Saturday, December 19, 2009
Saturday, December 05, 2009
Saturday, November 14, 2009
- Wells Fargo (current holding)
- American Express (current holding)
- Kraft Food (current holding)
- Berkshire Hathaway (current holding)
- If you apply a straight 15 times multiple to its earnings, you get a valuation of about $80 billion.
- If you based it on its net worth (or book value), the insurance book value is probably about $75 billion and applying a 1.5 times book value, you get a valuation of about $113B.
- Another way is to value underwriting and investment income separately. Underwriting gain does not really gets its earnings from the book value or investment assets, though the capacity or amount that can be underwritten depends on the net worth or equity in the business. So if you apply a multiple of 12 to the $1.8B in underwriting gain, you get a value of $22B. Then since investment income is derived directly from investment assets, we can simply just based the value of the investment income side on the net book value which is roughly about $75B and if you apply a 1.5 times to the book value, it is worth $113B. In total, the insurance business is worth about $135B.
Thursday, November 12, 2009
Saturday, November 07, 2009
Tuesday, September 08, 2009
Published September 8, 2009
Warren E. Buffett has two cardinal rules of investing. Rule No. 1: Never lose money. Rule No. 2: Never forget Rule No. 1.
Well, a lot of old rules got trashed when the financial crisis struck — even for the Oracle of Omaha.
At 79, Mr. Buffett is coming off the worst year of his long, storied career. On paper, he personally lost an estimated $25 billion in the financial panic of 2008, enough to cost him his title as the world’s richest man. (His friend and sometime bridge partner, Bill Gates, now holds that honor, according to Forbes.)
And yet few people on or off Wall Street have capitalized on this crisis as deftly as Mr. Buffett. After counseling Washington to rescue the nation’s financial industry and publicly urging Americans to buy stocks as the markets reeled, in he swooped. Mr. Buffett positioned himself to profit from the market mayhem — as well as all those taxpayer-financed bailouts — and thus secure his legacy as one of the greatest investors of all time.
When so many others were running scared last autumn, Mr. Buffett invested billions inGoldman Sachs — and got a far better deal than Washington. He then staked billions more on General Electric. While taxpayers never bailed out Mr. Buffett, they did bail out some of his stock picks. Goldman, American Express, Bank of America, Wells Fargo, U.S. Bancorp — all of them got public bailouts that ultimately benefited private shareholders like Mr. Buffett.
If Mr. Buffett picked well — and, so far, it looks as if he did — his payoff could be enormous. But now, only a year after the crisis struck, he seems to be worrying that the broader stock market might falter again. After boldly buying when so many were selling assets, his conglomerate, Berkshire Hathaway, is pulling back, buying fewer stocks while investing in corporate and government debt. And Mr. Buffett is warning that the economy, though on the mend, remains deeply troubled.
“We are not out of problems yet,” Mr. Buffett said last week in an interview, in which he reflected on the lessons of the last 12 months. “We have got to get the sputtering economy back so it is functioning as it should be.”
Still, Mr. Buffett hardly sounded shellshocked in the wake of what he once called the financial equivalent of Pearl Harbor. (An estimated net worth of $37 billion would be a balm to anyone’s psyche.)
“It has been an incredibly interesting period in the last year and a half. Just the drama,” Mr. Buffett said. “Watching the movie has been fun, and occasionally participating has been fun too, though not in what it has done to people’s lives.”
Investors big and small hang on Mr. Buffett’s pronouncements, and with good reason: if you had invested $1,000 in the stock of Berkshire in 1965, you would have amassed millions of dollars by 2007.
Despite that formidable record, the financial crisis dealt him a stinging blow. While he has not changed his value-oriented approach to investing — he says he likes to buy quality merchandise, whether socks or stocks, at bargain prices — Buffettologists wonder what will define the final chapters of his celebrated career.
In doubt, too, is the future of a post-Buffett Berkshire. The sprawling company, whose primary business is insurance, lost about a fifth of its market value during the last year, roughly as much as the broader stock market. While Berkshire remains a corporate bastion, it lost $1.53 billion during the first quarter, then its top-flight credit rating. It returned to profit during the second quarter.
