The Issuer is discussing with Berkshire the possibility of Berkshire acquiring an as yet unformed subsidiary of the Issuer, which would own a business and would own certain other assets to be determined but which may include shares of Berkshire common stock owned by the Issuer, in exchange for all of the Reporting Persons’ shares of Class B Stock in a transaction that would be structured to be a tax-free split-off. Berkshire and the Issuer have not agreed on any terms for such a transaction, and may not reach any such agreement. In particular, while Berkshire believes that such a transaction could be viable based on a valuation of Class B Stock and Berkshire’s common stock at prices prevailing on the date of this Amendment No. 8, a change in such prices may cause such a transaction to no longer be viable. Substantial other issues would also need to be resolved to proceed with such a transaction. If Berkshire and the Issuer do determine to enter into such a transaction, Berkshire believes that the transaction and related definitive agreement would be subject to approval by the Issuer’s board of directors, which to Berkshire’s knowledge has not yet considered any such transaction. Berkshire does not expect any transaction to be agreed upon unless the transaction will be of substantial economic benefit to both parties.This Malone-like move is a great idea as it will save in tax and simplify BRK's balance sheet not to mention make it more efficient.
This line from GHC's press release seems to indicate that this move was initiated by BRK.
WASHINGTON--(BUSINESS WIRE)--Feb. 12, 2014--This is interesting to me because I have been looking at Washington Post / Graham Holdings for years and could never really figure it out. It is one of those things that I really wanted to like and own a lot of. It is an owner-operator business with Buffett as the largest shareholder, and Don Graham ran the company very much in the style of Berkshire Hathaway.Graham Holdings Company (NYSE: GHC) is aware of the 13D/A filing made today by Berkshire Hathaway, Inc. regarding a potential split-off transaction with the Company. As indicated in the filing, the parties are in discussions and have not reached an agreement on terms of a potential transaction, and the parties may not reach such agreement. No transaction will be consummated unless it is in the interest of both parties.
But year after year of reading the annual reports, it just seemed to me that he wrote annual reports in the style of Buffett (honest, straight-talk) but I really couldn't find where he was operating under Buffett's values. He sort of seemed more like a caretaker of the family business. He wrote extensively about what he won't do (stupid things), but rarely wrote about anything that he actually did. Year after year, nothing seemed to happen. Of course, if you own a collection of very good assets, then you really don't have to do anything but we'll see that this was not the right way to go.
Anyway, when Washington Post sold the newspaper business and changed into Graham Holdings, it looked interesting because it was a major corporate action that changes the nature of the business. It may yet turn out to be a good buy for the long term. Maybe that will be another post at a later date.
But first, let's take a quick look at Don Graham's performance. He became CEO of Washington Post back in May 1991, so I will use that as the start date for his performance.
Don Graham Performance
According to Yahoo Finance, the adjusted price (which includes splits and dividends) of GHC stock in May 1991 was $132.85/share. It is now trading at $660/share. That's a five-bagger, so pretty nice. But the problem is that's over close to 23 years. That's only 7.3%/year. We don't have to go look at the outsider CEO performance table to see that this is not so great.
The S&P 500 index back then was 389.83 and it's now 1823; that's 7%/year excluding dividends. So that's pretty dreadful. No wonder Buffett wants out. It makes you think that Buffett's loyalty was with the newspaper and not with Don Graham.
Buffett's Other Long Term Holds
So I thought this might be a good time to look at Buffett's other holdings over the same time period. There aren't that many big holdings that he has held for the entire period from 1991 to now. He owned Capital Cities and Gillette back in 1991. Capital Cities is now part of Disney and Gillette is Procter and Gamble, so I'll use DIS and PG as proxies (even though Buffett doesn't own DIS; maybe he should have held on). His other large holdings were Coca Cola (KO) and Wells Fargo (WFC).
So here is how these stocks have done from May 1991 through now:
DIS: +10.4%/year ($7.66 -> $71.82)
PG: +11.7%/year ($6.35 -> $77.7)
KO: +9.9%/year ($4.54 -> $38.66)
WFC: +14.8%/year ($1.99 -> $46.00)
BRK/A: +14.0%/year ($8,750 -> $171,000)
S&P 500: +7.0%/year, excluding dividends! (389.83 -> 1823)
So the above is very interesting. It tells us what we already know, I guess:
- BRK has done pretty darn well over the past 23 years
- Buffett is a pretty darn good stock picker
- Don Graham is not such a great capital allocator/manager and clearly lags; it's no wonder Buffett wants to clean up the portfolio (especially with new managers able to allocate capital better than Graham (even though this deal doesn't raise cash)).
