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Sometime in the early 1970?s, a friend of mine said I should take a look at a stock named Berkshire Hathaway (BRKA) run by a young stud named Warren Buffett.
I thought, ?Why the hell should I invest in a company that makes sheets??
After all, the American textile industry was in the middle of a long trek toward extinction that began in the 1920?s, and was only briefly interrupted by the hyper prosperity of WWII. The industry?s travails were simply an outcome of ever rising US standards of living, which pushed wages, and therefore costs, up.
It turns out that Warren Buffett made a lot more than sheets. However, he is not a young stud anymore, just an old one, like me.
Since then, Warren?s annual letter to investors has been an absolute ?must read? for me when it is published every spring.
It has been edited for the past half century by my friend, Carol Loomis, who just retired after a 60-year career with Fortune magazine. (I never wrote for them because their freelance rates were lousy).
Witty, insightful, and downright funny, I view it as a cross between a Harvard Business School seminar and a Berkeley anti establishment demonstration. You will find me lifting from it my ?Quotes of the Day? for the daily newsletter over the next several issues. There are some real zingers.
And what a year it has been!
Berkshire?s gain in net worth was $18.3 billion, which increased the share value by 8.3%, and today, the market capitalization stands at an impressive $343.4 billion. (Sorry Warren, but I clocked 30% last year, eat your heart out).
The shares are not for small timers, as one now costs $214,801, and no, they don?t sell half shares. This compares to a 1965 per share market value of $23.80, and is why the media are always going gaga over Warren Buffett.
If you?re lazy and don?t want to do the math, that works out to a compound annualized return of an eye popping 21.6%. This is why guessing what Warren is going to do next has become a major cottage industry (Progressive Insurance anyone?).
Warren brought in these numbers despite the fact that its largest non-insurance subsidiary, the old Burlington Northern Santa Fe Railroad (BNSF) suffered an awful year.
Extensive upgrades under construction and terrible winter weather disrupted service, causing the railroad to lose market share to rival Union Pacific (UNP).
I was kind of pissed when Warren bought BNSF in 2009 for a blockbuster $44 billion, as it was long my favorite trading vehicles for the sector. Since then, its book value has doubled. Typical Warren.
Buffett plans to fix the railroad?s current problems with $6 billion in new capital investment this year, one of the largest single capital investments in American history. Warren isn?t doing anything small these days.
Buffett also got a hickey from his investment in UK supermarket chain Tesco, which ran up a $444 million loss for Berkshire in 2014. Warren admits he was too slow in getting out of the shares, a rare move for the Oracle of Omaha, who rarely sells anything (which avoids capital gains taxes).
Warren increased his investment in all of his ?Big Four? holdings, American Express (AXP), Coca-Cola (KO), IBM (IBM), and Wells Fargo (WFC).
In addition, Berkshire owns options on Bank of America (BAC) stock, which have a current exercise value of $12.5 billion (purchased the day after the Mad Hedge Fund Trader issued a Trade Alert on said stock for an instant 300% gain on the options).
The secret to understanding Buffett picks over the years is that cash flow is king.
This means that he has never participated in the many technology booms over the decades, or fads of any other description, for that matter.
He says this is because he will never buy a business he doesn?t intrinsically understand, and they didn?t offer computer programming as an elective in high school during the Great Depression.
No doubt this has lowered his potential returns, but with the benefit of much lower volatility.
That makes his position in (IBM) a bit of a mystery, the worst performing Dow stock of the past two years. I would much rather own Apple (AAPL) myself, which also boasts great cash flow, and even a dividend these days (with a 1.50% yield).
Warren will be the first to admit that even he makes mistakes, sometimes, disastrous ones. He cites his worst one ever as a perfect example, his purchase of Dexter Shoes for $433 million in 1993. This was right before China entered the shoe business as a major competitor.
Not only did the company quickly go under, he exponentially compounded the error through buying the firm with an exchange of Berkshire Hathaway stock, which is now worth a staggering $5.7 billion.
Ouch, and ouch again!
Warren has also been mostly missing in action on the international front, believing that the mother load of investment opportunities runs through the US, and that its best days lie ahead. I believe the same.
Still, he has dipped his toe in foreign waters from time to time, and I was sometimes quick to jump on his coattails. A favorite of mine was his purchase of 10% of Chinese electric car factory BYD (BYDDF) in 2009, where I have captured a few doubles over the years.
Buffett expounds at great length the attractions of the insurance industry, which today remains the core of his business. For payment of a premium up front, the buyers of insurance policies receive a mere promise to perform in the future, sometimes as much as a half century off.
In the meantime, Warren can invest the money any way he wants. The model has been a real printing press for Buffett since he took over his first insurer in 1951, GEICO.