Time is short. While he has no immediate plans to retire, Mr. Buffett is believed to be grooming several possible successors, notably David L. Sokol, chairman of MidAmerican Energy Holdings at Berkshire and also chairman of NetJets, the private jet company owned by Berkshire.
After searching in vain for good investments during the bull market years, Mr. Buffett used last year’s rout to make investments that could sow the seeds of future profits.
Justin Fuller, author of the blog Buffettologist and a partner at Midway Capital Research and Management, said the events of the last year, while painful for many, provided Mr. Buffett with the opportunity he had been waiting for.
“He put a ton of capital to work,” Mr. Fuller said. “The crisis gave him the ability to put one last and lasting impression on Berkshire Hathaway.”
For the moment, however, Mr. Buffett seems to be retrenching a bit. Like so many people, he was blindsided by the blowup in the housing market and the recession that followed, which hammered his holdings of financial and consumer-related companies. He readily concedes he made his share of mistakes. Among his blunders: investing in an energy company around the time oil prices peaked, and in two Irish banks even as that country’s financial system trembled.
Mr. Buffett declined to predict the short-run course of the stock market. But corporate data from Berkshire shows his company was selling more stocks than it was buying by the end of the second quarter, according to Bloomberg News. Its spending on stocks fell to the lowest level in more than five years, although the company is still deftly picking up shares in some companies and buying corporate and government debt.
Among the stocks Mr. Buffett has been selling lately is Moody’s, the granddaddy of the much-maligned credit ratings industry. Berkshire, Moody’s largest shareholder, said last week that it had reduced its stake by 2 percent.
The shift in Berkshire’s investments suggests Mr. Buffett is starting to worry, said Alice Schroeder, the author of “The Snowball,” a biography of Mr. Buffett.
But Ms. Schroeder said Mr. Buffett was also growing anxious about how he would be remembered. He wants to remain relevant in the twilight of his career, she said, and is taking a more prominent role on the public stage. That shift means ordinary investors are getting a chance to hear more of his sage advice, but it also carries some risk.
“Before, he always made sure to dole out the wisdom with an eyedropper,” Ms. Schroeder said. In the past, Mr. Buffett “said it was a mistake to believe that if you are an expert in one area that people will listen to you in others,” she said.
Whatever his recent missteps, many people, from President Obama down, listen to what Mr. Buffett has to say. He is important in his own right as a billionaire businessman but also because millions of ordinary investors follow his homespun aphorisms, copy his investing strategies and await his pronouncements on the markets.
Mr. Buffett refused to be drawn out on where stocks are headed, but he warned about the dangers of investing with borrowed money, or leverage, which proved disastrous when the crisis hit.
As for regrets, he has a few. His timing was bad, he concedes. He should have sold stocks sooner, before the markets tumbled. Then he served up a Buffettism that any investor might heed:
Asked if anything was keeping him awake at night, he said there was not. “If it’s going to keep me awake at night,” Mr. Buffett said, “I am not going to go there.”
Monday, September 07, 2009
In 2006, Goldman Sachs C.E.O. Henry Paulson reluctantly became Treasury secretary for an unpopular, lame-duck president. History will score his decisions, but the former Dartmouth offensive lineman definitely left everything on the field. In private conversations throughout his term, as crisis followed crisis—Bear Stearns, Fannie Mae and Freddie Mac, Lehman Brothers, A.I.G., and so forth—Paulson gave the author the inside track, from the political lunacy and bailout plans to the sleepless nights and flat-out fear, as he battled the greatest economic disruption in 80 years.