Other Berk-alikes?
Let's look at some of them (May 1991 through Feb 2014):
Alleghany (Y): +10.3%/year ($40.76 -> $376)
Markel (MKL): +16.6%/year ($17.25 -> $564)
Loews (L): +9.0%/year ($6.15 -> $43.80)
Leucadia (LUK)*: +15.2%/year ($1.10 -> $28.24)
*For LUK, I used year-end 1990 and 23 years since the Yahoo Finance price seemed off.
So we see that the good capital allocators do perform well over long periods of time.
Back to GHC
So if you want to evaluate GHC going forward, you have to start with how the CEO has done in the past. According to this measure, the answer is obviously not good. 23 years is a pretty long time. It just shows us how hard it is to perform well even with all the right values and good guidance; it's easy to talk the talk, but not many can actually walk the walk.
Implications for Berkshire Hathaway
This is actually great news for BRK. Not just because of the share buyback and dumping of a nonperforming asset, which of course is good. It sort of shows that there are no sacred cows. Buffett's sentimentality has it's limits. If you don't perform, out you go. Gimme back my shares!
I'm sure I'm not the only one noticing this but I do sense a big change going on over at Berkshire Hathaway.
And this leads to another topic that is related to this; another great book.
A Great Book!
I just finished reading Double Your Profits in 6 Months or Less by Bob Fifer. I read in an article related to the BRK/3G acquisition of Heinz that this book is handed out to 3G company managers and it is sort of a bible there. I put it on order at the local library and didn't really think much of it. I just thought it's another cost cutting book like many others. For whatever reason, I finally decided to read it and it is a really great book.
I thought it was just about cost cutting and things like that, but it is much more than that. For example, Fifer tells you to cut costs that don't produce anything but increase spending on things that do bring in business. He talks about how paying the high producers well may upset the non-producers, but it's better to keep the producers happy and non-producers unhappy than vice versa. I have seen this happen first hand.
Some things may seem a bit aggressive, like not paying bills until they are demanded multiple times and things like that. But there is plenty of really good stuff in here too.
I have never been a manager so don't spend too much time reading "how to" books on management so maybe this is not such a great book compared to others, but I have to say I was impressed. This is a well-known classic in the management world (an Amazon reviewer noted that Sandy Weill handed this book out after taking over Travelers in 1993).
Back to Berkshire Hathaway
So, how does this relate to Berkshire Hathaway? There has been a lot of press lately on the twenty-something Berkshire employee, Tracy Britt Cool. I found this to be very interesting. One of Cool's early projects was to learn how 3G turned around Burger King. So you can be sure that Cool read this book. If she is going to be working with folks at 3G, I don't have any doubt that she has read the book. Maybe she even carries it around (and extra copies of it) wherever she goes.
And here's the interesting part. Cool is seen now as sort of the fixer of Berkshire businesses, kind of like what David Sokol used to do.
Buffett has been known to purchase owner-operated businesses and just let them run the business. He never got involved in the various businesses, and he never bought turnaround situations. But we do know that Buffett will intervene to fix problems. As passive as he likes to be, he was very involved in Coca-Cola, for example, when they ran into trouble. He sent David Sokol in to fix NetJets when they couldn't stop losing money. Buffett used to be active in his younger days too; of course, BRK itself was an activist situation.
But now, BRK bought Heinz with 3G, folks that run businesses as described in the above book.
I think Cool was sent to Burger King to learn how 3G turned around the business partly to learn how 3G operates as BRK was going into business with them, but also partly for Tracy to learn how to turn a business around (so she can do it at BRK!).
So this is a bit different than the image of BRK buying stuff forever (he is trying to sell GHC now) and letting wholly owned businesses run independently (Sokol was sent to fix NetJets, Cool is sent to fix Benjamin Moore and possibly some other businesses).
Well, this is not to say that fixing up hasn't happened before; it probably has happened but out of the spotlight. We don't know what goes on in the various businesses. Buffett hates to lose money, so I'm sure similar things have happened in the past.
But now it seems to be happening out in the open. And the message is clear.
On the one hand, we can argue that BRK's private businesses are already highly efficient, or else Buffett wouldn't have bought them. And he wouldn't buy into businesses run by people who would create a lot of waste. But on the other hand, many businesses may not have been scrutinized closely in a long time; maybe there has been some waste built up over the years.
If that is the case, there can be a lot of value created from tightening things up.
Conclusion
I know the above doesn't sound very Buffett-like (having someone run around with a cost-cutting book micro-managing expenses), but times do change. Not too long ago we couldn't have imagined Buffett buying a tech stock or a capital intensive business. We couldn't imagine him hiring portfolio managers to manage BRK money. We couldn't imagine him splitting his stock. There are a lot of things that we couldn't imagine happening that did happen. So things do change.
