10x Pretax Earnings! Case Studies: KO, BNI etc.

So, one of the great things about writing a blog is that I get feedback from some pretty intelligent people.  Most of us don't have a Munger to call, but a blog works well too.  If I say something wrong, I'm sure someone would jump in to point it out.

10% Pretax for Stocks Too?
Anyway, I have mentioned 10x pretax earnings or 10% pretax yield as Buffett's valuation measure numerous times here and more than once I've gotten a response saying that this hurdle is for private deals and not for pricing listed companies.  The argument, of course, is that if you buy a stock at 10% pretax earnings, you won't actually earn 10% pretax (due to the additional tax at the investee corporate level whereas in a wholly owned business, a 10% pretax return is actually a 10% pretax return).

It is true that when Buffett speaks of returns in the stock market, he uses GDP growth and dividend yields; earnings can't grow more than GDP and stock returns will reflect earnings growth over time plus whatever dividends you get.

Translating that into individual stocks, you will get earnings growth plus dividend yield equals expected return on the stock.

The only problem with this is that it doesn't tell you what the business is worth.  Would you pay 50x p/e for it?  20x?  The above calculation only works if valuation stays the same.

Anyway, my usual response to this is that many value investors (including Buffett) likes to analyze businesses based on what a rational businessperson would pay for the business in a private transaction.

So, if Buffett is willing to pay 10x pretax earnings for Wells Fargo in a private transaction to buy the whole thing, that is a valuation benchmark for me.  I know that this is not actually possible.  There are size and regulatory issues that will make this unlikely.  But in terms of valuing businesses, I think it is still a useful benchmark.

Is this how Buffett thinks about it? If he pays 10x pretax earnings for WFC stock, he will not necessarily earn a 10% pretax yield.  I don't know the answer to that question. Maybe that's a good annual meeting question.

But as long as I know that Buffett  would be totally happy to pay 10x pretax for the whole business, that's good enough for me regardless of whether that will actually happen.

Yes, you can argue that these "private business transaction" valuations are only valid when there is some chance of a private deal occurring.  But I only think of that when the private valuations don't make too much economic sense to me; valuations per eyeball or per POP valuations in the past, for example, or 40x EV/EBITDA for some media assets, or per acre land valuations etc.; just because some people are paying high prices doesn't mean anything unless there is a real prospect that what you are looking at will also be taken out at some point at the same high level.

Is 10x Pretax Reasonable? 
But 10x pretax earnings, even for listed companies, is not unreasonable at all.  You can translate that 10x pretax into a 15x after tax p/e ratio, and that wouldn't be far off from the 100 year or so long term average of U.S. listed businesses.   Since Buffett buys quality, above average businesses, paying 10x pretax is like paying an average price for an above average business.

So even if my view is wrong, it passes the rationality test; why not pay average prices for above average businesses?  And this is not dependent on market p/e or interest rates because you are using a long term average.  We are not increasing valuations due to decreased interest rates.

Case Studies
So, this discussion piqued my interest again so I decided to go back and look at some more of Buffett's big deals.  I use the term "case study", but it's far from it, really.  I'm only looking at one measure; pretax earnings yield or price to pretax profits.  So I apologize for the exaggerated terminology and to folks who come here looking for a 300 page paper on why Buffett bought something; you'll only see one line.  We all know how great the businesses he owns are, so there really is no need to look at that.

So, I looked at the 2005 purchase of Wells Fargo, Walmart and the recent IBM purchases, but what about some of the other older ones?

Again, since the Warren Buffet Library of Corporate Annual Reports doesn't exist yet, I can only look at some of them.

I got lucky and found a 1988 annual report of Coke, so that's good. Let's start there.

Below, let's take a quick look at Coke (KO), American Express (AXP) and Burlington Northern (BNI) (which a prominent value investing academic said was a crazy/insane deal or some such.  We'll see if it really was a bad price) and some others.