Much of the letter promotes the upcoming shareholders annual meeting, known as the ?Woodstock of Capitalism?.
There, the conglomerate?s many products will be for sale, including, Justin Boots (I have a pair), the gecko from GEICO (which insures my Tesla S-1), and See?s Candies (a Christmas addiction, love the peanut brittle!).
There, visitors can try their hand at Ping-Pong against Ariel Hsing, a 2012 American Olympic Team member, after Bill Gates and Buffett wear her down first.
They can try their hand against a national bridge champion (don?t play for money). And then there is the newspaper-throwing contest (Buffett?s first gainful employment).
Some 40,000 descend on remote Omaha for the firm?s annual event. All flights to the city are booked well in advance, with fares up to triple normal rates.
Hotels sell out too, and many now charge three-day minimums (after Warren, what is there to do in Omaha for two more days other than to visit PayPal?s technical support?). Buffett recommends Airbnb as a low budget option (for the single shareholders?).
I was amazed to learn that Berkshire files a wrist breaking 24,100-page Federal tax return (and I thought mine was bad!). Add to this a mind numbing 3,400 separate state tax returns.
Overall, Berkshire holdings account for more than 3% of the total US gross domestic product, but a far lesser share of the government?s total tax revenues, thanks to careful planning.
Buffett ends his letter by advertising for new acquisitions and listing his criteria. They include:
(1) ?Large purchases (at least $75 million of pre-tax earnings unless the business will fit into one of our existing units),
(2) ?Demonstrated consistent earning power (future projections are of no interest to us, nor are ?turnaround? situations),
(3) ?Businesses earning good returns on equity while employing little or no debt,
(4) Managemen t in place (we can?t supply it),
(5) Simple businesses (if there?s lots of technology, we won?t understand it),
(6) An offering price (we don?t want to waste our time or that of the seller by talking, even preliminarily, about a transaction when price is unknown).
https://www.madhedgefundtrader.com/wp-content/uploads/2015/04/Warren-Buffett-e1429740484967.jpg249400Mad Hedge Fund Traderhttps://www.madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2016-04-19 01:06:052016-04-19 01:06:05A Chat With Berkshire Hathaway?s Warren Buffett
I think I have figured out the course of the global financial markets over the next few months.
We are currently transitioning from an economic data flow from Q1 that was very weak, to the second quarter, which will almost certainly deliver us a robust set of numbers. This is on the heels of a white hot Q1, 2014.
Hot, cold, hot; this is a trader?s dream come true, as it gives us the volatility we need to make a fortune, as we skillfully weave in and out of these gyrations.
That is, if you read the Diary of a Mad Hedge Fund Trader.
This is not a new thing. A weak Q1 has been a recurring event over the last 30 years. The anomaly has been so reliable that not a few traders have been able to earn a living from it. :) Heaven help us if the government ever tries to fix it.
To further complicate matters, some markets see this, while others have yet to open their eyes.
The stock market (SPY), (QQQ), (IWM) agree with my view, probing new all time highs, while companies announce diabolical Q1 earnings (Twitter (TWTR)? Yikes!). So do commodities, like oil (USO) and copper (FCX), whose recent strength suggests we are on the doorstep of a great economic Golden Age.
However, the foreign exchange market (FXE), (FXY) doesn?t see it this way. They can only comprehend the last data point that just crossed the tape.
If it is weak, they assume the Federal Reserve won?t even think about raising interest rates until well into 2016. If it is healthy, they bet the Fed will jack up rates tomorrow.
You might assume this is ridiculous, and you?d be right. However, forex traders live in a world where interest rate differentials are the principal, and to many the only driver of foreign exchange rates.
One market is right, and one is wrong. Did I mention that this is also a license for we nimble traders to print money?
Of course, you can play both side of the fence, as I do. That?s how I was able to coin it with a long position in the euro (a weak economy trade) the same day my long US equity portfolio (a strong economy trade) was going through the roof.
Let me give you another iteration of these scenarios. Inside the dollar correction we are seeing a pronounced sector rotation among US stocks.
Traders are moving out of small caps (IWM) that sheltered then from a strong dollar into large caps (SPY). They are also taking profits in biotech and rolling it into financials (GS), cyber security (PANW) and solar (TAN).
Goldman Sachs (GS) gave us more rocket fuel for the bull case for of American stocks this morning. The sage investment bank, in which my Trade Alert Service currently maintains a profitable long position, says that corporations will return a mind blowing $1 trillion to investors in 2015.
Share buy back from companies should rise by 18%, while dividends should pop by 7%. It is all a continuation of a six-year trend.