And that's actually really good news, I think, for BRK. I know 3G and other private equity people are controversial; people tend not to like them. But as readers here know, I am not one of those. Of course there are good private equity people and bad ones, but I don't think there is anything categorically wrong with what they do (I know Buffett/Munger don't agree, but that's OK).
So I have no problem with this as long as it is fair and reasonable. Of course, there is such a thing as going too far, destroying morale and things like that. But I do think that sometimes a fresh set of eyes looking at stuff can be really good for an organization.
And of course, I have to say that this is all just speculation on my part. I am probably reading too much into these various things, but you know, that's what I do. We try to read between the lines to see how things may change going forward.
Using the S&P 500 total return index, it looks like the total return on the S&P 500 index for the above period (May 1991 to now) is 9.3%. So even Buffett's picks (except for WFC) have only slightly outperformed the market. Using this metric, Loews underperformed for this period, and Alleghany only barely outperformed.
ReplyDeleteIt just goes to show how hard it is to beat the market over time, I suppose. And it also illustrates the difficulty in outperforming the index over the long haul by investing in large cap stocks.
If you are looking at total return of S&P - with reinvested dividends I guess - shouldn't you be looking at total return of the stocks you are comparing against? I'm sure this is hard to do for any stock that paid divvies, but otherwise you're handicapping them.
DeleteIt's easy to know BRK return, since they never paid divvies. :)
Hi, those stock returns do include divs; that's why it's more fair to compare it to S&P total return, which I should have put in the post. This makes everything look much more unimpressive. But the point of the post is unchanged; that GHC return is subpar...
ReplyDeleteThanks for reading.
How do you get stock returns that include divs?
DeleteIn Yahoo Finance, you can look at historical prices and just use the adjusted stock price going back. The adjusted stock price adjusts for dividends and splits.
DeleteI'm not sure this comparison is fair to Graham Holdings because newspapers entered a steep secular decline about 15 years ago. A comparison versus other newspaper companies is likely better.
ReplyDeleteThat's a fair point, but I never really viewed WPO as just a newspaper company. Graham's annual letters also talked about increasing shareholder value/intrinsic value of the business. Berkshire Hathaway was a textile company in secular decline too so there was that feeling that WPO will also redirect capital out of newspapers into other areas. At least that was my impression. And it didn't quite happen to the extent that it should have.
ReplyDeleteAnyway, if I owned WPO, I would have owned it for rational capital allocation (or reallocation), not as a newspaper company.
Good capital allocators move in and out as opportunity arises (Intel started with memory chips but got out of it to focus on microprocessors etc...).
One interesting aspect of the situation is that Buffett clearly had an opportunity to purchase the Washington Post newspaper or the entire company last year when the Graham family decided to exit the newspaper business. He passed on that even though he has been acquiring newspaper assets recently (although in smaller markets).
DeleteWarren Buffett is, above all else, a rational capital allocator but he is also loyal to his friends and business associates. His relationship with the Graham family accounts for part of his inaction with respect to Washington Post shares over the past twenty years. But he also obviously did not see the decline in newspapers, or at least the rapid decline over the past few years.
40+ years is an eternity in business and in life so the potential exit does not seen incongruous with Buffett's views on "permanent holdings". Effectively, Berkshire has an opportunity to repurchase Berkshire shares and potentially acquire some television and cable assets while divesting itself from the controversial for-profit education business. I'm not sure why the Graham family would want to become a for-profit education pure play, which they would probably be after Buffett gets the assets he wants. We'll have to see how it all plays out.
Good points. It is interesting that he passed on buying even just the newspaper last year. I think he did see it coming as he has said over the years that it's a bad business, but maybe that realization was too late anyway. I do remember Buffett often complaining that newspapers were giving the paper away for free online. Washington Post was free online for a long time, even when Buffett was complaining about it... so maybe Buffett and Graham disagreed on how to run the newspaper. That would explain a lot...
DeleteBut who knows.
It will be interesting to see how this goes.
Still, the newspaper business had tremendous value that was lost. The fact that they were still able to compound at that rate despite their core business going to hell is pretty amazing. New York Times is at the same price it was 30 years ago while these guys compounded 7% a year. And New York Times is the best newspaper out there.
DeleteA big difference between Berkshire & WPO was that berkshire was trading for less than cash & Buffett was able to deploy that cash. In the case of WPO all the value was in the newspaper business at the starting point.