Coca Cola  (KO)
From the 1988 KO annual report:

Pretax earnings:   $1,582 million
Net earnings:        $1,045 million
EPS:   $2.85
Shares outstanding: 365 million
Year-end stock price:  $44.63

From the Berkshire Hathaway annual reports, the cost of KO was:

                     #shares owned           cost ('000)       cost/share (my calculation)
1988 AR       14,172,500                  $592,540       $41.81
1989 AR       23,350,000               $1,023,920       $43.85

So with $1,582 million in pretax profits and 365 million shares outstanding, that's $4.33/share in pretax earnings per share.

So it turns out he paid 9.7x pretax earnings as of 1988 and 10.1x pretax earnings as of the end of 1989.  

That's a pretty stunning discovery, even for me.  I think a lot of value investors were puzzled at what looked like a growth stock purchase by Buffett at the time, but it fits right in with the 10x pretax benchmark perfectly.  He didn't pay up because KO was a really high quality business; he paid what he normally pays.


American Express  (AXP)
So this one doesn't quite fit the mold, but let's take a quick look at it (it doesn't fit only because he didn't pay almost exactly 10x pretax earnings, but far less).

The 1994 annual report is the first time AXP showed up in the BRK letter so let's look at that and what he paid for it:

                        # of shares owned          cost  ('000)          cost/share (my calculation)
1994 AR         27,759,941                     $729,919             $26.29

By the way, I know that this is only an estimated cost per share of the stocks.  There may be some adjustments somewhere that might throw this off, but I don't think it would change things materially.

Thankfully, the SEC database goes back to 1994, so let's pull the relevant AXP figures from 1994:

Pretax earnings:  $1,891 million
EPS: $2.75
Shares outstanding:  496 million

So we don't even have to go very far with this one.  It looks like Buffett paid 9.6x net earnings for AXP.

Pretax earnings per share comes to $3.81/share, so he paid a 6.9x pretax earnings.

It looks like he got AXP really cheaply.   It got pretty cheap in 2009 too.

Moving on.

U.S. Bancorp (USB)
It looks like he started buying USB in 2006, but maybe earlier.  It shows up first in 2006 on the annual report.  He bought more in 2007.  This is from the annual reports:

                     #shares owned           cost ($mn)       cost/share (my calculation)
2006 AR       31,033,800                  $969                 $31.22
2007 AR       75,176,026                $2,417                $32.45

And here are the figures for USB in 2006 and 2007:

              Pretax          diluted (mn)                  Pretax
              earnings       shares outstanding        EPS
2006       $6,912         1,804                            $3.83
2007       $6,282         1,758                            $3.57

2013       $7,990         1,849                            $4.32

So in 2006, BRK was paying 8.2x pretax earings, and the total cost through 2007 comes to 9.1x pretax earnings of 2007.

And interestingly, BRK increased shares held in USB from 78 million in 2012 to 96 million at the end of 2013.  The pretax EPS of USB was $4.32 in 2013 and the stock traded in the range of 7.4 - 9.5x that figure throughout the year.



Burlington Northern (BNI)
So this is one of his other major purchases that made everyone scratch their heads.  There are two things to look at here; one purchase when he just bought the shares and then a second time when he bought out the whole company.  Let's take a look.

The first time BNI appeared in the annual report was 2007.  In 2006, he said there were two positions worth $1.6 billion that was not listed, so BNI was probably purchased in 2006 and other times too (could be some before and some after).

Here is what the 2007 BRK annual report showed:

                       # of shares owned          cost  ($mn)          cost/share (my calculation)
2007 AR         60,828,818                     $4,731                  $77.78

And these are the figures for BNI for 2006 and 2007:

                                                   2006               2007
EPS:                                           $5.11              $5.10
Pretax earnings:                         $2.96 bn         $3.0 bn
diluted shares outstanding:           370 mn        359 mn
Pretax EPS:                                $8.11             $8.25

So from this, it looks like Buffett was paying 9.4x - 9.6x pretax earnings per share.  Voila!

