Wednesday, October 24, 2012

Buffett on CNBC

Buffett was on CNBC this morning.  Who has time to sit in front of the TV from 7:00 - 9:00 am?  And only the hardcore Buffett-heads would click through and watch all the videos or read the full transcript.   (Also, I tell people to listen to Buffett but I know most don't have the time to (who are not full time value investors, not that they would read the blog))

So here are some of my notes (may not be in any particular order):

First I'll put one of the last things he said first as it is most relevant to investors.

Stocks
  • Bad news from Europe, macro news and other headlines would not cause you to sell a farm run by capable people, or an apartment house where you had rents rising.  You wouldn't sell it just because there is some bad news.  A McDonald franchisee that has a good business wouldn't sell the business because of what is in the news.  You know you will do well over time and that should be the same with stocks.
  • To buy and sell stocks on current news is just crazy.  Dancing in and out of markets based on the news is a terrible mistake.
  • You have to treat owning stock like owning a business.  The above farmers, landlords and MCD franchisees wouldn't buy and sell their businesses depending on what's in the newspapers.
  • Buffett bought his first stock when he was 11 years old and that was three months after Pearl Harbor and the death march of Bataan was going on etc.  All the news was terrible, but it was a great time to buy stocks.
  • [ As an aside, Julian Robertson was on CNBC too this week and he said something similar.  He said now is the time to invest.  He knows a lot of very good investors that lost their way by being worried about Europe, QE2, QE3 etc, not realizing that there are a lot of marvelous companies at reasonable prices.  He likes AAPL, Ryan Air, OCN, COF; doesn't like steel ]