I think it's a bit unfair to judge DG this way. WPO was family run and it's extremely hard to make cold calculating decisions about that paper. He finally did it in the end. But it wasn't easy. I see him as smart and rational/ and the game isn't over. I see him trying to create a lot of value which is way more than most CEOs do. This deal with brk could be very big for GHC share price and in fact may be just the start of a series of events that lead to out performance. One thing missing from the post is an examination of not history but present. What is it worth. And even a back of the envelope exercise reveals it's worth way more than the current price. he's trying to unlock that value. if he can do this deal he will unlock the value of the brk shares that are sitting on his balance sheet, for which he gets zero credit.
ReplyDelete@well_mont
Good points. The results are what they are. I suppose you can say, well, for a newspaper he did well. As I said, I never really looked at WPO as just a newspaper company, even many years ago. So it's hard for me to say, "well, not bad for a newspaper".
DeleteI agree there might be great value there now and things might look good going forward. That is definitely a possibility that I will have to look into. There might be a pop in closing the gap with whatever it's worth on a sum-of-the-parts basis and current stock market value, but I would still be a little hesitant about DG's capital allocation skills going forward. I don't see any really great deals that he's done over the years. 23 years is a long time to run a company.
But anyway, DG seems like a very honest, decent, hard working guy, but I still can't seem to get my arms around what he's good at...
Oh, and I forgot to mention that it wasn't just the newspaper either... The big value decline recently came from education.
DeleteIn any case, I understand your point and it's a good point; DG was in a tough spot in a bad industry with extra baggage (legacy to defend).
This is the problem, sometimes, with these next generation CEO's. They are caught between defending the legacy and doing the right thing for shareholders.
This reminds me of Sony; the CEO saying things like they will never stop producing TV's because they are proud of their engineers (and don't want to upset them). The Sony CEO recently said that his job is to turn around the electronics division. I scratched my head at that one. I think his job is to ditch businesses that no longer make any sense and divert resources to where they can actually compete. But again, I think the current Sony CEO is making the mistake of trying to defend the legacy of Sony instead of doing the economically rational thing (which I admit would be politically difficult to do in a place like Japan).
Anyway, again, I'm not arguing. I do see your point of view too.
I think your analysis is one way to look at it. another way would be to try to calculate how much intrinsic value he added over 23 years. to do that you would have to go back to see where WPO traded in the capital markets in relation to it's intrinsic value. for example, was it fairly valued, undervalued, or over valued at time?
ReplyDeleteThis is a tough time to compare this company to those others. It has just sold the paper and changed it's name. and is suffering from the institutional rush out of newspaper stocks, which it is labeled as. it's struggling to find a new identity. His business changed dramatically. insurance doesn't change. soda doesn't change.
there are also technical issues at play. wpo has always been way less liquid than many of your other examples, it had two control shareholders, with a and b shares. brk and some of the others tend to trade around intrinsic value because they're big and liquid. I can understand why GHC would not. it's not what most investors are looking for, especially now with no real identity. it's a different animal.
Gross returns are but one way to look at it. I see DH as being an excellent steward of capital. he didn't take big risks. His goal was to preserve family wealth in real terms. His goals with this capital may have been entirely different than the goals of CEOs of KO and DIS for example. He's maintained a store of value that has exceeded the inflation rate for well over 2 decades. And there is lots of value still to unlock. I think the primary question for any stock is where to from here? It helps to know it's history. but Buffett had an interesting line about Librarians which applies here.
regards
wm
All good points. As for intrinsic value, I figured over 23 years, whatever premium/discount there was at the beginning or end wouldn't have that much of an impact. But yes, calculating growth in IV would be a better metric.
DeleteAnd yes, he preserved the family wealth, I suppose. But if you asked DG back in 1991 what his goal is, I would bet that he would have told you that he would like to beat the S&P 500 index over the long term. I also think that he would have told you that he hopes to earn high returns regardless of the future of the newspaper industry; he would allocate free cash into other areas etc...
I know people like DG, and I figured this post may come across as a little harsh. I too really want to love this stock and DG and have wanted to for many years. But when I put pen to paper and just take an objective look, it just doesn't look that good.
Anyway, we'll see... Going forward this may yet turn out to be an interesting investment.
I will take a look again, especially after the Q4 and full year 2013 figures come out.
Book value was $142/share in 1992. About $160 of dividends since. The very rough compounded return I came up with was 9%. Not too bad for an industry in more or less continual decline. I would say that investing in Kaplan was definitely a stroke of genius, and I don't know if he was responsible for that. Buying back 1.6mm shares from Buffett also a brilliant plan. Owning Berkshire stock and managing overfunded pension plan another stroke of genius.I don't like at all the current plan of becoming a mini-Berkshire industrial conglomerate, but it's easy to imagine a scenario in which Graham Holdings and Graham family went down with the ship. Don Graham has done a pretty good job overall of investing, all things considered.