And then of course, BRK bought the whole thing in late 2009 (on an announcement basis).  The offer price was $100, so let's see what the BNI figures were for 2009.  Even though the figures haven't come out yet when the announcement was made, most of the year was over, so they would have known pretty much what the earnings were going to be.

Here it is:

BNI 2009
EPS:   $6.08
Pretax earnings:  $3,368 mn
Diluted shares outstanding:  348 million
Pretax EPS:   $9.68

So at $100/share, Buffett paid 10.3x pretax EPS of BNI.

A lot of people thought Buffett overpaid, but it turns out he just paid what he always seems to pay.  I know, I know.  What about capex, maintanence capex / depreciation and all that?   Yes, that was the argument back then.  I don't know.  I'm just looking at this and noticing a pattern.  I don't have all the answers!

BNI Tangent
What's a blog post here without a tangent?  As I was doing this stuff, I just took a quick look at the famous 'projections' of BNI that was included in the merger proxy.  Buffett has said that he ignores these management projections, but these are often done by management / investment bankers in mergers so they can do their cash flow discount model analysis and whatnot.

So here are the various projections for BNI from the proxy dated December 2009:

2010 Recovery Case

		2009E			2010E			2011E			2012E			2013E			2014E			CAGR
		(In millions, except per share and percentage data)
Total revenue		$	14,013		$	14,994		$	16,601		$	17,611		$	18,667		$	19,418		6.7	%
Freight revenue w/o fuel			12,372			12,830			14,063			15,014			15,834			16,558		6.0	%
Operating income			3,204			3,421			4,336			4,921			5,360			5,745		12.4	%
EBITDA			4,737			5,052			6,056			6,746			7,313			7,825		10.6	%
Net income			1,631			1,717			2,224			2,476			2,663			2,831		11.7	%
Earnings per share			4.77			5.04			6.88			8.41			9.71			10.96		18.1	%

2011 Recovery Case

		2009E			2010E			2011E			2012E			2013E			2014E			CAGR
		(In millions, except per share and percentage data)
Total revenue		$	14,013		$	14,254		$	15,436		$	16,629		$	17,839		$	18,877		6.1	%
Freight revenue w/o fuel			12,372			12,424			13,345			14,291			15,244			16,044		5.3	%
Operating income			3,204			3,092			3,638			4,241			4,775			5,209		10.2	%
EBITDA			4,737			4,723			5,357			6,063			6,724			7,283		9.0	%
Net income			1,631			1,515			1,842			2,149			2,386			2,572		9.5	%
Earnings per share			4.77			4.41			5.43			6.74			8.10			9.35		14.4	%

No Recovery Case

		2009E			2010E			2011E			2012E			2013E			2014E			CAGR
		(In millions, except per share and percentage data)
Total revenue		$	14,013		$	14,012		$	14,410		$	14,622		$	14,844		$	15,069		1.5	%
Freight revenue w/o fuel			12,372			12,377			12,736			12,953			13,176			13,401		1.6	%
Operating income			3,204			3,010			3,224			3,324			3,314			3,310		0.7	%
EBITDA			4,737			4,639			4,939			5,138			5,249			5,363		2.5	%
Net income			1,631			1,465			1,607			1,660			1,631			1,610		(0.3	%)
Earnings per share			4.77			4.27			4.65			4.87			4.94			5.07		1.2	%

Deeper Recession Case

		2009E			2010E			2011E			2012E			2013E			2014E			CAGR
		(In millions, except per share and percentage data)
Total revenue		$	14,013		$	13,544		$	13,618		$	14,000		$	14,283		$	14,756		1.0	%
Freight revenue w/o fuel			12,372			12,107			12,147			12,351			12,632			12,929		0.9	%
Operating income			3,204			2,759			2,728			2,778			2,841			2,898		(2.0	%)
EBITDA			4,737			4,387			4,440			4,588			4,770			4,943		0.9	%
Net income			1,631			1,310			1,295			1,326			1,369			1,399		(3.0	%)
Earnings per share			4.77			3.82			3.74			3.80			3.89			4.05		(3.2	%)

