Current Recommendations
Slowly and carefully invest your cash reserves into global equities, preferring high quality U.S. blue chips and emerging market equities. Imputed 7-year returns are moderately above normal and much above the average of the last 15 years. But be prepared for a decline to new lows this year or next, for that would be the most likely historical pattern, as markets love to overcorrect on the downside after major bubbles. 600 or below on the S&P 500 would be a more typical low than the 750 we reached for one day.
In fixed income, risk finally seems to be attractively priced, in that most risk spreads seem attractively wide. Long government bond rates, though, seem much too low. They reflect the short-term fears of economic weakness and the need for low short-term rates. We would be short long government bonds in appropriate accounts.
As for commodities, who knows? There were a few months where they looked like a high-confidence short, but now they are half-price or less, and are much lowerconfidence bets.
In currencies, we know even less. It is easy to find currencies to dislike, and hard to find ones to like. There are no high-confidence bets, in our opinion. For the long term, research should be directed into portfolios that would resist both inflationary problems and potential dollar weakness. These are the two serious problems that we may have to face as a consequence of flooding the global financial system with government bailouts and government debt.
Fearless Forecasts for the Long Term
Under the shock of massive deleveraging caused by the equally massive write-down of perceived global wealth, we expect the growth rate of GDP for the whole developed world to continue the slowing trend of the last 12 years as we outlined in April 2008. Since this recent shock overlaps with slowing population growth, it will soon be widely recognized that 2% real growth would be a realistic target for the G7, even after we recover from the current negative growth period. Emerging countries are, of course, a different story. They will probably recover more quickly, and will continue to grow at double (or better) the growth rate of developed countries. (See “The Emerging Emerging Bubble,” April 2008.)
Friday, January 23, 2009
Warren Buffett "Not Opposed" to Berkshire Hathaway Stock Buyback: The Complete PBS Interview Transcript
GHARIB: Is there a price at which you would buy back shares of Berkshire? $85,000? $80,000?
BUFFETT: (Laughs.) I wouldn’t name a number. If I ever name a number, I’ll name it publicly. I mean, if we ever get to the point where we’re contemplating doing it, I would make a public announcement.
GHARIB: But would you ever be interested, are you in favor of buying back shares?
BUFFETT: I think if your stock is undervalued, significantly undervalued, that a management should look at that as an alternative to every other activity. That used to be the way people bought back stocks, but in recent years, companies have bought back stocks at high prices. They’ve done it because they like supporting the stock. They don't ever say it.
GHARIB: In your case, with Berkshire. I mean, it's down a lot. It was up to 147-thousand last year. Would you ever be opposed to buying back stock?
BUFFETT: I’m not opposed to buying back stock.
Thursday, January 22, 2009
Long-Term Investing: How I Learned to Stop Worrying and Ignore Volatility
I will break my comments into three parts:
• First, I’d like to define what I think risk means. The central point is that how you define risk has a lot to do with your time horizon.
• Second, I’ll discuss how you can help avoid catastrophe. Common to all great long-term investment track records is the managers survived in all kinds of environments.
• Finally, I touch on some behavioral issues—or why dealing with the long-term in the face of volatility is emotionally, physically, and psychologically hard. I’ll wrap up with some suggestions on what you can do if you accept my perspectives.
OK. If you have bought in to my comments on risk, catastrophe, and psychology, what should you consider doing?
1. Decide if you can be or should be a long-term investor. There’s nothing sacred about it—you just have to make sure you properly align your thinking, policies, and processes around your time horizon.
2. Don’t overbet. Constantly consider the problem of induction and the deleterious effects of leverage and incentives.
3. Work to reduce stress and maintain perspective. Some documented ways to lower stress include:
a. Exercise
b. Maintain and cultivate social connections (family & friends)
c. Get sleep and maintain a healthy diet
4. Don’t dwell on short-term portfolio moves. Sidestep loss aversion if possible.
5. Remember the story from Abraham Lincoln. He recounted that an Eastern monarch once charged his wise men to invent him a sentence that would be true in all situations. They came back with the words: “And this, too, shall pass away.” As Lincoln said, this phrase “chastens in the hour of pride, and consoles in the depths of affliction.” This too shall pass and long-term investors stand well to gain. 12
• First, I’d like to define what I think risk means. The central point is that how you define risk has a lot to do with your time horizon.