DeleteFound this quote in a Washington Post article when Buffett stepped down from the Post board:
ReplyDeletehttp://www.washingtonpost.com/wp-dyn/content/article/2011/01/20/AR2011012002972.html
Berkshire Hathaway is the largest shareholder in the Post, with 21 percent of the common stock, and Buffett said in an interview that he does not intend to alter his stake. The Graham family controls the company through its ownership of separate class of stock.
"It won't change at all," Buffett said. "I'll never back away from that statement." He predicted that his obituary, which he said he hoped would not be published anytime soon, would say that he owned the same number of shares of the Post Co.
Not calling him a liar or anything, but just pointing out that things do change!
I don't think ghc statement indicates at all that this was initiated by brk. I think the effect on IV will be far far greater on GHC than it will be on BRK. but it's interesting that most people are seeing this from brk perspective, which is curious but not surprising given the amount of scrutiny he is under. in fact it won't even register much on the IV meter at brk. but buying back $1b of ghc, well that's a very big deal. So one could argue that the party with the most at stake initiated this. but that is open to interpretation.
ReplyDeleteregards
wm
Yes, maybe it wasn't initiated by Buffett. Who knows. It wouldn't be the first time some guy on the internet is wrong about what is going on, lol... and that's OK.
DeleteActually, I don't think this has an impact on BRK either. This post was mostly prepping for evaluating GHC as an investment. I will look at a valuation once the 4Q figures are out; cable and TV may be stable, but the education division is shifting around a bit so I'd rather use 2013 full year figures.
And my first step in look at GHC as an investment candidate is to look at the long term performance of the CEO. As people have said in the comments, there are a lot of factors that impacted DG's returns, so maybe he is not so bad a CEO as it looks in the performance figure... (but that reminds me of a comment someone made about Stockhausen (or another one of the modern, avant garde composers); the music is actually much better than it sounds!).
That's the first step.
Don Graham's capital allocation record would look much different if the for-profit education market hadn't tanked at the same time that the writing on the wall for the newspaper industry became apparent to everyone. It would be interesting to look back at the past 20+ years and consider what the company would have looked like if Graham had distributed more profits to shareholders rather than diversifying into other lines of business such as for-profit education.
ReplyDeleteFamily run businesses are always interesting. On the one hand, you have less of a typical "agency" problem because the managers own so many shares. On the other hand, you have deep emotional issues at work and a degree of risk aversion that you might not have with a more typical management team. Selling the newspaper was probably unthinkable for a very long time and very painful to finally let go. There is no way the paper would have ever been sold during Katharine Graham's lifetime and for many years after her death. That's a capital allocation decision and it turned out to be a mistake. In fairness to DG, very few people understood the speed of the decline that would occur with the introduction of tablets. Well, better late than never when it comes to understanding.
buffett was on BOD for most of DG tenure as CEO. Yet he did not advise him selling WP newspaper. in fact he was writing about the newspaper business being a very good business a few years before it peaked as an industry. So he obviously didn't see the immense value destruction coming. And he did not sell Buffalo news. He still owns it. But here's the point. it's a tiny amount of money for brk and whatever he does with it will probably be neutral for Brk IV given the small amount of capital here. But this could be a very big event in terms of unlocking lots of value that has gone unrecognized at GHC.
ReplyDeletehere is what WP said about Buffett when he resigned from bod.
"Buffett, 80, has long advised Post Co.'s chairman and chief executive Donald E. Graham on the financial stewardship of the company. "
regards
mj
Yes, that's true. But not selling the newspaper may not have been their biggest mistake. The newspaper was a small part of WPO for a long time, actually. Like the other commenter says, the education business was a disaster too. They may yet recover and do well, but it's hard to believe that some of these aggressive things were done under DG's watch.
DeleteIt's interesting that Buffett seemed a little hedged (in the article I linked in a comment up somewhere) about the education division; he said if it deserves to grow, it will grow or something like that... I found that an odd comment. Maybe he knew more about what's going on there (and didn't like it) than he lets on...
But again, who knows.
DHC may yet be an interesting investment going forward. I may make a post about it after their full year earnings come out in the next couple of weeks. This way we'll see how the other businesses are doing (particularly education), and see what the post-newspaper DHC looks like.
ghc represents .04% of the market cap of brk. I seriously doubt that web gives this investment much thought. primarily because he knows the assets well, and he knows the CEO well. And the shares represent a tiny amount of the total brk capital at stake. It makes sense for brk to try to do a tax efficient swap, especially if it could help GHC. it's like pruning your portfolio of tiny positions that don't add up to much.
