The Buffett

 
 


  • Warren Buffett Stock - Investment Details since 1967

    1. --------------------------------------------------------------------

      Period 9

    2. Berkshire's earnings 2002-2005
    3. Cheap Re-insurance and its Perils
    4. Accounting for Retroactive insurance
    5. Berkshire's cost conscious business model
    6. Buffett's views on derivatives
    7. Berkshire's 2002 acquisitions
    8. How college students helped Buffett find a deal?
    9. Mclane
    10. Why Berkshire borrows money?
    11. Berkshire's entry into foreign currency
    12. Medpro
    13. Forest River
    14. Business wire
    15. Applied Underwriters
    16. Berkshire's investments 2002-2005
    17. Berkshire's earnings 2006-2011

    18. Berkshire's earnings from 2002-2005 (All numbers in millions)

      SEGMENT
      2002     2003     2004     2005    
      Avg Float
      $41,224     $44,220     $46,094     $49,287    
      REVENUES
                     
      INSURANCE AND OTHER
                     
      Insurance premiums earned
      $19,182     $21,493     $21,085     $21,997    
      Sales and service revenues
      $16,958     $32,098     $43,222     $46,138    
      Interest, dividend and other investment income
      $2,943     $3,098     $2,816     $3,487    
      Investment gains / losses
      $340     $2,914     $1,746     $5,728    
      TOTAL REVENUES - Insurance
      $39,423     $59,603     $68,869     $77,350    
      FINANCE and FINANCIAL PRODUCTS
                     
      Interest income
      $1,497     $1,093     $1,202     $1,554    
      Investment gains / losses
      $578     $1,215     $1,750     $468    
      Derivative gains / losses
      -     -     -     -$788    
      Other
      $737     $1,948     $2,561     $3,079    
      TOTAL REVENUES
      $42,235     $63,859     $74,382     $81,663    
                     
      COSTS AND EXPENSES
                     
      INSURANCE AND OTHER
                     
      Insurance losses and loss adjustment expenses
      $15,256     $14,927     $14,823     $15,482    
      Life and health insurance benefits
      -     -     -     $1,634    
      Insurance Underwriting expenses
      $4,324     $4,848     $4,711     $4,828    
      Cost of sales and services
      $11,971     $25,737     $35,882     $38,288    
      SG&A expenses
      $3,033     $4,228     $4,989     $5,328    
      Interest expense
      $192     $153     $137     $144    
      TOTAL EXPENSES - Insurance and other
      $34,776     $49,893     $60,542     $65,704    
                     
      FINANCE AND FINANCIAL PRODUCTS
                     
      Interest expense
      $533     $319     $584     $579    
      Other
      $926     $2,056     $2,557     $3,112    
      TOTAL EXPENSE - Finance and financial products
      $1,459     $2,375     $3,141     $3,691    
      TOTAL EXPENSES
      $36,235     $52,268     $63,683     $69,395    
                     
      Earnings before income taxes and equity earnings in earnings of Mid American holdings
      $6,000     $11,591     $10,699     $12,268    
      Equity in Mid American holdings
      $359     $429     $237     $523    
      Earnings before income taxes and minority interest
      $6,359     $12,020     $10,936     $12,791    
      Income Taxes
      $2,059     $3,805     $3,569     $4,159    
      Minority shareholder's interests
      $14     $64     $59     $104    
      Net income
      $4,286     $8,151     $7,308     $8,528    

      Share of investment income in Berkshire's overall income. (All numbers in $millions)

      2002     2003     2004     2005    
      Sum of Insurance investment income and gain from sale of securities (S)
      $3,861     $7,227     $6,312     $8,895    
      (S) / Total income
      60.72%     60.12%     57.72%     69.54%    

      CHEAP RE-INSURANCE AND ITS PERILS Buffett has outlined in his 2002 letter that cheap reinsurance can be fatal to an insurance company. It gave its own GEICO's example.