Apple (AAPL) certainly kicked off this quarter?s cavalcade of higher payouts on Monday, when it added $50 billion to its own stock repurchase program and jacked up its dividend by 11%.
Markets could get even more interesting after next week, when some 80% of S&P 500 companies will have existed the ?black out? period when they are not allowed by SEC regulations to buy their own stock.
I say ?tally ho,? and ?tally ho? again.
It?s Tally Ho for the Stock Market
https://www.madhedgefundtrader.com/wp-content/uploads/2015/04/Fox-Hunt-e1430337987633.jpg256400Mad Hedge Fund Traderhttps://www.madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2015-04-30 01:05:092015-04-30 01:05:09How the Markets Will Play Out This Quarter
I?ll let you in on my top secret investment strategy that has brought me blockbuster results over the past six years.
Listen to the Wharton Business School?s professor, Jeremy Siegel.
The good doctor has been unremittingly bullish year in and year out, nearly pegging the stock index performance annually.
So, when he says that the Dow Average is going to rise to 20,000 by the end of 2015, that?s good enough for me. In fact Siegel thinks that at current price earnings multiple of 17 times, the bull market has years to run.
It would not be until we hit nosebleed levels of 25X or 30X earnings that he would get worried. And the current ultra low level of interest might even make these high multiple numbers justifiable.
So for the foreseeable future, we are going to see long periods of tedious range trading, followed by frenetic rounds of buying, once the market decides that it is time to discount the next rise in corporate earnings.
We happen to be in one of those range-trading periods right now, which my partner, Mad Day Trader Jim Parker, thinks could last all the way until September.
Actually, it is a little more complicated than that.
There is good reason for the stock market to go to sleep over the next two weeks.
Do you hear that great sucking sound? That is the noise of 170 million tax payers writing checks to the US Internal Revenue Service.
Foreign readers may not realize this, but tax payments are due in the United States on April 15 every year. I would ask for your sympathy, but I know all of you pay far more in taxes than we do. I know, because I used to pay them myself when I lived abroad for 23 years.
Of the $6 trillion in revenues from all sources due to Uncle Sam in 2015, 37%, or $2.2 trillion will come in the form of individual income taxes. That is a big hit for the financial system. That means for the next two weeks there won?t be any extra money lying around to put into the stock market.
There is another reason why the stock indexes are stagnating here. The Q1, 2015 corporate earnings reporting season kicks off when Alcoa (AA) reports on April 8, or in six trading days. Until then, we are in the quiet period, and companies are not allowed the buy back their own stock.
This is a big deal, since companies buying back their own shares have provided major support for the stock market for many years. Possibly a quarter of all the net cash flow pouring into stocks since 2009 has come from this source.
Take it away, even for a short period, and the most bullish thing the market can do is move sideways, which is exactly what it has been doing for the past two months.
What happens when the tax payment deadline passes and the quiet period ends? Stocks take off like a bat out of hell. That will take us to the spring interim peak.
This is why I strapped on three new ?RISK ON? positions last Friday, longs in the Russell 2000 (IWM) and Goldman Sachs (GS) and a short in the euro (FXE).
https://www.madhedgefundtrader.com/wp-content/uploads/2015/03/Shhhh-e1427748076919.jpg300400Mad Hedge Fund Traderhttps://www.madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2015-03-31 01:04:342015-03-31 01:04:34Entering the Quiet Time
This year, your bonus is that you get to keep your job. That is the bad news that will be dished out to many disappointed staff during annual reviews at the major Wall Street firms this year.
We all know that volumes have been trading at subterranean levels which have created a real drought of commission incomes. New regulations imposed by Dodd-Frank and the Volker rule mean that banks have to become boring, no longer able to juice earnings with trading revenues. For boring, read less profitable, leading to smaller budgets for compensation. This is the price of preventing banks from committing suicide with your money in hand.
Industry compensation experts are seeing bonus cuts of up to 30%. Equity divisions are seeing the greatest cuts, followed by bond departments, and investment banking. Senior staff are being nudged toward early retirement to further reduce overhead. Only private wealth managers are seeing pay increases, thanks to their ability to charge rich fees for enhanced customer service and place high margin products, like local municipal bonds.
The scary thing is that shrinking payouts is a trend that could continue for years, unless a new bull market suddenly appears out of nowhere. When I first started working on Wall Street nearly 40 years ago, one out of three taxi drivers were brokers rendered jobless by deregulated commissions. Be careful next time you cross the street. You might get hit with some free investment advice.
Did You Say ?Buy? or ?Sell??
https://www.madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png00DougDhttps://www.madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngDougD2011-11-29 23:33:422011-11-29 23:33:42Austerity Hits Wall Street