ReplyDeleteThere is nothing wrong with for profit education per se. It has been tainted by others. And kaplan has multiple segments. but this is yet another business that has undergone big change. given his two main businesses have had to deal with so much disruption, not to mention Newsweek, it's amazing he's been able to keep overall values of ghc growing, albeit more slowly than the index. However, the sale of the post and this event if it happens, which may allow him to retire 22% of the shares, makes me think that he has a plan to enhance shareholder value. In fact these signs do point to the idea that dg may radically reshape the portfolio, if not liquidate the company over time. at which point he may direct his life more to philanthropy. who knows. but there is little doubt he has sprung into action. and that is going to be worth watching given the assets in place here.
regards
wm
sorry ghc represents .4% of brk market cap.
ReplyDeleteregards
wm
Thx for your write ups. I have owned brk for a while and learned a lot from him. However, don't you find his comments increasingly colored and possibly downright purposefully misleading sometimes? A while ago he mentioned that taxes don't really matter when making investment decisions, yet he structured his whole vehicle to avoid taxes. He also does tax friendly deals like this one. Just curious of your thoughts. Don't get me wrong. I think he is a great investor and follow him closely but I feel I am not as idealistic as before and assume he talks with an agenda just like everyone else.
ReplyDeleteHi,
DeleteYes, I do hear that argument a lot, but I don't really agree. When he said taxes don't matter, I think he was saying that if income taxes go up, people aren't going to stop looking for good investments. He likes to look for good stocks to buy like many other value investors. If they boost the capital gains tax, value investors aren't going to suddenly stop looking for stocks. I think that's what he meant. Now, when he compares two investments side by side, then he will obviously (hopefully) go for the one that gives him the higher after-tax return.
So that's sort of a different issue. Taxes do matter on a case by case basis to see what makes sense, but taxes don't matter in the overall scheme. Maybe it was the private equity carried interest tax that he was talking about. Making the carried interest taxable at ordinary rates isn't going to make KKR and Blackstone close up shop. They will take the tax hit, but they will keep doing what they're doing. I think that's what Buffett meant.
To illustrate, he said that he lived through an era with 90% top tax rate and all of the rich people he knew worked just as hard as they do now. They didn't slow down because tax rates were too high and then work harder when tax rates came down etc...
So I still do think he means what he says, and of course, to some extent he will "talk his book", but he doesn't do it self-servingly, even if it is self-serving, if that makes any sense. He makes bullish comments about the country and the stock market, for example (in 2009); it is self-serving cuz he is long a ton of stock. But he doesn't say it just to push up stock prices. He says it cuz he means it. There's a subtle difference that I suppose is hard to see sometimes...
Completely off topic.....sort of.
ReplyDeleteI noticed today that Tom Gaynor at MKL has sold out of his position in LUK.
I would be very interested in your thoughts as to what Mr. Gaynor perhaps is seeing in his tea leaves...as both companies are value oriented investors.
Again, I realize this is way of topic. Apologies for the hi-jack
No problem; it's always on topic to talk about those guys.
DeleteThat's an easy answer. I think Gaynor owned LUK to invest with Cumming/Steinberg, and they are gone now. LUK is now run by the JEF guys (Rich Handler etc...). I think those guys can create value too, but LUK is definitely a different entity than it used to be (highly focused, distressed asset investor/flipper; now a mid-sized investment bank with some private investments on the side).
So I am not surprised that old LUK shareholders would sell.
Thank you for your thoughtful response. Yes I agree investors will continue to look for investments even if/ when taxes go up. But I think Buffett oversimplifies his views to the public on purpose knowing they will get picked up by all news services with the final message being Buffett thinks higher taxes won't effect anything etc.
ReplyDeleteI don't agree w your pt that when the marginal tax rate was 90% people just worked harder. There is some good research on this. Very few people in the whole country ever paid a 90% tax rate. Just like today smart people find loop holes and work around the rules to avoid taxes. http://online.wsj.com/news/articles/SB10001424127887324705104578151601554982808
Also when Buffett made the pt he compared a scenario where you have an opportunity to make say 30% return but now would be less when taxes are up. But this presumes an investment is risk free and it's just a matter of putting your money in certain assets and collect the gold. You can lose money also. It net lowers your net after tax expected return. As a result rational people will invest less in productive businesses since the returns would be lower. It's always helpful to look at extreme examples to analyze a pt. let's say they increased the cap gains rate to 95%. Well of course if you made an investment in a stock and made 30% and after taxes you got 1.5% that is better than zero. But at some pt the trade off doesn't become good enough. Am I willing to risk all my money for just a 1.5% gain? No I would just hoard my cash because at least I know I have that.