As he noted, “There’s a great lack of financial literacy and understanding in this nation, even among college-educated people.” But Paulson did figure out how to behave on the Hill. “There’s a way, keeping full integrity, of answering the questions you want to answer,” Paulson told me in one of our conversations, reflecting on what he had learned about committee hearings. “The thing that scared me was not a question I didn’t know the answer to. Just say, ‘I don’t know.’ The thing that scared me was some question that I knew, and answered correctly, and I’d be in deep doo-doo!” As his tenure wore on, Paulson confessed, “I amuse myself a lot by sitting there sometimes and thinking what would happen if I said, ‘Do you realize what an idiotic question that is?’ "
Wednesday, September 02, 2009
- When it comes to whacking golf ball, the possibilities of explanation are endless: For relaxation, for socialization, to get close to mother nature, etc.
- The "new" vs. "old" normal dichotomy was perhaps best contrasted by Barton Biggs when he said he was a "child of the bull market."
- Biggs' point was for as long as he's been in the market, it has paid to buy the dips because markets, economies, profits and assets always rebounded and went to higher level.
- Economies grow, profits grow, just like children do.
- However, the surprise is that there's been a significant break in that growth pattern because of delevering, deglobalization, and reregulation (DDR).
- DDR in combination means that it's time to recognize that things have changed and that they will continue to change for the next decade or even two.
- We are heading towards the new normal which is a period of time in which economies grow very slowly as opposed to growing like weeds, the way children do; in which profits are relatively static; in which government plays a significant role in terms of deficits and reregulation and control of the economy; in which consumers stops shopping until he drops and begins.
- American-style capitalism and the making of paper instead of things. America would consume, then print paper assets and debt in order to pay for it. Developing countries would make things and accept America's securities in return. This game is over and unless developing countries step up and generate a consumer ethic of their own, the world will grow at a slower pace.
- The invisible hand of free enterprise is being replaced by the visible fist of government. The once-successful "shadow banking system" is being reregulated and delevered.
- Global economic leadership. China has spent three times the amount of money (relative to GDP) to revive its economy and managed to grow at a "near normal" 8% pace vs. U.S. "big R" recessionary numbers.
- Old normal housing models encouraged home ownership, eventually peaking at 69% (sometime in 2004). Subsidized and tax-deductible mortgage interest rates promoted a long-term housing boom and now a significant housing bust.
- Housing alone can't lead U.S. out of this big R recession no matter what the recent Case-Shiller home price numbers may suggest. Home ownership may sink perhaps to a new normal level of 65%, as opposed to 69% of American households.
- The shadow banking system has fueled an American era of consumerism because debt was available, interest rates were low and the living became easy.
- Saving rates plunged from 10% to -1%. Now things have perhaps changed and saving rates are headed up, consumer spending growth rates moving down. A new normal is taking place.
- Increased health care may be GDP positive but it's only a plus from a "broken window" point of view. It's far better to have a younger, healthier society than to spend trillions fixing up an aging, increasingly overweight and diabetic one.
- Same thing goes for energy. Better and more profitable to pump oil than to spend trillions on a new "green" society.
- The investment implications of this new normal evolution cannot easily be modeled econometrically, quantitatively, or statistically. The successful investor during this transition will be one with common sense and importantly the powers of intuition, observation, and the willingness to accept uncertain outcomes.
- PIMCO observes that the highest probabilities favor the following strategic conclusions: 1) Global policy rates will remain low for extended periods of time; 2) The extent and duration of quantitative easing and fiscal stimulation efforts are keys to future investment returns across a multitude of asset categories: 3) Investors should continue to anticipate and shake hands with government policies, utilizing leverage and guarantees to their benefit; 4) Asia and Asian-connected economies (Brazil, Australia) will dominate future global growth; 5) The dollar is vulnerable on a long-term basis.
- Investors need to play conservatively and avoid critical mistakes. An "even par" scorecard may be enough to hoist the trophy in a New Normal world.
Tuesday, August 25, 2009
The Mistakes We Make—and Why We Make Them
How investors think often gets in the way of their results. Meir Statman looks into our heads and tells us what we're doing wrong.
What was I thinking?
If there's one question that investors have asked themselves over the past year and a half, it's that one. If only I had acted differently, they say. If only, if only, if only.