      Here's one footnote to GEICO's 2002 earnings that underscores the need for insurers to do business with only the strongest of reinsurers. In 1981-1983, the managers then running GEICO decided to try their hand at writing commercial umbrella and product liability insurance. The risks seemed modest: the company took in only $3,051,000 from this line and used almost all of it ?$2,979,000 ?to buy reinsurance in order to limit its losses. GEICO was left with a paltry $72,000 as compensation for the minor portion of the risk that it retained. But this small bite of the apple was more than enough to make the experience memorable. GEICO's losses from this venture now total a breathtaking $94.1 million or about 130,000% of the net premium it received. Of the total loss, uncollectible receivables from deadbeat reinsurers account for no less than $90.3 million (including $19 million charged in 2002).

      Accounting for Retroactive insurance When an insurance company writes a retroactive policy, they immediately record both the premium and a reserve for the expected losses. The difference between the two is entered as an asset entitled "deferred charges" reinsurance assumed. They then amortize this asset downward by charges to income over the expected life of each policy.

      Berkshire's cost conscious business model One of the pillars of Berkshire's success has been its cost conscious culture. Instead of having any centralized mantra to it, Buffett simply buys the businesses whose managers are ingrained with this quality. Following is what Buffett had to say about Berkshire's model.

      We cherish cost-consciousness at Berkshire. Our model is the widow who went to the local newspaper to place an obituary notice. Told there was a 25-cent-a-word charge, she requested “Fred Brown died.” She was then informed there was a seven-word minimum. “Okay,” the bereaved woman replied, “make it ‘Fred Brown died, golf clubs for sale.’

      Buffett's views on derivatives Following are Buffett's views on Derivative contracts and a simple lesson on them.

      1.His perception of derivatives He views them as time bombs for both the issuer and the party that buys the contract. The reason he refers them as "time bombs" is because its impact on a business is spontaneous and is felt way after the transaction is over.

      2. What are derivatives Essentially, these instruments call for money to change hands at some future date, with the amount to be determined by one or more reference items, such as interest rates, stock prices or currency values. If, for example, you are either long or short an S&P 500 futures contract, you are a party to a very simple derivatives transaction ?with your gain or loss derived from movements in the index. Derivatives contracts are of varying duration (running sometimes to 20 or more years) and their value is often tied to several variables.

      3.Importance of credit worthiness and accounting for derivatives : Unless derivatives contracts are collateralized or guaranteed, their ultimate value also depends on the creditworthiness of the counterparties to them. In the meantime, though, before a contract is settled, the counterparties record profits and losses ?often huge in amount ?in their current earnings statements without so much as a penny changing hands.

      4. Gen re's derivatives portfolio When Berkshire bought Gen re, it had planned to sell its derivatives business (General Re securities). But Buffett and Munger were wrong in there assumptions. Very soon they realized that closing down derivatives business is easier said than done.

      5. Room for accounting manipulations. "Another commonality of reinsurance and derivatives is that both generate reported earnings that are often wildly overstated. That's true because today's earnings are in a significant way based on estimates whose inaccuracy may not be exposed for many years. Errors will usually be honest, reflecting only the human tendency to take an optimistic view of one's commitments. But the parties to derivatives also have enormous incentives to cheat in accounting for them. Those who trade derivatives are usually paid (in whole or part) on earnings calculated by mark-to-market accounting. But often there is no real market and mark-to-model utilized. This substitution can bring on large-scale mischief. As a general rule, contracts involving multiple reference items and distant settlement dates increase the opportunities for counterparties to use fanciful assumptions.

      In extreme cases, mark-to-model degenerates into what I would call mark-to-myth. Of course, both internal and outside auditors review the numbers, but that's no easy job. For example, General Re Securities at yearend (after ten months of winding down its operation) had 14,384 contracts outstanding, involving 672 counterparties around the world. Each contract had a plus or minus value derived from one or more reference items, including some of mind-boggling complexity. Valuing a portfolio like that, expert auditors could easily and honestly have widely varying opinions. The valuation problem is far from academic: In recent years, some huge-scale frauds and near-frauds have been facilitated by derivatives trades. In the energy and electric utility sectors, for example, companies used derivatives and trading activities to report great earnings until the roof fell in when they actually tried to convert the derivatives-related receivables on their balance sheets into cash. "Mark-to-market" then turned out to be truly "Mark-to-myth" .

      6. Who benefits from derivatives' accounting manipulation. I can assure you that the marking errors in the derivatives business have not been symmetrical. Almost invariably, they have favored either the trader who was eyeing a multi-million dollar bonus or the CEO who wanted to report impressive earnings (or both). The bonuses were paid, and the CEO profited from his options. Only much later did shareholders learn that the reported earnings were a sham.