Plus I never seem to hear him talk about how major fortune 100 companies pay extremely low tax rates and how we need to fix that problem. I guess dumb joe investor doesn't have an army of 1000 tax lawyers like ge does so it's easier to make joe six pack pay more.
Hi,
DeleteI didn't say that people worked harder with 90% tax rates... Buffett said that his rich friends worked just as hard. And sure, they probably found ways to reduce their taxes.
I sort of agree with Buffett. Look at Europe. Taxes are way up and the wealthy tend to stay where they are. Sure, some leave to tax free havens, but the rich pretty much stay where they are and they pay a lot of taxes, even if they find ways to avoid some.
You cap gains example is too extreme. If income tax was 100%, nobody would work, of course. So if capital gains tax is 95%, nobody would make capital investments. I agree with that.
But I think Buffett is just talking only within reasonable ranges of taxes. He's not advocating any sort of destructive tax like that.
Anyway, I too don't like taxes and it's a highly emotional/political topic.
So let's just say that I think I understand what Buffett is saying, and no, I don't think he is anything that he doesn't really believe.
I agree I don't have the energy to have a heated back and forth. But I find it strange how you say my example of 95% cap gains tax rate is to extreme and destructive after you personally pointed to a historical 90% marginal tax rate as an example of how things still worked out pretty well. In addition, advocating higher taxes then saying it's ok for rich people to find every loop hole possible to avoid the said taxes is bizarre to me.
ReplyDeleteAnyway, I just try to find good investments, I think Buffett got steered wrong on his political thinking along the way. I think he feels some sense of guilt and anger towards his dad and it has effected his thinking. If you are for less freedom and more state control over every aspect of your life then higher taxes assures no faster way of achieving that end.
Again, that's not my example. Buffett himself said that he lived through the era of 90% rates and he personally didn't know anyone who stopped working because taxes got too high. Part of that, as you say, may be because they just found a way not to pay. I don't know.
DeleteAnyway, I understand your frustration and these discussions go nowhere, usually (politics, religion etc...).
But one thing I do appreciate is that Buffett is not the only one with that view. You would think Wall Street and the hedge fund world would be full of free market republicans or libertarians, but that is not so. There are a lot of democrats, actually, and many have the same view as Buffett!
And they are very smart people. And they don't have that view for any other reason than they actually believe it.
Buffett and Munger are the smartest people in the world and they don't agree on politics. You can find many more supersmart people on opposite sides politically...
When you think of it that way, it's not really about Buffett. He is not unique in any way. He is only unique because he gets the publicity. The press loves the irony of the super-successful billionaire calling for higher taxes. That's why it gets so much coverage, and that's why it irritates exactly half the BRK shareholder base. (assuming 50% democrat, 50% republican shareholder base).
Couldn't agree more with the premise. Graham likely has a bizarro transference disorder from his association with Buffett, but the numbers don't lie. His performance is poor (what would have been even more interesting is to show where GHC's 7%/yr return rank vs other S&P constituents from 1991- of those that are still left) and after seeing him recently at an investor conference, it's not hard to understand why.
ReplyDeleteHe seems to suffer from dual allegiances- one towards hyperbolic notions of success in the realm of shareholder returns, and the other- in grandstanding and philosophizing on the right and wrongs of the social order. I believe he fancies himself a capitalist with an over-indulged conscience, but he does come off as a bit of a blowhard, being particularly skilled at achieving neither of his ultimate agendas.
Having done the work on GHC myself, I think you'll likely find a wildly over-capitalized entity, with compelling FCF and a history of exceptionally unexceptional returns (I show DD ROE"s only 2 of last 12 years!)..Significant hidden asset value (See Graham presentation at UBS Conf in Dec'13) and a cheap valuation couldn't tempt me here though, as Graham's efforts at running this company are only identifiable
in year after year of losses in all acquisitions (in fact, the DNA of the company today was ALL forged before he became CEO, as TV, Cable One, Kaplan and what were the newspapers were all legacy businesses prior to his tenure) he's embarked upon include At-home respiratory therapy, Digital marketing, arc welding products, and a smattering of other expensive rides down the drain.
Look forward to reading what you come up with- but I'll warn you- Skip it!
Thanks for your insight.
DeleteI do suspect that if there is anything here, it will just be an asset play (play the gap between market and intrinsic value) and not really a going concern / great CEO play.
Buffett seems to be liquidating his stocks. He exchanged his PSX stock for one of PSX's subsidiaries. Now he is doing the same with WaPo.