And check this out.  These are the figures for 2013 that BNI actually booked (from the BNI 10-K):

BNI 2013 Results
Revenues:             $22,014 million
Operating income:  $6,667 million
Pretax income:        $5,928 million
Net income:             $3,793 million

The most bullish projection in 2009 was for operating income of $5,360 million and net income of $2,663 million.  Operating income came in 24% higher and net came in 42% higher!


Lubrizol
OK, so here's one more acquisition.  This name might not give BRK holders a warm and fuzzy feeling (due to the Sokol incident), but it is a major acquisition so it is a relevant data point.

BRK bought Lubrizol in 2011 for $135/share.

For the 2010 year, here are some figures for Lubrizol:

EPS:  $10.64
Pretax earnings:  $1.00 billion
Diluted shares outstanding:  68.8 million
Pretax EPS:  $14.53

So a $135/share purchase is 9.3x pretax EPS.

Recap
So let's just recap all of this stuff I said in the last post (part 5) and this one.

These are the multiples to pretax earnings Buffett paid in these big deals:

KO in 1988/89:    10.1x
AXP in 1994:         6.9x
WMT in 2005:      10.3 - 12.9x (range of stock price in2005)
WFC in 2005:         9x
USB in 2006/2007:  9.1x
USB in 2013:  7.4 - 9.5x (range of stock price in 2013)
BNI stock purchase: 9.5x
BNI acquisition:  10.3x
Lubrizol:   9.3x
IBM:  9.7x

I exclude Heinz here as it is a different situation and I think he said he wouldn't have done the deal without 3G.  I may be missing some here as I didn't intend this to be comprehensive by any means, but just looked quickly at some of the large purchases he has made over the years and it is very interesting.

Conclusion
It's amazing how so many of the deals cluster around the 10x pretax earnings ratio despite these businesses being in different industries with different capital expenditure needs and things like that.

Even the BNI acquisition, which many thought was overpriced (crazy / insane deal! Buffett has lost his marbles!) looks normal by this measure; a price that Buffett has always been paying.

And yes, right now I'm the guy swinging around a hammer (seeing only nails), but I notice a pattern and think it's really interesting.

Of course, this actually makes no sense as every company has different capital needs (free cash flow / owner earnings etc.)  Of course, what Buffett calls "owner earnings" are more important than pretax profits.  This was one of the arguments about the BNI deal.

And it is silly to think you can price anything and everything at 10x pretax profits.  Buffett obviously looks at everything else and has a deep understanding of the various businesses and is only willing to pay this amount for the very best businesses out there.

Why he says he will pay 9-10x pretax earnings (OK, for private deals) and yet seems to go out and pay 9-10x pretax earnings on stocks is a good and valid question.

It's amazing, though, isn't it?  Even if it is an odd coincidence.

But I don't think 10x pretax earnings for a stock is a bad price if it's a high quality business that can grow over time etc...  (But you still have to answer the question how much growth there will be and how much a shareholder can expect to get back.)

Harold!

That's the hint Warren Buffett offered to CNBC Monday morning when he said he will tell viewers which stock he has been buying this year.  None of the CNBC folks were able to guess (I had no idea) what stock it was. 

Harold's short name is Hal, of course, and Hal is the computer in the movie "Space Odyssey"; the letters following each of H-A-L are I-B-M.

This is a surprise on many fronts.  For many years, Buffett spoke of not wanting to invest in technology because it's hard to know what the industry will look like in five, ten, or twenty years.  Buffett really does continue to surprise. 