QE3
  • Asked if he would have voted for QE3 (if he was on the Fed board), Buffett said that his instincts would have been against it.  There is only so much the Fed can do.
  • Bernanke has done an "absolutely superb" job.  What he did in 2008 was the right thing and saved the economy.
  • Buffett is worried about the continuously expanding balance sheet of the Fed.  The Fed has unlimited buying power, but not unlimited selling power (the Fed can buy all the paper it wants, but when it's time to sell they'll need cooperation (from buyers)).
  • 3% of revenues of the U.S. government is profits from the Fed.  The Fed is the fourth largest source of revenues for the government (after personal income tax, payroll tax and corporate income tax).  The Fed pays $70-80 billion dividend to the government (of the $2.4-2.5 trillion total revenues)
Verizon/ATT
  • Asked why he doesn't buy Verizon and ATT with their 5% dividend yields and toll bridge-like business, he said that he doesn't know what they'll look like five to ten years from now. 
  • He explained that he buys stocks for their future earnings (and not dividends). 
  • He mentioned that ATT/Verizon would be better off buying back shares instead of paying dividends (Buffett is a big fan of share repurchases as it reduces share count and increases ownership of current stockholders and increases intrinsic value per share if repurchases occur at attractive levels).
  • Mentioned that IBM has bought back $3 billion per quarter this year.
The Economy/Employment
  • Berkshire Hathaway (BRK) has at least 50 companies out of the 75 businesses they own that would fit the middle market definition (sales between $10 million - $1 billion) so he gets a sense of what business is like for them.
  • BRK will add 8,000 jobs organically this year off of a 275,000 employee base and they will add another 10,000 - 15,000 employees through acquisitions (mostly bolt-on acquisitions).
  • Clayton Homes will sell 15% more homes this year than last year.
  • Furniture, carpets and other housing related businesses doing well. 
Cash / Elephants
  • BRK has at least $40 billion cash on the balance sheet (he has said in the past that he wants at least $20 billion cash on the balance sheet for liquidity).  He has looked at two deals this year in the $20 billion range (plus or minus) where the CEO wanted to do a deal, but it didn't get done due to price.
  • BRK is an unlevered buyer so often can't meet the price of levered competitive bidders who get cheap financing now with rates so low. 
  • Prices for that reason now are too tough.  Cheap money is a factor.  (This is exactly what Leucadia said in their annual report).
  • When he gets home he will look at a $6 billion deal he was offered but he hasn't seen the financials yet.
  • BRK has done many deals this year; 15 deals that add up to around $2 billion, but those are bolt-on acquisitions.  Buffett wants elephants.
Stock Market Weakness this Week
  • Has has added some Wells Fargo (WFC) in the past week, but not the past couple of days.  IBM was added this year.  $1 billion or so of WFC was added this year and hundreds of millions of IBM was added this year.
IBM
  • Learned more about IBM by asking BRK managers.  They are IBM clients and asked them about their future plans, alternatives and the managers said they had no plans in changing providers, convincing Buffett that IBM had a sticky client-base.
Insurance
  • The insurance business has been good this year.  There were some big events last year, but not much this year.
  • I'm surprised Buffett didn't mention anything (unless I missed it) about premiums.  James Tisch said recently on Bloomberg or CNBC that there is a 5-8% inflation story going on now in insurance.  More than underwriting profits/losses (which is volatile and not very indicative of anything in the short term), the industry has been waiting for a hardening market (higher premium prices), and that seems to be happening.  Anyway, Buffett didn't say anything about that.
Coke
  • Has been around since 1886
  • Physical volume is up +4% in the first nine months of this year in a world that is growing 1%. 
  • Per capita usage has gone up almost every year since 1886.
  • Coke is a huge distribution machine.
  • Mexico has 600+ 8 ounce servings per capita, 50% higher than in the U.S. and it grows every year.
  • This comment was in response to a question about inflation and higher input costs.  He never got there but I guess he was going to say that great businesses with great products will be able to price their products profitably (pass through costs).
Proctor and Gamble
  • Sold some PG stocks over the years on valuation.  He said he sold some during the Lafley (former CEO) years and the McDonald (current CEO) years.
  • Earnings have been disappointing for a few years.
  • What mistakes they made, what happens inside of PG, what the plans are, Buffett has no idea.  The jury is out on that and he doesn't know what will happen.
Election
  • Election comes down to who has a better ground game in Ohio.
  • The better organized one will win; Democrats need a lot of work because their election day turnout is lower than the Republicans, so they really need to work hard to get their constituents to vote.
  • Buffett has no particular insight on who will win; his views no better than Intrade (online bookie).
  • American business and economy will do better in the next four years no matter who wins.
Bloomberg Soda Ban
  • When asked about NYC Mayor Bloomberg's ban on large sodas, Buffett said it makes no sense to ban just one type of drink.  A 16 ounce serving of Coke has 200 calories, but other drinks and foods have 200 calories too.   Why just soda?
  • He mentioned that Dairy Queen's same store sales was up +5.8% in September; much better than McDonalds.
  • He said he drinks five 12 ounce cans of Cherry Coke every day, and that's 750 calories.  His doctor told him to drink a lot of fluids.  He asked, "How about Cherry Coke?" and the doctor said that's fine.
Europe
  • Europe has a banking problem (he has said many times recently that U.S. banks are in great shape).
  • It's tough to have austerity and try to grow GDP at the same time.  Europe will be tough for some time.
  • Monetary union without discipline is not sustainable.  They will have to become closer.
  • Printing money has consequences and we have yet to see what that will be. 
  • The movie in Europe is not over.
Homes
  • Buffett said that it's a terrible mistake if you don't buy a home now, if you know where you are going to live for a long time and if you have a stable job/income.
  • Get a 30 year mortgage, it's a "golden opportunity" that won't be around in a few years.  No chance like this five years from now (has Buffett spoken to any Japanese homeowners in the past 20 years?).
Stock Activity at BRK
  • Most stock buying and selling activity at BRK is not Buffett but his two new portfolio manager hires.
  • Buffett oversees very few stocks, like IBM, WFC, KO etc.  So other than activity in those names, most other stock trading is done by Ted and Todd.  They will buy $500 million at a time.
  • He mentioned that both Ted and Todd used to run hedge funds with a very low tax rate for themselves and yet they came to BRK happily for lower compensation and a much higher tax rate and they are happy.  This is an "indictment" of the current tax system (and argument against claims that a higher tax rate will reduce incentive to work in this country).
Greg Smith
  • He was asked about Greg Smith's book/op-ed Why I Left Goldman Sachs.
  • Buffett said he didn't read the book but saw the interview with Greg Smith.
  • He said that publishing an op-ed by a single disgruntled employee (out of 30,000 employees) who wasn't happy making only $500,000/year and not $1,000,000/year where in other industries he would be making only $75,000/year with no details other than the word "muppets" didn't reflect great editorial judgement.
Facebook
  • Buffett wouldn't invest in Facebook.   He doesn't understand the business.
  • He's not even a member even though FB has a billion members.
Global Economy
  • The economy came up again and he said there is no question economy is slowing around the world.
  • In the U.S., residential housing is picking up and it will have a significant impact.  Nothing big yet in housing, but it has turned.
  • General economy better in the U.S. than Europe.  Slope of slowdown is steep in Asia.  U.S. has steadiest trajectory (inching ahead) and Buffett sees no change in that unless there is chaos somewhere. 
  • U.S. economy is not tanking
  • Clayton Homes growing 10-15% in terms of units.
  • Real estate brokerage is seeing 15% increase with median prices up (a little) all over the country.
  • U.S. has adapted to what's happening around the world.
  • BRK invested $6 billion in plant and equipment in 2010, a record.  In 2011 they invested $8 billion and in 2012, it will be $9 billion.  So there are things to do (capex is mostly rails and energy).
  • BRK's railroad business carry 15% of all U.S. freight measured in ton miles.  Burlington Northern alone carries almost 1/2 the ton miles that all trucks carry. 
  • There has been small gains in freight volumes (coal down but oil up etc.); July-August had misleadingly strong figures due to floods last year.
Banks
  • Likes WFC and bought more in the past week.
  • Banks can't be as profitable as it used to be in the past.
  • Banks business model has two factors: Return-on-assets (ROA) and assets-to-equity (leverage).
  • Return on assets won't go up.  WFC earns 1.4%-1.5% ROA and USB does 1.7%.  This won't change.
  • In the past, (some) banks had 20x assets to equity.  With an ROA of 1.5%, 20x leverage gives you a ROE of 30%.  This won't happen in the future.
  • Banks used to earn 25% return on tangible equity and that's a crazy number.  We won't be going back to that.
  • But banking is still a good business.