      7.How derivatives can bring a crisis to a corporation. Another problem about derivatives is that they can exacerbate trouble that a corporation has run into for completely unrelated reasons. This pile-on effect occurs because many derivatives contracts require that a company suffering a credit downgrade immediately supply collateral to counterparties. Imagine, then, that a company is downgraded because of general adversity and that its derivatives instantly kick in with their requirement, imposing an unexpected and enormous demand for cash collateral on the company. The need to meet this demand can then throw the company into a liquidity crisis that may, in some cases, trigger still more downgrades. It all becomes a spiral that can lead to a corporate meltdown.

      8. Micro vs Macro. When a "Chain reaction" threat exists within an industry, it pays to minimize links of any kind. That's how we conduct our reinsurance business, and it's one reason we are exiting derivatives. Many people argue that derivatives reduce systemic problems, in that participants who can't bear certain risks are able to transfer them to stronger hands. These people believe that derivatives act to stabilize the economy, facilitate trade, and eliminate bumps for individual participants. And, on a micro level, what they say is often true. Indeed, at Berkshire, I sometimes engage in large-scale derivatives transactions in order to facilitate certain investment strategies.

      Charlie and I believe, however, that the macro picture is dangerous and getting more so. Large amounts of risk, particularly credit risk, have become concentrated in the hands of relatively few derivatives dealers, who in addition trade extensively with one other. The troubles of one could quickly infect the others. On top of that, these dealers are owed huge amounts by non-dealer counterparties. Some of these counterparties, as I抳e mentioned, are linked in ways that could cause them to contemporaneously run into a problem because of a single event (such as the implosion of the telecom industry or the precipitous decline in the value of merchant power projects). Linkage, when it suddenly surfaces, can trigger serious systemic problems. Indeed, in 1998, the leveraged and derivatives-heavy activities of a single hedge fund, Long-Term Capital Management, caused the Federal Reserve anxieties so severe that it hastily orchestrated a rescue effort.

      9. Long Term capital management's use of total-return swaps. One of the derivatives instruments that LTCM used was total-return swaps, contracts that facilitate 100% leverage in various markets, including stocks. For example, Party A to a contract, usually a bank, puts up all of the money for the purchase of a stock while Party B, without putting up any capital, agrees that at a future date it will receive any gain or pay any loss that the bank realizes. Total-return swaps of this type make a joke of margin requirements. Beyond that, other types of derivatives severely curtail the ability of regulators to curb leverage and generally get their arms around the risk profiles of banks, insurers and other financial institutions. Similarly, even experienced investors and analysts encounter major problems in analyzing the financial condition of firms that are heavily involved with derivatives contracts. When Charlie and I finish reading the long footnotes detailing the derivatives activities of major banks, the only thing we understand is that we don't understand how much risk the institution is running.

      10. Buffett's final verdict. The derivatives genie is now well out of the bottle, and these instruments will almost certainly multiply in variety and number until some event makes their toxicity clear. Knowledge of how dangerous they are has already permeated the electricity and gas businesses, in which the eruption of major troubles caused the use of derivatives to diminish dramatically. Elsewhere, however, the derivatives business continues to expand unchecked. Central banks and governments have so far found no effective way to control, or even monitor, the risks posed by these contracts. Charlie and I believe Berkshire should be a fortress of financial strength ?for the sake of our owners, creditors, policyholders and employees. We try to be alert to any sort of mega catastrophe risk, and that posture may make us unduly apprehensive about the burgeoning quantities of long-term derivatives contracts and the massive amount of uncollateralized receivables that are growing alongside. In our view, however, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.

      Berkshire's 2002 acquisitions. During 2002, Berkshire completed five business acquisitions for cash consideration of approximately $2.3 billion in the aggregate. Information concerning these acquisitions is as follows.

      Albecca Inc.  On February 8, 2002, Berkshire acquired all of the outstanding shares of Albecca. Albecca designs, manufactures and distributes a complete line of high-quality custom picture framing products primarily under the Larson-Juhl name.