He always talked about how he doesn't like capital intensive businesses but then bought Mid-American, a capital intensive, regulated utility.  He also bought Burlington Northern more recently, both capital intensive and cyclical.  He has spoken about derivatives as weapons of mass destruction and then wrote $34 billion in notional amount of global stock index put options.  He speaks up against investment banks and then buys a large stake in Goldman Sachs (via preferred shares with warrants).

Now, after years of avoiding technology, he makes his largest public equity purchase ever and buys IBM.  What is great about Buffett is that he evolves.

Anyway, let's take a quick look at this.

Big Bet: Focus / Concentration
Buffett bought 64 million shares for $10.7 billion, starting in March of this year.  That's a huge buy.  To see how big it is, take a look at these figures.

as of September 2011:
Berkshire Hathaway Shareholder's Equity:   $160 billion
Stock holdings at Market:                              $67 billion

So he made a purchase that was 6.7% of the total net worth of Berkshire, and 16% of it's entire stock portfolio.  Now, that's focused investing.  How many people put 16% of their stocks into a single idea?

For reference, here is Berkshire's largest equity holdings as of December 2010:

If you look at the "cost" column here, you will see that this $10.7 billion purchase of IBM stock is the largest purchase ever for Berkshire.  After IBM, the next largest purchase is $8 billion in Wells Fargo and after that, nothing even comes close.  Kraft Foods comes in at $3.2 billion.

Of course, this table only includes stocks that BRK still owns, and not ones that were sold or were taken over completely (like GEICO, Burlington Northern, Gen Re etc...).

But still, there's no question this is a big purchase.   Only Coca-Cola would be worth more at this point than IBM.  Even the companies that he really likes, like Walmart, Procter & Gamble, Johnson and Johnson and others come in at only $2-3 billion.  Wow.

Reading Annual Reports
The other striking thing about this is that Buffett was triggered to move on IBM after reading the 2010 annual report in early March.  He said he read the report, did some work on it and then started buying in late March.

What is amazing is that he said he has been reading IBM annual reports every year for the past 50 years.  He said the same thing when he bought Annheuser-Busch too.  So even though Buffett wasn't interested in technology and thought he'd never buy tech company stocks, he kept reading IBM annual reports every single year anyway.  *This* is why he has such a strong understanding of business and good feel of the stock market.  This is why he is such a great investor.  Can you imagine the information stored in his head from reading tons of annual reports over the decades?  Even of stocks you never bought or thought of buying?  Incredible.

(Not to belabor the point, but next time you talk to someone who has lost money (or keeps losing money) in the stock market and blames the market, Wall Street or anything else, ask them how many annual reports they have read in the past month, year, lifetime?)

Due Diligence/ BRK Advantage
The other thing that struck me was yet again how BRK being a large conglomerate can be a big advantage.  I keep saying that Buffett may not be an economist and his predictions may be no better than anyone else, but with so many businesses reporting to him on a daily basis, he has a real time finger on the 'pulse' of the economy so he knows what's going on.  He doesn't have to wait for government statistics and he doesn't have to plug them into econometric models or comments/predictions from economists.  He knows what is going on every single day.

And here, for kicking the tires on IBM, he researched IBM's competitive position by asking all his companies about their IT.  He realized how sticky IBM really is and entrenched in corporate IT systems (and high cost of switching out), and how businesses will have to rely on IBM more over time as the need to process information increases.

He realized, apparently, that IBM is not your typical tech stocks subject to changing trends.  It would be very difficult to displace IBM with their strong position, much stronger than say a software company that writes limited applications and things like that.

Buying at the Highs
As usual, people focus on superficial things like the nominal stock price.  But IBM is trading at it's all time highs, they say.  It's not cheap.  These people would rather buy a crappy stock on their lows, like airline stocks in front of bankruptcy.  A good stock is a good stock because it's a great business trading at a decent valuation.  It doesn't matter if the stock is at an all-time high or low.