• Second, I’ll discuss how you can help avoid catastrophe. Common to all great long-term investment track records is the managers survived in all kinds of environments.
• Finally, I touch on some behavioral issues—or why dealing with the long-term in the face of volatility is emotionally, physically, and psychologically hard. I’ll wrap up with some suggestions on what you can do if you accept my perspectives.
OK. If you have bought in to my comments on risk, catastrophe, and psychology, what should you consider doing?
1. Decide if you can be or should be a long-term investor. There’s nothing sacred about it—you just have to make sure you properly align your thinking, policies, and processes around your time horizon.
2. Don’t overbet. Constantly consider the problem of induction and the deleterious effects of leverage and incentives.
3. Work to reduce stress and maintain perspective. Some documented ways to lower stress include:
a. Exercise
b. Maintain and cultivate social connections (family & friends)
c. Get sleep and maintain a healthy diet
4. Don’t dwell on short-term portfolio moves. Sidestep loss aversion if possible.
5. Remember the story from Abraham Lincoln. He recounted that an Eastern monarch once charged his wise men to invent him a sentence that would be true in all situations. They came back with the words: “And this, too, shall pass away.” As Lincoln said, this phrase “chastens in the hour of pride, and consoles in the depths of affliction.” This too shall pass and long-term investors stand well to gain. 12
Monday, January 19, 2009
Warren Buffett's Dateline Interview with NBC's Tom Brokaw: The Complete Transcript
BROKAW:
I've been describing this as the domestic equivalent of war. Is that an overstatement?
BUFFETT:
Well, actually, in September I said-- this is an economic Pearl Harbor. I-- that was the time congress had made it in. It really is an economic Pearl Harbor. It-- the-- the country is facing something it hasn't faced since World War II.
And they're fearful about it. And they don't know quite what to do about it. And the point is-- and-- and it-- and temporarily it looks like we're losing. It has that-- that same aspect. Interestingly enough, we were losing for a while after Pearl Harbor. But the American people never doubted that we'd win. I mean, we had that attitude then. I think, right now, that they're sort of paralyzed.
BROKAW:
And how long will it be before Warren Buffet is tooling around Omaha in an electric car?
BUFFETT:
Well, we have this investment -- (LAUGHTER) in a Chinese company. I'm going to have-- I'm going to have an electric car at the annual meeting at Berkshire next year.
BROKAW:
And is that gonna be the future of this country as well?
BUFFETT:
Well, I-- I think an electric car is-- is definitely part of the future. I mean I-- it-- it makes so much sense. I mean, the battery, obviously, is the big stumbling block. But we-- we'll figure out how to do that. I mean, we figured out a lot of things in this-- I-- I will predict that within-- certainly within five years, there is a-- a reasonably priced electric car that will go a long way with a plug in arrangement.
BROKAW:
Paul Krugman, among others, says we're not doing enough. That we've got to even-- open the valves even greater than we have been. A lot of people are concerned about the deficit and what the consequences are gonna be down the stream. Are we doing enough?
BUFFETT:
I don't know the perfect answer. Nobody else does either. I mean, Paul Krugman doesn't know it. And Barack Obama doesn't know it. And (Treasury Secretary-Designate) Tim Geithner doesn't know it. All we know is we have to do something on a very major scale. And if we find out six months down the road that we've-- you know, we've gone a little off course, left of right, we-- that can be adjustment-- we do not want to sit around and debate for six months what the perfect solution is.
We wouldn't know it if we found it. The-- the Morton thing to do is do what we know we need to do now. And-- and we'll always-- there will always be critics on that. That-- that-- the important thing is, that the person that's there takes the action that makes sense at the time. Did we handle the-- the aftermath of Pearl Harbor the next month perfectly? I don't know whether we did or not. But I would doubt that. You know, somebody now can come up with a better system. The important thing is, we got going.