      Fruit of the Loom. On April 30, 2002, Berkshire acquired the basic apparel business of Fruit of the Loom, LTD. FOL is a leading vertically integrated basic apparel company manufacturing and marketing underwear, active wear, casual wear and children's wear. FOL operates on a worldwide basis and sells its products principally in North America under the Fruit of the Loom and BVD brand names.

      Garan, Incorporated. On September 4, 2002, Berkshire acquired all of the outstanding common stock of Garan. Garan is a leading manufacturer of children's, women's, and men's apparel bearing the private labels of its customers as well as several of its own trademarks, including GARANIMALS.

      CTB International. On October 31, 2002, Berkshire acquired all of the outstanding shares of CTB, a manufacturer of equipment and systems for the poultry, hog, egg production and grain industries.

      The Pampered Chef, LTD. On October 31, 2002, Berkshire acquired The Pampered Chef, LTD. The Pampered Chef is the largest branded kitchenware company and the largest direct seller of house wares in the U.S.

      Clayton Homes. A gift from college students to Buffett : Dr. Al Auxier, a finance professor from University of Tennessee used to visit with his students to Omaha where Buffett used to address the kids. After the session they used to present Thank you gifts, which usually used to be sports memorabilia. But in 2003 they presented with a autobiography from Jim Clayton, founder of Clayton Homes. Buffett had learnt about Clayton in a rather expensive way when he bought distressed junk debt of Oakwood Homes. Oakwood eventually went bankrupt. But in the process Buffett did learn quite a bit about manufactured housing industry. Manufactured housing industry as a whole was going through tough times because of some bad lending practices. But Clayton homes was better than industry's average. Buffett also told students that how much he admired the company. Al Auxier took that message to Knoxville and requested Buffett to call Kevin, Jim's Son and the CEO of the company. Buffett liked his managerial ability and offered to buy Clayton Homes. Best of all Clayton agreed to buy some assets of Oakwood. Thus as a full circle the Oakwood investment turned out a small profit for Buffett. Each of the 40 students got Berkshire-B share and Al got a Berkshire-A share for their efforts in getting Clayton to Buffett.

      Mclane. Walmart wanted to sell its subsidiary McLane. Buffett jumped on the offer and it was closed in no time. Even though Mclane operates in a razor thin margin of 1%. But Buffett was fine with it because of its core competence in the wholesale industry. Buffett had a single meeting of about two hours with Tom Schoewe, Wal-Mart's CFO, and we then shook hands. (He did, however, first call Bentonville). Twenty-nine days later Wal-Mart had its money. Berkshire did no due diligence. They knew everything would be exactly as Wal-Mart said it would be ?and it was.

      Why Berkshire borrows money? Berkshire is always sitting on a mountain of cash. So why does the company need to borrow money? Buffett believes on every tub on its own philosophy. This means that he wants each of its non-insurance subsidiaries who lend money should pay appropriate rate for funds needed to carry its receivables and should not be subsidized by its parent.

      Berkshire's entry into foreign currency. Before March-2002, neither Berkshire nor Buffett had ever had ever traded currencies. But at the turn of the century Buffett became skeptical of USA currency and decided to invest in foreign currency. But interestingly he thought and still thinks that USA economy is the greatest engine of capitalism and will continue to be. By end of 2004 Berkshire owned $21.4 billion of foreign exchange contracts spread amongst 12 countries.

      Medpro. On June-30 / 2005 Berkshire bought Medpro, A 106 year old medical malpractice insurance company based in Fort Wayne. After merging with Berkshire Medpro took advantage of Berkshire's financial strength that gave it a huge advantage over its competitors.

      Forest River. Buffett had never heard of this Recreational vehicle manufacturer before. On June-21-2005 he got a fax from Pete Liegel, its owner and manager. Buffett liked the summary and asked for more details, they were sent to him the next day. That afternoon Buffett made an offer to Pete and on June-28 the deal was finalized. Such is the speed with which Buffett closes the deals. On November 12, 2005, an article ran in The Wall Street Journal dealing with Berkshire's unusual acquisition and managerial practices. In it Pete declared, "it was easier to sell my business than to renew my driver's license."