Of course, we value investors typically like to look for things on the new lows list to see if there are any babies in the bathwater, but Buffett has since been more interested in paying fair prices for great businesses rather than great prices for fair businesses (or something to that effect; I'll never get these things exactly right).

Some people analogize this to his Coca-Cola (KO) purchase too, which from a value investor standpoint wasn't a 'cheap' price nor was it on the new low list.  But it has done tremendously well.  I think people do tend to overemphasize this 'nominal' price.  This, by the way, extends to the overall market too.  Some only want to buy stocks during panic periods, like in early 2009 and think it's not a good time to buy stocks otherwise.  However, the KO purchase was not done at a depressed valuation for either KO or the stock market, and yet it is one of Buffett's biggest winners.

His Burlington Northern purchase also was at a high and the valuation was not even that attractive (I think 20x p/e or some such), and yet this holding (now completely owned by BRK so no market price) has been estimated to be worth 30 or 40% more than the acquisition price already (looking at earnings growth and using multiples of other listed railroad stocks).   A huge winner already.


IBM
So what's so great about IBM?  Buffett was impressed with the management even though he couldn't even pronounce the CEO's name (he said, "Palmi...", looked uncertainly at Quick who said "Palmisano").  He has been reading the annuals for years and was impressed with the change that they have undergone recently.  He said he was impressed by how they outlined exactly what they were going to do five years ago and achieved it. 

He said the 2010 annual report really details why he likes the company so much, and he can't think of any other management team that has laid out a roadmap with so much detail/specifics on exactly what they are going to do.  They did this before five years ago and achieved it so he feels they will continue to be able to meet their plans.

IBM 2010 Annual Report
OK, so what's the big deal about the 2010 annual report?  I took a quick look and here are some notes.

From the letter to shareholders:
Since 2002, IBM has:

• added $14 billion in pretax profit base to IBM
• Increased pretax income 3.4x and EPS 4.7x and free cash flow 2.8x
• had cumulative free cash flow of $96 billion
• Gross margins improved 9.4 points to 46.1%
• Pretax margin improvement to 19.7%
• 90% of profits in 2010 from software, services and financing

In 2010,

• Earned EPS of $11.52, up 15% for eight consecutive years of double digit growth (revenues were up +4%, pretax income +9%)
• Free cash flow was $16.3 billion
• Use of cash in 2010 was $6 billion in acquisitions, $4 billion in net capex, returned $18 billion to stockholders via $15.4 billion in share repurchases and $3.2 billion in dividends.

Over the past decade, IBM has returned $107 billion to shareholders through dividends and share repurchases after $70 billion in capex and $60 billion in R&D.   They also earned free cash flow of $109 billion, tripled software profits and increased share of revenues from growth markets to 21% from 11%.


In 2006, IBM introduced the Road Map 2010.  In this, one of the goals was for EPS of $10-11/share by 2010 (they achieved $11.52).

For the 2015 Road Map IBM expects $50 billion in share repurchases and $20 billion in dividends to be paid out.

Over the next five years through 2015, IBM will:

• earn at last $20/share in EPS
• generate $100 billion in free cash
• return $70 billion to shareholders
• grow revenues from growth markets to 30% (from 21% in 2010)

 Over the past ten years, free cash flow was $109 billion and $107 billion of that was returned to shareholders so we know that IBM is shareholder friendly.  Also, net income over those years were $95.6 billion so net income may be a conservative proxy for free cash flow so looking at the p/e ratio won't lead you too far off course here.  (In other words, they really do earn their EPS and they do convert that to distributable/returnable cash, and then they actually do return it to shareholders! This is very unlike other companies that put up positive accounting earnings but generate no cash, or even if they do, spend it unwisely and destroy shareholder value.)

So having said that, what is IBM worth?  What does Buffett see?  His average purchase price, he said, is $170/share.

That comes to 14.8x last year's earnings, 12.7x current year and 11.4x next year's earnings estimates.  That's pretty cheap for a company that plans to grow EPS by 11%/year (to at least $20/share by 2015), and that has grown 10%/year over the past ten years. 