Friday, January 16, 2009
Hoisington Quarterly Review and Outlook -- THE GREAT EXPERIMENT
The late Nobel Laureate, Milton Friedman, noted in his 1963 book, Monetary History of the United States (coauthored with Anna Swartz), that the money stock decreased by a massive 31% in the Great Depression. The turnover of that money, called velocity, fell 21%. Nominal GDP equals money multiplied by velocity. Consequently, from 1929 to 1933 the breakdown of both measures resulted in a contraction in nominal GDP of approximately 50%. However, Friedman postulated that if the Fed had not let money shrink, velocity would have been steady and the Great Depression would have been averted, i.e., nominal GDP would not have collapsed. Our current Fed Chairman, Ben Bernanke, is an expert on the Great Depression, and he has, in fact, adopted Friedman’s strategy to greatly expand the money supply. Whether this prescription for economic stability will work in a period of over indebtedness, such as now exists in the U.S., is most uncertain. Indeed, this could be called the “great experiment” since this economic theory has yet to be thoroughly tested in the real world.
While the historical record indicates that the ultimate low in Treasury yields lies years away, the path to the ultimate low will be anything but smooth or linear as significant volatility continues. As the experience from U.S. and Japanese history indicates, many “false dawns” will occur, with investors assuming that the long-delayed cyclical recovery in economic activity is at hand. During these pleasant but relatively short interludes, stock prices will probably rise dramatically and bond yields will increase. If history is a guide, however, these episodes will further drain wealth and will be thwarted by the persistent forces of the debt deflation. With yields in the long Treasury market very low in nominal terms, the real return will be greater if deflation sets in. Moreover, in Japan from 1988 to the present, as well as in the U.S. from 1872 to 1892 and 1928 to 1948, the total return on Treasury bonds exceeded the total return on stocks. Such a condition cannot happen for the long run, but it did happen in these three instances spanning two decades. As a hedge against a recurrence of a prolonged debt deflation, some investors may want to consider even larger positions in high quality, long term Treasury securities.
While the historical record indicates that the ultimate low in Treasury yields lies years away, the path to the ultimate low will be anything but smooth or linear as significant volatility continues. As the experience from U.S. and Japanese history indicates, many “false dawns” will occur, with investors assuming that the long-delayed cyclical recovery in economic activity is at hand. During these pleasant but relatively short interludes, stock prices will probably rise dramatically and bond yields will increase. If history is a guide, however, these episodes will further drain wealth and will be thwarted by the persistent forces of the debt deflation. With yields in the long Treasury market very low in nominal terms, the real return will be greater if deflation sets in. Moreover, in Japan from 1988 to the present, as well as in the U.S. from 1872 to 1892 and 1928 to 1948, the total return on Treasury bonds exceeded the total return on stocks. Such a condition cannot happen for the long run, but it did happen in these three instances spanning two decades. As a hedge against a recurrence of a prolonged debt deflation, some investors may want to consider even larger positions in high quality, long term Treasury securities.
Biggest meltdown winner: be very wary
Canada’s pre-eminent market oracle, Prem Watsa, has been cautiously buying stocks and bonds since late November even though he doesn’t believe the bottom has been reached.
The crux of the problem
“De-leveraging” is hoarding, paying down debt, postponing expenditures by banks, individuals and companies which is contributing to the recession and deflation of prices, he explained.
The two historical examples of the serious meltdown the world now faces occurred in the 1930s after the 1929 market crash and Japan’s economic malaise since its 1989 meltdown, not as severe but nonetheless serious.
“In the case of both those data points, the de-leveraging was so severe that even though governments built infrastructure and interest rates went to zero the economy did not around,” he said.
“De-leveraging means that the value of houses, for instance, have to go down so low that people will start to turn around to buy them again. It means that factories with excess capacity will have to close until demand returns and makes surviving factories busy again,” he said. “It might take four or five years.”
Political vigilance is critical
The danger signs are if any of the three disastrous policies from the 1930s rear their ugly heads again: tariff barriers; higher taxes to balance budgets or higher interest rates to support currencies.