      Business wire. In New York, Cathy Baron Tamraz read the article, and it struck a chord. On November 21, 2005 she sent Buffett a letter that began, "As president of Business Wire, I'd like to introduce you to my company, as I believe it fits the profile of Berkshire Hathaway subsidiary companies as detailed in a recent Wall Street Journal article." By the time Buffett finished Cathy's two-page letter, he felt Business Wire and Berkshire were a fit. He particularly liked her penultimate paragraph: "He run a tight ship and keep unnecessary spending under wraps. No secretaries or management layers here. Yet we'll invest big dollars to gain a technological advantage and move the business forward." He promptly gave Cathy a call, and before long Berkshire had reached agreement with Business Wire's controlling shareholder, Lorry Lokey, who founded the company in 1961.

      Applied Underwriters. In December-2005 Berkshire agreed to buy 81% of Applied Underwriters, a company that offers a combination of payroll services and workers' compensation insurance to small businesses. A majority of Applied's customers are located in California. In 1998, though, when the company had 12 employees, it acquired an Omaha-based operation with 24 employees that offered a somewhat-similar service. Sid Ferenc and Steve Menzies, who built Applied's remarkable business, concluded that Omaha had many advantages as an operational base ?by 2005, 400 of the company's 479 employees were located at Omaha. In 2004, Applied entered into a large reinsurance contract with Ajit Jain, the extraordinary manager of National Indemnity's reinsurance division. Ajit was impressed by Sid and Steve, and they liked Berkshire's method of operation. So Berkshire and Applied decided to join forces.

      Berkshire Hathaway's investments 2002-2005 (All numbers in millions) except no of shares

      2002

      COMPANY
      No. OF SHARES     COST     MARKET    
      American Express Company
      151,610,700     $1,470     $5,359    
      The Coca-Cola Company
      200,000,000     $1,299     $8,768    
      The Gillette Company
      96,000,000     $600     $2,915    
      H&R Block
      15,999,200     $255     $643    
      M&T Bank
      6,708,760     $103     $532    
      Moody's corp
      24,000,000     $499     $991    
      Wells Fargo & Company
      53,265,080     $306     $2,497    
      The Washington Post Company
      1,727,765     $11     $1,275    
      Others
      -     $4,621     $5,383    
      Total
          $9,164     $28,363    

      2003

      COMPANY
      No. OF SHARES     COST     MARKET    
      American Express Company
      151,610,700     $1,470     $7,312    
      The Coca-Cola Company
      200,000,000     $1,299     $10,150    
      The Gillette Company
      96,000,000     $600     $3,526    
      H&R Block
      15,999,200     $227     $809    
      HCA inc
      15,476,500     $492     $665    
      M&T Bank
      6,708,760     $103     $659    
      Moody's corp
      24,000,000     $499     $1,453    
      Petro China
      2,338,961,000     $488     $1,340    
      Well's Fargo
      56,446,380     $463     $3,324    
      Washington Post co
      1,727,765     $11     $1,367    
      Others
      -     $2,863     $4,682    
      Total
          $8,515     $35,287    

      2004

      COMPANY
      No. OF SHARES     COST     MARKET    
      American Express Company
      151,610,700     $1,470     $8,546    
      The Coca-Cola Company
      200,000,000     $1,299     $8,328    
      The Gillette Company
      96,000,000     $600     $4,299    
      H&R Block
      15,999,200     $223     $703    
      White Mountain Insurance
      1,724,200     $369     $1,114    
      M&T Bank
      6,708,760     $103     $723    
      Moody's corp
      24,000,000     $499     $2,084    
      Petro China
      2,338,961,000     $488     $1,249    
      Well's Fargo
      56,446,380     $463     $3,508    
      Washington Post co
      1,727,765     $11     $1,698    
      Others
      -     $3,531     $5,465    
      Total
          $9,056     $37,717    

      2005

      COMPANY
      No. OF SHARES     COST     MARKET    
      American Express Company
      151,610,700     $1,287     $7,802    
      Ameriprise Financial inc
      30,222,137     $183     $1,243    
      Anheuser-Busch cos inc
      43,854,200     $2,133     $1,884    
      Coca-cola
      200,000,000     $1,299     $8,062    
      M&T Bank
      6,708,760     $103     $732    
      Moody's corp
      24,000,000     $499     $2,948    
      Petro China
      2,338,961,000     $488     $1,915    
      P&G
      100,000,000     $940     $5,788    
      Wal-mart
      19,944,300     $944     $933    
      Wells-Fargo & co
      56,446,380     $2,754     $5,975    
      Washington Post co
      1,727,765     $11     $1,322    
      White Mountain Insurance
      1,724,200     $369     $963    
      Others
          $4,937     $7,154    
      Total
          $15,947     $46,721    