7 comments:

  1. Great summary. Thanks for your time and effort!

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  2. Thanks! Great summary. Got here via Abnormal Returns.

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  3. Great, thorough coverage. As you say, who watches TV (or CNBC)? Retirees I guess... Anyway, I appreciate your efforts! (Also via AR).

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  4. I absolutely hate it when Buffett makes investing sound so easy. :-)
    If I could get 1/10th of his internal calm, I would be a much better investor!

    Thanks for the summary though.

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  5. Your style is unique in comparison to other folks I've read stuff from. Many thanks for posting when you've got the opportunity, Guess I'll just bookmark this web site.

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  6. Global Economy - http://www.cnbc.com/id/49526511
    Crazy to buy and sell a farm on short term news - http://www.cnbc.com/id/49533493
    Pricing is difficult and money is cheap - http://www.cnbc.com/id/49535864
    Salivating for deals and why any new purchases are being compared to existing holdings: http://www.cnbc.com/id/49537172
    15 minutes, likely contains all of 4 linked prior: http://www.cnbc.com/id/49537172

    Few things I really liked:
    1. When describing recent decreases in production in Europe and Asian countries, he says that while the Asian countries have a steeper drop, he doesn't let the number worry him, because they came from a far higher recent growth number.

    I liked this, because he's truly thinking like a owner and looking at the starting point. Sometimes, in business, I see that companies have an absolutely stellar year, and everyone should rightfully celebrate it, and we should also be cognizant that this can often virtually guarantee the following year will be lower. A year from then, the headlines will say that earnings were down 33% YoY, however that is expected. Very few looking at the starting place. His early records for profitability from See's candy show this despite continual price increases.

    2. Banks - I was surprised that he talked about multiple firms here, because he doesn't normally really get into the details. He mentioned that USB has a great ROA and WFC is lower. In another video, he talked about the deposit base at a company being an edge over the others. I'm curious what a Berkshire Hathaway sponsored bank would look like - would they stop writing in years when things get too crazy for them? Very few have the culture to be conservative even if it means not writing loans, and I get the feeling Berkshire is the one place this would be praised.

    3. To the blogger regarding insurance premiums - I'm guessing he doesn't discuss this, because it isn't related to the general economy. (My hypothesis) This premium "inflation" is likely due to market changes (capacity, reserve "strengthening" at competitors hehe, catastrophic weather like Sandy forcing pricing reevaluation, etc.) rather than the general economy.

    Thanks for posting this summary - I missed the video and hope the full video shows up online.

    Take care,
    Ankit

    Side note - the post you did comparing money managers and the chart with their different ROE's was really interesting. Thanks for posting that.

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