Yet here's the problem: While we know that we made investment mistakes, and vow not to repeat them, most people have only the vaguest sense of what those mistakes were, or, more important, why they made them. Why did we think and feel and behave as we did? Why did we act in a way that today, in hindsight, seems so obviously stupid? Only by understanding the answer to these questions can we begin to improve our financial future.
This is where behavioral finance comes in. Most investors are intelligent people, neither irrational nor insane. But behavioral finance tells us we are also normal, with brains that are often full and emotions that are often overflowing. And that means we are normal smart at times, and normal stupid at others.
The trick, therefore, is to learn to increase our ratio of smart behavior to stupid. And since we cannot (thank goodness) turn ourselves into computer-like people, we need to find tools to help us act smart even when our thinking and feelings tempt us to be stupid.
Let me give you one example. Investors tend to think about each stock we purchase in a vacuum, distinct from other stocks in our portfolio. We are happy to realize "paper" gains in each stock quickly, but procrastinate when it comes to realizing losses. Why? Because while regret over a paper loss stings, we can console ourselves in the hope that, in time, the stock will roar back into a gain. By contrast, all hope would be extinguished if we sold the stock and realized our loss. We would feel the searing pain of regret. So we do pretty much anything to avoid that pain—including holding on to the stock long after we should have sold it. Indeed, I've recently encountered an investor who procrastinated in realizing his losses on WorldCom stock until a letter from his broker informed him that the stock was worthless.
Successful professional traders are subject to the same emotions as the rest of us. But they counter it in two ways. First, they know their weakness, placing them on guard against it. Second, they establish "sell disciplines" that force them to realize losses even when they know that the pain of regret is sure to follow.
So in what other ways do our misguided thoughts and feelings get in the way of successful investing—not to mention increasing our stress levels? And what are the lessons we should learn, once we recognize those cognitive and emotional errors? Here are eight of them.
Goldman Sachs is faster than you.
There is an old story about two hikers who encounter a tiger. One says: There is no point in running because the tiger is faster than either of us. The other says: It is not about whether the tiger is faster than either of us. It is about whether I'm faster than you. And with that he runs away. The speed of the Goldman Sachses of the world has been boosted most recently by computerized high-frequency trading. Can you really outrun them?
It is normal for us, the individual investors, to frame the market race as a race against the market. We hope to win by buying and selling investments at the right time. That doesn't seem so hard. But we are much too slow in our race with the Goldman Sachses.
So what does this mean in practical terms? The most obvious lesson is that individual investors should never enter a race against faster runners by trading frequently on every little bit of news (or rumors).
Instead, simply buy and hold a diversified portfolio. Banal? Yes. Obvious? Yes. Typically followed? Sadly, no. Too often cognitive errors and emotions get in our way.
The future is not the past, and hindsight is not foresight.
Wasn't it obvious in 2007 that financial institutions and financial markets were about to collapse? Well, it was not obvious to me, and it was probably not obvious to you, either. Hindsight error leads us to think that we could have seen in foresight what we see only in hindsight. And it makes us overconfident in our certainty about what's going to happen.
Want to check the quality of your foresight? Write down in permanent ink your forecast of tomorrow's stock prices. Do that each day for a year and check the accuracy of your predictions. You are likely to find that your foresight is not nearly as good as your hindsight.
Some prognosticators say that we are now in a new bull market and others say that this is only a bull bounce in a bear market. We will know in hindsight which prognostication was right, but we don't know it in foresight.
When I hear in my mind's ear a voice that says that the stock market is sure to zoom or plunge, I activate my "noise-canceling" device rather than go online and trade. You might wish to install this device in your mind as well.
Take the pain of regret today and feel the joy of pride tomorrow.