(Yahoo finance earnings estimates for IBM were: 
  12/2011:  $13.38
  12/2012:  $14.85)

Even at the current price of $189/share, it is trading at  14.1x this year and 12.7x next year's estimate.

Buffett wouldn't have bought IBM if he thought IBM's competitive position would decay over the next few years.  If this is true, then IBM should manage at least a market multiple as their growth prospects are better than the average company. 

Given management's $20/share EPS target by 2015 (this is a low-end target as they say they will earn at least $20) and putting a 15 P/E multiple on that gives a target price of $300/share for IBM.

Buying it now at $189/share gives a return of 12% or so per year by 2015, not bad at all.

Should We Follow Buffett Into IBM?
In general, you can't really go wrong copying Buffett's stock buys.  He knows more about businesses and stocks than most others and his decisions will obviously be superior to others.

So for those looking for large, blue chip companies that they can own for a long time, I would recommend IBM and other BRK holdings for sure.

What's great about recent purchases is that the prices are still pretty close to where Buffett bought it, and the circumstances is going to be the same; fundamentals haven't changed much over the year.

This may not necessarily be true for Buffett's other holdings.  For example, people followed Buffett into Coca-Cola back in the late 90s calling it a Buffett stock, but they paid 40-50x P/E.  This did not turn out well for them (Buffett paid way lower prices back in the late 80s).

Buffett would not pay 40x P/E, even for Coke.   

Finding the right stock is only part of the equation.  A good price is the other side, and this is trickier to determine for Buffett's longtime holdings (again, since they may be overvalued at any given point in time).

Buffett put $10 billion+ of fresh BRK capital into IBM at these prices, so that's a different story than trying to figure out whether the other holdings are good buys now or not.

Having said that, for full-time investors and pros, IBM is not going to be the most attractive investment.  BRK can only buy stocks in the largest corporations in the world.  This reduces his universe dramatically from what is available to everyone else.  There are thousands of companies listed in the U.S. (actually, probably tens of thousands).

Joel Greenblatt, in a speech a while ago, recommended to investors, don't invest like you're managing $10 billion.  That means to go look for other opportunities where big players can't look (smaller cap stocks).

Anyway, I haven't even really dug into the IBM annual report for 2010 (10K etc...) so don't really have a good feel of the business.  I will take a look at it and may post an update if I find interesting things to say about it.

And a By the Way About Microsoft (and Intel)
Some people might have been surprised that Buffett bought IBM and not Microsoft (MSFT) given the cheapness of MSFT versus IBM and his close friendship and presumably good understanding of MSFT's business and future.

Buffett did say in the CNBC interview that he or anyone at BRK will never buy MSFT because he is just too close to Bill Gates.  If he or anyone at BRK (including the two new investment manager hires he told that MSFT was off limits) buys MSFT and then there is a positive development at the company, nobody would believe that Buffett didn't have inside knowledge of such development.  He also did say that it was an attractive stock.

Todd Combs, one of Buffett's two new investment management hires also bought a bunch of Intel stock (INTC) according to the latest filing.  This is also very interesting.

The argument against Microsoft and Intel is quite simply that the Wintel era is over and PC's are dead.  This is why we aren't supposed to like these companies even if they are cheap.  The suggestion is that these are value traps.

Perhaps they are.  I actually don't have a strong view on the future of PC's.  But I am inclined to think that maybe assuming the PC era is over and MSFT and INTC are not interesting investments may go into what Howard Marks calls "first level thinking" and not "second level thinking".  (Speaking of which, it wasn't too long ago that IBM was supposed to be dead because the PC was going to kill their mainframe business).

Anyway, Buffett's comment on the attractiveness of MSFT and Comb's purchase of INTC stock is a counterpoint to the "PC is dead so stay away from MSFT and INTC" argument.