style is dead. Yet, the "black swan" funds have poor track records, albeit that has not been widely reported, and in fact, it has been inaccurately reported. It is nothing more than a PR stunt. If one wants to buy insurance, i.e., put options, one does not have to pay 2% in fees and 20% of the upside to a mediocre manager with no exit strategy. The funds may have one good year followed by years of consistently losing money. The loss of that money is permanent value destruction. More than that, what kind of person wants to spend their entire life curled up in a corner with their fists balled up in front of their faces in a defensive posture? It's a ridiculous way to spend your life, and you create nothing of value in the economy other than buying insurance. No wonder they have not held onto their insurance payouts and have poor track records.

When one invests in value, there is no permanent destruction of value. Stock prices may go up or down, but the underlying companies have value, and they make products that people want and need. These companies keep generating earnings and value and when the economy recovers, they are positioned to soar. Warren doesn't distinguish between "value" and "growth" companies because they are one in the same to a value investor. He wants to buy companies at a fair price-better yet, at a cheap price-and he wants to buy companies that have a potential to grow.

While it is true that Berkshire Hathaway may not achieve the high returns of its past due to its enormous size, it will continue to achieve future satisfactory returns. Investors focus more on book value and other metrics rather than the fickle market price. People said value investing was dead in the 1970's when Berkshire Hathaway's share price was down two years in a row (more than 15% for the fiscal year then ending March 1974, and down more than 35% for March 1975). The share price was $51 on March 31, 1975, down from $93 on March 31, 1973. Even if you had "bad timing," and had bought the stock at $93, you would be a happy investor today (BRKA closed yesterday at $86,705). Long-term value investing works if you know the principles of finance and know how to value a company.

The philosophy of value investing seems very healthy to me. One generates value by investing in society and creating permanent value in the economy.

Another thing that struck me about Warren is that he does not dwell on past mistakes. He is not a brooder. He freely admits that mistakes will be made, and that you may never figure out what complicated mix of psychology led you to make them. The key is to avoid making big ones. This is where the idea of building a margin of safety comes in. He skews the probability of success in his favor by limiting the probability of disaster and increasing the probability of a high future gain. He doesn't rely on random luck, he is using conditional probabilities. Given that he knows the principles of creating value, he has stacked the odds in his favor of a satisfactory outcome. No one can guarantee you a successful outcome, unexpected events will occur, and mistakes will be made. Knowing all of that, one can still improve one's odds, and Warren Buffett excels at stacking the deck in favor of his investors.

Examiner: Is Zhao Danyang (who paid $2.1 million to have lunch with Buffett this week at the Smith and Wollensky restaurant in New York) getting his money's worth?

JT: That is a nice contribution for the Glide Foundation. Mr. Danyang felt that it was worth $2.1 million to have lunch with Warren Buffett, and Warren will give him his money's worth.

Examiner: What are some things that you have observed about WEB during the lunch or subsequent interactions that the public doesn't know about him?

JT: Warren does not talk down to people, and he doesn't try to impress people with his intelligence. As a result, many people underestimate him. For example, one reporter wasted an interview with Warren by repeating a myth that he doesn't carry a cell phone. Warren whipped out his cell phone and joked that Alexander Graham Bell had given it to him. He would never belittle someone for wasting his time (and theirs), but he also won't tell the reporter what to ask. He can [be] like a Wimbledon winner playing tennis with a child. He won't slam the ball at the feet of an inexperienced player. But when he meets a skilled player, he increases his level of play to match the other player.

Warren's command of derivatives and financial principles is deep, but his explanations are so elegantly simplified that experts sometimes deceive themselves into thinking he is not as smart as they are. I call it the "I am a genius, and you're not" syndrome. Warren doesn't suffer from that. When Warren appears on television, he makes things sound simple. When he hesitates, it is as if he is translating complex material to simple language for public consumption. A less secure man might try to impress the audience with jargon or with details. He is not competing with anyone else, and he respects his audience. I would like to be more like him when I grow up.

Examiner: Do you often attend the annual meeting in Omaha?

JT: My schedule is crammed, and I am not a fan of large crowds, but I attended in 2006 and I attended this year. Warren also invited me to sign copies of "DEAR MR. BUFFETT" at the annual meeting, so I popped out during lunch and the breaks to sign copies.

Examiner: Thanks, Janet.

Janet Tavakoli

President

Tavakoli Structured Finance, Inc.

360 E. Randolph St., Suite 3007

Chicago, Illinois 60601 USA

(312) 540-0243

e-mail: jt@tavakolistructuredfinance.com

web site: www.tavakolistructuredfinance.com

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