“These are the kind of things you have to look for as signals about the future,” he said. “If Obama starts talking about `Buy American’ that’s less obvious but is a form of protectionism that may impede a turnaround.”
Another unintended consequence that may loom is the exchange rate issues such as the concern about China’s low value or that Greece, Ireland and Spain have been downgraded by S&P because they are not meeting Euro standards. Their debts and spending are too high.
“One of those countries may leave the Euro or be booted out,” he said.
Overall optimism
Its most recent deal was Northbridge’s privatization and is an example of Fairfax’s financial heft. “We took Northbridge public in 2003 because we needed the money. We owned it for 23 years and its now Canada’s biggest commercial lines company,” he said. “It went public at 1.2 times’ book value at C$15 a share. In the fourth quarter we had a US$350 million dividend from a U.S. investment so we made an offer to buy out the rest of Northbridge for 1.3 times’ book value and a 30% premium to its average trading price or C$39 a share.”
Northbridge shareholders, 67% of whom acceded to the deal, made 20% compounded annually if they had held the stock since 2003.
Watsa also owns a chunk of CanWest whose stock has fallen dramatically, but remains a loyal, long-term investor.
Fairfax is optimistic overall, has been carefully investing and took the hedges off its portfolios this fall but remains vigilant. And Watsa believes that allinvestors should do the same.
The crux of the problem
“De-leveraging” is hoarding, paying down debt, postponing expenditures by banks, individuals and companies which is contributing to the recession and deflation of prices, he explained.
The two historical examples of the serious meltdown the world now faces occurred in the 1930s after the 1929 market crash and Japan’s economic malaise since its 1989 meltdown, not as severe but nonetheless serious.
“In the case of both those data points, the de-leveraging was so severe that even though governments built infrastructure and interest rates went to zero the economy did not around,” he said.
“De-leveraging means that the value of houses, for instance, have to go down so low that people will start to turn around to buy them again. It means that factories with excess capacity will have to close until demand returns and makes surviving factories busy again,” he said. “It might take four or five years.”
Political vigilance is critical
The danger signs are if any of the three disastrous policies from the 1930s rear their ugly heads again: tariff barriers; higher taxes to balance budgets or higher interest rates to support currencies.
“These are the kind of things you have to look for as signals about the future,” he said. “If Obama starts talking about `Buy American’ that’s less obvious but is a form of protectionism that may impede a turnaround.”
Another unintended consequence that may loom is the exchange rate issues such as the concern about China’s low value or that Greece, Ireland and Spain have been downgraded by S&P because they are not meeting Euro standards. Their debts and spending are too high.
“One of those countries may leave the Euro or be booted out,” he said.
Overall optimism
Its most recent deal was Northbridge’s privatization and is an example of Fairfax’s financial heft. “We took Northbridge public in 2003 because we needed the money. We owned it for 23 years and its now Canada’s biggest commercial lines company,” he said. “It went public at 1.2 times’ book value at C$15 a share. In the fourth quarter we had a US$350 million dividend from a U.S. investment so we made an offer to buy out the rest of Northbridge for 1.3 times’ book value and a 30% premium to its average trading price or C$39 a share.”
Northbridge shareholders, 67% of whom acceded to the deal, made 20% compounded annually if they had held the stock since 2003.
Watsa also owns a chunk of CanWest whose stock has fallen dramatically, but remains a loyal, long-term investor.
Fairfax is optimistic overall, has been carefully investing and took the hedges off its portfolios this fall but remains vigilant. And Watsa believes that allinvestors should do the same.
Tuesday, January 13, 2009
Saturday, January 10, 2009
Bruce Berkowitz: “Prices today are as attractive as I have seen in my career”
You were recently elected to serve on the Board of one of your portfolio companies, AmeriCredit Financial (ACF), in which you and another investor have a controlling interest. How do you value ACF in run-off mode? As a going concern? You have investments in two levels of ACF's capital structure and are now a director. How do you weigh the advantages of being an activist with the business risk of being an insider?