Emotions are useful, even when they sting. The pain of regret over stupid comments teaches presidents and the rest of us to calibrate our words more carefully. But sometimes emotions mislead us into stupid behavior. We feel the pain of regret when we find, in hindsight, that our portfolios would have been overflowing if only we had sold all the stocks in 2007. The pain of regret is especially searing when we bear responsibility for the decision not to sell our stocks in 2007. We are tempted to alleviate our pain by shifting responsibility to our financial advisers. "I am not stupid," we say. "My financial adviser is stupid." Financial advisers are sorely tempted to reciprocate, as the adviser in the cartoon who says: "If we're being honest, it was your decision to follow my recommendation that cost you money."
In truth, responsibility belongs to bad luck. Follow your mother's good advice, "Don't cry over spilled milk."
Where am I leading you? Stop focusing on blame and regret and yesterday and start thinking about today and tomorrow. Don't let regret lead you to hold on to stocks you should be selling. Instead, consider getting rid of your 2007 losing stocks and using the money immediately to buy similar stocks. You'll feel the pain of regret today. But you'll feel the joy of pride next April when the realized losses turn into tax deductions.
No. 4 Investment success stories are as misleading as lottery success stories.
Have you ever seen a lottery commercial showing a man muttering "lost again" as he tears his ticket in disgust? Of course not. What you see instead are smiling winners holding giant checks.
Lottery promoters tilt the scales by making the handful of winners available to our memory while obscuring the many millions of losers. Then, once we have settled on a belief, such as "I'm going to win the lottery," we tend to look for evidence that confirms our belief rather than evidence that might refute it. So we figure our favorite lottery number is due for a win because it has not won in years. Or we try to divine—through dreams, horoscopes, fortune cookies—the next winning numbers. But we neglect to note evidence that hardly anybody ever wins the lottery, and that lottery numbers can go for decades without winning. This is the work of the "confirmation" error.
What is true for lottery tickets is true for investments as well. Investment companies tilt the scales by touting how well they have done over a pre-selected period. Then, confirmation error misleads us into focusing on investments that have done well in 2008.
Lottery players who overcome the confirmation error conclude that winning lottery numbers are random. Investors who overcome the confirmation error conclude that winning investments are almost as random. Don't chase last year's investment winners. Your ability to predict next year's investment winner is no better than your ability to predict next week's lottery winner. A diversified portfolio of many investments might make you a loser during a year or even a decade, but a concentrated portfolio of few investments might ruin you forever.
No. 5 Neither fear nor exuberance are good investment guides.
A Gallup Poll asked: "Do you think that now is a good time to invest in the financial markets?" February 2000 was a time of exuberance, and 78% of investors agreed that "now is a good time to invest." It turned out to be a bad time to invest. March 2003 was a time of fear, and only 41% agreed that "now is a good time to invest." It turned out to be a good time to invest. I would guess that few investors thought that March 2009, another time of great fear, was a good time to invest. So far, so wrong. It is good to learn the lesson of fear and exuberance, and use reason to resist their pull.
No. 6 Wealth makes us happy, but wealth increases make us even happier.
John found out today that his wealth fell from $5 million to $3 million. Jane found out that her wealth increased from $1 million to $2 million. John has more wealth than Jane, but Jane is likely to be happier. This simple insight underlies Prospect Theory, developed by Daniel Kahneman and Amos Tversky. Happiness from wealth comes from gains of wealth more than it comes from levels of wealth. While gains of wealth bring happiness, losses of wealth bring misery. This is misery we feel today, whether our wealth declined from $5 million to $3 million or from $50,000 to $30,000.
We'll have to wait a while before we recoup our recent investment losses, but we can recoup our loss of happiness much faster, simply by framing things differently. John thinks he's a loser now that he has only $3 million of his original $5 million. But John is likely a winner if he compares his $3 million to the mountain of debt he had when he left college. And he is a winner if he compares himself to his poor neighbor, the one with only $2 million.
In other words, it's all relative, and it doesn't hurt to keep that in mind, for the sake of your mental well-being. Standing next to people who have lost more than you and counting your blessings would not add a penny to your portfolio, but it would remind you that you are not a loser.
No. 7 I’ve only lost my children’s inheritance.