      2006 to 2011 has been a very challenging time for Berkshire. In fact, it's not just Berkshire but industry as a whole went through some breathtaking moments in September-2008 which even a market veteran like Buffett acknowledged that he had not witnessed before. But even in those tough times Buffett didn't lose his cool and didn't panic. He stuck to his principle of "be fearful when others are greedy and be greedy when others are fearful" and invested close to $15bn in 1 month.

      Berkshire's earnings from 2006-2011 (All numbers in millions)

      SEGMENT 2006 2007 2008 2009 2010 2011
      Avg Float $50,887 $58,698 $58,500 $61,911 $65,832 $70,571
      REVENUES
      INSURANCE AND OTHER
      Insurance premiums earned 23,964 31,783 25,525 27,884 30,749 32,075
      Sales and service revenues 51,803 58,243 65,854 62,555 67,225 72,803
      Interest, dividend and othe investment income 4,382 4,979 4,966 5,245 5,215 4,792
      Investment gains / losses 1,697 5,405 -647 -2,904 4,044 1,973
      Other than temp impairment losses on investments -1,973 -908
      81,846 100,410 95,698 92,780 105,260 110,735
      UTILITIES AND ENERGY ( and Railroad for 2010)
      Operating revenues 10,301 12,376 12,668 11,204 26,186 30,721
      Other 343 252 1,303 239 178 118
      10,644 12,628 13,971 11,443 26,364 30,839
      FINANCE AND FINANCIAL PRODUCTS
      Interest income 1,610 1,717 1,790 1,886 1,683 1,618
      Investment gains / losses 114 193 7 67 14 209
      Derivative gains / losses 824 -89 -6,821 3,624 261 -2,104
      Other 3,501 3,386 3,141 2,693 2,603 2,391
      6,049 5,207 -1,883 8,270 4,561 2,114
      TOTAL REVENUES 98,539 118,245 107,786 112,493 136,185 143,688


      COSTS AND EXPENSES
      INSURANCE AND OTHER
      Insurance losses and loss adjustment expenses 13,068 21,010 16,259 18,251 18,087 20,829
      Life and health insurance benefits 1,618 1,786 1,840 1,838 4,453 4,879
      Insurance Underwriting expenses 5,440 5,613 4,634 6,236 6,196 6,119
      Cost of sales and services 42,416 47,477 54,103 52,647 55,585 59,839
      SG&A expenses 5,932 7,098 8,052 8,117 7,704 8,670
      Interest expense 195 164 156 130 278 308
      68,669 83,148 85,044 87,219 92,303 100,644
      UTILITIES AND ENERGY ( and Railroad for 2010)
      Cost of sales and services 8,189 9,696 9,840 8,739 19,637 22,736
      Interest expense 979 1,158 1,168 1,176 1,577 1,703
      9,168 10,854 11,008 9,915 21,214 24,439
      FINANCE AND FINANCIAL PRODUCTS
      Interest expense 550 588 639 686 703 653
      Other 3,374 3,494 3,521 3,121 2,914 2,638
      3,924 4,082 4,160 3,807 3,617 3,291
      TOTAL EXPENSES 81,761 98,084 100,212 100,941 117,134 128,374
      Earnings before income Taxes and minority interest 16,778 20,161 7,574 11,552 19,051 15,314
      Income Taxes 5,505 6,594 1,978 3,538 5,607 4,568
      Earnings from equity method inv 427 50
      Minority shareholder's interests 258 354 602 386 527 492
      NET INCOME 11,015 13,213 4,994 8,055 12,967 10,254
      (S) Sum of Investment income and sale of securities (A+B+C+D) 7,017 10,488 -2,495 6,032 9,534 4,870
      % of S to Pre Tax Income 41.82% 52.02% -32.94% 50.35% 49.91% 31.80%
      Tax rate (F/E) 32.81% 32.71% 26.12% 30.63% 29.43% 29.83%

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