This is an excellent question and it goes to the key issues behind our investment. We bought ACF because we believed there was significant value in the company through its ability to generate free cash flow. Then we looked at ways in which we could “kill” the company – i.e., what kinds of mistakes or misfortunes could impair our investment. In the case of ACF, we believe that in some of those scenarios – such as in run-off mode – we could get significantly higher value. The tangible book value should start to approximate the liquidation value. But then we look for what is not included in the tangible value, such as the time value of money (e.g., the present value of future insurance premiums) and whether the tangible values are really
tangible (e.g., whether their fixed assets are fairly valued on their balance
sheet).
In the worst case, we will make some pretty good money.
I look at my Board seat as a way to protect our shareholders’ value. It does not affect my relationships with or ability to invest in any other companies. In fact, it expands my knowledge of related industries, from automobile lending to dealerships to insurance. When the time comes to sell our investment, I will leave the Board. I do not accept any compensation, such as fees or
restricted stock grants. Only my travel expenses are reimbursed. I will only stay on the Board to help our shareholders.
Based on your metric of free cash flow yield, how cheap or expensive is the
overall market on a historical basis?
The last tough environment was in 1987, but that was a sudden shock and not a big event. Within a year the markets had recovered. In the Dot Com era the markets were caught in a mania, but the current crisis is much worse than what occurred at the end of that bubble, which was contained in the tech sector.
You would have to go back to 1974, when even the smartest investors were down 50% or 60%. I cannot say whether the market is as under-valued today as it was then, but certainly we are seeing valuations for companies in our portfolio that are comparable to those of 1974.
What should investors expect from the market in 2009?
I don’t mind tough questions but this is an impossible question. There are two ways to invest – either predicting or reacting. I admit I have no skill at predicting. To predict would be foolish, so we react. We invest based on free cash flow relative to the price of a stock. We could be bouncing around the bottom of the market. But I don’t know whether the true bottom will come in 31 days or 31 months. Prices today are as attractive as I have seen in my career and it will be worth the wait for the market to deliver the true value of these companies.
This is an excellent question and it goes to the key issues behind our investment. We bought ACF because we believed there was significant value in the company through its ability to generate free cash flow. Then we looked at ways in which we could “kill” the company – i.e., what kinds of mistakes or misfortunes could impair our investment. In the case of ACF, we believe that in some of those scenarios – such as in run-off mode – we could get significantly higher value. The tangible book value should start to approximate the liquidation value. But then we look for what is not included in the tangible value, such as the time value of money (e.g., the present value of future insurance premiums) and whether the tangible values are really
tangible (e.g., whether their fixed assets are fairly valued on their balance
sheet).
In the worst case, we will make some pretty good money.
I look at my Board seat as a way to protect our shareholders’ value. It does not affect my relationships with or ability to invest in any other companies. In fact, it expands my knowledge of related industries, from automobile lending to dealerships to insurance. When the time comes to sell our investment, I will leave the Board. I do not accept any compensation, such as fees or
restricted stock grants. Only my travel expenses are reimbursed. I will only stay on the Board to help our shareholders.
Based on your metric of free cash flow yield, how cheap or expensive is the
overall market on a historical basis?
The last tough environment was in 1987, but that was a sudden shock and not a big event. Within a year the markets had recovered. In the Dot Com era the markets were caught in a mania, but the current crisis is much worse than what occurred at the end of that bubble, which was contained in the tech sector.
You would have to go back to 1974, when even the smartest investors were down 50% or 60%. I cannot say whether the market is as under-valued today as it was then, but certainly we are seeing valuations for companies in our portfolio that are comparable to those of 1974.
What should investors expect from the market in 2009?
I don’t mind tough questions but this is an impossible question. There are two ways to invest – either predicting or reacting. I admit I have no skill at predicting. To predict would be foolish, so we react. We invest based on free cash flow relative to the price of a stock. We could be bouncing around the bottom of the market. But I don’t know whether the true bottom will come in 31 days or 31 months. Prices today are as attractive as I have seen in my career and it will be worth the wait for the market to deliver the true value of these companies.
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