Another lesson here in happiness. Mental accounting—the adding and subtracting you do in your head about your gains and losses—is a cognitive operation that regularly misleads us. But you can also use your mental accounting in a way that steers you right.
Say your portfolio is down 30% from its 2007 high, even after the recent stock-market bounce. You feel like a loser. But money is worth nothing when it is not attached to a goal, whether buying a new TV, funding retirement, or leaving an inheritance to your children or favorite charity.
A stock-market crash is akin to an automobile crash. We check ourselves. Is anyone bleeding? Can we drive the car to a garage, or do we need a tow truck? We must check ourselves after a market crash as well. Suppose that you divide your portfolio into mental accounts: one for your retirement income, one for college education of your grandchildren, and one for bequests to your children. Now you can see that the terrible market has wrecked your bequest mental account and dented your education mental account, but left your retirement mental account without a scratch. You still have all the money you need for food and shelter, and you even have the money for a trip around the country in a new RV. You might want to affix to it a new version of the old bumper sticker: "I've only lost my children's inheritance."
So here's my advice: Ask yourself whether the market damaged your retirement prospects or only deflated your ego. If the market has damaged your retirement prospects, then you'll have to save more, spend less or retire later. But don't worry about your ego. In time it will inflate to its former size.
No. 8 Dollar-cost averaging is not rational, but it is pretty smart.
Suppose that you were wise or lucky enough to sell all your stocks at the top of the market in October 2007. Now what? Today it seems so clear that you should not have missed the opportunity to get back into the market in mid-March, but you missed that opportunity. Hindsight messes with your mind and regret adds its sting. Perhaps you should get back in. But what if the market falls below its March lows as soon as you get back in? Won't the sting of regret be even more painful?
Dollar-cost averaging is a good way to reduce regret—and make your head clearer for smart investing. Say you have $100,000 that you want to put back into stocks. Divide it into 10 pieces of $10,000 each and invest each on the first Monday of each of the next 10 months. You'll minimize regret. If the stock market declined as soon as you have invested the first $10,000 you'll take comfort in the $90,000 you have not invested yet. If the market increases you'll take comfort in the $10,000 you have invested. Moreover, the strict "first Monday" rule removes responsibility, mitigating further the pain of regret. You did not make the decision to invest $10,000 in the sixth month, just before the big crash. You only followed a rule. The money is lost, but your mind is almost intact.
Things could be a lot worse.
--Mr. Statman is a professor of finance at Santa Clara University in Santa Clara, Calif.
|2||Caisse des Dépots et Consignations (CDC)||France|
|3||Bank Nederlands Gemeenten (BNG)||Netherlands|
|10||Royal Bank of Canada||Canada|
|11||National Australia Bank||Australia|
|12||Commonwealth Bank of Australia||Australia|
|13||Banco Bilbao Vizcaya Argentaria (BBVA)||Spain|
|15||Australia & New Zealand Banking Group||Australia|
|16||Westpac Banking Corporation||Australia|
|17||Banco Espanol de Credito S.A. (Banesto)||Spain|
|18||ASB Bank||New Zealand|
|19||HSBC Holdings||United Kingdom|
|21||Wells Fargo||United States|
|26||U.S. Bankcorp||United States|
|32||Bank of Montreal||Canada|
|33||DnB NOR Bank||Norway|
|34||The Bank of New York Mellon||United States|
|35||Banco Popular Español||Spain|
|36||Caixa Geral de Depositos||Portugal|
|37 =||United Overseas Bank||Singapore|
|37 =||OCBC (Oversea-Chinese Banking Corp.)||Singapore|
|39||Axa Bank Europe||Belgium|
|41||Nationwide Building Society||United Kingdom|
|43||National Bank of Kuwait||Kuwait|
|45||JPMorgan Chase||United States|
|46||Bank of Tokyo-Mitsubishi UFJ||Japan|
|47||Credit Suisse Group||Switzerland|
|48||Banque Fédérative du Crédit Mutuel (BFCM)||France|
|49||Crédit Industriel et Commercial (CIC)||France|
|50||BB&T Corporation||United States|