ReplyDeleteLooks like he has a bearish view on the stock market. Maybe we will have a bear market this year because everyone if expecting either a correction or a flat market.
Hi,
DeleteBuffett doesn't buy and sell stocks based on a stock market outlook. There could be many reasons for liquidating stocks. But part of it could be freeing up capital and simplifying things for the post-Buffett BRK, but I don't know. Before he sold a bunch of stocks to raise capital for the BNI acquisition, so it ca be for that too. But the PSX and GHC exchanges don't raise cash so that's not it.
Either way, whatever it is, I doubt it has anything to do with his market outlook. Don't forget, his recent actions are that huge buy of IBM and recent XOM. He buys for the long term so won't sell just because the market looks a little toppy here...
Hi KK,
ReplyDeleteWhat did you think of Comcast buying TWC? People say Comcast outfoxed Malone. It seems to me that its the other way around. Because now it leaves the rest of American cable to Charter, while the big 2 are tied up with the FCC and DOJ.
Whats your opinion?
I was surprised, and I think CHTR was too. I think they were genuinely surprised; they really wanted TWC. CHTR may yet get something. I don't know how easy it will be to clear FCC/DOJ. Maybe if it was just the cable business, you can argue that they will be like DTV etc... so not a problem, but what they will focus on is that they are vertically integrated too so that could complicate things. So who knows.
DeleteWaPo's cable operations should be worth more than $2 billion. Are they giving it to Buffett for less than half that price for sentimental reasons? Buffett is getting both their broadcasting and cable assets for $1.1 billion.
ReplyDeleteCharter was offering TWC $4000 per subscriber and WaPo's cable subsidiary has 593,000 video, 459,000 high-speed data subscribers.
Hi,
DeleteI haven't seen anything to indicate which business or businesses will be split off. Knowing these two parties, I'm sure they will do it at very fair value. I may not appreciate too much DG's skills as a capital allocator/CEO, but I do trust his character. I do believe he is an honest, straight shooter.
I don't know Graham neither do I know about his qualities as a manager. But I remember Buffet saying that if you put a good manager in a crappy industry the industry will win. Newspapers have been crappy all way long so just conserving the status quo might be an achievement in itself. I don't talk about his capital allocation skills though...
ReplyDeleteThat's right. The crappy industry will win. But if you read the book about the outsider CEOs, you will notice that a lot of those guys were in crappy industries. It's baffling how well General Dynamics did, for example, during the time of huge defense spending cuts.
DeleteBut as mentioned above, newspapers was a small part of WPO for a long time. It was maybe 1/4 of revenues, but very small part of profits so it wasn't just about the newspaper decline.
Anyway, I know he was dealt a hand a long time ago that he had no control over, and I wish the results were different. But it is what it is. I just look at the numbers and see what the results are.
Thanks for reading.
Are you familiar with BKR's IBM thesis? Also, Arlington Value fund bought a big chunck as well. Thanks.
ReplyDeleteHi,
DeleteBuffett has said that he likes how IBM tells us what they are going to do and they actually go out and do it. They allocate capital wisely, repurchasing shares etc. Critics argue that IBM's eps growth is financial engineering and not 'real' or sustainable, but we know from the Outsiders book that repurchasing shares when it is attractively priced is a totally valid way to increase intrinsic value per share of a business. Other critics argue that sales are not growing. But again, IBM wants out of low margin businesses, so they will not grow sales for the sake of growing sales.
Druckenmiller had a big short on this now calling it his biggest short ever or something like that. He thinks the cloud is the future and IBM is toast. That is probably true too at some level, but Buffett has said that he likes the stickiness of IBM's business (he asked the Berkshire Hathaway companies if they would switch from IBM to someone else for their IT needs and they said no, the cost of switching is too high or some such).
And it's cheap.
What do you think of GHC today? With a $4Bn market cap, cash on the balance sheet and and $1.2Bn underfunded pension, seems like it's extremely underpriced, no? Are people just not giving any value for the underfunded pension?
ReplyDeleteMeant overfunded, not underfunded, of course.
ReplyDeleteHi,
DeleteI'm not sure what people think of GHC, but I would be worried about what Graham does over time. If GHC is in liquidation mode, then buying at a discount would be interesting, but if he is going to liquidate real estate and other things to keep investing in new businesses, then I wouldn't be too excited. I may be wrong, but I don't get the sense that Graham is a good capital allocator.
Buffett bailing out is very, very telling. Why would he get out after so many years if GHC is so cheap and has a bright future? He obviously thought BRK and the TV stations were a better deal than GHC itself...
So it is an interesting situation, but I am not a fan of Graham...